Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGEAND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year Ended December FOR THE FISCAL YEAR ENDED DECEMBER31, 20192020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period fromFOR THE TRANSITION PERIOD FROM ___ toTO ___

 

Commission file number:COMMISSION FILE NUMBER: 1-13463

 

BIO-KEY INTERNATIONAL,INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

41-1741861

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification Number)

 

3349 HIGHWAY 138, BUILDING A, SUITEE, WALL, NJ 07719

(Address of principal executive offices) (Zip Code)

(732) 359-1100

Registrant’s telephone number, including area code.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Titleofeachclass

Title of each class

Trading Symbol(s)

Nameofexchangeonwhichregistered

Name of exchange on which registered

Common Stock, $0.0001 par value per share

BKYI

Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  ☐    No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  ☐    No  ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒   No  ☐

 


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐

Accelerated filer  ☐

Non-accelerated filer   

Smaller reporting company  ☒

Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 


Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

As of June 28, 201930, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $8.2$15.7 million based upon the closing price for shares of the registrant’s post-split common stock of $1.23$7.12 as reported by the Nasdaq Stock Market on that date.

 

As of May 12, 2020,March 26, 2021, the registrant had 21,212,2977,817,475 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain sections of the registrant’s Proxy Statement for its 2020 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission, are incorporated herein by reference in Part III of this Form 10-K.

 

 

 

TABLE OF CONTENTS

 

PART I

Item 1.

Business

1

Item 1A

Risk Factors

9

Item 2

Description of Property

1516

Item 3

Legal Proceedings

1517

Item 4

Mine Safety Disclosures

1517

PART II

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

1618

Item 6

Selected Financial Data

1618

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

1618

Item 7A

Quantitative And Qualitative Disclosures About Market Risk

26

Item 8

Financial Statements and Supplementary Data

2526

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

2526

Item 9A

Controls and Procedures

2526

Item 9B

Other Information

26

PART III

Item 10

Directors, Executive Officers and Corporate Governance

2627

Item 11

Executive Compensation

2630

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

2633

Item 13

Certain Relationships and Related Transactions, and Director Independence

2635

Item 14

Principal Accounting Fees and Services

2636

PART IV

Item 15

Exhibits and Financial Statement Schedules

2636

Item 16

Form 10-K Summary

2637

Signatures

Signatures

5771

 


 

 

PRIVATE SECURITIES LITIGATION REFORM ACT

 

All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “should,” “estimate,” “will,” “may,” “future,” “plan,” “intend” and “expect” and similar expressions generally identify forward-looking statements. Although we believe our plans, intentions, assumptions and expectations reflected in the forward-looking statements are reasonable, we cannot be sure they will be achieved. Additionally, the duration and severity of the current coronavirus COVID-19 pandemic and its effect 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 could cause our actual results to be materially different than those expressed in our forward looking statements. We caution that it is very difficult to predict the impact of known factors, it is impossible for us to anticipate all factors that could affect our actual results, and that actual results may differ materially and adversely from the forward-looking statements contained herein due to a number of factors, including but not limited to those factors set forth under the caption “Risk Factors” in Item 1A of this Annual Report and other filings with the Securities and Exchange Commission. These factors are not intended to represent a complete list of the general or specific factors that may affect us. It should be recognized that other factors, including general economic factors and business strategies, may be significant, presently or in the future. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

 


 

 

PART I

ITEM 1. BUSINESS

 

Solely for convenience, trademarks and tradenames referred to in this Annual Report on Form 10-K appear (after the first usage) without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these trademarks and tradenames.

Overview

BIO-key International, Inc., a Delaware corporation (the “Company,” “BIO-key,” “we,” or “us), was“us”) is a leading identity and access management (IAM) platform provider enabling secure work-from-anywhere for enterprise, education, and government customers.  Our vision is to enable any organization to secure streamlined and passwordless workforce, customer, citizen and student 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, WEB-key® biometric civil and large-scale ID infrastructure, and high-quality, low-cost accessory hardware to provide a full and complete solution for identity-innovating customers.

BIO-key PortalGuard empowers organizations to maximize the power of cloud, mobile and web technologies by securing users’ identities and connecting them with the applications they rely on, while keeping cyber-intruders and unauthorized delegates (proxy) out.

Millions of users trust BIO-key® to secure access to a variety of cloud, mobile and web applications, on-premise and cloud-based hypervisor servers from all of their devices. Employees and contractors sign into BIO-key PortalGuard to seamlessly and securely access the applications of need to do their work, and customers sign into BIO-key PortalGuard to access online services.  Organizations use PortalGuard to securely collaborate and communicate with their partners and to provide their customers with flexible, resilient user experiences online and while using mobile devices.

BIO-key’s WEB-key is a scalable biometric service management platform, incorporating key functions for regulatory compliance, enrollment, authentication or identification, and integrity in a multi-tenant private or public cloud delivery platform.  Government agencies use BIO-key for their large-scale civil ID projects, because WEB-key underpins a biometric identity ecosystem, is cloud-ready, and provides a scalable, high-integrity trust platform which can be operated anywhere and supports over 30 fingerprint scanners interchangeably.

We also deliver biometric software integration application programming interfaces, or APIs, allowing software developers to leverage our platform to securely and efficiently embed biometric multi-factor authentication, or MFA, into their own products.  This allows software developers to focus on their core functionality while BIO-key ensures users enter the application without requiring they carry their phone or any token.

Even the most security-focused organizations are suffering breaches as a result of human error or improper conduct. As enterprises scale the number of software as a service, or SaaS applications, and multi-cloud services they rely on and the interconnections between them increase, assured identity has emerged as a critical component of an organization’s security framework, directly affecting each triad of cybersecurity – confidentiality, integrity, and availability.  As access perimeters dissolve, organizations must evolve from network-based security models to Zero Trust and Continuous Authentication and Risk Trust Assessment (CARTA) security models, focusing on adaptive and context-aware controls.  True server-secured biometric verification removes the human nature vulnerability at the root of many security compromises creating a more reliable means to manage user access and protect digital assets against rogue users willing to hand over their credentials to a proxy.  Our global identity as a service, or IDaaS, hosting capability allows our customers to simplify and efficiently scale their security infrastructures across internal IT systems and external customer facing applications without installation overhead, security or uptime management efforts.

We designed BIO-key PortalGuard IDaaS and WEB-key to provide organizations an integrated approach to managing and securing all of their identities using the technologies they already use while providing capacity for future needs through the strategic use of biometrics to limit vulnerability and contain authentication costs.  Our platform allows users to authenticate their customers, employees, contractors, and partners. It enables any user to connect to any device, cloud or application, all with a simple, customizable, intuitive and consumer-friendly user experience.  We utilize server-secured biometrics to support roving users without requiring them to carry their phone or a token. As of December 31, 2020, more than 300 customers across multiple industries use BIO-key to secure and manage access for users around the world.

1

Development of Business

We were founded in 1993 to develop and market advanced fingerprint biometric technology and related security software solutions. First incorporated as BBG Engineering, the company was renamed SAC Technologies in 1994 and renamed BIO-key International, Inc. in 2002. Our principal executive office is located at 3349 Highway 138, Building A, Suite E, Wall, New Jersey 07719.   

 

We develop and market advanced fingerprint biometric identification and identity verification technologies, as well as related identity management and credentialing hardware and software solutions. We were pioneers in developing automated, finger identification technology that supplements or compliments other methods of identification and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, PKI, credit card, passports, driver’s licenses, OTP or other form of possession or knowledge-based credentialing. Additionally,Our advanced BIO-key® technology has been, and is, used to improve both the accuracy and speed of competing finger-based biometrics.fingerprint biometrics in some of the largest biometric systems in the world.

On June 30, 2020, we enhanced our product offering by acquiring PistolStar, Inc. (“PistolStar”) for $2.5 million.  PistolStar provides enterprise-ready identity access management solutions to commercial, government and education customers throughout the United States and internationally.  PistolStar develops and markets our PortalGuard line of software and services.  

Our Products

BIO-key PortalGuard and PortalGuard IDaaS

BIO-key PortalGuard is an independent, customer-controlled and neutral-by-design cloud-based identity platform that allows our customers to integrate with any cloud or on-premise SaaS application, service or cloud host, as well as Windows device authentication through a single secure, reliable and scalable IAM platform.  It provides identical capabilities in both a SaaS (PortalGuard IDaaS) or on-premise (PortalGuard) delivery model.  Our three-way IAM neutrality consists of:

fifteen MFA authentication factor choices, including our server-secured biometrics,

open user directory choices including on premise, hybrid or full-Azure Active Directory, LDAP, IBM Domino, or custom SQL user directory; and  

multiple single sign on, or SSO, federation options, including SAML, OIDC, CAS and WS-Fed.

The forgoing allows our customers to combine and authenticate legacy and future technologies and to securely connect users to the technology that they choose. We design transparent compatibility of the BIO-key PortalGuard IDaaS with on-premise infrastructures and public and hybrid clouds.

Our customers use the BIO-key PortalGuard IDaaS to secure their workforces and student populations and make their partner networks more collaborative. PortalGuard IDaaS provides more and secure experiences for their customers and end users, which enables our customers to future-proof their environments. PortalGuard IDaaS can be used as the central system for an organization’s connectivity, access, authentication and identity lifecycle management needs across all of its users, technology and applications. We enable our customers to easily deploy, manage and secure applications and devices, and offer provisioning services using open source tools.

Developers can leverage an extensive suite of API and modular SDK tools to build custom cloud, mobile and web application enrollment and authentication experiences that leverage BIO-key PortalGuard and WEB-key as the underlying identity management platform. Once deployed, PortalGuard allows administrators to enforce contextual access management decisions based on conditions such as user identity, device, geolocation, application destination identity, IP range, and time of day.

Our customers use BIO-key to (i) manage and secure work-related IT access of their employees, contractors and supply chain partners, which we call workforce identity; and (ii) manage and secure the identities of users of their web properties, which we call customer identity.

BIO-key PortalGuard and PortalGuard IDaaS for Workforce Identity.  PortalGuard streamlines the way an organization’s employees, contractors and supply chain partners connect to its applications and data from any device, while increasing user efficiency, preventing unauthorized delegation, credential sharing, and keeping digital environments secure through our MFA capabilities. We enable organizations to provide their workforces with immediate and secure access to every application from any device they use, without maintaining multiple credentials.  Our multi-directory support interfaces with the directories in place at an organization, while allowing SQL-based custom directories where none presently exist.  BIO-key PortalGuard Desktop allows customers to extend the BIO-key PortalGuard IDaaS to their existing on-premises and remote workstation Windows sign in.  

BIO-key PortalGuard and PortalGuard IDaaS for Customer Identity.  BIO-key PortalGuard allows organizations to secure access to their online properties, while upgrading their customers’ user experience by delivering self-enrollment and management for customer-facing cloud, mobile or web applications. We enable an organization’s product team to layer BIO-key’s MFA, SSO and self-service password reset, or SSPR, functionality into their cloud, web and mobile applications through federation standards or using our APIs.  Our customers are able to centrally manage policies, audit and log access across their properties, leading to more seamless customer experiences.

2

BIO-key VST and WEB-key; Products; Civil and Large-Scale ID Infrastructure

 

We have developed what we believe is the most discriminating and effective commercially available finger-based biometric technology. Our primary market focus includesThis technology is embedded in our PortalGuard product for enterprise security, mobile paymentsproviding customers with a unique capability to authenticate users without a phone or token, where appropriate, such as manufacturing, retail, call centers, and credentialing, healthcare records, and data security, among other things. Our secondary focus includeshealth care workers.  Other markets for scalable biometric engines include government markets, large scale identity projects such as voter’s registration, driver’s license, national ID programs, and SIM card registration.

 

We marketalso offer a full line of easy to use finger scanners for both enterprise and sell through distributors and directly to end users via Amazon, ourconsumer markets.  Our SideSwipe®, EcoID® and SideTouch®SidePass® finger readers which can be used on any laptop, tablet or other device which contains a USB A or C port.

We continuemarket and sell these fingerprint scanners through distributors and directly to develop advancements in our capabilities, as well as explore potential strategic relationships, including business combinations and acquisitions, which could help us leverage our capability to deliver our solutions. To drive revenue we rely upon our inside and outside sales teams, and continue to develop relationships with distributors, resellers, integrators, value added resellers (“VAR’s”), and technology partners. We’re building a growing network of partners with substantial experience in selling technology solutions to government and corporate customers in their respective markets.

In 2020,  we announced that we had secured two of the largest contracts in the Company’s history, with our partner Technology Transfer Institute (“TTI”). The contracts, valued at a combined $75M, are for large-scale identification projects in Africa and Nigeria. These historic opportunities are expected to showcase the Company’s ability to support large scale projects utilizing our core biometric authentication software engine, WEB-key®.end users via Amazon.

 

Impact of COVID-19

 

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, and, in the following weeks, many U.S. states and localities issued lockdown orders impacting our operations. Since then, the COVID-19 situation within the U.S. has rapidly escalated.  The recent COVID-19 outbreak has causedled us to migrate to a remote business model for our sales, marketing, administrative and executive teams.  Research and development and production are adjusting to the new landscape to maintain production as best as possible considering the conditions and regulations.  We continueOur transition to monitor the situation closelyremote work has been highly successful, and it is possible that we will implement further measures. Since we qualify as an essential business in New Jersey because we serve the healthcare industry, we have been ableour teams operate efficiently using our own IAM software to access inventory to fulfill ordersauthenticate video conferencing applications and ship products as required.other collaboration tools.  The COVID-19 pandemic has extended sales cycles and delayed deployments in most markets in which we operate, particularly in Africa which remains subject to shut-down and shelter at home orders.Africa.  We continue to conduct business daily and are actively closing transactions throughout the current climate, with no changes to personnel.

 

Overview

BIO-key is a leader in finger-based biometric identification and personal identity verification, as well as authentication-transaction security. Stand-alone, or in partnerships with OEMs, integrators, and solution providers, we provide biometric security solutions to private and public sector customers. We help customers reduce risk by providing the ability to control access to online assets. Our solutions positively identify individuals before granting access to corporate resources, subscribed services, cloud services and other applications.

We also develop and distribute hardware components that are used in conjunction with our software and sell third-party hardware components with our software in various configurations required by our customers. Our products are interoperable with all major fingerprint reader and hardware manufacturers, enabling application developers, VAR’s, and channel partners to integrate our fingerprint biometrics into their applications, while dramatically reducing maintenance, upgrade and life-cycle costs. Our core technology supports interoperability on over 40 different commercially available fingerprint readers and is interoperable across Windows, Linux, and the Android mobile operating systems. This interoperability is unique in the industry, is a key differentiator for our products in the biometric market and, in our opinion, makes our technology more viable than competing technologies and expands the size of the overall market for our products.

1

2018 saw the emergence of a few trends as customers in financial services and manufacturing began reaching out to us to add a layer of biometric sign-in to their security infrastructure. Use cases included securing the online activity of roving users and shared workstations. Manufacturers turned to us to incorporate workflow efficiencies such as replacing eSignature processes with biometric tracking and reducing the use of long sophisticated passwords with biometric sign-in.

Late 2018, Lockheed Martin, a global government contractor, purchased SidePass and EcoID to secure employee access to the device and to leverage the biometric authentication capabilities of Windows Hello – Windows Hello for Business.

Along with organizations that sought out our solutions to address compliance requirements for multifactor authentication, emerged a new area of opportunity as state board of election organizations were funded to address key security concerns and biometric sign-in became a preferred solution.

In the second half of 2019, we modified our software licensing program to a software as a service (SaaS) model.  By migrating to a SaaS billing model, we open the door for more organizations to use our technology by lowering the cost of entry.  Although we expect to sacrifice some short-term revenue, the SaaS model is expected to generate more revenue than our former “perpetual billing method” which provided for an upfront payment for all licenses.

We approached CES 2019 as a critical proving ground for our TouchLock line of products. After expanding the product line and marketing the products on Shopify and Amazon, we targeted CES 2019 as a crossroad to either continue to market TouchLock, or to discontinue the products to focus on the core business. Upon returning from the event, our the executive team and our Board of Directors decided to exit the US consumer lock business.

In 2019, we entered into a sales incentive agreement with TTI to pursue market opportunities in the continent of Africa and  compete for large-scale ID products in Africa and the surrounding region.  The World Bank announced that it has dedicated $443M in funds to support government ID, voter ID, SIM Card registration programs throughout Africa and the surrounding countries. TTI has already secured $75M in contracts as of April, 2020.  The COVID-19 pandemic has delayed  the timing of the rollout of the programs.  We are continuing to  monitor the effects of the pandemic and expect that we may experience further delays.

In 2019, we won two significant international government law enforcement projects, one in Dubai and one in Singapore. Both organizations are using ID Director for Windows along with BIO-key fingerprint scanners to secure internal access to files and applications.

With the upcoming election, and security being a concern, during 2019 we emerged as the preferred biometric authentication solution for certain election offices in the Southeastern United states.  Within the past twelve (12) months, we have completed projects with eight (8) county election offices to secure internal access to the voter registration databases and additional state and county offices are evaluating our solutions. We anticipate the trend may continue to grow both in number of offices supported and in geographic coverage.

Banking remains a primary focus as we added several banks and credit unions to our financial services footprint.  During the first quarter of 2019, we published and distributed a case study highlighting First National Bank of Long Island.  Banks are finding ID Director for Windows and BIO-key scanners offer secure cost-effective multifactor authentication, protecting internal access to customer data.

The U.S. Senate became a BIO-key customer when they ordered our fingerprint scanners to secure access to laptops, computers, and tablets. Several offices within the White House have deployed our scanners as a way to secure the device and protect critical files and applications.

ProductsMarkets

 

Finger-based Biometric IdentificationIdentity Management, User Authentication, Privilege Entitlement and Personal Identity VerificationAccess Control

 

Our biometric identification technology improves bothproducts simplify the accuracyauthentication process for enterprise users and speedconsumers, while raising security levels. This allows our customers to meet new, stronger authentication requirements and security best practices across many industries, while delivering a superior end-user experience. Customers use our products to reduce risk of authenticatingtheft, fraud, loss, account takeover attacks, and unauthorized account sharing by limiting access to valuable assets, privileges, data, services, networks and places to only authorized individuals. Our products provide stronger identity binding and a superior user experience versus traditional credentialing systems, which utilize a physical or identifying individuals, by extracting unique landmarks and other characteristics from a fingerprint and comparing itknowledge-based electronic credential to authenticate the holder, but fail to authenticate the actual user in addition to the landmarks from previously enrolled fingerprintstoken. Both commercial enterprises and the public sector have seen a shift in the requirement for stronger authentication, and the FBI, NIST and industry thought leaders such as SalesForce and Microsoft have encouraged entities to determineenhance their security posture by implementing stronger 2-factor authentication (2FA) or MFA. We believe the market for advanced user MFA, including fingerprint biometrics, extends to nearly every industry segment and the market opportunity for our products is massive, global and growing. 

Historically, our largest market has been access control within highly regulated industries like government and healthcare. However, we are witnessing a match. Thechange in the landscape as organizations within all industries and of all sizes are embracing biometric technology is built to be scalable and to handle databases containingMFA as a security and workflow solution. Championed by the millions of fingerprints. We achieve the highest levels of discrimination without requiring any other identifying data (multi-factor)users that have been successfully introduced to biometrics by companies such as Apple and Samsung, today’s users have witnessed the security and convenience benefits of biometric technology in their phones and welcome the same user experience to access applications without passwords.

More recently, in connection with the acquisition of PistolStar we have developed a user ID, smart ID cards, or tokens, althoughlarge customer base in the higher education vertical. Colleges and universities throughout the United States use our technology can be usedPortalGuard single sign on platform. As colleges and universities continue to operate in conjunction with suchremote environments, we have seen additional factors. Users ofdemand for our technology have the option of on device or cloud authentication. This flexible authentication option in conjunction with our interoperable capabilities, is another key differentiator of our biometric identification solutions.

 

We support industry standards, such as SAML, FIDO, BioAPI,Upon introducing a series of compact fingerprint readers, we saw an immediate increase in inquiries from both commercial companies seeking an alternative to passwords, and have received National Institute of Standardsfrom consumers recognizing that they could use SidePass, SideSwipe or EcoID to replace their Windows passwords and Technology independent laboratory certification of our ability to support Homeland Security Presidential Directive #12 (HSPD-12) and ANSI/INCITS-378 templates, as well as validation of our fingerprint match speed and accuracy in large database environments.enable Windows Hello without replacing or upgrading laptops or tablets.

 

2

establishing relationships and conducting business is the Asia Pacific Region. Through our Hong Kong subsidiary, we support the growing demand for secure identification and authentication in the region.

 

Our fingerprint identification algorithm, Vector Segment Technology (VST™), and WEB-key biometric service manager areWe believe there is potential for significant market growth in the core intellectual property behind our full suite of biometric products that include:following key areas:

ID Director™— is a suite of solutions for integration with CA Technologies / Broadcom’s Single Sign-on solution, Oracle’s Fusion Middleware SSO, IBM Tivoli Access Manager as well as ISAM and other solutions, utilizing the power and security of WEB-key. This solution provides a simple to implement, custom authentication scheme for companies looking to enhance authentication. ID Director is designed to add a level of security and convenience to the transaction level of any application. Versions of ID Director include: 

 

 

ID Director for Windows provides enterprise customersCorporate network access control, corporate campuses, computer networks, and applications.

Large scale identification projects, especially in Africa and the ability to implement and operate a biometric-centric multi-factor authentication (MFA) solutions with their Microsoft Active Directory and Azure Cloud platforms.surrounding regions.

3

 

 

ID Director for SAML allows for simplified integration with many applications and identity and access management (IAM) platforms, without coding,Government funded initiatives, including CA Technologies / Broadcom’s Single Sign-on, Oracle’s IDCS, IBM Tivoli Access Manager ESSO as well as Salesforce, SAP, and other SAML-enabled solutions, leveraging the power and securitystate board of WEB-key into a growing set of end user authentication scenarios. This solution provides a simple-to-implement, secure biometric authentication solution for companies looking to enhance authentication across many applications.elections.

 

 

International law enforcement use case applications as prospects see us as a global leader in the biometric technology space as witnessed by our agreement with the Israeli Defense Force, and the Singapore and Dubai Police departments.

Consumer mobile credentialing, including mobile payments, credit and payment card programs, data and application access, and commercial loyalty programs. 

Demand for BIO-key hardware products from Windows 10 users and Fortune 500 companies.

Government services and highly regulated industries including, Medicare, Medicaid, Social Security, drivers licenses, campus and school ID, Directorpassports/visas.

The Asia Pacific region.

New remote authentication challenges, including those created by the COVID-19 pandemic.

Business Model

Our business model is focused on the following key areas:

Market

Drivers

The frequent announcements of supply chain breaches, ransomware attacks, and administrative access compromises have highlighted the shortcomings of mainstream MFA and security approaches, which leave far too much responsibility on end-users to comply with cyber-hygiene policies.  BIO-key biometrics remove the human error and human nature elements from the authentication process, while making the end user’s access easier than ever.  The current climate of broad enterprise adoption of MFA to replace passwords, an ongoing upgrade cycle of Microsoft Windows 10, and accompanying moves to Windows Hello for EPIC adds BIO-key authenticationBusiness, all present broad opportunities for us to EPIC EHR environments, simplifying strong authentication for access, as well as meeting electronic prescribing regulations for authentication.leverage our unique differentiators and exploit the gaps in existing IAM technology approaches.  One of those gaps is the challenge of authenticating users that “rove” among workstations. A second gap is preventing unauthorized account sharing and delegation.

 

OEM

Customers

Vector Segment Technology SDK (VST)—Our biometric software development kit (“SDK”)We will continue to prioritize securing agreements with OEM customers. The history of success supporting NCR, McKesson, Omnicell, and LexisNexis provides developers withan established footprint that we intend to build upon. As OEM customers embed our solutions within their products, the abilitycustomer benefits from the enhanced security and workflow, and frees them from investing in R&D to incorporate our biometric capabilities intomanage an IAM infrastructure of their respective product offerings or infrastructure. VST is available as a low level SDK for incorporation into any application architecture to increase security while not sacrificing convenience. VST runs on Windowsown. OEM customers’ ordering patterns are more predictable and Linux as well as within WEB-key on iOSOEM customers generally require lower service and Android systems.support resourcing.

 

Highly

Regulated

Industries

Intelligent Image Indexing®—Our biometric identification solution offers both large-scale one-to-manyGovernment ID projects and one-to-one user identification. This solution enables customers to perform false aliashealthcare organizations, including hospitals, clinics, and fast entry checks,small private practices present a strong opportunity for us. Additionally, the financial services industry, including preventing fraudulent access to systemsbanks and privileges. Intelligent image indexing scales identification capabilities from thousands to millions of users. The solution runs on commercially available hardware making it scalable for any size system.credit unions has grown substantially.

 

Partner

Model

Biometric Service ProviderIn 2020, we took major steps to upgrade our partner program. We providehired dedicated resources and announced the launch of a new Channel Alliance Partner program (CAP) focused on partnering with select value added resellers, integrators, and resellers.

Microsoft

Partnership

We are a Microsoft Partner and our line of compact fingerprint scanners has been tested and qualified by Microsoft to support Windows Hello and Windows Hello for Business.

Hardware

Hardware products generated 16% of our revenue in 2020. EcoID has emerged as our most popular scanner for enterprise deployments. For customers that require the BioAPI (a standards-based solution meeting worldwide needs)highest level of security, PIV-Pro is a FIPS complaint fingerprint scanner, suitable for highly regulated industries and organizations that want a compliant interface to applications using biometrics for verification and identification. We enhance the traditional use of BioAPI by adding 64-bit support and other advanced features, supporting identification calls and also providing a single user interface for multiple fingerprint readers.best-in-class solution.

 

We also offerhave grown our business through a full linecombination of easyorganic growth and the strategic acquisition of PistolStar.  We expect to use finger scanners for both enterprisecontinue to pursue strategic acquisitions of select businesses and consumer markets. Our SideSwipe, SideTouch and EcoID scanners are plug and play compatible with Microsoft Windows and our Q-180 Touch reader is a Micro USB compatible fingerprint reader for Android devices. The readers are currently soldassets in the Microsoft stores, as well as through their on-line channel, on Amazon, and through our website.

IAM space.  In 2015, Microsoft announced native support for biometricsfurtherance of this strategy, we are active in the Windows 8.1industry and Windows 10 Operating platformsregularly 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 well as Office 2016. With Microsoft Hello,to whether we will be able to complete any user can replace their PIN or password to access their device withoutacquisition and if completed, successfully integrate any special software downloads by usingbusiness we acquire into our finger scanners, SideSwipe, SideTouch and EcoID, which are plug and play (PnP) compatible withoperations. Please see the Microsoft platforms. We have been the preferred partner, in particular at the Microsoft “Ignite your Business” Windows 10 and Office 2016 launch events.

In 2018, we continued to invest and grow our relationship with Microsoft. The 2018 Ignite your Business event included Microsoft hosting an exclusive BIO-key demonstration kiosk within their event showcase.

In 2018, we also introduced OmniPass Consumer, a secure biometric-enabled application to manage multiple passwordssection captioned “RISK FACTORS for online apps, services or accounts.additional information regarding acquisition risks.

 

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Authentication Transaction SecurityMarketing and Distribution

 

Our authentication-transaction security technology, WEB-key®, provides the abilityWe sell our products directly through our field and inside sales teams, as well as indirectly through our network of channel partners. Through our CAP, we have partnered with more than 40 resellers, system integrators and other distribution partners.  We are committed to conduct identification and identity verification transactionsaggressively growing this program in potentially unsecure environments, including the World Wide Web or in off-site cloud environments. 2021.

 

WEB-key® makes cloud-basedWe partner with leading application, managed service and infrastructure vendors, such as Ingram, D&H, Insight, NGEN, Amazon Web Services, UCROO Campus, Software House International (SHI), Virtual Graffiti, Atlassian, and ProCirrus.

We offer our software under a SaaS term license and generate annual recurring revenue (ARR) primarily by selling multi-year subscriptions to our software. We employ a customer success team, focused on customer satisfaction and early remediation. 

In 2020, we announced that we had secured two of the largest contracts in our history, with our partner Technology Transfer Institute. The contracts, valued at a combined $75,000,000, are for large-scale identification projects in Nigeria. Under the first contract, we will provide biometric user-authentication viable and eliminates technology constraints on online service providers, who are otherwise dependent on handset providerauthentication to support the infrastructure of a new e-commerce project developed with the expectation to generate more than one million jobs in Nigeria. The second contract provides for BIO-key hardware and software platform decisions. It extends all featuresto be used by a leading African telecommunications company to secure internal access to customer data. Currently Africa and functionalitiesthe surrounding regions are receiving government funding to expand the use of biometric authentication solutions to help establish trustworthy government programs and reduce fraud.  These historic opportunities are expected to showcase our ability to support large scale projects utilizing our core biometric authentication software engine, WEB-key and hardware to support large-scale enrollment and ID verification. We received our first purchase order under these contracts in the fourth quarter of 2020 which we expect to ship in the first half of 2021 upon receipt of prepayment of the VST algorithmorder. The COVID-19 pandemic has and may continue to customers looking to add an enhanced leveldelay the rollout of security to their thin client and client/server applications. Both Windows and Linux operating systems currently support WEB-key®. Clients are available on Windows and Android operating systems.these programs. 

 

Intellectual Property Rights

 

We develop and own significant intellectual property and believe that our intellectual property is fundamental to our biometric operation:

 

Patents

 

We own patented technologies and trade secrets developed or acquired by us.

 

In May 2005, the U.S. Patent & Trademark Office issued patent 6,895,104 for our Vector Segment fingerprint technology (VST), our core biometric analysis and identification technology. With the payment of all maintenance fees, this patent will expire on March 4, 2023.

 

On October 3, 2006, we announced that our patent for a biometric authentication security framework had been granted by the U.S. Patent & Trademark Office. The patent No. 7,117,356 was issued to us for a biometric authentication security framework that enhances commercial and civil biometric use. Our authentication security framework protects privacy and security of cloud or network-based authentications while also facilitates ease of use of biometric systems. The technology that this patent is based on is the foundation for the authentication security incorporated in our WEB-key product line. WEB-key is a mature enterprise authentication solution that functions in a wide variety of application environments. The solution supports a variety of implementation alternatives including card technologies for “two-factor” authentication and also supports “single-factor” authentication. Partners and customers implementing our WEB-key software to provide convenient and secure user identity include a number of institutions including the Allscripts Healthcare Solutions, Computer Associates Site Minder, Oracle Access Manager and many other enterprise and solutions-based systems. With the payment of all maintenance fees, this patent will expire on May 20, 2023.

 

On December 26, 2006, we were issued US patent No. 7,155,040 covering our unique image processing technology, which is critical for enhancing information used in the extraction of biometric minutiae. The issued patent protects a critical part of an innovative four-phase image enhancement process developed by us. With the payment of all maintenance fees, this patent will expire on January 29, 2025.

 

On April 15, 2008, we were issued US patent No. 7,359,553 covering our image enhancement and data extraction core algorithm components. The solution protected under this patent provides the capability to quickly and accurately transform a fingerprint image into a computer image that can be analyzed to determine the critical data elements. With the payment of all maintenance fees, this patent will expire on January 3, 2025.

 

On August 19, 2008, we were issued US patent No. 7,415,605 for our “Biometric Identification Network Security” method. The solution protected under this patent provides a defense against hackers and system attacks, while leveraging the industry standard Trusted Platform Module (TPM) specification for encryption key management. With the payment of all maintenance fees, this patent will expire on May 20, 2023.

 

5

On November 18, 2008, we were issued US patent No. 7,454,624 for our “Match Template Protection within a Biometric Security System” method. The solution protected under this patent limits the scope of enrollment templates usage and also eliminates the need for revocation or encryption processes, which can be expensive and time consuming. With the payment of all maintenance fees, this patent will expire on May 17, 2025.

 

On March 10, 2009, we were issued US patent No. 7,502,938 for our “Trusted Biometric Device” which covers a simple, yet secure method of protecting a user’s biometric information. It covers the transmission of information from the point the information is collected at the biometric reader until the data reaches the computer or device that is authenticating the user’s identity. With the payment of all maintenance fees, this patent will expire on October 25, 2025.

 

4

On May 26, 2009, we were issued US patent No. 7,539,331 for our “Image Identification System” method for improving the performance and reliability of image analysis within an image identification system. With the payment of all maintenance fees, this patent will expire on March 22, 2022.

 

On November 8, 2011, we were issued US Patent No. 8,055,027 for our “Generation of Directional Information in the Context of Image Processing” method for image enhancement and processing. With the payment of all maintenance fees, this patent will expire on October 10, 2027.

On June 5, 2012, PistolStar was issued US Patent No. 8,196,193 for “Method For Retrofitting Password Enabled Computer Software with a Redirectional User Authentication Method”, where a device, method, and system may be used to integrate and control authentication and passwords among various applications and platforms. With the payment of all maintenance fees, this patent will expire on November 1, 2030. 

 

On July 3, 2012, we were issued US Patent No. 8,214,652 for our “Biometric Identification Network Security”, an expanded method of network and related network authentication security systems utilizing hardware-based support for encryption and key management for authentication purposes. With the payment of all maintenance fees, this patent will expire on April 24, 2024.

On March 12, 2013, PistolStar was issued US Patent No. 8,397,077 for “Client Side Authentication Redirection”, where user specific attributes may be accessed and used to produce a generated password, using an algorithm and the user attributes. With the payment of all maintenance fees, this patent will expire on August 7, 2030.

 

On May 3, 2017, we were issued US Patent No. 9,646,146 for our “Utilization of Biometric Data”, a method enables existing small area sensors to capture substantially more fingerprint surface area, leading to a higher degree of accuracy when performing a match. With the payment of all maintenance fees, this patent will expire on March 6, 2035.   

 

On June 19, 2018 we were issued U.S. Patent No. 10,002,244 for our “Utilization of Biometric Data” to allow continuous, passive user authentication on a mobile device. With the payment of all maintenance fees, this patent will expire on March 6, 2035.

 

On July 27, 2018 we were issued U.S. Patent No. 10,025,831 for “Adaptive Short Lists and Acceleration of Biometric Database Search”, a method to quickly and iteratively search a database of biometric data. With the payment of all maintenance fees, this patent will expire on August 10, 2036.

On September 3, 2019 we were issued U.S. Patent No. 10,400,481 for “Fingerprint Lock”, a lock design method of the shackle and spring integration to electronics. With the payment of all maintenance fees, this patent will expire on June 27, 2037.

On September 10, 2019 we were issued U.S Patent No. 10,410,040 for “Fingerprint Lock Control method and Fingerprint Lock System”, a lock design method of the control process of scanning, and server communications for user profile management. With the payment of all maintenance fees, this patent will expire on July 26, 2037.

 

We have also been granted parallel patents to the US Patent portfolio to certain of our patents in many foreign countries offering protection of our intellectual property rights around the world.

 

Licensed Technology

In the fourth quarter of 2015, we entered into a license agreement with affiliates of CGG. The license agreement provides for the grant to our subsidiary, BIO-key Hong Kong Limited (“BIO-key Hong Kong”), of a perpetual, irrevocable, exclusive, worldwide, fully-paid license to all software and documentation regarding the software code, toolkit, electronic libraries and related technology currently known as or offered under the FingerQ name, together with perpetual license under all related patents held by the licensors and any other intellectual property rights owned by the licensors related to the forgoing software.  This portfolio includes 16 patents focused on, among other things, mobile payment systems and mobile payment methods based on biometric authentication as well finger print authentication systems and a finger print authentication method based on near field communication (“NFC”). The license agreement grants us the exclusive right to reproduce, create derivative works and distribute copies of the FingerQ software and documentation, create new FingerQ related products, and grant sublicenses of the licensed technology to end users. In addition, in the event the licensors make any derivatives or improvement in the FingerQ software or make any product or service that may compete with or which includes functionality similar to the FingerQ technology, they are required to license such derivative, improvement, product or service to us on the terms set forth in the license agreement at no additional charge. The license arrangement also allows us to create new, innovative solutions to address the growing demand for secure mobile transactions.  However, since we have not been able to generate the expected revenue from this agreement, we have written off the balance of the FingerQ resalable software license rights.

Trademarks

 

We have registered our trademarks “BIO-key”, “True User Identification”, “Intelligent Image Indexing”, “WEB-key”, “SideSwipe,“SideSwipe”, “SidePass”, “EcoID”, “PistolStar®”, “PortalGuard”, “PASSIVEKEY®”, and “The Biometric of Things” (application pending) with the U.S. Patent & Trademark Office, as well as many foreign countries, protecting our companies name and key technology offering names.

 

Through our subsidiary PistolStar, we have the following additional registered trademarks: “PortalGuard®”, “PASSIVEKEY®”, and “PISTOLSTAR®”. We also acquired the following unregistered trademarks: “PortalGuard NebulaTM”, “Password PowerTM” and “ScoochTM”.

6

Copyrights and trade secrets

 

We take measures to ensure copyright and license protection for our software releases prior to distribution.distribution When possible, the software is licensed in an attempt to ensure that only licensed and activated software functions to its full potential. We also take measures to protect the confidentiality of our trade secrets.

 

5

Markets

Identity Management, User Authentication, Privilege Entitlement and Access Control

Our products simplify the authentication process for enterprise users and consumers, while raising security to the highest levels of assurance. This allows our customers to meet new, stronger authentication requirements and security best practices across many industries, while delivering a superior end-user experience. Customers use our products to reduce risk of theft, fraud, loss, account takeover attacks, and unauthorized account sharing by limiting access to valuable assets, privileges, data, services, networks and places to only authorized individuals. Our products provide stronger identity binding and a superior user experience versus traditional credentialing systems, which utilize a physical or knowledge-based electronic credential to authenticate the holder, but fail to authenticate the actual user in addition to the token. Nearly every enterprise and public sector has seen a shift in the requirement for stronger authentication, and both NIST and industry thought leaders such as Microsoft have encouraged entities to enhance their security posture by implementing stronger 2-factor (2FA) or multi-factor authentication (MFA). Our products help organizations to meet their strong authentication goals, with a sign in process that end users prefer. In our opinion, the market for advanced user authentication, including fingerprint biometrics, extends to nearly every industry segment. We believe the market opportunity for our products is massive, global and growing. 

Historically, our largest market has been access control within highly regulated industries like government and healthcare. However, we are witnessing a change in the landscape as organizations within all industries and of all sizes are embracing biometric technology as a security and workflow solution. Championed by the millions of users that have been successfully introduced to biometrics by companies such as Apple and Samsung, today’s users have witnessed the security and convenience benefits of biometric technology.

Upon introducing a series of compact fingerprint readers, we saw an immediate increase in inquiries from both large commercial companies seeking an alternative to passwords, and from consumers recognizing that they could use SideSwipe or EcoID to replace their Windows password.

In October 2015, we established BIO-key Hong Kong for purposes of establishing relationships and conducting business is the Asia Pacific Region. Through our Hong Kong subsidiary, we support the growing demand for secure identification and authentication in the region.

We believe there is potential for significant market growth in the following key areas:

 Corporate network access control, corporate campuses, computer networks, and applications.

 Large scale identification projects, especially in Africa and the surrounding regions.

Government funded initiatives, including with the state board of elections.

International law enforcement use case applications as prospects see us as a global leader in the biometric technology space as witnessed by our agreement with the Israeli Defense Force, and the Singapore and Dubai Police departments.

Consumer mobile credentialing, including mobile payments, credit and payment card programs, data and application access, and commercial loyalty programs. 

Demand for BIO-key hardware products from Windows 10 users and Fortune 500 companies.

Government services and highly regulated industries including, Medicare, Medicaid, Social Security, Drivers Licenses, Campus and School ID, Passports/Visas.

Continued growth in the Asia Pacific region.

New remote authentication challenges – which our solutions are ideally suited to address.

 New opportunity to market our remote security solutions, spurred on because of the COVID-19 outbreak.

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Business Model

Our business model for 2020 and beyond is focused on the following key areas:

Market

Drivers

The current climate of broad enterprise adoption of MFA to replace passwords, an ongoing upgrade cycle of Microsoft Windows 10, and accompanying moves to Windows Hello for Business, all present broad opportunities for our products to leverage our unique differentiators and exploit the gaps left in existing technology approach.

There are gaps in the existing IAM solution space that provide the opportunity for us to demonstrate the unique business value of our solutions. One of those gaps is the challenge of authenticating users that “rove” among workstations. A second gap is preventing unauthorized account sharing. These gaps represent soft entry points to gain market share by highlighting known shortcomings of the status quo IAM approach.

OEM

Customers

We will continue to prioritize securing agreements with OEM customers. The history of success supporting NCR, Omnicell, and LexisNexis provides an established footprint that we intend to build upon. As OEM customers embed our solutions within their products, the customer benefits from the enhanced security and workflow. OEM customers ordering patterns are more predictable and OEM customers generally require lower service and support resourcing. In 2019, we continued to meet with potential partners, constantly seeking that ideal synergistic partner relationship.

Highly

Regulated

Industries

Government ID projects and Healthcare organizations, including hospitals, clinics, and small private practices present a strong opportunity for BIO-key. In healthcare, we anticipate that patient identification will emerge as a highly regulated requirement for all healthcare organizations and we are developing our software to accommodate this need. Additionally, the financial services footprint of banking and credit union customers has grown substantially.

Partner

Model

In 2019, we took major steps to upgrade our partner program. We hired dedicated resources and announced the launch of a new incentive laden Channel Alliance Partner program (CAP). The new CAP program provides VAR’s, Integrators, and Resellers with pricing and promotional incentives. The result to date has been the addition of 20+ new partners and we are  committed to growing this program aggressively in 2020.

Microsoft

Partnership

We remain a Microsoft Partner and our line of compact fingerprint scanners have been tested and qualified by Microsoft to support Windows Hello and Windows Hello for Business. We continue to attend Microsoft’s premier IT event, Ignite your Business, which has become a source for generating leads.

Hardware

Hardware products generated 40% of the Company’s revenue in 2019. EcoID has emerged as our most popular scanner for enterprise deployments. For customers that require the highest level of security, PIV-Pro is a FIPS complaint fingerprint scanner, suitable for highly regulated industries and organizations that want a best-in-class solution.

Research and Development

 

Our PortalGuard IAM product line is mature, with hundreds of active customers, and we are adding additional factors and capabilities to the product, as well as enhancing the self-management for the functionally equivalent PortalGuard IDaaS offering.  Our VST and WEB-key biometric platform isplatforms are mature, stable, and widely-deployed and we concentrate our research and development efforts on enhancing the functionality, reliability and integration of our current products as well as acquiring and developing new and innovative products and solutions for providing broader access to the BIO-key user experience, such as ID Director for Windows and ID Director for SAML. experience. 

Although we believe that our identification technology is one of the most advanced and discriminating fingerprint technologies available today, the markets in which we compete are characterized by rapid technological change and evolving standards.standards and use-cases. In order to maintain our position in the market, we will need to continue to upgrade and refine our existing technologies as new standards become relevant to our customers and markets.

 

We have also licensed mobile platform software from CGG which we have integrated with our core WEB-key offerings and introduced to the Asian markets in 2016. During the years ended December 31, 2020 and 2019, we incurred $1,396,436 and 2018, we spent $1,331,667, and $1,415,401, respectively, on research and development.

 

Moving forward, much ofIn future periods our R&D focusefforts will remain focused on updating and advancing our core software products including PortalGuard and PortalGuard IDaaS, WEB-key and VST. These products are critical to support the anticipated growth in enterprise IAM and large-scale ID projects.

 

Competition

 

The IAM MFA and SSO market has many providers of solutions in either standalone or IAM suite delivery models.  We believe that our unique differentiator in this market is the incorporation of an unparalleled server-secured biometric authentication capability among our 15 authentication factors.  In addition to companies that provide existing commonplace methods of restricting access to facilities and logical access points such as pass cards, PIN numbers, passwords, locks and keys, there are numerous companies involved in the development, manufacturing and marketing of fingerprint biometrics products to commercial, government, law enforcement and prison markets. These companies include, but are not limited to, 3M (Cogent), NEC, and MorphoTrak.

 

The majority of sales for automated fingerprint identification products in the market to date have been deployed for government agencies, healthcare facilities, and law enforcement applications. The consumer and commercial markets represent areas of significant growth potential for biometrics, led by the use of mobile devices.

 

The epidemic of security and data breaches reported over the past few years is one of the driving factors for identifying new methods of protecting valuable data. After attempting to create a more sophisticated password or more efficient token or PIN, it has become apparent that each of these methods are easily compromised, and the downside risks are significant.

 

We have also seen “keys” disruptFIDO-compliant keys enter the market, led by Yubico’s YubiKey, a USB key that storesacts as a credential for access.  Keys alone do not meet the needs of large organizations for which key sharing and protects the user’s passwords. Keyslost keys are concerns.  We are introducing a line of low-cost USB keys and they do not offer the security benefits of biometric technology as they can be easily lost or stolen and replacement costs / managing the product becomes a growing expense.

7

 

With respect to competing biometrics technologies, each has its strengths and weaknesses and none has emerged as a market leader:

 

 

Fingerprint identification is generally viewed as very accurate, inexpensive and non-intrusive and is the dominant biometric in use today and will be for the foreseeable future;

 

 

Palm Vein scanning is expensive, technique-sensitive, and offers mobility challenges;

 

 

Iris scanning is viewed as accurate, but the hardware is significantly more expensive; and

 

 

Facial recognition can have accuracy limitationsprivacy concerns with work-from-home use, and is typically highly dependent on ambient lighting conditions, angle of view, and other factors.

 

7

Government Regulations

 

Various state, federal and EU privacy laws govern the collection, storage, use and any sale of biometric-related data.  To the extent that BIO-key’s IDaaS offerings include the collection and storage of customer users’ personal or biometric data, we operate as a processor of such data.  Our WEB-key platform includes compliance features to ensure automated compliance with these laws including collection of informed written consent during enrollment workflows and robust auditing to control and report on the retention of biometric data and removal requests.  Additionally, our customers have access to these tools to maintain their own compliance, including deletion of user data when business relationships terminate.

We believe in biometric privacy rights, and that both users and their organizations benefit from a responsibly operated biometric identity infrastructure.  We actively participate in industry privacy workgroups as recognized biometric subject matter experts in order to influence and keep abreast of any proposed changes to these regulations. Beyond these regulations, we are not currently subject to direct regulation by any government agency, other than regulations generally applicable to businesses or related to specific project requirements. In the event of any international sales, we would be subject to various domestic and foreign laws regulating such exports and export activities.

 

Environmental Regulations

 

As of the date of this report, we have not incurred any material expenses relating to our compliance with federal, state, or local environmental laws and do not expect to incur any material expenses in the foreseeable future.

 

Employees, Contractors,Seasonality

Generally, our revenues do not exhibit a seasonal pattern, however, revenue is affected by customer budgeting, government fiscal year planning, and Consultantscapital budgets.

Human Capital Resources

 

As of May 11, 2020,the date of this report, we employed fifteenthirty-four individuals on a full-time basis as follows: (i) sixsixteen in engineering, customer support, and research and development; (ii) threeeight in finance and administration; and (iii) sixten in sales and marketing. We also use the services of threetwo consultants (part-time) who provide engineering and technical services. Additionally, our Hong Kong subsidiary employs two individualsservices on a full-timepart-time basis, as follows: (i) one in research and development, and (ii) one in finance and administration. We also use the services of twothree full-time factory contractors, (full-time)and three part-time factory contractors in China. None of our employees are represented by a labor union and we believe that our relationship with our employees is good.

Available Information

We maintain a website with the address www.BIO-key.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available on our website, without charge, as soon as reasonably practicable after they are filed electronically with the SEC. The SEC also maintains a website that contains reports, proxy and information statements and other information statements and other information regarding issuers who file electronically with the SEC. The SEC’s website address is www.sec.gov.

 

8

 

ITEM 1A. RISK FACTORS

 

Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements appearing just before the section captioned “Business”BUSINESS in Item 1. above. Effective November 20, 2020, we implemented a reverse stock split of our outstanding common stock at a ratio of 1-for-8. All share figures are reflected on a post-split basis.

 

Business and Financial RisksBUSINESS AND FINANCIAL RISKS

 

Based on our lack of sufficient revenue since inception and recurring losses from operations, our independent registered public accounting firm has included an explanatory paragraph in their opinion as to the substantial doubt about our ability to continue as a going concern.

Due to, among other factors, our history of losses and limited revenue, our independent registered public accounting firm has included an explanatory paragraph in their opinion for the year ended December 31, 2019 as to the substantial doubt about our ability to continue as a going concern. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which contemplate that we will continue to operate as a going concern. Our financial statements do not contain any adjustments that might result if we are unable to continue as a going concern.

Since our formation, weWe have historically not generated significant revenue and have sustained substantial operating losses.

 

As of December 31, 2019, we had an accumulated deficit of approximately $90 million. In order to increase revenue, we have developed a direct sales force and anticipate the need to retain additional sales, marketing and technical support personnel and may need to incur substantial expenses. We cannot assure you that we will be able to secure these necessary resources, that a significant market for our technologies will develop, or that we will be able to achieve our targeted revenue. If we are unable to achieve revenue or raise capital sufficient to cover our ongoing operating expenses, we will be required to scale back operations, including marketing and research initiatives, or in the extreme case, discontinue operations. As of December 31, 2020, we had an accumulated deficit of approximately $99 million.

 

Our biometric technology has yet to gain widespread market acceptance and we do not know how large of a market will develop for our technology.

 

Biometric technology has received only limited market acceptance, particularly in the private sector. Our technology represents a novel security solution and we have not yet generated significant sales. Although recent security concerns relating to identification of individuals and appearance of biometric readers on popular consumer products, including the Apple iPhone, have increased interest in biometrics generally, it remains an undeveloped, evolving market. Biometric based solutions compete with more traditional security methods including keys, cards, personal identification numbers and security personnel. Acceptance of biometrics as an alternative to such traditional methods depends upon a number of factors including:

 

 

national or international events which may affect the need for or interest in biometric solutions;

 

 

the performance and reliability of biometric solutions;

 

 

marketing efforts and publicity regarding these solutions;

 

 

public perception regarding privacy concerns;

 

 

costs involved in adopting and integrating biometric solutions;

 

 

proposed or enacted legislation related to privacy of information; and

 

 

competition from non-biometric technologies that provide more affordable, but less robust, authentication (such as tokens and smart cards).

 

For these reasons, we are uncertain whether our biometric technology will gain widespread acceptance in any commercial markets or that demand will be sufficient to create a market large enough to produce significant revenue or earnings. Our future success depends, in part, upon business customers adopting biometrics generally, and our solution specifically.

 

Biometric technology is a new approach to Internet security, which must be accepted in order for our WEB-key solution to generate significant revenue.

 

Our WEB-key authentication initiative represents a new approach to Internet security, which has been adopted on a limited basis by companies that distribute goods, content or software applications over the Internet. The implementation of our WEB-key solution requires the distribution and use of a finger scanning device and integration of database and server side software. Although we believe our solutions provide a higher level of security for information transmitted over the Internet than existing traditional methods, unless business and consumer markets embrace the use of a scanning device and believe the benefits of increased accuracy outweigh implementation costs, our solution will not gain market acceptance.

 

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The market for our solutions is still developing and if the biometrics industry adopts standards or a platform different from our standards or platform, our competitive position would be negatively affected.

 

The market for identity solutions is still developing. The evolution of this market may result in the development of different technologies and industry standards that are not compatible with our current solutions, products or technologies. Several organizations set standards for biometrics to be used in identification and documentation. Although we believe that our biometric technologies comply with existing standards, these standards may change and any standards adopted could prove disadvantageous to or incompatible with our business model and current or future solutions, products and services.

 

Our software products maycontain defects which will make it more difficult for us to establish and maintain customers.

 

Although we have completed the development of our core biometric technology, it has only been used by a limited number of business customers. Despite extensive testing during development, our software may contain undetected design faults and software errors, or “bugs” that are discovered only after it has been installed and used by a greater number of customers. Any such defect or error in new or existing software or applications could cause delays in delivering our technology or require design modifications. These could adversely affect our competitive position and cause us to lose potential customers or opportunities. Since our technologies are intended to be utilized to secure physical and electronic access, the effect of any such bugs or delays will likely have a detrimental impact on us. In addition, given that biometric technology generally, and our biometric technology specifically, has yet to gain widespread acceptance in the market, any delays would likely have a more detrimental impact on our business than if we were a more established company.  

 

In order to generate revenue from our biometric products, we are dependent upon independent original equipment manufacturers, system integrators and application developers, which we do not control. As a result, it maybe more difficult to generate sales.

 

We market our technology through licensing arrangements with:

 

 

Originaloriginal equipment manufacturers (OEMs), system integrators and application developers which develop and market products and applications which can then be sold to end users; and

 

Companies

companies which distribute goods, services or software applications over the Internet.

 

As a technology licensing company, our success will depend upon the ability of these manufacturers and developers to effectively integrate our technology into products and services which they market and sell. We have no control over these licensees and cannot assure you that they have the financial, marketing or technical resources to successfully develop and distribute products or applications acceptable to end users or generate any meaningful revenue for us. These third parties may also offer the products of our competitors to end users. While we have commenced a significant sales and marketing effort, we have only begun to develop a significant distribution channel and may not have the resources or ability to sustain these efforts or generate any meaningful sales.

 

We face intense competition and maynot have the financial and human resources necessary to keep up with rapid technological changes, which mayresult in our technology becoming obsolete.

 

The Internet, facility access control, and information security markets are subject to rapid technological change and intense competition. We compete with both established biometric companies and a significant number of startup enterprises as well as providers of more traditional methods of access control. Most of our competitors have substantially greater financial and marketing resources than we do and may independently develop superior technologies, which may result in our technology becoming less competitive or obsolete. We may not be able to keep pace with this change. If we are unable to develop new applications or enhance our existing technology in a timely manner in response to technological changes, we will be unable to compete in our chosen markets. In addition, if one or more other biometric technologies such as voice, face, iris, hand geometry or blood vessel recognition are widely adopted, it would significantly reduce the potential market for our fingerprint identification technology. 

 

We introduced our products in Asian markets in 2016 and expect material revenues from Africa beginning in 2020.2021 and future periods. Our financial performance will be subject to risks associated with changes in the value of the U.S. dollar versus local currencies.

 

Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales and operating expenses worldwide. Weakening of foreign currencies relative to the U.S. dollar will adversely affect the U.S. dollar value of our foreign currency-denominated sales and earnings, if any, and could lead to us raising international pricing, potentially reducing the demand for our products. In addition, margins on sales of our products in foreign countries and on sales of products that include components obtained from foreign suppliers could be materially adversely affected by foreign currency exchange rate fluctuations.

 

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Although we have made significant sales of our products throughout Asia and Africa in prior years, we have not been able to consistently enforce our contract rights and collect all receivables which has resulted in material write-offs.

In June 2015, we made a license sale in Africa for approximately $2.1 million, of which approximately $1.7 million remains unpaid. In December 2018, we made a license sale in Asia for approximately $1.1 million, of which approximately $0.5 million remains unpaid.  These amounts have been written off in full which has negatively impacted our financial position and results of operation.

 

Our ability to enforce our international contracts is contingent on our relationships with foreign resellers, and their financial viability. Although we are making efforts to better enforce our contract rights, there can be no assurance that we will be able to fully collect all receivables originating in Asia and Africa or that will not have to write-off future receivablereceivables which may be material in amount.  Any such write-offs have in the past and will negatively impact our financial position and results of operation.

 

We depend on key employees and members of our management team, including our Chairman of the Board and Chief Executive Officer and our Chief Technology Officer, in order to achieve our goals. We cannot assure you that we will be able to retain or attract such persons.

 

Our employment contracts with Michael W. DePasquale, our Chairman of the Board and Chief Executive Officer, and Mira LaCous, our Chief Technology Officer, expire annually, and renew automatically for successive one year periods unless notice of non-renewal is provided by the Company. Although the contracts do not prevent them from resigning, they do contain confidentiality and non-compete clauses, which are intended to prevent them from working for a competitor within one year after leaving our Company. Our success depends on our ability to attract, train and retain employees with expertise in developing, marketing and selling software solutions. In order to successfully market our technology, we will need to retain additional engineering, technical support and marketing personnel. The market for such persons remains highly competitive and our limited financial resources will make it more difficult for us to recruit and retain qualified persons.

 

We cannot assure you that the intellectual property protection for our core technology provides a sustainable competitive advantage or barrier to entry against our competitors.

 

Our success and ability to compete is dependent in part upon proprietary rights to our technology. We rely primarily on a combination of patent, copyright and trademark laws, trade secrets and technical measures to protect our propriety rights. We have filed a patent application relating to both the optic technology and biometrics solution components of our technology wherein several claims have been allowed. The U.S. Patent and Trademark Office has issued us a series of patents for our Vector Segment fingerprint technology (VST), and our other core biometric analysis and identification technologies. However, we cannot assure you that we will be able to adequately protect our technology or other intellectual property from misappropriation in the U.S. and abroad. Any patent issued to us could be challenged, invalidated or circumvented or rights granted thereunder may not provide a competitive advantage to us. Furthermore, patent applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and other rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property rights on a worldwide basis in a cost-effective manner. In jurisdictions where foreign laws provide less intellectual property protection than afforded in the U.S. and abroad, our technology or other intellectual property may be compromised, and our business would be materially adversely affected. If any of our proprietary rights are misappropriated or we are forced to defend our intellectual property rights, we will have to incur substantial costs. Such litigation could result in substantial costs and diversion of our resources, including diverting the time and effort of our senior management, and could disrupt our business, as well as have a material adverse effect on our business, prospects, financial condition and results of operations. We can provide no assurance that we will have the financial resources to oppose any actual or threatened infringement by any third party. Furthermore, any patent or copyrights that we may be granted may be held by a court to infringe on the intellectual property rights of others and subject us to the payment of damage awards. 

 

We may be subject to claims with respect to the infringement of intellectual property rights of others, which could result in substantial costs and diversion of our financial and management resources.

 

Third parties may claim that we are infringing on their intellectual property rights. We may violate the rights of others without our knowledge. We may expose ourselves to additional liability if we agree to indemnify our customers against third party infringement claims. While we know of no basis for any claims of this type, the existence of and ownership of intellectual property can be difficult to verify and we have not made an exhaustive search of all patent filings. Additionally, most patent applications are kept confidential for twelve to eighteen months, or longer, and we would not be aware of potentially conflicting claims that they make. We may become subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, and we may incur licensing fees or be forced to develop alternative technology or obtain other licenses. In addition, we may incur substantial expenses in defending against these third party infringement claims and be diverted from devoting time to our business and operational issues, regardless of the merits of any such claim.

 

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In addition, in the event that we recruit employees from other technology companies, including certain potential competitors, and these employees are engaged in the development of portions of products which are similar to the development in which they were involved at their former employers, we may become subject to claims that such employees have improperly used or disclosed trade secrets or other proprietary information. If any such claims were to arise in the future, litigation or other dispute resolution procedures might be necessary to retain our ability to offer our current and future services, which could result in substantial costs and diversion of our financial and management resources. Successful infringement or licensing claims against us may result in substantial monetary damages, which may materially disrupt the conduct of our business and have a material adverse effect on our reputation, business, financial condition and results of operations. Even if intellectual property claims brought against us are without merit, they could result in costly and time consuming litigation, and may divert our management and key personnel from operating our business.

 

If we are unable to effectively protect our intellectual property rights on a worldwide basis, we may not be successful in the international expansion of our business.

 

Access to worldwide markets depends in part on the strength of our intellectual property portfolio. There can be no assurance that, as our business expands into new areas, we will be able to independently develop the technology, software or know-how necessary to conduct our business or that we can do so without infringing the intellectual property rights of others. To the extent that we have to rely on licensed technology from others, there can be no assurance that we will be able to obtain licenses at all or on terms we consider reasonable. The lack of a necessary license could expose us to claims for damages and/or injunction from third parties, as well as claims for indemnification by our customers in instances where we have a contractual or other legal obligation to indemnify them against damages resulting from infringement claims. With regard to our own intellectual property, we actively enforce and protect our rights. However, there can be no assurance that our efforts will be adequate to prevent the misappropriation or improper use of our protected technology in international markets.

 

We face inherent product liability or other liability risks that could result in large claims against us. 

 

We have inherent risk of exposure to product liability and other liability claims resulting from the use of our products, especially to the extent customers may depend on our products in public safety situations that may involve physical harm or even death to individuals, as well as exposure to potential loss or damage to property. Despite quality control systems and inspection, there remains an ever-present risk of an accident resulting from a faulty manufacture or maintenance of products, or an act of an agent outside of our or our supplier’s control. Even if our products perform properly, we may become subject to claims and costly litigation due to the catastrophic nature of the potential injury and loss. A product liability claim, or other legal claims based on theories including personal injury or wrongful death, made against us could adversely affect operations and financial condition. Although we may have insurance to cover product liability claims, the amount of coverage may not be sufficient. 

 

We expect that we willmay need to obtain additional financing to execute our business plan over the long-term, which may not be available. If we are unable to raise additional capital or generate significant revenue, we may not be able to continue operations.

 

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 $525,000$735,000 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation. During 2019,2020, we generated approximately $2,268,000$2,837,000 of revenue, which is below our average monthly requirements. If we are unable to generate sufficient revenue to cover operating expenses and fund our business plan, we will need to obtain additional third-party financing to (i) conduct the sales, marketing and technical support necessary to execute our plan to substantially grow operations, increase revenue and serve a significant customer base; and (ii) provide working capital.financing. We may, therefore, need to obtain additional financing through the issuance of debt or equity securities. We cannot assure you that we will be able to secure any such additional financing on terms acceptable to us or at all. If we cannot obtain such financing, we will not be able to execute our business plan, will be required to reduce operating expenses, and in the extreme case, discontinue operations. 

 

We maynot achieve sustainable profitability with respect to the biometric component of our business if we are unable to maintain, improve our offerings.

 

We believe that our future business prospects depend in part on our ability to maintain and improve our current services and to develop new ones on a timely basis. Our services will have to achieve market acceptance, maintain technological competitiveness, and meet an expanding range of customer requirements. As a result of the complexities inherent in our service offerings, major new wireless data services and service enhancements require long development and testing periods. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new services and service enhancements. Additionally, our new services and service enhancements may not achieve market acceptance. If we cannot effectively develop and improve services, we may not be able to recover our fixed costs or otherwise become profitable.

 

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If we fail to adequately manage our resources, it could have a severe negative impact on our financial results or stock price.

 

We could be subject to fluctuations in technology spending by existing and potential customers. Accordingly, we will have to actively manage expenses in a rapidly changing economic environment. This could require reducing costs during economic downturns and selectively growing in periods of economic expansion. If we do not properly manage our resources in response to these conditions, our results of operations could be negatively impacted.

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The recent outbreak of COVID-19 has and may continue to have a negative impact on our business, sales, results of operations and financial condition.

 

The global outbreak of COVID-19 has led to severe disruptions in general economic activities, particularly retail operations and travel, as businesses and federal, state, and local governments take increasingly broad actions to mitigate this public health crisis. Individually and collectively, the consequences of the COVID-19 outbreak could have a material adverse effect on our business, sales, results of operations and financial condition.  Although our employees have been accustomed to working remotely prior to the COVID-19 pandemic, the uncertainty has extended sales cycles, extended payment terms, impacted access to inventory overseas, and delayed the start of planned deployments, particularly in the continent of Africa which remains subject to shut-down and shelter at home orders. deployments.

 

Additionally, our liquidity could be negatively impacted if these conditions continue for a significant period of time and we may be required to pursue additional sources of financing to obtain working capital, maintain appropriate inventory levels, and meet our financial obligations. Currently capital and credit markets have been disrupted by the crisis and our ability to obtain any required financing is not guaranteed and largely dependent upon evolving market conditions and other factors. Depending on the continued impact of the crisis, further actions may be required.

 

The extent to which the COVID-19 outbreak ultimately impacts our business, sales, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience significant impacts to our business as a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future. 

 

We have taken measures to minimize the health risks of COVID-19 to our employees, as their safety and well-being are a top priority. Despite these efforts, there is a risk that one or more of our employees, including members of senior management, could contract COVID-19. Our U.S. employees are working remotely when possible, and we may experience reduced productivity due to the remote work environment. The extent to which COVID-19 impacts our business, sales and results of operations will depend on future developments, which are highly uncertain and cannot be predicted.

 

War, terrorism, other acts of violence or natural or manmade disasters such as a global pandemic may affect the markets in which the Company operates, the Companys customers, the Company’sCompanys delivery of products and customer service, and could have a material adverse impact on our business, results of operations, or financial condition.

 

Our business may be adversely affected by instability, disruption or destruction in a geographic region in which we operate, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest, and natural or manmade disasters, including famine, food, fire, earthquake, storm or pandemic events and spread of COVID-19, described above.

 

Such events may cause customers to suspend their decisions on using our products and services, make it difficult or impossible to access some of our inventory, and give rise to sudden significant changes in regional and global economic conditions and cycles that could interfere with purchases of goods or services. These events also pose significant risks to the our personnel and to physical facilities which could materially adversely affect our financial results.

 

Our business could be negatively impacted by security threats, including cybersecurity threats, ransomware, and other disruptions.

 

As a technology company, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information. Although we utilize various procedures and controls to monitor these threats and mitigate our exposure to such threats, there can be no assurance that these procedures and controls will be sufficient in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of sensitive information, critical infrastructure, personnel or capabilities, essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations, or cash flows.

 

Cybersecurity attacks in particular are evolving and include but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. Although we have implemented systems and procedures that are designed to protect customer, employee, vendor and Company information, prevent data loss and other security breaches, and otherwise identify, assess, and analyze cybersecurity risks, these measures may not be effective. Development and maintenance of these systems is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures increase and become more sophisticated. We face an evolving threat landscape in which cybercriminals, among others, employ a complex array of techniques designed to access personal data and other information, including, for example, the use of fraudulent or stolen access credentials, malware, ransomware, phishing, denial of service and other types of attacks. While, to the best of our knowledge, we have not experienced any material misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a security breach or cyber attackcyberattack that could materially increase financial risk to the Company or our customers, such a security breach or cyber attackcyberattack could adversely affect our business and operations, including by damaging our reputation and our relationships with our customers, employees and investors, exposing us to litigation, fines, penalties or remediation costs.

 

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We may experience difficulties in completing the integration of the operations, personnel and assets of PistolStar which we acquired in June 2020.

We recently acquired PistolStar. There can be no assurance that we will be able to manage PistolStar’s business or successfully integrate the business with our historic operations without substantial costs, delays or other operational or financial problems. In addition, we cannot assure you that we will be able to maintain and grow the revenues and operating margins of the combined business, realize cost synergies with PistolStar’s products, services, and operations, or that we will be able to retain all of PistolStar’s existing customers and employees. If we are unable to successfully manage the new business, we will not be able to generate sufficient revenue to offset the acquisition costs that we have incurred which would have a material adverse effect on our financial position and results of operations.

There is a scarcity of and competition for acquisition opportunities.

There are a limited number of operating companies available for acquisition that we deem to be desirable targets. In addition, there is a very high level of competition among companies seeking to acquire these operating companies. Many established and well-financed entities are active in acquiring interests in companies that we may find to be desirable acquisition candidates. Many of these entities have significantly greater financial resources, technical expertise and managerial capabilities than us. Consequently, we will be at a competitive disadvantage in negotiating and executing possible acquisitions of these businesses. Even if we are able to successfully compete with these entities, this competition may affect the terms of completed transactions and, as a result, we may pay more or receive less favorable terms than we expected for potential acquisitions. We may not be able to identify operating companies that complement our strategy, and even if we identify a company that complements our strategy, we may be unable to complete an acquisition of such a company for many reasons, including:

failure to agree on the terms necessary for a transaction, such as the purchase price;

incompatibility between our operational strategies or management philosophies with those of the potential acquiree;

competition from other acquirers of operating companies;

lack of sufficient capital to acquire a profitable distribution company; and

unwillingness of a potential acquiree to work with our management.

Risks Related related to acquisition financing.

We have a limited amount of financial resources and our ability to make additional acquisitions without securing additional financing from outside sources is limited. In order to continue to pursue our acquisition strategy, we may be required to obtain additional financing. We may obtain such financing through a combination of traditional debt financing or the placement of debt and equity securities. We may finance some portion of our future acquisitions by either issuing equity or by using shares of our common stock for all or a portion of the purchase price for such businesses. In the event that our common stock does not attain or maintain a sufficient market value, or potential acquisition candidates are otherwise unwilling to accept our common stock as part of the purchase price for the sale of their businesses, we may be required to use more of our cash resources, if available, in order to maintain our acquisition program. If we do not have sufficient cash resources, we will not be able to complete acquisitions and our growth could be limited unless we are able to obtain additional capital through debt or equity financings.

We may experience difficulties in integrating the operations, personnel and assets of any business we acquire which may disrupt our business, dilute stockholder value, and adversely affect our operating results.

A component of our business plan is to acquire businesses and assets in the biometric and identity access management industry. There can be no assurance that we will be able to identify, acquire or profitably manage businesses or successfully integrate acquired businesses into the Company without substantial costs, delays or other operational or financial problems. Such acquisitions also involve numerous operational risks, including:

difficulties in integrating operations, technologies, services and personnel;

the diversion of financial and management resources from existing operations;

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the risk of entering new markets;

difficulties in retaining the existing customers;

the potential loss of existing or acquired strategic operating partners following an acquisition;

the potential loss of key employees following an acquisition and the associated risk of competitive efforts from such departed personnel;

assumed or unforeseen liabilities that arise in connection with the acquired business

possible legal disputes with the acquired company following an acquisition; and

the inability to generate sufficient revenue to offset acquisition or investment costs.

As a result, if we fail to properly evaluate and execute any acquisitions or investments, our business and prospects may be seriously harmed.

To the extent we make any material acquisitions, our earningsmayadversely affected by non-cash charges relating to the amortization of intangible assets.

Under applicable accounting standards, purchasers are required to allocate the total consideration paid in a business combination to the identified acquired assets and liabilities based on their fair values at the time of acquisition. The excess of the consideration paid to acquire a business over the fair value of the identifiable tangible assets acquired must be allocated among identifiable intangible assets including goodwill. The amount allocated to goodwill is not subject to amortization. However, it is tested at least annually for impairment. The amount allocated to identifiable intangible assets, such as customer relationships and the like, is amortized over the life of these intangible assets. We expect that this will subject us to periodic charges against our earnings to the extent of the amortization incurred for that period. Because our business strategy focuses, in part, on growth through acquisitions, our future earnings may be subject to greater non-cash amortization charges than a company whose earnings are derived solely from organic growth. As a result, we may experience an increase in non-cash charges related to the amortization of intangible assets acquired in our acquisitions. Our Common Stockfinancial statements will show that our intangible assets are diminishing in value, even if the acquired businesses are increasing (or not diminishing) in value.

RISKS RELATED TO OUR COMMON STOCK

 

We have issued a substantial number of securities that are convertibleoptions and warrants exercisable into shares of our common stock which could result in substantial dilution to the ownership interests of our existing shareholders.stockholders.

 

As of the date of this report, approximately 9,300,0004,917,000 shares of our common stock were reserved for issuance upon exercise or conversion of outstanding stock options warrants, and convertible notes.warrants. The exercise or conversion of these securities will result in a significant increase in the number of outstanding shares and substantially dilute the ownership interests of our existing stockholders. 

 

The availability of a substantial number of shares of our common stock for public sale may cause the price of our common stock to decline. 

 

Our most recent registration statement, which was declared effectivepublic offering in September 2019, coveredJuly 2020 resulted in the public resaleissuance of 2,040,0005,059,850 shares of our common stock, underlying a convertible noteincluding the exercise of prefunded warrants, and 2,000,000warrants to purchase approximately 4,260,000 shares underlyingof common stock.  These warrants which we issued in a July 2019 private offering. In the first quarter of 2020, we amended the convertible note to reduce the conversion price to $0.65 per share which increased the number of shares issuable upon conversion of the note. Asare immediately exercisable as of the date of this report approximately 5,000,000 shares have been converted under the note  In addition, on May 6, 2020, we issued a convertible note and warrants convertible and exercisable, respectively, into approximately 3,900,000 shares of common stock.  We have agreedsubject to register the public resale of these shares which represent approximately 19% of our outstanding shares.an effective registration. The availability of these shares for sale to the public, whether or not sales have occurred or are occurring, and the sale of such shares in the public markets could have an adverse effect on the market price of our common stock. Such an adverse effect on the market price would make it more difficult for us to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

 

An active trading market for our common stock may not be sustained.

 

Although our common stock is listed on the Nasdaq Capital Market, an active trading market for our shares may not be developed and if developed, sustained. If an active market for our common stock is not developed or sustained, it may be difficult for you to sell your shares without depressing the market price for the shares or sell your shares at all. Any inactive trading market for our common stock may also impair our ability to raise capital to continue to fund our operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

 

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If we fail to comply with the continued minimum closing bid requirements of the Nasdaq or other requirements for continued listing, our Common Stock may be delisted and the price of our Common Stock and our ability to access the capital markets could be negatively impacted.

 

Our common stock is listed for trading on Nasdaq. We must satisfy Nasdaq’s continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share for 30 consecutive business days.and minimum stockholders’ agreement. A delisting of our common stock from Nasdaq could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our Common Stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees and fewer business development opportunities.

 

In September 2019, we received a letter from the Nasdaq stating that our share price had not satisfied the continued listing requirement to maintain a minimum bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2). We were not able to regain compliance during the 180-day period following the letter, and have provided a written notice to the Nasdaq stating that it is our intention to regain compliance during the second 180-day period. On April 20, 2020, the Company received notice from the Listing Qualifications Department of The Nasdaq Capital Market that the grace period to regain compliance with the continued listing standard set forth in Rule 5550(a)(2) of the Nasdaq Listing Rules (the “Minimum Bid Price Requirement”) has been extended due to the global market impact caused by COVID-19. More specifically, Nasdaq has stated that the compliance periods for any company previously notified about non-compliance with the Minimum Bid Price Requirement will be suspended effective April 16, 2020, until June 30, 2020. On July 1, 2020, companies will receive the balance of any pending compliance period in effect on April 16, 2020 to come back into compliance with the applicable Minimum Bid Price Requirement. As a result of this extension, we now has until December 4, 2020, to regain compliance with the Minimum Bid Price Requirement.

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We expectmay need to raise additional funds in the future through issuances of securities and such additional funding may be dilutive to stockholders or impose operational restrictions.

 

We expect that we willmay need to raise additional capital in the future to help fund our operations through sales of shares of our common stock or securities convertible into shares of our common stock, as well as issuances of debt. Such additional financing may be dilutive to our stockholders, and debt financing, if available, and may involve restrictive covenants which may limit our operating flexibility. If additional capital is raised through the issuance of shares of our common stock or securities convertible into shares of our common stock, the percentage ownership of existing stockholders will be reduced. These stockholders may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.

 

Because we do not expect to pay dividends for the foreseeable future, investors seeking cash dividends should not purchase our shares of common stock.

 

We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Our paymentPayment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. Accordingly, investors seeking cash dividends should not purchase shares of our common stock.

Our share ownership is concentrated which will limit your ability to influence corporate matters.

Our directors, officers and principal stockholders, beneficially own approximately 36% of our common stock and will continue to have significant influence over the outcome of all matters submitted to the stockholders for approval, including the election of our directors and approval of significant corporate transactions. This concentration of ownership will limit your ability to influence corporate matters, and as a result, actions may be taken that you may not view as beneficial. 

 

Provisions of our certificate of incorporation, bylaws and Delaware law may make a contested takeover of our Company more difficult.

 

Certain provisions of our certificate of incorporation, bylaws and the General Corporation Law of the State of Delaware (“DGCL”) could deter a change in our management or render more difficult an attempt to obtain control of us, even if such a proposal is favored by a majority of our stockholders. For example, we are subject to the provisions of the DGCL that prohibit a public Delaware corporation from engaging in a broad range of business combinations with a person who, together with affiliates and associates, owns 15% or more of the corporation’s outstanding voting shares (an “interested stockholder”) for three years after the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Our certificate of incorporation also includes undesignated preferred stock, which may enable our board of directors to discourage an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise. Finally, our bylaws include an advance notice procedure for stockholders to nominate directors or submit proposals at a stockholders meeting. Delaware law and our charter may, therefore, inhibit a takeover. 

 

The trading price of our common stock may be volatile.

 

The trading price of our shares has from time to time fluctuated widely and in the future may be subject to similar fluctuations. The trading price may be affected by a number of factors including the risk factors set forth in this prospectus as well as our operating results, financial condition, announcements of innovations or new products by us or our competitors, general conditions in the biometrics and access control industries, and other events or factors. We cannot assure you that any of the broker-dealers that currently make a market in our common stock will continue to serve as market makers or have the financial capability to stabilize or support our common stock. A reduction in the number of market makers or the financial capability of any of these market makers could also result in a decrease in the trading volume of and price of our shares. In recent years broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. Such broad market fluctuations may adversely affect the future-trading price of our common stock.  

 

ITEM 2. DESCRIPTION OF PROPERTY

 

We do not own any real estate. We conduct operations from leased premises in Eagan, Minnesota (5,544 square feet), Bedford, New Hampshire (3,364 square feet), and Wall, New Jersey (4,517 square feet), as well as in several home-office locations across the country.. Internationally, we conduct operations from leased premises in Tsuen Wan, Hong Kong (1,098 square feet), and Jiangmen, China (3,267 square feet).  Our Eagan, Minnesota and Bedford, New Hampshire offices provide research and development, and customer support, for BIO-key software and PistolStar software, respectively. Our Wall, New Jersey location serves as our corporate headquarters.  Our Hong Kong location is a small warehouse for finished goods as well as administrative and sales support.  Our Jiangmen, China facility provides our hardware research and development, contract manufacturing and warehousing of raw materials, work-in-process, and finished goods.

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ITEM 3. LEGAL PROCEEDINGS

 

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this report, we are not a party to any pending lawsuit.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PARTII

 

ITEM 5. MARKET FOR REGISTRANT’SREGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock currently trades on the Nasdaq Capital Market under the symbol “BKYI”.

 

Holders

 

As of May 11, 2020,March 26, 2021, the number of stockholders of record of our common stock was 55.112.

 

Dividends

 

We have not paid any cash dividends on our common stock to date,to-date and have no intention of paying any cash dividends on our common stock in the foreseeable future. The declaration and payment of dividends on our common stock is also subject to the discretion of our Board of Directors and certain limitations imposed under the DGCL.Delaware General Corporation Law.  The timing, amount, and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

TheFor information concerning ouron securities authorized for issuance under the Company’s equity compensation plans, is incorporated by reference from information contained under the section “Equity Compensation Plans” in our Proxy Statement for the 2020 Annual Meetingsee “Item 12 - Security Ownership of Stockholders. Certain Beneficial Owners and Related Stockholder Matters.”

 

Unregistered Sales of Equity Securities

 

There were no unregistered sales of the Company’s equity securities during 20192020 that were not previously disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.

 

Rule 10B-1810b-18 Transactions

 

None.

 

ITEM6. SELECTED FINANCIAL DATA

 

Not Applicable.

 

ITEM 7. MANAGEMENT’SMANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion Andand Analysis Ofof Financial Condition Andand Results Ofof 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 should be read in conjunction with our audited financial statements included elsewhere herein.

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand theour Company. The MD&AThis discussion is provided as a supplement to and should be read in conjunction with our consolidated financial statements for the years ended December 31, 2020 and 2019 and the accompanying notes.notes included elsewhere in this Report.

 

OVERVIEWEffective November 20, 2020, we implemented a reverse stock split of our outstanding common stock at a ratio of 1-for-8. All share figures are reflected on a post-split basis.

Overview

 

We developare a leading identity access management (IAM) platform provider for the enterprise and market advanced fingerprintlarge-scale customer and civil ID solutions.  Built to leverage BIO-key’s world-class biometric identificationcore platform among 14 other strong authentication factors, BIO-key PortalGuard and identity verification technologies, as well as related identity managementhosted PortalGuard IDaaS are platforms that enable our customers to securely and credentialing fingerprint biometric hardware and software solutions. We were pioneers in developing automated, finger identification technologyeasily assure that supplements or compliments other methods of identification and verification,only the right people can access the right systems.  PortalGuard goes beyond traditional multifactor authentication (MFA) solutions by addressing sizeable gaps, such as personal inspection identification, passwords, tokens, smart cards, ID cards, PKI, credit card, passports, driver’s licenses, OTP or other forms of possession or knowledge-based credentialing.  Advanced BIO-key technology has been and is usedallowing roving users to improve both the accuracy and speed of competing finger-based biometrics. Our solutions are used by customers in every sector of our economy including government, financial services, education, manufacturing, retail, and call centers.

We provide the ability to positively identify andbiometrically authenticate individuals before granting access to valuable corporate resources, web portals or applications in seconds.  Powered by our patented Vector Segment Technology (VST), WEB-key and BSP development kits are fingerprint biometric solutions that provide interoperability with dozens of reader manufacturers, enabling application developers and integrators to integrate fingerprint biometrics intoat any workstation without using their applications. 

Our biometric identification technology improves both the accuracy and speed of screening individuals, for identification purposes or for personal identity verification, by extracting unique data from a fingerprint and comparing it to existing similar fingerprint data. The technology has been built to be scalable and to handle databases containing millions of fingerprints. We achieve the highest levels of discrimination without requiring any other identifying data (multi-factor) such as a user ID, smart cards,phones or tokens, although our technology can be used in conjunction with such additional factors. Users of our technology have the option of on device or cloud authentication. This flexible authentication option in conjunction with our interoperable capabilities, is another key differentiator of our biometric identification solutions.eliminating unauthorized account delegation, detecting duplicate users, and accommodating in-person identification. 

 

1618

 

Our WEB-key solutionMillions use BIO-key every day to securely access a variety of cloud, mobile and web applications, on-premise and cloud-based hypervisor 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 10 million of their customers in branches on a daily basis. 

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 BIO-key hardware and our NIST-certified biometric platform is a client server suiteunique in that it supports interoperable mixing and matching combinations of fingerprint scanners regardless of manufacturer, so that the right scanner can be integrateddeployed for the right use case, without mandating the user of a particular scanner.

Security-conscious developers leverage our platform APIs and federation interfaces to securely and efficiently embed biometric and MFA identity capabilities into virtually any application, whether web based or desktop application based on Windows. The WEB-key solution istheir 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.

We operate a security solution that protects the biometric data in processing, transmissionSaaS business model with customers subscribing to term use of our software for annual recurring revenue. We sell our products directly through our field and storage. WEB-key provides a turn-key solution for biometricinside sales teams, as well as multi-factor authentication across an enterprise, governmentindirectly 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 any user population.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. 

 

We also develop and distribute hardware components that arePortalGuard is used in conjunction with our software, and sell third-party hardware components with our software in various configurations required by our customers. Our products are interoperable with major fingerprint readercustomers to manage and hardware manufacturers, supporting Windows, Linux, Mac OS X,secure IT access by their employees, contractors and Android operating systems enabling application developers, value added resellers,partners, which we call workforce identity. PortalGuard is also used to manage and channel partnerssecure the identities of an organization’s customers through integration of APIs we have developed and industry-standard federation standards, which we call customer identity. We invoice customers in advance in annual and multi-year prepaid installments for subscriptions to integrate our fingerprint biometrics into their applications, while dramatically reducing maintenance, upgrade and life-cycle costs. This interoperability is unique in the industry, and a key differentiator for our products in the biometric market. In our opinion, these features makes our technology more viable than competing technologies and expands the size of the overall market for our products.platforms.

 

In partnerships with OEMs, VARs, integrators, and solution providers, we market and sell biometric hardware and software solutions to SMBs, the Fortune 500 and government agencies.

We support industry standards, including PIV, FIPS, ANSI, ISO, SAML, and BioAPI among others. We have received National Institute of Standards and Technology (NIST) independent laboratory testing and certification of our ability to support Homeland Security Presidential Directive #12 (HSPD-12) and ANSI/INCITS-378 templates, as well as validation of our fingerprint match speed and accuracy in large database environments.

We have developed what we believe is the most discriminating and effective commercially available finger-based biometric technology. Our primary focus is in marketing and selling this technology to customers seeking to secure access to networks, applications and data on-premises or remotely. Our primary market focus includes, government, financial services, education, healthcare, manufacturing, retail, and call centers.

PRODUCTS

We also offer a full line of easy to use finger scanners for both enterprise and consumer markets. Our SideSwipe, SideTouch and EcoID scanners are plug and play compatible with Microsoft Windows and our Q-180 Touch reader is a Micro USB compatible fingerprint reader for Android devices. The readers are currently sold in the Microsoft stores, as well as through their on-line channel, on Amazon, and through our website.  In 2018, we introduced OmniPass Consumer, a secure biometric-enabled application to manage multiple passwords for online apps, services, or accounts.

In 2015, Microsoft announced native support for biometrics in the Windows 8.1 and Windows 10 Operating platforms as well as Office 2016. With Microsoft Hello, any user can replace their PIN or password to access their device without any special software downloads by using our finger scanners, SideSwipe, SideTouch and EcoID, which are plug and play compatible with the Microsoft platforms. We have been the preferred partner, in particular at the Microsoft “Ignite your Business” Windows 10 and Office 2016 launch events..

Finally, our  ID Director for Windows and  ID Director for SAML  offer biometric authentication to SAML enables apps such as Office 365, GoToMeeting, Zoom, SalesForce, Google G-Suite, and many others.

STRATEGIC OUTLOOKStrategic Outlook

 

Historically, our largest market has been access control within highly regulated industries such as government, financial services, and healthcare.  DuringIn 2019 we became the go-to biometric authentication provider for board of election offices as eight offices deployed our hardware and software to secure internal access to the voter registration database. We will seek to extend this footprint in 20202021 and beyond.

 

WorkingIn 2020, we announced that we had secured two of the largest contracts in our history, with our partner TTI, we expect to begin deploying severalTechnology Transfer Institute.  The contracts, valued at a combined $75,000,000, are for large-scale identity and accessidentification projects in the second quarter of 2020. We  are in the process of establishing an African subsidiary, to work closely with TTI who was awarded contracts of $45MAfrica and $30M.Nigeria. Under the first contract, we will provide biometric authentication to support the infrastructure of a new e-commerce project developed with the expectation to generate more than one million jobs in Nigeria. The second contract provides for BIO-key hardware and software to be used by a leading African telecommunications company to secure internal access to customer data. Based on information available today,Currently Africa and the surrounding regions are receiving government funding to expand the use of biometric authentication solutions to help establish trustworthy government programs and reduce fraud.  As described above,We received our first purchase order under these contracts in the fourth quarter of 2020 which we expect to ship in the first half of 2021 upon receipt of prepayment for the order.  The COVID-19 pandemic has and may continue to delay the rollout of these programs.

 

17

We plan to have a more significant role in the Identity and Access Management (IAM)IAM market which continues to expand. We plan 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.

 

As devices with onboard fingerprint sensors continue to deploy to consumers, we expect that third-party application developers will demand the ability to authenticate users of their respective applications (apps) with the onboard fingerprint biometric. We further believe that authentication will occur on the device itself for potentially low-value, and therefore low-risk, use-transactions and that user authentication for high-value transactions will migrate to the application provider’s authentication server, typically located within their supporting technology infrastructure, or cloud. We have developed our technology to enable, on-device authentication as well as network or cloud-based authentication and believe we may be the only technology vendor capable of providing this flexibility and capability. Our core technology works on major commercially available fingerprint readers, across Windows and Linux, Mac OS X and Android operating systems. This interoperability, coupled with the ability to authenticate users via the device or cloud, is unique in the industry, provides a key differentiator for us, and in our opinion, makes our technology more viable than competing technologies and expands the size of the overall market for our products.

We believe there is potential for significant market growth in the following key areas:

 Corporate network access control, corporate campuses, computer networks, and applications.

 Large scale identification projects, especially in Africa and the surrounding regions.

Government funded initiatives, including with the state board of elections.

International law enforcement use case applications as prospects see us as a global leader in the biometric technology space as witnessed by our agreement with the Israeli Defense Force, and the Singapore and Dubai Police departments.

Consumer mobile credentialing, including mobile payments, credit and payment card programs, data and application access, and commercial loyalty programs. 

Demand for BIO-key hardware products from Windows 10 users and Fortune 500 companies.

Government services and highly regulated industries including, Medicare, Medicaid, Social Security, Drivers Licenses, Campus and School ID, Passports/Visas.

Continued growth in the Asia Pacific region.

New remote authentication challenges – which our solutions are ideally suited to address.

New opportunity to market our remote security solutions, spurred on because of the COVID-19 outbreak.

In the near-term, we expect to grow our business within government services and highly-regulated industries in which we have historically had a strong presence.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 integration ofcompatible, yet superior portable biometric user experience offered by our technology intofor 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 two primary sales strategies call for expandedare focused on (i) increased marketing efforts into the IAM market, along with a(ii) dedicated pursuit of large-scale identification projects across the globe.globe and (iii) growing our channel alliance program which we have grown to more than forty participants and is starting to generate incremental revenues.

19

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. 

 

We also plan on expanding our new Channel Alliance Program which now has more than twenty participants and started to generate modest initial revenues.

RECENT DEVELOPMENTSRecent Developments

 

As discussed under “Item 1A. Risk Factors” above, an outbreak of a novel strain of the coronavirus, COVID-19, has been recognized as a pandemic by the World Health Organization. This outbreak has severely restricted the level of economic activity around the world. In response to this coronavirus outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, including imposing restrictions on travel and business operations and requiring individuals to limit or forego their time outside of their homes. Given the uncertainty regarding the spread of this coronavirus, the related financial impact cannot be reasonably estimated at this time.

18

 

The complications caused by COVID-19 has forced organizations to quickly adapt to a work from home remote business model. This increases the risk of unauthorized users, phishing attacks, and hackers whomwho are eager to take advantage of the challenges of securing remote workers. We believe that biometrics should play a key role in remote user authentication.

 

RESULTS OF OPERATIONS

 

Consolidated Results of Operations

 

Two Year % trend

 

 

Years ended

December 31,

  

Years ended

December 31,

 
 

2019

  

2018

  

2020

  

2019

 

Revenues

                

Services

  40

%

  25

%

  50

%

  40

%

License fees

  20

%

  43

%

  34

%

  20

%

Hardware

  40

%

  32

%

  16

%

  40

%

  100

%

  100

%

  100

%

  100

%

Costs and other expenses

                

Cost of services

  12

%

  11

%

  18

%

  12

%

Cost of license fees

  41

%

  76

%

  2

%

  41

%

Cost of hardware

  56

%

  16

%

  9

%

  56

%

  109

%

  103

%

  29

%

  109

%

Gross Profit (Loss)

  -9

%

  -3

%

  71

%

  -9

%

                

Operating expenses

                

Selling, general and administrative

  222

%

  132

%

  206

%

  222

%

Research, development and engineering

  58

%

  35

%

  49

%

  58

%

Total operating expenses before impairment  280

%

  167

%

  255

%

  280

%

Impairment of resalable software license rights  307%  -   0

%

  307

%

Operating loss

  -596

%

  -170

%

  -184

%

  -596

%

                

Other income (expense)

                

Total other income (expense)

  -47

%

  0

%

  -158

%

  -47

%

Net loss

  -643

%

  -170

%

  -342

%

  -643

%

20

 

Revenues and Costs and other expenses

 

          

2019 - 2018

 
  

2019

  

2018

  

$ Chg

  

% Chg

 
                 

Revenues

                

Services

 $925,245  $1,012,576  $(87,331

)

  -9

%

License fees

  442,649   1,739,897   (1,297,248

)

  -75

%

Hardware

  899,634   1,292,069   (392,435

)

  -30

%

Total Revenue

 $2,267,528  $4,044,542  $(1,777,014

)

  -44

%

                 

Costs and other expenses

                

Services

 $272,318  $443,210  $(170,892

)

  -39

%

License fees

  916,112   3,072,356   (2,156,244

)

  -70

%

Hardware

  1,272,815   648,624   624,191   96

%

Total Costs and other expenses

 $2,461,245  $4,164,190  $(1,702,945

)

  -41

%

        2020 - 2019 
  

2020

  

2019

  

$ Chg

  

% Chg

 
                 

Revenues

                

Services

 $1,432,228  $925,245  $506,983   55

%

License fees

  962,038   442,649   519,389   117

%

Hardware

  442,516   899,634   (457,118

)

  -51

%

Total Revenue

 $2,836,782  $2,267,528  $569,254   25

%

                 

Costs and other expenses

                

Services

 $502,214  $272,318  $229,896   84

%

License fees

  49,891   916,112   (866,221

)

  -95

%

Hardware

  242,721   1,272,815   (1,030,094

)

  -81

%

Total Costs and other expenses

 $794,826  $2,461,245  $(1,666,419

)

  -68

%

 

Revenues

 

Revenue decreased $1,777,014increased $569,254 or 44%25% to $2,836,782 in 2020 as compared to $2,267,528 in 2019 as compared to $4,044,542 in 2018 due to the factors stated below. 

 

For the years ended December 31, 20192020 and 2018,2019, service revenues included approximately $904,000$1,383,000 and $895,000,$904,000, respectively, of recurring maintenance and support revenue, and approximately $21,000$49,000 and $118,000,$21,000, respectively, of non-recurring custom services revenue.  Recurring service revenue increased 1%53% from 20182019 to 2019 as we moved2020 which is due largely to the additional service revenue from a perpetual licensePistolStar customers in the last six months of 2020. Non-recurring custom services increased 134% due to subscription based licensing.increased new customer installations. As our customer base continues to grow, we expect the recurringservice revenue to increase in future periods. Non-recurring custom services decreased 82% in 2019 as a result of a completed special software requirement from an existing customer in the first quarter of 2018.

 

For the years ended December 31, 20192020 and 2018,2019, license revenue decreased 75%increased approximately $519,000 or 117% to $442,649. The decrease was primarily due to one large international order received$962,038. We increased both the variation and number of customers, including additional revenue from the PistolStar acquisition in the fourth quarterlast six months of 2018 in amount of approximately $1,111,000 without a comparable transaction  in the fourth quarter of 2019.2020. 

 

Hardware sales decreased by approximately $392,000,$457,000, or 30%51%, to $899,634$442,516 in 20192020 as a result of fewer large customer deployments, and primarily reduced lock sales.  Fingerprint reader sales decreased approximately $158,000,$412,000, or 16%48%, while the biometric locks decreased approximately $235,000,$45,000, or 84%98% from 2018.2019.

 

Costs of goods sold

 

For the year ended December 31, 2019,2020, cost of service decreasedincreased approximately 39%84% to $272,318,$502,214, due to a completed special software requirement from an existing customer in the first quarter of 2018.increased revenue and the direct support for the PortalGuard installations.

 

License costs for the year ended December 31, 20192020 decreased approximately 70%95% to $916,112.$49,891. The decrease was attributable primarily to the amortization and actual deployments of the software rights of approximately $15,000 in the approximate amount of2020 compared to $884,000 in 2019 compared to $2,658,000 in 2018.2019.

 

Hardware costs for the year ended December 31, 2019 increased2020 decreased approximately 96%81% to $1,272,815.$242,721. The increasedecrease was attributable primarily to the write down of lock inventory and parts as a result of the discontinuance of lock sales in the US offset by a decrease in factory costs due to reduced lock2019 and reduction of hardware sales.

 

Selling, general and administrative

 

 

 

 

 

 

 

 

 

 

 

2019 - 2018   

 

 

 

2019

 

 

2018

 

 

$ Chg

 

 

% Chg

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,036,820

 

 

$

5,333,906

 

 

$

(297,086

)

 

 

-6

%

      2020 - 2019 

2020

  

2019

  

$ Chg

  

% Chg

 
               
$5,848,687  $5,036,820  $811,867   16

%

 

Selling, general and administrative costs for year ended December 31, 20192020 were $5,036,820$5,848,687 representing a 6% decrease from16% increase over 2018. Decreases in costs2019. The increase included non-cash share-based compensation expenses decreased bad debt expense,associated with new marketing personnel and relatedweb-site integration of PistolStar, additional costs associated with the PistolStar office staff and travel.expenses, one-time integration costs incurred in connection the acquisition of PistolStar, increased accounting and legal fees incurred in connection with financing transactions, and costs associated with establishing our African subsidiary.  These amounts were offset in part by increasesa decrease in factoringtravel, bad debt expense, factor fees, legal and accounting fees related to capital raising transactions, and insurance costs.non-cash compensation.

 

21

Research, development and engineering

 

 

 

 

 

 

 

 

 

 

 

2019 - 2018

 

 

 

2019

 

 

2018

 

 

$ Chg

 

 

% Chg

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,331,667

 

 

$

1,415,401

 

 

$

(83,734

)

 

 

-6

%

      2020 - 2019 

2020

  

2019

  

$ Chg

  

% Chg

 
               
$1,396,436  $1,331,667  $64,769   5

%

 

For the year ended December 31, 2019,2020, research, development and engineering costs were $1,331,667$1,396,436 representing a 6% decrease5% increase over 2018,2019, as a result of decreased personnel, non-cash share-based compensationan increase in recruiting expenses and costs related to our Hong Kong subsidiary.the addition of PistolStar expenses.  These amounts were offset by increased recruiting costs.a decrease in contracting services and non-cash compensation.

 

Impairment

 

          2019 - 2018 
  2019  2018  $ Chg  % Chg 

Impairment of resalable software license rights

 $(6,957,516

)

  -  $(6,957,516

)

  n/a 
        2020 - 2019 
  

2020

  

2019

  

$ Chg

  

% Chg

 

Impairment of resalable software license rights

 $-   6,957,516  $(6,957,516

)

  -100

%

 

Impairment of assets relates to the write-down of the FingerQ resalable software license rights to zero in the fourth quarter of 2019.

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

2019 - 2018

 

 

 

2019

 

 

2018

 

 

$ Chg

 

 

% Chg

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

  

154

   

80

   

74

   

93

%

Interest expense

  

(1,069,134

)

  

-

   

(1,069,134

)

  

n/a

 

 

 

$

(1,068,980

 

$

80

 

 

$

(1,069,060

)

 

 

  

        2020 - 2019 
  

2020

  

2019

  

$ Chg

  

% Chg

 
                 

Interest income

  30,649   154   30,495   19,802

%

Government grant

  340,819   -   340,819   n/a 

Interest expense

  (4,343,212

)

  (1,069,134

)

  (3,274,078

)

  306

%

Loss of extinguishment of debt

  (499,076

)

  -   (499,076

)

  n/a 
  $(4,470,820

)

 $(1,068,980

)

 $(3,401,840

)

  318

%

 

Interest expense for the 2019 period2020 related to the interest expense on convertible debt financings and amortization of debt discounts and debt issuance costs relating to convertible notes of approximately $3,574,000, as well as the debtamortization of a beneficial conversion feature of approximately $641,000. Also included in other income (expense) for 2020 was a loss on the extinguishment of a convertible note in the approximate amount of $500,000 resulting from the issuance of an amended and restated convertible note, for which the issuer did not grant a concession. These amounts were partially offset by amounts received under the Payment Protection Program (the “Program”) the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration of approximately $341,000 and interest income of approximately $31,000.

The 2019 total includes the write-off of unamortized discount and debt issuance costs incurred as a result ofrelated to the convertible debt financings.April 2019 and June 2019 notes repaid prior to maturity.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Operating activities overview

 

Net cash used for operations during the year ended December 31, 20192020 was approximately $1,850,000.$4,950,000. Items of note included:

 

 

Net positive cash flows related to accounts receivable, prepayments, inventory, accounts payables, accruals and deferred revenuenon-cash expenses of approximately $2,222,000. $6,104,000.

 

Net positive cash flows related to adjustments for non-cash expenses for impairment, depreciation, amortization, bad debt expense, and share-based compensation of approximately $10,609,000.

Negativenegative cash flows related to changes in contract costsaccounts receivable, prepayments, accounts payable, accruals, lease liabilities, and factoringdeferred revenue of approximately $105,000, due to working capital management.$1,457,000 and our net loss for the period.

 

Investing activities overview

 

Approximately $543,000$2,230,000 was used for investing activities during the year ended December 31, 20192020 and related primarily to the purchaseacquisition of a non-marketable bond for approximately $513,000 and capital expenditures of $30,000.PistolStar.

 

Financing activities overviewoverview

 

Approximately $2,149,000$24,094,000 was provided by financing activities during the year ended December 31, 2019 from2020 consisting of the issuance of common stock and warrants in our underwritten public offering, exercise of warrants and issuance of convertible notes.  These amounts were offset by repayment of debt, including convertible notes, less fees.  repayment of notes payable and other related party debt, debt service fees, and costs associated with the issuance of our securities.

 

22

 

CAPITAL RESOURCESSources 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:

 

We entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has since been extended throughto October 31, 2020.2021 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 per quarter 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 isare 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.   

 

On August 24, 2018, we completed a public offering of units consisting of 1,380,000 shares of common stock and warrants to purchase 1,035,000 shares of common stock for an aggregate gross proceed of $2,070,000, or $1.50 per unit.

On April 4, 2019, we issued a $550,000 secured convertible debenture to an institutional investor with a maturity date of November 15, 2019 which was convertible into common stock at a conversion price of $1.50$12.00 per share. The debenture was redeemable at any time by payment of a premium to the principal balance starting at 5% and increasing to 20%.  The debenture was issued at a 7% original issue discount. On July 10, 2019, this debenture was redeemed and repaid in full in connection with the financing described below.

 

On June 14, 2019, we issued a $157,000 principal amount convertible note to an institutional investor with a maturity date of November 14, 2019 which was convertible into common stock at a conversion price of $1.50$12.00 per share. The note was redeemable at any time by payment of a premium to the principal balance starting at 10% and increasing to 30%. On July 10, 2019, this note was redeemed and repaid in full in connection with the financing described below.

 

On July 10, 2019, we issued a $3,060,000 principal amount senior secured convertible note (the “Original Note”) to an institutional investor. At closing, $2,550,000 was funded. The Original Note iswas secured by a lien on substantially all of our assets and properties and was convertible into shares of our common stock at a fixed conversion price of $1.50$12.00 per share. Pursuant to amendments in the first and second quarter of 2020, we amended the Original Note to increase the principal amount to $3,789,000 as a result of interest and penalties, accelerated the maturity date to June 13, 2020, and reduced the conversion price to $0.65$5.20 per share (the “Amended Note”). As a result of conversions of amounts due under the Amended Note into shares of the Company’s common stock, the current outstanding principal amountThe full balance of the Amended Note is $539,000.has been converted into common stock.

 

On January 13, 2020, we issued a $157,000 principal amount convertible note to an institutional investor with a maturity date of June 13, 2020 which was convertible into common stock at a conversion price of $1.50$12.00 per share. TheThis note is redeemable at any timewas paid in full on June 12, 2020 by payment of a premium to the principal balance starting at 10% and increasing to 30%. $211,984.

 

On February 13, 2020, we issued a $126,000 principal amount convertible note to an institutional investor with a maturity date of July 13, 2020 which was convertible into common stock at a conversion price of $1.15$9.20 per share. TheThis note is redeemable at any timewas paid in full on July 10, 2020 by payment of a premium to the principal balance starting at 10% and increasing to 30%. $170,442.

 

On April 20, 2020, we entered into a Paycheck Protection Program Term Note (the “SVB Note”) with Silicon Valley Bank (“SVB”) pursuant to the Paycheck Protection Program (the “Program”) of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration.Program. We received total proceeds of $340,000approximately $341,000 which will bewas used in accordance with the requirements of the CARES Act. We will apply to SVB for forgiveness of amounts due on the SVB Note to the extent they are used for eligible payroll costs, rent obligations, and covered utility payments incurred during the eight weeks following disbursement under the SVB Note.   Until the six-month anniversary of the dateThe full amount of the SVB Note (the “Deferral Expiration Date”), neither principal nor interest is due and payable. On the Deferral Expiration Date, the outstanding principal of the SVB Note that is not forgiven will convert to an amortizing term loan at an interest rate of 1% per annum requiring equal monthly payments of principal and interest through November 20, 2022.has been forgiven.

 

On May 6, 2020, we issued a $2,415,000 principal amount senior secured convertible note (the “Note”).note. The principal amount iswas due and payable in five equal monthly installments of $268,333 beginning seven months after the funding date with the remaining balance due in on the twelfth monthtwelve months after the date of funding. The Note is convertible at a fixed convertible priceFollowing the completion of $1.16.the underwritten offering consummated in July 2020 discussed below, all outstanding amounts relating this note were paid in full.

 

LIQUIDITY OUTLOOKOn June 29, 2020, we issued a $1,811,250 principal amount senior secured convertible note. The principal amount was due and payable in nine equal monthly installments of $201,250 beginning four months after the funding date. Following the completion of the underwritten offering consummated in July 2020 discussed below, all outstanding amounts relating this note were paid in full.

On July 23, 2020, we completed an underwritten public offering of shares of common stock and warrants resulting in net proceeds of approximately $22.7 million, inclusive of the over-allotment and after deducting underwriting discounts and commissions and estimated offering expenses. We used approximately $4.2 million of the net proceeds to repay all outstanding amounts due under outstanding convertible promissory notes at that time.

23

Liquidity Outlook

 

At December 31, 2019,2020, our total cash and cash equivalents were approximately $79,000,$17,000,000, as compared to approximately $324,000$79,000 at December 31, 2018.2019.  At December 31, 2020 we had working capital of approximately $17,000,000. 

 

As discussed above, we have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. We currently require approximately $525,000$735,000 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation.  During 2019,2020, we generated approximately $2,268,000$2,837,000 of revenue, which is below our average monthly requirements.

If we are unable to generate sufficient revenue to fund current operations or meetand execute our goals,business plan, we may need to obtain additional third-party financing. As of the date of this report, we do not expect that we will need to obtain additional third-party financing to (i) conductduring the sales, marketing and technical support necessary to execute our plan to substantially grow operations, increase revenue and serve a significant customer base; and (ii) provide working capital. We may, therefore, need to obtain additional financing through the issuance of debt or equity securities.next twelve months.

 

Due to several factors, including our history of losses and limited revenue, our independent auditors have included an explanatory paragraph in their opinion related to our annual financial statements as to the substantial doubt about our ability to continue as a going concern. Our long-term viability and growth will depend upon the successful commercialization of our technologies and our ability to obtain adequate financing. To the extent that we require such additional financing, no assurance can be given that any form of additional financing will be available on terms acceptable to us, that adequate financing will be obtained to meet our needs, or that such financing would not be dilutive to existing stockholders. If available financing is insufficient or unavailable or we fail to continue to generate sufficient revenue, we may be required to further reduce operating expenses, delay the expansion of operations, be unable to pursue merger or acquisition candidates, or in the extreme case, not continue as a going concern.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements that have, or are in the opinion of management reasonably likely to have, a current or future effect on our financial condition or results of operations.

 

CRITICAL ACCOUNTING POLICIES

 

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. With the exception of the adoption of ASC 842 for Leases and ASC 606 for Revenue Recognition, thereThere have been no material changes to these estimates for the periods presented in this Annual Report on Form 10-K.

 

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.operations, as listed below:

 

1. Revenue Recognition

 

The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps: 

Identify the contract with a customer

Identify the performance obligations in the contract

Determine the transaction price

 Allocate the transaction price to performance obligations in the contract

 Recognize revenue when or as the Company satisfies a performance obligation

All of our performance obligations, and associated revenue, are generally transferred to customers at a point in time, with the exception of support and maintenance, and professional services, which are generally transferred to the customer over time.

Software licenses2. Business Combinations

Software license revenue consist of fees for perpetual software licenses for one or more of our biometric fingerprint solutions. Revenue is recognized at a point in time once the software is available to the customer for download. Software license contracts are generally invoiced in full on execution of the arrangement.

Hardware

Hardware revenue consists of fees for associated equipment sold with or without a software license arrangement, such as servers, locks and fingerprint readers. Customers are not obligated to buy third party hardware from us, and may procure these items from a number of suppliers. Revenue is recognized at a point in time once the hardware is shipped to the customer. Hardware items are generally invoiced in full on execution of the arrangement.

Support and Maintenance

Support and Maintenance revenue consists of fees for unspecified upgrades, telephone assistance and bug fixes. We satisfy our Support and Maintenance performance obligation by providing “stand-ready” assistance as required over the contract period. We record deferred revenue (contract liability) at time of prepayment until the contracts term occurs. Revenue is recognized over time on a ratable basis over the contract term. Support and Maintenance contracts are up to one year in length and are generally invoiced either annually or quarterly in advance.

Professional Services

Professional services revenues consist primarily of fees for deployment and optimization services, as well as training. The majority of our consulting contracts are billed on a time and materials basis, and revenue is recognized based on the amount billable to the customer in accordance with practical expedient ASC 606-10-55-18. For other professional services contracts, we utilize an input method and recognizes revenue based on labor hours expended to date relative to the total labor hours expected to be required to satisfy its performance obligation.

Contracts with Multiple Performance Obligations

Some contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis.  The standalone selling prices are determined based on overall pricing objectives, taking into consideration market conditions and other factors, including the value of the contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users within the contracts.

We considered several factors in determining that control transfers to the customer upon shipment of hardware and availability of download of software.  These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership.

Accounts receivable from customers are typically due within 30 days of invoicing.  We do not record a reserve for product returns or warranties as amounts are deemed immaterial based on historical experience.

 

 

Costs to Obtain3. Goodwill and Fulfill a Contractacquired intangible assets

Costs to obtain and fulfill a contract are predominantly sales commissions earned by the sales force and are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit determined to be four years. These costs are included as capitalized contract costs on the balance sheet. The period of benefit was determined by taking into consideration customer contracts, technology, and other factors based on historical evidence. Amortization expense is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

 

2.4. Impairment or Disposal of Long Lived Assets, including Intangible Assets

 

We review our long-lived assets, including intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is equal to the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. In assessing recoverability, we must make assumptions regarding estimated future cash flows and discount factors. If these estimates or related assumptions change in the future, we may be required to record impairment charges. Intangible assets with determinable lives are amortized over their estimated useful lives, based upon the pattern in which the expected benefits will be realized, or on a straight-line basis, whichever is greater. We recorded an impairment charge for the 2019 year with respect to the FingerQ Resalable License Rights. Refer Note G – Resalable License Rights for additional information.

3.5. Research and Development Expenditures

 

Research and development expenses include costs directly attributable to the conduct of research and development programs primarily related to the development of our software products and improving the efficiency and capabilities of our existing software. Such costs include salaries, payroll taxes, employee benefit costs, materials, supplies, depreciation on research equipment, services provided by outside contractors, and the allocable portions of facility costs, such as rent, utilities, insurance, repairs and maintenance, depreciation and general support services. All costs associated with research and development are expensed as incurred.

4.6. Income Taxes

 

The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryforward period available under tax law. We evaluate, on a quarterly basis whether, based on all available evidence, it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Because of our historical performance and estimated future taxable income a full valuation allowance has been established.

5.7. Accounting for Stock-Based Compensation

 

We account for share based compensation in accordance with the provisions of ASC 718-10, “Compensation — Stock Compensation,” which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The majority of our share-based compensation arrangements vest over either a three or four year vesting schedule. We expense our share-based compensation under the ratable method, which treats each vesting tranche as if it were an individual grant. The fair value of stock options is determined using the Black-Scholes valuation model, and requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of our common stock price over the option’s expected term, the risk-free interest rate over the option’s expected term, and our expected annual dividend yield. Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized as an expense in the consolidated statements of operations. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, are likely to change our valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the service period, net of estimated forfeitures (the number of individuals that will ultimately not complete their vesting requirements). The estimation of stock awards that will ultimately vest requires significant judgment. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

See financial statements appearing at pages 27-5337-66 of this Annual Report on Form 10-K.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2019.2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2019,2020, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Management’sManagements Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and with the participation of our management, including our CEO and CFO, we have conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2019,2020, based upon the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2019.2020.

 

As we are a smaller reporting company, this annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.

 

Changes in Internal Control Over Financial Reporting

 

No change in our internal control over financial reporting occurred during the quarter ended December 31, 20192020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

ITEM 9B. OTHER INFORMATION

 

None.

 


PARTIII

 

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The following sets forth certain information required by this item will be set forth under “Proposal No. 1: Electionabout each director, executive officer, and key employee of Directors” in the 2020 Proxy Statement and incorporated herein by reference.Company.

 

NAME

AGE

POSITIONS HELD

Michael W. DePasquale

66

Chairman of the Board of Directors and Chief Executive Officer

Thomas E. Bush, III (a)* (c)

68

Director

Robert J. Michel (a) (b)*

64

Director

Thomas Gilley (c)

61

Director

Wong Kwok Fong (Kelvin)

57

Director and Vice-Chairman of the Board of Directors

Pieter Knook (b)

62

Director

Emmanuel Alia (Manny) (b)

55

Director

Cecilia Welch

61

Chief Financial Officer

Mira K. LaCous

58

Chief Technology Officer

James Sullivan

52

Vice President of Strategy and Compliance, Chief Legal Officer


(a)

Compensation Committee Member

(b)

Audit Committee Member

(c)

Nominating Committee Member

*

Indicates chair of committee

Set forth below is a brief description of the background and business experience of our directors and executive officers for the past five years. 

Directors

 

Michael W. DePasquale has served as our Chief Executive Officer and a Director since January 3, 2003, and Chairman of the Board since January 29, 2014. He served as Co-Chief Executive Officer of the Company from July 2005 to August 2006. Mr. DePasquale brings more than 30 years of executive management, sales and marketing experience to the Company. Prior to joining us, Mr. DePasquale served as the President and Chief Executive Officer of Prism eSolutions, Inc., a Pennsylvania-based provider of professional consulting services and online solutions for ISO-9001/14000 certification for customers in manufacturing, healthcare and government markets, since February 2001. From December 1999 through December 2000, Mr. DePasquale served as Group Vice President for WRC Media, a New York-based distributor of supplemental education products and software. From January 1996 until December 1999, Mr. DePasquale served as Senior Vice President of Jostens Learning Corp., a California-based provider of multimedia curriculum. Prior to Jostens, Mr. DePasquale held sales and marketing management positions with McGraw-Hill and Digital Equipment Corporation. Mr. DePasquale earned a Bachelor of Science degree from the New Jersey Institute of Technology. He serves as the Vice Chairman on the Board of Directors of the International Biometrics and Identification Industry Association. We believe Mr. DePasquale’s qualifications to sit on the board of directors include his extensive executive management experience in the technology sector and biometric industry expertise which strengthen the board’s collective qualifications, skills and experience.   

Thomas E. Bush, III has served as a Director of the Company since January 29, 2014. Since 2009, Mr. Bush has provided business consulting services through his firm, Tom Bush Consulting. Prior to that, Mr. Bush served with the Federal Bureau of Investigation for over 33 years. Mr. Bush joined the FBI in September 1975, ultimately becoming the Director of the CJIS division, with over 2,500 employees and a budget of approximately one billion dollars. Mr. Bush is known for providing critical services in support of the criminal justice community, including two significant IT projects, Next Generation Identification and N-Dex, which were awarded by CJIS during his tenure at the FBI. Mr. Bush has received many awards during his career, most notably a Presidential Rank Award for Meritorious Service in 2007. We believe Mr. Bush’s qualifications to sit on the board of directors include his extensive experience in law enforcement, security matters, and the use of biometric technologies in the government sector, which provide the board with a unique perspective on security and public sector matters. 

Robert J. Michel has served as a Director of the Company since April 10, 2017. He has over 30 years of accounting and financial management experience. Since September, 2018, he has served as the Chief Financial Officer of Daxor Corporation (NYSE MKT: DXR), a medical device manufacturing company specializing in blood volume analysis. Prior to Daxor, from November, 2017 until September 2018, Mr. Michel served as the CFO of Roadway Moving, Inc., a transportation, moving and storage company located in New York City. Immediately prior to Roadway Moving, Inc., Mr. Michel served as a consultant with Feuer & Orlando, LLP, a New York City based CPA firm, from May, 2016 until November 2017. From 2009 until March, 2016, Mr. Michel was the Chief Financial Officer of Asta Funding, Inc. (Nasdaq: ASFI), a diversified financial services company where he was responsible for all financial matters and SEC reporting. From 2004 until 2009, Mr. Michel served as the Controller and the Director of Financial Reporting and Compliance for Asta Funding. Mr. Michel is a certified public accountant, earned a MBA in Taxation from St. John’s University, and a BS in Business Administration from Villanova University. Mr. Michel gained his public accounting experience at PricewaterhouseCoopers in New York.  We believe Mr. Michel’s qualifications to sit on the board of directors include his substantial experience in accounting and financial management for public companies which provide the board with a deep knowledge of financial and SEC reporting and strengthen the board’s collective qualifications, skills, and experience.

27

Thomas Gilley has served as a Director of the Company since January 29, 2014. Mr. Gilley is an entrepreneur, investor and advisor in the connected product Internet of Things (IoT) industry with 37 patents. Since founding his Enterprise Software IoT company in 2012 and selling it in 2016, Mr. Gilley invests in technology companies, serves as growth strategy advisor, and independent board member to companies in the connected industry. Mr. Gilley was previously employed at Apple Computer, in the Advance Technology Group, Portable Products Group and Strategy Advisor. Before and after Apple, Mr. Gilley founded several successful companies including PicoStar, a Silicon Valley incubator-technology investment company, and an on-demand web media company he sold to Vignette. Mr. Gilley acted as CTO throughout the transaction until the company’s ultimate acquisition by OpenText. We believe Mr. Gilley’s qualifications to sit on the board of directors include his substantial experience in starting, operating and financing technology companies which provides the board with a deep knowledge of the sales and development cycles applicable to growth businesses in the technology industry.

Wong Kwok Fong (Kelvin) has served as a Director of the Company since December 4, 2015, as Managing Director of our Hong Kong Subsidiary since August 2016, and as Vice-Chairman of the Board of Directors since March 2019. He is the co-founder of China Goldjoy Group (previously World Wide Touch Technology Holdings Limited), a company listed on The Stock Exchange of Hong Kong. From 1997 until August, 2015, Mr. Wong served as the Chairman of China Goldjoy Group and served as its Chief Technology Officer through October 2016. During this time, Kelvin played a significant role in the substantial growth of the business. Kelvin brings over 15 years of senior management experience in manufacturing, supply chain, and marketing functions in the electronics and technology industries, including establishing manufacturing plants in Hong Kong and China, and building an extensive network in the electronics and technology industries. We believe Kelvin’s qualifications to sit on the board of directors include his substantial experience in the technology industry, including biometrics and payment systems, and serving the Asian markets, which broaden and strengthen the board’s collective qualifications, skills, and experience.

Pieter Knook, has served as a Director of the Company since May 2, 2016. Mr. Knook has over 30 years of experience in mobility and software technology in Europe, Asia and the United States. Since 2010, Mr. Knook has served on the boards of a number of private equity backed and publicly traded early stage technology companies, including Altitude Angel in Reading, the London Internet Exchange, Pulsant in the UK, BroadHorizon in the Netherlands and Telenor in Norway. Mr. Knook served as the Director of Internet Services at Vodafone Group in London from March 2008 through October 2010. Prior to joining Vodafone, Mr. Knook spent 18 years at Microsoft. As President of Microsoft Asia from 1997 to 2001, Mr. Knook led the company’s efforts in opening and expanding Asian markets. He subsequently served as Senior Vice President of Microsoft’s mobile communication business from 2001 through 2008. We believe Mr. Knook’s qualifications to sit on the board of directors include his extensive technology industry experience, which further broaden and strengthen the board’s collective qualifications, skills, and experience.

Emmanual Alia (Manny), was appointed Director of the Company on April 3, 2020. Since 2018 Mr. Alia has been providing management consulting services as an advisor to businesses seeking market entry strategies to emerging markets such as Africa and the Caribbean. From 2011 to 2018, Mr. Alia served as an Executive Director at the Corporate and Investment division of JPMorgan, and as a Senior Vice-President at CHASE Bank’s Consumer and Community Banking specializing in the financial and banking services industry and opportunities in Africa. During Mr. Alia’s tenure with JPMorgan, he served as head of WholeSale Operations in the Receivables Operations of the Global banking operations in the US and Canada, head of Retail Banking in the Greater Detroit area, and head of branches in the New York and New Jersey areas. For two years Mr. Alia was co-chair of the Black Organizational Leadership Development, an employee networking group in JPMorgan that works with firm’s leadership to strengthen the firm’s message, strategies and community outreach globally. Mr. Alia received a Bachelor of Arts in Accounting from SouthEastern University and a Master’s of Business Administration (MBA) from Cornell University. We believe Mr. Alia’s qualifications to sit on the board of directors include his extensive industry experience and connection and networking abilities in the African communities and markets which further broaden and strengthen the board’s collective qualifications, skills, and experience.

Non-director Executive Officers

Cecilia Welch has served as the Chief Financial Officer of the Company since December 21, 2009. Ms. Welch joined the Company in 2007 as Corporate Controller. Prior to joining the Company, from January 2006 to December 2006, she was the Controller for Savaje Technologies (acquired by Sun Microsystems), a developer of advanced mobile telephone software. From October 2004 to January 2006, she was Controller for Crystal Systems, a manufacturer of sapphire crystals used for industrial, semiconductor, defense and medical applications. From December 1988 to July 2004, she was the Controller for ATN Microwave (acquired by Agilent Technologies), a manufacturer of automated test equipment. Ms. Welch has a Bachelor’s degree in Accounting from Franklin Pierce University.

28

Mira K. Lacous has served as Chief Technology Officer of the Company since March 13, 2014. Prior to her appointment as Chief Technology Officer, she served as Senior Vice President of Technology & Development since 2012, and as our Vice President of Technology and Development since 2000. Ms. LaCous has over 30 years of product/project management, solution architecture, software development, team leadership and customer relations experience, with a background that includes successfully bringing numerous technologies to market, including automated voice response systems, automated building control systems, software piracy protection, intranet training materials and testing, page layout and design software, image scanning software and systems, biometric security, and biometric algorithms. Ms. LaCous is also the author of six US patented technologies, multiple international patents, and other patent pending solutions. Ms. LaCous has a Bachelor’s in Computer Science from North Dakota State University.

James Sullivan has served as BIO-key’s Senior Vice President of Strategy and Compliance and BIO-key’s Chief Legal Officer since February, 2020, as Senior Vice President of Strategy and Business Development the Company from April 2012 through December 2018, and the dual role as Senior Vice President of Global Sales from August 2015 through December of 2016. Mr. Sullivan is a recognized expert in biometric authentication, cyberlaw and privacy for consumer and mobile applications. During over 17 years with the Company, Mr. Sullivan has directly worked with dozens of the Company’s customers, including AT&T, Israel Defense Forces, LexisNexis, NCR and Omnicell, as well as large-scale biometric-centered identity management projects that interface daily with millions of corporate and consumer users. Mr. Sullivan earned a Juris Doctor cum laude from Georgia State University College of Law, is a member of the Georgia Bar, and enrolled to practice before the IRS. Mr. Sullivan has an undergraduate degree in Computer Science from Brown University and has over 25 years of experience in IT projects and implementation, including directly working with security and identity management solutions at the Company, Computer Associates, Platinum Technology, and Memco Software.

Committees of the Board of Directors

Audit Committee

Our audit committee is comprised of Robert J. Michel (Chair), Pieter Knook, and Emmanuel Alia, all of whom meet the independence standards for purposes of serving on an audit committee established by NASDAQ and under the Exchange Act. Our audit committee (i) assists the board of directors in its oversight of the integrity of our financial statements, compliance with legal and regulatory requirements, and corporate policies and controls, (ii) has the sole authority to retain and terminate our independent registered public accounting firm, approve all auditing services and related fees and the terms thereof, and pre-approve any non-audit services to be rendered by our independent registered public accounting firm, and (iii) is responsible for confirming the independence and objectivity of our independent registered public accounting firm. Our independent registered public accounting firm has unrestricted access to our audit committee. Our board of directors has determined that Robert J. Michel qualifies as an “audit committee financial expert,” as such term is defined in Item 407 of Regulation S-K.

Our audit committee operates under a written charter that is reviewed annually. The charter is available on our website at www.bio-key.com.

Compensation Committee

Our compensation committee is comprised of Thomas Bush, III (Chair) and Robert Michel, both of whom meet the independence standards established by NASDAQ and under the Exchange Act. The compensation committee’s duties include overseeing our overall compensation philosophy, policies and programs. This includes reviewing and analyzing the design and function of our various compensation components, establishing salaries, incentives and other forms of compensation for officers and non-employee directors, and administering our equity incentive plan. In fulfilling its responsibilities, the compensation committee has the authority to delegate any or all of its responsibilities to a subcommittee of the compensation committee.

Our compensation committee operates under a written charter that is reviewed annually. The charter is available on our website at www.bio-key.com.

Code of Ethics

We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Our Code of Ethics is designed to deter wrongdoing and promote: (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in our other public communications; (iii) compliance with applicable governmental laws, rules, and regulations; (iv) the prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and (v) accountability for adherence to the code.  We intend to disclose amendments or waivers of the Code of Ethics on our website within four business days.  Any person may obtain a copy of our Code of Ethics free of charge by sending a written request for such to the attention of the Chief Financial Officer of the Company, 3349 Highway 138, Building A Suite E, Wall, NJ 07719. 

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Term of Office

Our directors are elected at the annual meeting of stockholders and hold office until the annual meeting of the stockholders next succeeding his or her election, or until his or her prior death, resignation or removal in accordance with our bylaws. Our officers are appointed by the Board and hold office until the annual meeting of the Board next succeeding his or her election, and until his or her successor shall have been duly elected and qualified, subject to earlier termination by his or her death, resignation or removal.

Delinquent Section 16(a) Reports

Reports of all transactions in our common stock by officers, directors and ten percent (10%) stockholders are required to be filed with the SEC pursuant to Section 16(a) of the Exchange Act. Based solely on our review of copies of the reports received, or representations of such reporting persons, we believe that during the year ended December 31, 2020, all Section 16(a) filing requirements applicable to our officers, directors and ten percent (10%) stockholders were satisfied in a timely fashion, except for one late Form 4 filing by Mr. Sullivan.

ITEM 11.EXECUTIVE COMPENSATION

 

The information requiredfollowing table sets forth a summary of the compensation paid to or accrued by this item will be set forth under “Executiveour chief executive officer and Director Compensation”the two most highly compensated executive officers other than our chief executive officer, for the fiscal years ended December 31, 2020 and 2019:

SUMMARY COMPENSATION TABLE

Name

 

Fiscal

Year

 

Salary

($)

  

Bonus

($)

  

Option

Awards

($) (1)

  

Stock

Awards

($) (2)

  

All Other

Compensation

($) (3)

  

Total

($)

 
                           

Michael W. DePasquale

 

2020

  275,000   50,000   -   21,450   2,219   348,669 

Chief Executive Officer

 

2019

  275,000   -   34,510   -   1,127   310,637 
                           

Mira K. LaCous

 

2020

  213,000   -   -   21,450   2,493   236,943 

Chief Technology Officer

 

2019

  213,075   -   12,941   -   1,401   227,417 
                           

James Sullivan

 

2020

  150,000   35,000   -   21,450   137,238(4)  343,688 

Chief Legal Officer

 

2019

  150,000   -   25,883   -   55,240(5)  231,123 

(1)

The aggregate grant date fair value of the option awards was estimated using the Black-Scholes option pricing model, with the assumptions listed in Note A to the Company’s financial statements. The amount shown in this column represents the grant date fair value calculated under FASB ASC 718.

(2)

The aggregate grant date fair value of the restricted shares is calculated by the multiplying the quantity of shares issued by the closing trading price of the shares on the date of issuance calculated under FASB ASC 718.

(3)

Consists of life insurance premiums paid by the Company except as otherwise noted.

(4)

(5)

Consists of $135,383 of sales commissions and $1,855 of life insurance premiums paid by the Company.

Consists of $53,385 of sales commissions and $1,855 of life insurance premiums paid by the Company.

Narrative Disclosure to Summary Compensation Table

Compensation for our executives is comprised of three main components: base salary, annual performance-based cash bonus, and long-term equity awards. We do not target a specific weighting of these three components or use a prescribed formula to establish pay levels. Rather, the board of directors and compensation committee considers changes in the business, external market factors and our financial position each year when determining pay levels and allocating between long-term and current compensation for the named executive officers.

Cash compensation is comprised of base salary and an annual performance-based cash bonus opportunity. The compensation committee generally seeks to set a named executive officer’s targeted total cash compensation opportunity within a range that is the average of the applicable peer company and/or general industry compensation survey data, adjusted as appropriate for individual performance and internal pay equity and labor market conditions.

In setting cash compensation levels, we favor a balance in which base salaries are generally targeted at slightly below the peer average and a bonus opportunity that is targeted at slightly above the average. The base salary of our CEO has not been increased since 2018. In 2020, Proxy Statementwe increased the base salary of Mr. Sullivan to $225,000 to compensate for the fact that in connection with his promotion to Chief Legal Officer, he would be limited to sales commissions on only three of his existing long term accounts.  

Performance-based bonuses have historically been based upon the achievement of certain revenue milestones established by the compensation committee. The committee believes that this higher emphasis on performance-based cash bonuses places an appropriate linkage between a named executive officer’s pay, his or her individual performance, and incorporated hereinthe achievement of specific business goals by reference.placing a higher proportion of annual cash compensation at risk, thereby aligning executive opportunity with the interests of stockholders.

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In 2020, due to extraordinary efforts in maintaining operations during the pandemic, acquiring PistolStar, and the completing an underwritten public offering, Mr. DePasquale and Mr. Sullivan were awarded cash bonuses of $50,000 and $35,000, respectively. Based on the performance of the Company in 2019, we did not award any discretionary incentive compensation to our named executive officers. 

We also include an equity component as part of our compensation package because we believe that equity-based compensation aligns the long-term interests of our named executive officers with those of stockholders. In March 2019, we issued options to Mr. DePasquale to purchase 4,167 of common stock, to Mr. Sullivan to purchase 3,125 shares of common stock, and to Ms. LaCous to purchase 1,563 shares of common stock. The foregoing options have an exercise price of $9.44 per share, the last sales price of our common stock on the date of grant, have a term of seven years, and vest in three equal annual installments commencing March 21, 2020. We did not issue any options to the named executive officers in 2020.  In August 2020, we issued 4,125 shares of restricted stock to Mr. DePasquale, Mr. Sullivan and Ms. LaCous. These shares vest in equal annual installments over a three-year period from the date of grant.

These cash and equity compensation components of pay are supplemented by various benefit plans that provide health, life, accident, disability and severance benefits, most of which are the same as the benefits provided to all of our US based employees.

Employment Agreements

On March 26, 2010, we entered into an employment agreement, effective as of March 25, 2010, with Michael W. DePasquale to serve as our Chief Executive Officer until March 24, 2011. The agreement automatically renews for subsequent one-year terms, unless the employment relationship is terminated by either party, or modified in accordance with the terms and conditions of the agreement. Since 2018, Mr. DePasquale’s annual base salary has been $275,000, subject to adjustment by the compensation committee. In addition to the base salary, a “Performance Bonus” may be awarded to Mr. DePasquale on the basis of the Company achieving certain corporate and strategic performance goals, as determined by the compensation committee in its sole discretion. The employment agreement contains standard and customary confidentiality, non-solicitation and “work made for hire” provisions as well as a covenant not to compete which prohibits Mr. DePasquale from doing business with any current or prospective customer of the Company or engaging in a business competitive with that of the Company during the term of his employment and for the one-year period thereafter. This agreement also contains a number of termination and change in control provisions as described under the captions “Termination Arrangements” and “Change in Control Arrangements” below.

On April 5, 2017, we entered into an employment agreement with James Sullivan. The agreement automatically renews for subsequent one-year terms, unless terminated by the Company upon at least two months prior written notice which is treated as termination without cause. Under this agreement, Mr. Sullivan’s initial base salary was $150,000 plus commissions, subject to adjustment. The agreement contains standard and customary confidentiality, technical invention provisions as well as non-competition and non-solicitation covenants which prohibit Mr. Sullivan from doing business with any current or prospective customer of the Company or engaging in any business competitive with that of the Company during the term or his employment and for the one-year period thereafter. The agreement also contains a number of termination provisions as described under the caption “Termination Agreements” below.

On November 20, 2001, we entered into an employment agreement with Mira LaCous. The agreement automatically renews for subsequent one-year terms, unless terminated by the Company upon at least one-month prior written notice which is treated as termination without cause and provides for a discretionary bonus which shall not exceed 50% of base salary. The agreement contains standard and customary confidentiality, technical invention provisions as well as non-competition and non-solicitation covenants which prohibit Ms. LaCous from doing business with any current or prospective customer of the Company or engaging in any business competitive with that of the Company during the term or her employment and for the one-year period thereafter. The agreement also contains a number of termination provisions as described under the caption “Termination Agreements” below.

Stock Option Grants and Restricted Stock Awards

In the event of any change in the outstanding shares of our common stock by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the board deems to be similar circumstances, the number and kind of shares subject to outstanding options and restricted stock awards, and the exercise price of such options shall be appropriately adjusted. Restricted Furthermore, option agreements and restricted stock award agreements contain change of control provisions as described under the caption “Change in Control Provisions” below. 


OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

DECEMBER 31, 2020

The following table sets forth for each named executive officer, information regarding outstanding equity awards as at December 31, 2020. The option awards and per share amounts for all periods reflect our 1-for-8 reverse stock split, which was effective November 20, 2020.

  

Option Awards

 

Stock Awards

 

Name

 

Number of

securities

underlying

unexercised

options

exercisable

(#)

  

Number of

securities

underlying

unexercised

options

unexercisable

(#)

  

Option

exercise

price

($)

 

Option

expiration

date

 

Number of

shares or units

of stock that

have not vested

 

(#)

  

Market value of

shares of units of

stock that have not

vested

 

($)(1)

 
                      

Michael W. DePasquale

  2,605       39.35 

3/13/2021

  4,125   14,520 
   2,605       17.27 

8/13/2022

        
   31,250       21.20 

3/16/2024

        
   2,778   1,389(2)  15.68 

3/23/2025

        
   1,389   2,778(3)  9.44 

3/21/2026

        
                      

Mira LaCous

  1,563       39.36 

3/13/2021

  4,125   14,520 
   1,042       17.27 

8/13/2022

        
   12,500       21.20 

3/16/2024

        
   1,042   521(2)  15.68 

3/23/2025

        
   521   1,042(3)  9.44 

3/21/2026

        
                      

James Sullivan

  1,563       39.36 

3/13/2021

  4,125   14,520 
   2,084       17.27 

8/13/2022

        
   12,500       21.20 

3/16/2024

        
   2,084   1,041(2)  15.68 

3/23/2025

        
   1,042   2,083(3)  9.44 

3/21/2026

        


(1)

Calculated based on the closing market price of the Company’s common stock on December 31, 2020 of $3.52 per share.

(2)

The options vest equally in three annual installments commencing March 23, 2019.

(3)

The options vest equally in three annual installments commencing March 21, 2020.

Narrative Disclosure to Outstanding Equity Awards at Fiscal Year End Table

The following are the material terms of each agreement, contract, plan or arrangement that provide for payments to one or more of our named executive officers at, following or pursuant to their resignation, retirement or termination, or in connection with a change in control of the Company.

Termination Arrangements

We may terminate our employment agreement with Mr. DePasquale at any time with or without cause. In the event of termination by us without cause, we will continue to pay Mr. DePasquale his then current base salary for the greater of nine months from the date of such termination or the number of months remaining until the end of the term of the agreement.

We may terminate our employment agreement with Mr. Sullivan at any time with or without cause. In the event of termination by us without cause, we will continue to pay Mr. Sullivan his then current base salary, plus earned commissions, for the greater of six months from the date of such termination or the number of months remaining until the end of the term of the agreement.

We may terminate our employment agreement with Ms. LaCous at any time with or without cause. In the event of termination by us without cause, we will continue to pay Ms. LaCous her then current base salary for nine months from the date of such termination.

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Change in Control Provisions

Our 2015 Equity Incentive Plan (the “Plan”) provides for the acceleration of vesting of unvested options and termination of any restriction or forfeiture provisions applicable to restricted stock awards upon a “Change in Control” of the Company. A Change in Control is defined in the Plans to include (i) a sale or transfer of substantially all of the Company’s assets; (ii) the dissolution or liquidation of the Company; (iii) a merger or consolidation to which the Company is a party and after which the prior stockholders of the Company hold less than 50% of the combined voting power of the surviving corporation’s outstanding securities; (iv) the incumbent directors cease to constitute at least a majority of the Board of Directors; or (v) a change in control of the Company which would otherwise be reportable under Section 13 or 15(d) of the Exchange Act. In the event of a “Change In Control” the Plan provides for the immediate vesting of all options issued thereunder and termination of all forfeiture provisions applicable to restricted stock award issued thereunder. Options issued to executive officers outside of the Plans contain change in control provisions substantially similar to those contained in the Plans.

Our employment agreement with Mr. DePasquale contains a change in control provision that is triggered if Mr. DePasquale is not offered continued employment with us or any successor, or within five years following such Change of Control, we or any successor terminate Mr. DePasquale’s employment without cause. If this occurs, then we will pay Mr. DePasquale his base salary and benefits earned but unpaid through the date of termination, and any prorated bonus earned during the then current bonus year, plus two times his then current base salary.

 

 

DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED

DECEMBER 31, 2020

The following table sets forth for each director, information regarding their compensation for the year ended December 31, 2020:

Name (1)

 

Stock Awards

($) (2)

  

Total

($)

 

Thomas E. Bush, III (3)

  4,502   4,502 

Thomas Gilley (3)

  4,002   4,002 

Yau Jianhui (4)

  1,001   1,001 

Pieter Knook (5)

  6,002   6,002 

Robert J Michel (5)

  6,502   6,502 

Fabian Shin (6)

  4,001   4,001 

Alia, Emmanuel (7)

  3,501   3,501 


(1)

Mr. DePasquale and Kelvin Wong have been omitted from the above table because they do not receive any additional compensation for serving on our Board of Directors.

(2)

The aggregate fair value of the common stock issued was calculated based on the closing price of our common stock on the date of issuance in accordance with FASB ASC 718.

(3)

At December 31, 2020, Messrs. Bush and Gilley each held options to purchase 2,716 shares of common stock.

(4)

At December 31, 2020, Mr. Jianhui held options to purchase 188 shares of common stock. Mr. Jianhui was not nominated for re-election to the Board of Directors at Company’s Annual Meeting in 2020.

(5)

At December 31, 2020, Messrs. Knook and Michel each held options to purchase 2,064 shares of common stock.

(6)

At December 31, 2020, Mr. Shin held options to purchase 501 shares of common stock. Mr. Shin resigned from the Board of Directors on September 2, 2020.

(7)

At December 31, 2020, Mr. Alia held options to purchase 313 shares of common stock.

Narrative Disclosure to Director Compensation Table

During 2020, we had a policy to pay to each non-employee director $3,000 per board meeting, $1,000 per telephonic board meeting, and $500 per board committee meeting attended. Fees for attendance at regular quarterly board meetings held during the first three quarters of each fiscal year are paid through the issuance of common stock and payments for the last meeting of the year are paid in cash or, at the option of the director, in shares of common stock. All of our directors elected to receive payment in common stock for the last board meeting in 2020. All directors will be indemnified by us for actions associated with being a director to the fullest extent permitted under Delaware law. We reimburse each of our non-employee directors for their reasonable expenses incurred in connection with attending meetings of the board of directors and related committees. 

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth, as of March 26, 2021 information required by Item 403with respect to the securities holdings of Regulation S-K regarding securityall persons that we, pursuant to filings with the SEC and our stock transfer records, have reason to believe may be deemed the beneficial owner of more than 5% of our common stock. The following table also sets forth, as of such date, the beneficial ownership of certainour common stock by all of our current officers and directors, both individually and as a group.

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The beneficial owners and management willamount of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Exchange Act and, in accordance therewith, include all shares of our common stock that may be set forth under “Stock Ownership” inacquired by such beneficial owners within 60 days of March 99999, 2021 upon the 2020 Proxy Statement and incorporated herein by reference.exercise or conversion of any options, warrants or other convertible securities. This table has been prepared based on 7,817,475 shares of common stock outstanding on March 26, 2021.

Name and Address of Beneficial Owner (1)

 

Amount and Nature

of Beneficial

Ownership

  

Percentage

of

Class

 
         

Michael W. DePasquale

  60,988(2)  * 

Cecilia Welch

  28,189(3)  * 

Mira LaCous

  21,835(4)  * 

James Sullivan

  37,523(5)  * 

Thomas Gilley

  6,239(6)  * 

Robert J. Michel

  5,686(7)  * 

Thomas E. Bush, III

  5,758(8)  * 

Pieter Knook

  5,164(9)  * 

Emmanuel Alia

  998(10)  * 

Wong Kwok Fong (Kelvin)

  578,659(11)  7.4

%

All officers and directors as a group (10) persons

  751,039   9.6%
         

Lind Global Micro Fund, LP

  833,126(12)  9.6

%


*

Less than 1%

(1)

Unless otherwise indicated, the address of each person listed below is c/o BIO-key International, Inc., 3349 Highway 138, Building A, Suite E, Wall, NJ 07719.

(2)

Includes 43,405 shares issuable on exercise of options and 4,125 shares of restricted stock of which 4,125 remain subject to vesting. Does not include 1,389 shares issuable upon exercise of options subject to vesting.

(3)

Consists of shares issuable upon exercise of options and 4,125 shares of restricted stock of which 4,125 remain subject to vesting. Does not include 1,041 shares issuable upon exercise of options subject to vesting.

(4)

Consists of shares issuable upon exercise of options and 4,125 shares of restricted stock of which 4,125 remain subject to vesting. Does not include 521 shares issuable upon exercise of options subject to vesting.

(5)

Includes 21,355 shares issuable on exercise of options and 4,125 shares of restricted stock of which 4,125 remain subject to vesting. Does not include 1,042 shares issuable upon exercise of options subject to vesting.

(6)

Includes 2,300 shares issuable on exercise of options. Does not include 416 shares issuable upon exercise of options subject to vesting.

(7)

Includes 1,648 shares issuable on exercise of options. Does not include 416 shares issuable upon exercise of options subject to vesting.

(8)

Includes 2,300 shares issuable on exercise of options. Does not include 416 shares issuable upon exercise of options subject to vesting.

(9)

Includes 1,648 shares issuable on exercise of options. Does not include 416 shares issuable upon exercise of options subject to vesting.

(10)

Consists of shares of common stock. Does not include 313 shares issuable upon exercise of options subject to vesting.

(11)

Includes 25,695 shares issuable on exercise of options. The address of Kelvin is Flat C, 27/F, Block 5, Grand Pacific Views, Siu Lam, Hong Kong N7.

(12)

Includes 833,125 shares issuable upon exercise of warrants. The address of Lind Global Capital Micro Fund, LP is 444 Madison Ave, Floor 41, New York, NY 10022


EQUITY COMPENSATION PLAN INFORMATION

 

The following table sets forth, as of December 31, 2020, information with respect to securities authorized for issuance under equity compensation plans. The shares and per share amounts reflect BIO-key’s 1-for-8 reverse stock split, which was effective November 20, 2020.

  

Number of

securities to be

issued

upon exercise

of outstanding

options,

warrants and

rights

(a)

  

Weighted-

average

exercise price

of outstanding

options,

warrants and

rights

(b)

  

Number

of securities

remaining

available for

future issuance

under equity

compensation

plans

(excluding

securities

reflected in

column (a))

(c)

 

Equity compensation plans approved by security holders

  94,183   10.73   36,086 

Equity compensation plans not approved by security holders

  133,091  $22.48    

Total

  227,274  $17.61   36,086 

On January 27, 2016, the stockholders approved the 2015 Equity CompensationIncentive Plan Information table required(the “2015 Plan”). Under the terms of this plan, 187,500 shares of common stock are reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which may not be below 100-110% of fair market value. The term of stock options granted may not exceed ten years. Options issued under the 2015 Plan vest pursuant to Item 201(d)the terms of Regulation S-K willstock option agreements with the recipients. In the event of a change in control, certain stock awards issued under this plan may be set forthsubject to additional acceleration of vesting as may be provided in the participants’ written agreement. The 2015 Plan expires in December 2025.

In addition to options issued under the 2015 Plan, we have issued options to purchase common stock to employees, officers, directors and consultants outside of the plan. As of December 31, 2020, Proxy Statementthere were outstanding non-plan options to purchase 133,091 shares of common stock. The terms of these outstanding options are substantially similar to the provisions of the 2015 Plan and incorporated herein by reference.options issued thereunder.  In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately.

 

 

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this item will be set forth under “TransactionsStandstill Agreement with Related Persons” and “Director Independence” in the 2020 Proxy Statement and incorporated herein by reference.Principal Stockholder

 

Pursuant to separate securities purchase agreements dated October 29, 2015 and November 11, 2015 with each of Wong Kwok Fong (Kelvin), Micron, and Giant Leap we issued and sold shares of series A-1 stock to Kelvin and shares of series B-1 stock to Micron and Giant Leap, which were subsequently converted into shares of our common stock. The forgoing agreements contain a standstill provision (the “Standstill”) which prohibits each of these investors either alone or together with any other person, from acquiring additional shares of our common stock or any of our assets, soliciting proxies, or seeking representation on our board of directors. Kelvin is the Co-Chairman of the board of directors, and an executive officer.

 

Loans from Wong Kwok Fong (Kelvin)

Between March 2019 and February 2020, we received a series of non-interest-bearing advances from Mr. Wong Kwok Fong (Kelvin) in the aggregate amount of $217,360 to pay current liabilities. The amounts were repaid in their entirety during the 2020 fiscal year. Mr. Wong is the Vice-Chairman of the Board, an executive officer, and a principal stockholder of the Company.

Loans from Michael W. DePasquale

In December 2019, we received two non-interest-bearing advances from Michael DePasquale in the aggregate amount of $114,000 to pay current liabilities. The amounts were repaid in their entirety during the 2020 fiscal year. Mr. DePasquale serves as the Chairman of the Board and Chief Executive Officer of the Company.

Sales Incentive Agreement with Technology Transfer Institute (TTI)

On March 25, 2020, we entered into a sales incentive agreement TTI. The agreement provides that for each $5,000,000 in revenue (up to a maximum of $20,000,000), TTI generates for the Company during the first year that generate net income (calculated under U.S. generally accepted accounting principles) of at least 20%, we will pay TTI a sales incentive fee of $500,000 payable by the issuance of 62,500 shares of common stock. In the event that TTI generates revenue for the Company in excess of $20,000,000 during first year, we will issue TTI a five-year warrant to purchase 12,500 shares of Common Stock at an exercise price of $12.00 per share for each $1,000,000 of revenue in excess of $20,000,000 (up to a maximum of $25,000,000). In no event will we be obligated to issue more than 250,000 shares of common stock or warrants to purchase more than 62,500 shares of common stock pursuant to this agreement. Manny Alia, a member of our board of directors, served as the Chief Executive Officer of TTI until August 12, 2020.

Director Independence

As required under the NASDAQ Marketplace Rules, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the board of directors. Our board considered certain relationships between our directors and us when determining each director’s status as an “independent director” under Rule 5605(a)(2) of the NASDAQ Marketplace Rules. Based upon such definition and SEC regulations, we have determined that Robert Michel, Pieter Knook, Emmanuel Alia, Thomas Bush, III, and Thomas Gilley are “independent” under NASDAQ standards. 


ITEM 14.PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES

 

The information requiredfollowing table shows fees for professional services and quarterly audit fees billed to us by this item will be set forth under “Ratification of Rotenberg Meril Solomon Bertiger & Guttilla, P.C. as Independent Registered Public Accounting Firm(“RMSBG”) for 2020” in the audit of our annual consolidated financial statements for the years ended December 31, 2020 Proxy Statement and incorporated herein by reference. 2019:

 

 

  

2020

  

2019

 
         

Audit Fees

 $124,200  $104,743 

Audit-Related Fees

  76,925   7,204 

Tax Fees

  16,000   18,500 
         

Total Fees

 $217,125  $130,447 

Audit Fees consist of fees billed for professional services rendered for the audit of our financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by our auditors in connection with statutory and regulatory filings or engagements.

Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and which are not reported under audit fees. These fees relate primarily to services provided in connection with registration of securities and review of documents filed with the SEC.

Tax Fees consist of fees billed for professional services for tax compliance assistance rendered during the fiscal year.

Audit Committee Pre-Approval Procedures

The audit committee of our board of directors consists of Robert J. Michel (Chairman), Pieter Knook, and Emmanuel Alia. The audit committee approves the engagement of our independent auditors to render audit and non-audit services before they are engaged. All of the fees for 2020 and 2019 shown above were pre-approved by the audit committee.

The audit committee pre-approves all audit and other permitted non-audit services provided by our independent auditors. Pre-approval is generally provided for up to one year, is detailed as to the particular category of services and is subject to a monetary limit. Our independent auditors and senior management periodically report to the audit committee the extent of services provided by the independent auditors in accordance with the pre-approval, and the fees for the services performed to date. The audit committee may also pre-approve particular services on a case-by-case basis.

Our audit committee will not approve engagements of our independent registered public accounting firm to perform non-audit services for us if doing so will cause our independent registered public accounting firm to cease to be independent within the meaning of applicable SEC rules. In addition, our audit committee considers, among other things, whether our independent registered public accounting firm is able to provide the required services in a more or less effective and efficient manner than other available service providers.

PART IV

ITEM 15. EXHIBITS

 

(a)       The following documents are filed as part of this Report. Portions of Item 15 are submitted as separate sections of this Report:

 

(1)  Financial statements filed as part of this Report:

  Reports of Independent Registered Public Accounting Firm

  Consolidated Balance Sheets as at December 31, 2019 and 2018

  Consolidated Statements of Operations—Years ended December 31, 2019 and 2018

  Consolidated Statements of Stockholders’ Equity (Deficit)—Years ended December 31, 2019 and 2018

  Consolidated Statements of Cash Flows—Years ended December 31, 2019 and 2018

  Notes to Consolidated Financial Statements—December 31, 2019 and 2018

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as at December 31, 2020 and 2019

Consolidated Statements of Operations—Years ended December 31, 2020 and 2019

Consolidated Statements of Stockholders’ Equity (Deficit)—Years ended December 31, 2020 and 2019

Consolidated Statements of Cash Flows—Years ended December 31, 2020 and 2019

Notes to Consolidated Financial Statements—December 31, 2020 and 2019

 

(b)       The exhibits listed in the Exhibits Index immediately preceding such exhibits are filed as part of this Report

 

36

 

ITEM 16. FORM 10-K SUMMARY

 

None.

 

ITEM 8—FINANCIAL STATEMENTS

 

The following financial statements of BIO-key International, Inc. are included herein at the indicated page numbers:
 

Report of Independent Registered Public Accounting Firm

2838

Consolidated Balance Sheets as at December 31, 20192020 and 20182019

2940

Consolidated Statements of Operations—Years ended December 31, 20192020 and 20182019

3041

Consolidated Statements of Stockholders’ Equity (Deficit) —Years ended December 31, 20192020 and 20182019

3142

Consolidated Statements of Cash Flows—Years ended December 31, 20192020 and 20182019

3243

Notes to the Consolidated Financial Statements—December 31, 20192020 and 20182019

3445

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors of

BIO-key International, Inc.

Wall, NJ

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of BIO-key International, Inc. and Subsidiaries (the “Company”) as of December 31, 20192020 and 2018,2019, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in the consolidated financial statements, the Company has suffered substantial net losses in recent years, has negative working capital and has an accumulated deficit at December 31, 2019 and is dependent on debt and equity financing to fund its operations, all of which raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are disclosed in Note A. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Change in Accounting Principles

As discussed in Note A and Note B to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers as of January 1, 2018 due to the adoption of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. The Company adopted the new revenue standard using the modified retrospective approach.

As discussed in Note A and Note N to the financial statements, the Company adopted ASC 842, Leases as of January 1, 2019 using the modified retrospective approach. ASC 842 had a significant effect on the balance sheet resulting in increased non-current right of use assets and increased current and non-current lease liabilities, required by the new standard. 

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) are especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition Refer to Notes A and B of the consolidated financial statements

Description of the Matter

The Company’s revenues are generated pursuant to written contractual arrangements to provide software licenses and/or hardware and to provide related maintenance and support services or professional services. The Company’s performance obligations are either satisfied at a point in time when the customer obtains control of the hardware or is granted the software license or satisfied over time for maintenance revenue over the contractual period. Software licenses may be sold as perpetual licenses or subscription licenses. Contracts may include multiple performance obligations. Significant judgment is exercised by the Company in determining revenue recognition for these contractual arrangements, and includes the following:

Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services.

The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.

Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration and/or optional purchases).

Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.

38

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures included:

We obtained an understanding of the Company’s revenue recognition process including the various product and service offerings;

We reviewed management’s assessment of the terms and conditions of contracts with customers which included an analysis of the distinct performance obligations and a review of the conclusion as to whether revenue from such performance obligations should be recognized over time or at a point in time;

We selected a sample of contracts with customers and performed the following:

o  Obtained and read customer sales orders and/or sales invoices and other documents that are part of the agreement.
o  Tested management’s process for identifying distinct performance obligation(s) in the contract;
o  Tested the allocation between software revenue and maintenance revenue including testing any carve  out of maintenance from subscription based software and maintenance sales.

The outcome of the audit procedures resulted in determining the amounts of revenue and the application of ASC 606 is reasonable.

PistolStar, Inc. Acquisition Refer to Note C of the consolidated financial statements

Description of the Matter

On June 30, 2020, the Company acquired PistolStar, Inc. The total purchase price included a cash payment of $2,000,000 and the issuance of a $500,000 promissory note. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. The promissory note component of the purchase price was adjusted to fair value of $464,000, resulting in total purchase consideration of $2,464,000. The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values.

Management utilized the services of an outside business valuation and advisory firm to assist with determining the fair values of the purchase consideration, deferred revenue and identified intangible assets. The fair values of the identified intangible assets and deferred revenue were estimated by the outside firm using discounted cash flow analysis including the relief-from-royalty method for proprietary software and trade names, excess earnings method for customer relationship, and cost to recreate methodology for assembled workforce, the latter of which is included with residual goodwill. Determining the fair value of the identified intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows and the selected discount rate.

We identified the assumptions related to estimating the amount and timing of the expected future cash flows and discount rate to be a critical audit matters given the inherent judgement involved in estimating these amounts. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions require a high degree of auditor judgement and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures included:

We obtained an understanding of the Company's process to determine the fair value of the net assets acquired.

We read the stock purchase agreement;

We evaluated the reasonableness of the following:

o Valuation methodologies utilized by the outside business valuation and advisory firm in estimating fair values of assets acquired and liabilities assumed;
o The discount rates utilized, including testing the source of information underlying the determination of the discount rates, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rates used by management.

The outcome of the audit procedures resulted in determining that the values recorded by management and provided by the outside business valuation and advisory firm are reasonable.

/s/ Rotenberg Meril Solomon Bertiger & Guttilla,P.C.

ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.

We have served as the Company's auditor since 2010.

Saddle Brook, New Jersey

March 29, 2021

Saddle Brook, New Jersey

May 14, 2020

 

 

BIO-key International,Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

 

December 31,

  

December 31,

 
 

2019

  

2018

  

2020

  

2019

 

ASSETS

                

Cash and cash equivalents

 $79,013  $323,943  $16,993,096  $79,013 

Accounts receivable, net

  126,000   1,574,032   548,049   126,000 

Due from factor

  110,941   56,682   60,453   110,941 

Note receivable

  295,000   - 

Inventory

  429,119   998,829   330,947   429,119 

Prepaid expenses and other

  201,507   108,397 

Investment – debt security

  512,821   512,821 

Total current assets

  18,941,873   1,366,291 

Resalable software license rights

  -   1,125,000   58,882   73,802 

Prepaid expenses and other

  108,397   150,811 

Investment – non-marketable security

  512,821   - 

Total current assets

  1,366,291   4,229,297 

Resalable software license rights, net of current portion

  73,802   6,790,610 

Equipment and leasehold improvements, net

  95,509   148,608   81,793   95,509 

Capitalized contract costs, net

  231,519   319,199   165,315   231,519 

Deposits and other assets

  8,712   8,712   8,712   8,712 

Operating lease right-of-use assets

  566,479   -   487,325   566,479 

Intangible assets, net

  154,386   195,906   1,514,146   154,386 

Goodwill

  1,262,526   - 

Total non-current assets

  1,130,407   7,463,035   3,578,699   1,130,407 

TOTAL ASSETS

 $2,496,698  $11,692,332  $22,520,572  $2,496,698 
                

LIABILITIES

                

Accounts payable

 $919,294  $481,269  $244,158  $844,557 

Loans payable – related parties

  -   188,737 

Accrued liabilities

  686,885   548,232   508,487   572,885 

Convertible notes payable, net of debt discount and debt issuance costs

  2,255,454   -   -   2,255,454 

Deferred revenue

  359,212   196,609 

Note payable – PistolStar acquisition, net of debt discount

  232,000   - 

Deferred revenue - current

  657,349   359,212 

Operating lease liabilities, current portion

  170,560   -   234,309   170,560 

Total current liabilities

  4,391,405   1,226,110   1,876,303   4,391,405 

Deferred revenue – long term

  44,987   - 

Operating lease liabilities, net of current portion

  390,466   -   264,163   390,466 

Total non-current liabilities

  390,466   -   309,150   390,466 

TOTAL LIABILITIES

  4,781,871   1,226,110   2,185,453   4,781,871 
                

Commitments and Contingencies

        

Commitments

        
                

STOCKHOLDERS’ EQUITY (DEFICIT)

        

Common stock — authorized, 170,000,000 shares; issued and outstanding; 14,411,432 and 13,977,868 of $.0001 par value at December 31, 2019 and December 31, 2018, respectively

  1,441   1,398 

STOCKHOLDERS EQUITY (DEFICIT)

        

Common stock — authorized, 170,000,000 shares; issued and outstanding; 7,814,572 and 1,812,483 of $.0001 par value at December 31, 2020 and December 31, 2019, respectively

  782   182 

Additional paid-in capital

  87,436,402   85,599,140   119,844,026   87,437,661 

Accumulated deficit

  (89,723,016

)

  (75,134,316

)

  (99,509,689

)

  (89,723,016

)

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)

  (2,285,173

)

  10,466,222 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 $2,496,698  $11,692,332 

TOTAL STOCKHOLDERS EQUITY (DEFICIT)

  20,335,119   (2,285,173

)

TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)

 $22,520,572  $2,496,698 

 

All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-8 reverse stock split, which was effective November 20, 2020.

The accompanying notes are an integral part of these statements.

 

 

BIO-key International,Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

Years ended December 31,

  

Years ended December 31,

 
 

2019

  

2018

  

2020

  

2019

 
                

Revenues

                

Services

 $925,245  $1,012,576  $1,432,228  $925,245 

License fees

  442,649   1,739,897   962,038   442,649 

Hardware

  899,634   1,292,069   442,516   899,634 

Total revenues

  2,267,528   4,044,542   2,836,782   2,267,528 
                

Costs and other expenses

                

Cost of services

  272,318   443,210   502,214   272,318 

Cost of license fees

  916,112   3,072,356   49,891   916,112 

Cost of hardware

  1,272,815   648,624   242,721   1,272,815 

Total costs and other expenses

  2,461,245   4,164,190   794,826   2,461,245 

Gross Profit (Loss)

  (193,717

)

  (119,648

)

  2,041,956   (193,717

)

                

Operating expenses

                

Selling, general and administrative

  5,036,820   5,333,906   5,848,687   5,036,820 

Research, development and engineering

  1,331,667   1,415,401   1,396,436   1,331,667 

Total operating expenses before impairment

  6,368,487   6,749,307   7,245,123   6,368,487 
Impairment of resalable software license rights  (6,957,516)  -   -   (6,957,516

)

Operating loss

  (13,519,720

)

  (6,868,955

)

  (5,203,167

)

  (13,519,720

)

                

Other income (expense)

                

Interest income

  154   80   30,649   154 

Government grant – Paycheck Protection Program

  340,819   - 

Interest expense

  (1,069,134

)

  -   (4,343,212

)

  (1,069,134

)

Loss on extinguishment of debt

  (499,076

)

  - 

Total other income (expense)

  (1,068,980

)

  80   (4,470,820

)

  (1,068,980

)

Net loss

  (14,588,700

)

  (6,868,875

)

  (9,673,987

)

  (14,588,700

)

Deemed dividend from trigger of anti-dilution provision feature

  -   (1,428,966

)

  (112,686

)

  - 

Convertible preferred stock dividends

  -   (198,033

)

Net loss available to common stockholders

  (14,588,700

)

  (8,495,874

)

  (9,786,673

)

  (14,588,700

)

                

Basic and Diluted Loss per Common Share

 $(1.03

)

 $(0.73

)

 $(2.08

)

 $(8.21

)

                

Weighted Average Shares Outstanding:

                

Basic and Diluted

  14,223,685   11,607,933   4,700,787   1,777,961 

All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-8 reverse stock split, which was effective November 20, 2020.

The accompanying notes are an integral part of these statements.


BIO-key International,Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

  

Common Stock

  

Additional

Paid-in

  

Accumulated

     
  

Shares

  

Amount

  

Capital

  

Deficit

  

Total

 

Balance as of December 31, 2018

  1,758,288  $176  $85,600,362  $(75,134,316

)

 $10,466,222 

Issuance of common stock for directors’ fees

  4,612   1   35,012   -   35,013 

Issuance of common stock for commitment fees net of adjustments

  49,583   5   594,995   -   595,000 

Warrant debt discount valuation

  -   -   595,662   -   595,662 

Legal and commitment fees

  -   -   (301,077

)

  -   (301,077

)

Share-based compensation

  -   -   912,707   -   912,707 

Net loss

  -   -   -   (14,588,700

)

  (14,588,700

)

Balance as of December 31, 2019

  1,812,483  $182  $87,437,661  $(89,723,016

)

 $(2,285,173

)

Issuance of common stock for directors’ fees

  5,270   -   28,511   -   28,511 

Issuance of common stock pursuant to securities purchase agreements

  43,939   5   277,828   -   277,833 

Issuance of common stock pursuant to public offering

  4,264,313   426   22,173,999   -   22,174,425 

Issuance of common stock pursuant to warrant exercises

  918,538   92   5,602,503   -   5,602,595 

Issuance of common stock for conversion of convertible note payable

  728,654   73   3,788,927   -   3,789,000 

Issuance of restricted common stock to employees

  41,375   4   (4

)

  -   - 

Warrants issued with convertible notes

  -   -   1,388,339   -   1,388,339 

Warrant issued for consulting fees

  -   -   107,576   -   107,576 

Legal and commitment fees

  -   -   (2,371,223

)

  -   (2,371,223

)

Beneficial conversion feature

  -   -   641,215   -   641,215 

Deemed dividends related to down-round features

  -   -   112,686   (112,686

)

  - 

Share-based compensation

  -   -   656,008   -   656,008 

Net loss

  -   -   -   (9,673,987

)

  (9,673,987

)

Balance as of December, 2020

  7,814,572  $782  $119,844,026  $(99,509,689

)

 $20,335,119 

All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-8 reverse stock split, which was effective November 20, 2020.

The accompanying notes are an integral part of these statements.


BIO-key International,Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

  

Years ended December 31,

 
  

2020

  

2019

 
         

CASH FLOW FROM OPERATING ACTIVITIES:

        

Net loss

 $(9,673,987

)

 $(14,588,700

)

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

        

Bad debt expense

  -   564,361 

Depreciation

  85,751   81,852 

Amortization of intangible assets and write-off

  120,240   43,256 

Amortization of resalable software license rights

  -   843,287 

Impairment of resalable software license rights

  -   6,957,516 

Amortization of debt discount

  1,425,040   571,332 

Amortization of capitalized contract costs

  152,714   138,679 

Amortization of debt issuance costs

  2,166,650   424,980 

Loss on extinguishment of debt

  499,076   - 

Amortization of beneficial conversion feature

  641,215   - 

Share based and warrant compensation for employees and consultants

  763,584   912,707 

Stock based fees to directors

  28,511   35,013 

Amortization of operating lease right-of-use assets

  220,915   36,458 

Change in assets and liabilities:

        

Accounts receivable

  (237,257

)

  883,671 

Due from factor

  50,488   (54,259

)

Capitalized contract costs

  (86,510

)

  (50,999

)

Inventory

  98,172   569,710 

Resalable software license rights

  14,920   41,005 

Prepaid expenses and other

  (83,625

)

  29,819 

Accounts payable

  (600,399

)

  438,025 

Accrued liabilities

  (84,415

)

  138,653 

Deferred revenue

  (246,876

)

  162,603 

Operating lease liabilities

  (204,315

)

  (29,316

)

Net cash used for operating activities

  (4,950,108

)

  (1,850,347

)

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Issuance of note receivable

  (295,000

)

  - 

Purchase of PistolStar

  (2,000,000

)

  - 

Cash acquired from purchase of PistolStar

  100,747   - 

Proceeds from maturity of debt security

  512,821   - 

Purchase of debt security

  (512,821

)

  (512,821

)

Cash paid for patents

  -   (1,736

)

Capital expenditures

  (35,568

)

  (28,753

)

Net cash used for investing activities

  (2,229,821

)

  (543,310

)

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Proceeds from public offering

  22,174,425   - 

Proceeds from issuance of convertible notes

  3,958,000   3,217,000 

Repayment of convertible notes

  (4,509,250

)

  (707,000

)

Proceeds from the exercise of warrants

  5,602,595   - 

Costs to issue notes and common stock

  (2,693,021

)

  (361,273

)

Repayment of note payable - PistolStar

  (250,000

)

  - 

Net repayments of loans payable to related parties

  (188,737

)

  - 

Net cash provided by financing activities

  24,094,012   2,148,727 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  16,914,083   (244,930

)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

  79,013   323,943 

CASH AND CASH EQUIVALENTS, END OF YEAR

 $16,993,096  $79,013 

 

The accompanying notes are an integral part of these statements.

 

 

BIO-key International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTSSUPPLEMENTARY DISCLOSURES OF STOCKHOLDERS’ EQUITY (DEFICIT)CASH FLOW INFORMATION

 

  

Series A-1

Preferred Stock

  

Series B-1

Preferred Stock

  

Common Stock

  

Additional

Paid-in

  

Accumulated

     
  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Deficit

  

Total

 

Balance - as of December 31, 2017

  62,596  $6   105,000  $11   7,691,324  $769  $80,829,001  $(67,076,492

)

 $13,753,295 

ASC 606 adoption

                              240,017   240,017 

Issuance of common stock for directors’ fees

  -   -   -   -   20,976   2   37,530   -   37,532 

Issuance of common stock pursuant to securities purchase agreement

  -   -   -   -   1,380,000   138   2,069,862   -   2,070,000 

Dividends declared on preferred stock

  -   -   -   -   -   -   (198,033

)

  -   (198,033

)

Conversion of A-1 preferred stock to common stock

  (62,596

)

  (6

)

  -   -   1,738,778   174   (168

)

  -   - 

Conversion of B-1 preferred stock to common stock

  -   -   (105,000

)

  (11

)

  2,916,668   292   (281

)

  -   - 

Conversion of dividends payable on A-1 preferred stock

  -   -   -   -   98,893   10   356,005   -   356,015 

Conversion of dividends payable on B-1 preferred stock

  -   -   -   -   131,229   13   472,411   -   472,424 

Deemed dividend related to down-round features

  -   -   -   -   -   -   1,428,966   (1,428,966

)

  - 

Stock issuance costs

          -   -   -   -   (338,845

)

  -   (338,845

)

Share-based compensation

  -   -   -   -   -   -   942,692   -   942,692 

Net loss

  -   -   -   -   -   -   -   (6,868,875

)

  (6,868,875

)

Balance as of December 31, 2018

  -  $-   -  $-   13,977,868  $1,398  $85,599,140  $(75,134,316

)

 $10,466,222 

Issuance of common stock for directors’ fees

  -   -   -   -   36,897   3   35,010   -   35,013 

Issuance of common stock for commitment fees net of adjustments

  -   -   -   -   396,667   40   594,960   -   595,000 

Warrant debt discount valuation

  -   -   -   -   -   -   595,662   -   595,662 

Legal and commitment fees

  -   -   -   -   -   -   (301,077

)

  -   (301,077

)

Share-based compensation

                          912,707       912,707 

Net loss

  -   -   -   -   -   -   -   (14,588,700

)

  (14,588,700

)

Balance as of December 31, 2019

  -  $-   -  $-   14,411,432  $1,441  $87,436,402  $(89,723,016

)

 $(2,285,173

)

  

Years ended December 31,

 
  

2020

  

2019

 
         

Cash paid for:

        

Interest

 $109,426  $72,822 

Income taxes

 $-  $- 
         

Noncash investing and financing activities:

        
         

Accounts receivable acquired from PistolStar

 $184,792  $- 

Prepaid expenses acquired from PistolStar

 $9,485  $- 

Equipment acquired from PistolStar

 $36,467  $- 

Intangible assets acquired from PistolStar

 $1,480,000  $- 

Goodwill related to PistolStar acquisition

 $1,262,526  $- 

Issuance of note payable for PistolStar acquisition, net of discount

 $464,000  $- 

Accrued expenses acquired from PistolStar

 $20,017  $- 

Deferred revenue acquired from PistolStar

 $590,000  $- 

Right-of-use asset addition under ASC 842

 $141,761  $719,812 

Operating lease liabilities under ASC 842

 $141,761  $707,217 

Issuance of common stock for conversion of note payable

 $3,789,000  $- 

Issuance of common stock pursuant to securities purchase agreements

 $277,833  $595,000 

Warrants issued with convertible notes

 $1,388,339  $595,662 

Beneficial conversion feature

 $641,215  $- 

Deemed dividends related to down-round features

 $112,686  $- 

Debt issuance cost allocated to equity

 $-  $152,000 

Debt discount issued with convertible note

 $-  $550,000 

 

The accompanying notes are an integral part of these statements.

 

 

BIO-key International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

  

Years ended December 31,

 
  

2019

  

2018

 
         

CASH FLOW FROM OPERATING ACTIVITIES:

        

Net loss

 $(14,588,700

)

 $(6,868,875

)

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

        

Bad debt expense

  564,361   720,000 

Depreciation

  81,852   84,617 

Amortization of intangible assets and writeoff

  43,256   15,596 

Amortization of resalable software license rights

  843,287   1,513,237 

Impairment of resalable software license rights

  6,957,516   - 

Amortization of debt discount

  571,332   - 

Amortization of capitalized contract costs

  138,679   123,171 

Amortization of debt issuance costs

  424,980   - 

Share based compensation for employees and consultants

  912,707   942,692 

Stock based fees to directors

  35,013   37,532 

Amortization of operating lease right-of-use assets

  36,458   - 

Change in assets and liabilities:

        

Accounts receivable

  883,671   1,341,914 

Due from factor

  (54,259

)

  53,183 

Capitalized contract costs

  (50,999

)

  (202,353

)

Inventory

  569,710   (51,982

)

Resalable software license rights

  41,005   1,144,961 

Prepaid expenses and other

  29,819   1,843 

Accounts payable

  438,025   (17,961

)

Accrued liabilities

  138,653   (139,793

)

Deferred revenue

  162,603   (311,257

)

Operating lease liabilities

  (29,316

)

  - 

Net cash used for operating activities

  (1,850,347

)

  (1,613,475

)

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Patents

  (1,736)  (30,398

)

Capital expenditures

  (28,753

)

  (52,060

)

Purchase of investment – non-marketable security

  (512,821

)

  - 

Net cash used for investing activities

  (543,310

)

  (82,458

)

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Proceeds from issuance of convertible notes

  3,217,000   - 

Repayment of convertible notes

  (707,000

)

  - 

Proceeds from issuance of common stock

  -   1,875,100 

Costs to issue notes and common stock

  (361,273

)

  (143,945

)

Net cash provided by financing activities

  2,148,727   1,731,155 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  (244,930

)

  35,222 

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

  323,943   288,721 

CASH AND CASH EQUIVALENTS, END OF YEAR

 $79,013  $323,943 

The accompanying notes are an integral part of these statements.

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

  

Years ended December 31,

 
  

2019

  

2018

 
         

Cash paid for:

        

Interest

 $72,822  $- 

Income taxes

 $-  $- 
         

Noncash investing and financing activities:

        

Accrual of unpaid preferred dividends

 $-  $198,033 

Conversion of A-1 preferred dividends payable to common stock

 $-  $356,015 

Conversion of A-1 preferred stock to common stock

 $-  $6,259,600 

Conversion of B-1 preferred dividends payable to common stock

 $-  $472,426 

Conversion of B-1 preferred stock to common stock

 $-  $10,500,000 

Deemed dividend from trigger of anti-dilution provision feature

 $-  $1,428,966 

Right-of-use asset addition under ASC 842

 $719,812  $- 

Operating lease liabilities under ASC 842

 $707,217  $- 

Share based loan commitment fees

 $595,000  $- 

Debt issuance cost allocated to equity

 $152,000  $- 

Debt discount issued with convertible note

 $550,000  $- 

Warrant debt discount valuation

 $595,662  $- 

The accompanying notes are an integral part of these statements.

BIO-key International, Inc. and Subsidiaries

NOTES TO THE FINANCIAL STATEMENTS

December31, 20192020 and 20182019

 

 

 

 

NOTE A —THETHE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

The Company, founded in 1993, develops and markets proprietary fingerprint identification biometric technology and software solutions.solutions enterprise-ready identity access management solutions to commercial, government and education customers throughout the United States and internationally. The Company was a pioneer in developing automated, finger identification technology that supplements or compliments other methods of identification and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, PKI, credit card,cards, passports, driver’s licenses, OTP or other form of possession or knowledge-based credentialing. Additionally, advanced BIO-key® technology has been, and is, used to improve both the accuracy and speed of competing finger-based biometrics.

 

Going Concern and Basis of Presentation

 

The Company has incurred significant losses to date, and at December 31, 2019, it had an accumulated deficit of approximately $90 million. In addition, broad commercial acceptance of the Company’s technology is critical to the Company’s success and ability to generate future revenues. At December 31, 2019, total cash and cash equivalents were approximately $79,000, as compared to approximately $324,000 at December 31, 2018.

As discussed below, the Company hasWe have historically financed itself in the pastour operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. The CompanyWe currently requiresrequire approximately $525,000$735,000 per month to conduct our operations, a monthly amount that it haswe have been unable to consistently achieve through revenue generation.  During 2020, we generated approximately $2,837,000 of revenue, which is below our average monthly requirements.  During 2020, we raised approximately $24,000,000 from financing activities and at December 31, 2020 had approximately $17,000,000 in cash. As of the date of this report, the Company has enough cash for twelve to eighteen months of operations, and therefore, there is no longer uncertainty in our going concern status.

 

IfEffective November 20, 2020, the Company is unable to generate sufficient revenue to meetimplemented a reverse stock split of its goals, it will need to obtain additional third-party financing to (i) conduct the sales, marketingoutstanding common stock at a ratio of 1-for-8. All share figures and technical support necessary to execute its plan to substantially grow operations, increase revenue and serve a significant customer base; and (ii) provide working capital. No assurance can be given that any form of additional financing will be available on terms acceptable to the Company, that adequate financing will be obtained by the Company in order to meet its needs, or that such financing would not be dilutive to existing shareholders.

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which contemplate continuation of the Company as a going concern, and assumes continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The matters described in the preceding paragraphs raise substantial doubt about the Company’s ability to continue as a going concern. Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon the Company’s ability to meet its financing requirementsresults are reflected on a continuing basis, and become profitable in its future operations. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Reclassification

Reclassifications occurred to certain prior year amounts in order to conform to the current year presentation to segregate cost of sales for licenses and hardware. The reclassifications have no effect on the reported net loss.post-split basis.

 

Summary of Significant Accounting Policies

 

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

 

1.  Principlesof Consolidation

 

The accompanying consolidated financial statements include the accounts of BIO-key International, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Intercompany accounts and transactions have been eliminated in consolidation. 

 

2. Use of Estimates

 

Our consolidated financial statements are prepared in accordance with GAAP as set forth in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) and consider the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission (SEC). These accounting principles require us to make certain estimates, judgments and assumptions. The Company believes that the estimates, judgments and assumptions upon which it relies are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, accounts receivable, inventory, intangible assets and long-lived assets, and income taxes. To the extent there are material differences between these estimates, judgments or assumptions and actual results, its consolidated financial statements will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result.

 

3. Revenue Recognition

 

The Company adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. In accordance with ASC Topic 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps: 

 

 

Identify the contract with a customer

 

Identify the performance obligations in the contract

 

Determine the transaction price

45

 

Allocate the transaction price to performance obligations in the contract

 

Recognize revenue when or as the Company satisfies a performance obligation

 

All of the Company's performance obligations, and associated revenue,revenues, are generally transferred to customers at a point in time, with the exception of support and maintenance, and professional services, which are generally transferred to the customer over time.

 

Software licenses

Software license revenue consist of fees for perpetual and SaaS softwaresubscription licenses for one or more of the Company’s biometric fingerprint solutions or identity access management solutions. Revenue is recognized at a point in time once the software is available to the customer for download. Software license contracts are generally invoiced in full on execution of the arrangement.

Hardware

Hardware revenue consists of fees for associated equipment sold with or without a software license arrangement, such as servers, locks and fingerprint readers. Customers are not obligated to buy third party hardware from the Company, and may procure these items from a number of suppliers. Revenue is recognized at a point in time once the hardware is shipped to the customer. Hardware items are generally invoiced in full on execution of the arrangement.

Support and Maintenance

Support and Maintenancemaintenance revenue consists of fees for unspecified upgrades, telephone assistance and bug fixes. The Company satisfies its Supportsupport and Maintenancemaintenance performance obligation by providing “stand-ready” assistance as required over the contract period. The Company records deferred revenue (contract liability) at time of prepayment until the contracts term occurs. Revenue is recognized over time on a ratable basis over the contract term. Support and Maintenancemaintenance contracts are up to one yearto five years in length and are generally invoiced either annually or quarterly in advance.advance at the beginning of the term. Support and Maintenance revenue for subscription licenses is carved out of the total license cost at 18% and recognized on a ratable basis over the license term.

Professional Services

Professional services revenues consist primarily of fees for deployment and optimization services, as well as training. The majority of the Company’s consulting contracts are billed on a time and materials basis, and revenue is recognized based on the amount billable to the customer in accordance with practical expedient ASC 606-10-55-18. For other professional services contracts, the Company utilizes an input method and recognizes revenue based on labor hours expended to date relative to the total labor hours expected to be required to satisfy its performance obligation.

 

Contracts with Multiple Performance Obligations

Some contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The standalone selling prices are determined based on overall pricing objectives, taking into consideration market conditions and other factors, including the value of the contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users within the contracts.

 

The Company considered several factors in determining that control transfers to the customer upon shipment of hardware and availability of download of software.  These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership.

 

Accounts receivable from customers are typically due within 30 days of invoicing.  The Company does not record a reserve for product returns or warranties as amounts are deemed immaterial based on historical experience.

 

Costs to Obtain and Fulfill a Contract

Costs to obtain and fulfill a contract are predominantly sales commissions earned by the sales force and are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit determined to be four years. These costs are included as capitalized contract costs on the balance sheet. The period of benefit was determined by taking into consideration customer contracts, technology, and other factors based on historical evidence. Amortization expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

 

Deferred Revenue

Deferred revenue includes customer advances and amounts that have been paid by customer for which the contractual maintenance terms have not yet occurred. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which generally is 12-60 months. Contracts greater than 12 months are segregated as long term deferred revenue. Maintenance contracts include provisions for unspecified when-and-if available product updates and customer telephone support services. At December 31, 2020 and 2019, amounts in deferred revenue were approximately $702,000 and $359,000, respectively.

4.Business Combinations

In accordance with ASC 805, Business Combinations (ASC 805), the Company recognizes the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Determining these fair values requires management to make significant estimates and assumptions, especially with respect to intangible assets.

46

The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair value. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net acquisition date fair value of the assets acquired and the liabilities assumed and represents the expected future economic benefits arising from other assets acquired that are not individually identified and separately recognized. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Assumptions may be incomplete or inaccurate, and unanticipated events or circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

5. Goodwill and acquired intangible assets

Goodwill is not amortized, but is evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that there is a single reporting unit for the purpose of conducting this goodwill impairment assessment. For purposes of assessing potential impairment, the Company estimates the fair value of the reporting unit, based on the Company’s market capitalization, and compares this amount to the carrying value of the reporting unit. If the Company determines that the carrying value of the reporting unit exceeds its fair value, an impairment charge would be required. The annual goodwill impairment test will be performed as of December 31st of each year. To date, the Company has not identified any impairment to goodwill.

Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. The Company amortizes acquired definite-lived intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.

6. Cash Equivalents

 

Cash equivalents consist of liquid investments with original maturities of three months or less. At December 31, 20192020 and 2018,2019, cash equivalents consisted of a money market account.

 

5.7. Accounts Receivable

 

Accounts receivable are carried at original amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful receivables by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Accounts receivable are written off when deemed uncollectible.

 

As a result of the payment delays for a large customer, the Company has reserved $1,720,000 at December 31, 20192020 and 2018,2019, which represents 100% of the remaining balance owed under the contract. Recoveries of accounts receivable previously written off are recorded when received. The Company made a license sale to a Chinese reseller in December 2018. Revenue was recognized in accordance with ASC 606 in the amount of $1.1 million in 2018. As of December 31, 2019, the second payment for $555,555 was still outstanding and payable. The Company wrote off directly to bad debt expense $555,555 that was promised to be paid in March 2019, but not received.

 

Accounts receivable at December 31, 20192020 and 20182019 consisted of the following: 

 

 

December 31,

  

December 31,

 
 

2019

  

2018

  

2020

  

2019

 
                

Accounts receivable - current

 $139,785  $1,587,817  $561,834  $139,785 
Accounts receivable - non current  1,720,000   1,720,000   1,720,000   1,720,000 
  1,859,785   3,307,817   2,281,834   1,859,785 
                

Allowance for doubtful accounts - current

  (13,785

)

  (13,785

)

  (13,785

)

  (13,785

)

Allowance for doubtful accounts - non current  (1,720,000)  (1,720,000)  (1,720,000

)

  (1,720,000

)

  (1,733,785)  (1,733,785)  (1,733,785

)

  (1,733,785

)

                

Accounts receivable, net of allowances for doubtful accounts

 $126,000  $1,574,032  $548,049  $126,000 

47

 

The allowance for doubtful accounts for the years ended December 31, 20192020 and 20182019 is as follows:

 

 

Balance at

Beginning

of Year

  

Charged to

Costs

and

Expenses

  

Deductions

From

Reserves

  

Balance at

End of Year

  

Balance at

Beginning

of Year

  

Charged to

Costs

and

Expenses

  

Deductions

From

Reserves

  

Balance at

End of Year

 

Year Ended December 31, 2019

                

Year Ended December 31, 2020

                

Allowance for Doubtful Accounts

 $1,733,785  $-  $-  $1,733,785  $1,733,785  $-  $-  $1,733,785 

Year Ended December 31, 2018

                

Year Ended December 31, 2019

                

Allowance for Doubtful Accounts

 $1,013,785  $720,000  $-  $1,733,785  $1,733,785  $-  $-  $1,733,785 

 

Bad debt expenses (if any) are recorded in selling, general, and administrative expense. 

 

6. Software License Rights

Software license rights acquired for re-sale to end users are recorded as assets when purchased and are stated at the lower of cost or estimated net realizable value.

The cost of the software license rights was initially allocated pro-rata to the maximum number of resalable end-user licenses in the rights contract. Through December 31, 2018, the remaining license rights were amortized over the greater of the following amounts: 1) an estimate of the economic use of such license rights, 2) the amount calculated by the straight line method over ten years or 3) the actual cost basis of sales usage of such rights. After re-evaluation of the expected timeline of future license transaction, commencing January 1, 2019, the Company changed its amortization methodology to the greater of the straight-line methodology or actual unit cost per license sold.

Management re-evaluates the total sub-licenses it expects to sell during the proceeding twelve months and will adjust the allocation of the current portion vs. non-current portion of software rights.

The rights are also evaluated by management on a periodic basis to determine if estimated future net revenues, on a per sub-license basis, support the recorded basis of each license. If the estimated net revenues are less than the current carrying value of the capitalized software license rights, the Company will reduce the rights to their net realizable value.

7.8. Equipment and Leasehold Improvements,Intangible Assets and Depreciation and Amortization

 

Equipment and leasehold improvements are stated at cost.  Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over the estimated service lives, principally using straight-line methods. Leasehold improvements are amortized over the shorter of the life of the improvement or the lease term, using the straight-line method.

 

The estimated useful lives used to compute depreciation and amortization for financial reporting purposes are as follows:

 

  

Years

 

Equipment and leasehold improvements

     

Equipment (years)

  3-5 

Furniture and fixtures (years)

  3-5 

Software (years)

  3  

Leasehold improvements

 

life or lease term

 

 

Intangible assets other than goodwill consist of patents.patents, trade name, proprietary software, and customer relationships.  Patent costs are capitalized until patents are awarded. Upon award, such costs are amortized using the straight-line method over their respective economic lives. If a patent is denied, all costs are charged to operations in that year. Trade names, proprietary software, and customer relationships are amortized over the economic useful life.

 

8.9. Impairment or Disposal of Long Lived Assets, including Intangible Assets

 

The Company reviews long-lived assets, including intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is equal to the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. In assessing recoverability, the Company must make assumptions regarding estimated future cash flows and discount factors. If these estimates or related assumptions change in the future, the Company may be required to record impairment charges. Intangible assets with determinable lives are amortized over their estimated useful lives, based upon the pattern in which the expected benefits will be realized, or on a straight-line basis, whichever is greater. The Company recorded an impairment charge for thein 2019 year with respect to the FingerQ Resalable Software License Rights. Refer to Note GI – Resalable License Rights for additional information.

 

9.10. Advertising Expense

 

The Company expenses the costs of advertising as incurred. Advertising expenses for 20192020 and 20182019 were approximately $494,000 and $317,000, and $309,000, respectively.

10. Deferred Revenue

Deferred revenue includes customer advances and amounts that have been paid by customer for which the contractual maintenance terms have not yet occurred. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which generally is 12 months.

 

11. Research and Development Expenditures

 

Research and development expenses include costs directly attributable to the conduct of research and development programs primarily related to the development of our software products and improving the efficiency and capabilities of our existing software. Such costs include salaries, payroll taxes, employee benefit costs, materials, supplies, depreciation on research equipment, services provided by outside contractors, and the allocable portions of facility costs, such as rent, utilities, insurance, repairs and maintenance, depreciation and general support services. All costs associated with research and development are expensed as incurred.

 

48

12. Earnings Per Share of Common Stock (“EPS”(EPS)

 

The Company’s EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuances of common stock, such as stock issuable pursuant to the conversion of preferred stock, exercise of stock options and warrants, when the effect of their inclusion is dilutive. See Note U - Earnings Per Share “EPS” for additional information.

 

13. Accounting for Stock-Based Compensation

 

The Company accounts for share based compensation in accordance with the provisions of ASC 718-10, “Compensation — Stock Compensation,” which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The majority of its share-based compensation arrangements vest over either a three or four year vesting schedule. The Company expenses its share-based compensation under the ratable method, which treats each vesting tranche as if it were an individual grant. The fair value of stock options is determined using the Black-Scholes valuation model, and requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of its common stock price over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized as an expense in the consolidated statements of operations. As required under the accounting rules, the Company reviews its valuation assumptions at each grant date and, as a result, the Company is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the service period, net of estimated forfeitures (the number of individuals that will ultimately not complete their vesting requirements). The estimation of stock awards that will ultimately vest requires significant judgment. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from current estimates. Options and warrants to outsiders are accounted for under ASC 718.

 

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

 

 

Year ended

December 31,

  

Year ended

December 31,

 
 

2019

  

2018

  

2020

  

2019

 
                

Selling, general and administrative

 $828,981  $855,125  $705,971  $828,981 

Research, development and engineering

  118,739   125,099   86,124   118,739 
 $947,720  $980,224  $792,095  $947,720 

 

Valuation Assumptions for Stock Options

 

For 2020 and 2019, 28,440 and 2018, 241,334 and 351,91830,167 stock options were granted, respectively. The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

 

Year ended

December 31,

  

Year ended

December 31,

 
 

2019

  

2018

  

2020

  

2019

 

Weighted average Risk free interest rate

  2.33

%

  2.70

%

  0.30

%

  2.33

%

Expected life of options (in years)

  4.50   4.50   4.50   4.50 

Expected dividends

  0

%

  0

%

  0

%

  0

%

Weighted average Volatility of stock price

  84

%

  143

%

  115

%

  84

%

 

The stock volatility for each grant is determined based on the review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected option term. The expected term was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla” options; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

49

 

14. Derivative Liabilities

 

In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company early-adopted the new provisions issued July 2017, for derivative liability instruments under FASB ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Under ASU 2017-11, down round features do not meet the criteria for derivative accounting and no liability is to be recorded until an actual issuance of securities triggers the down-round feature. Prior to these provisions, the liabilities were recorded without the actual issuance of the securities triggering the down-round feature.

 

15. Income Taxes

 

The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. The Company evaluates, on a quarterly basis whether, based on all available evidence, if it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Because of the Company’s historical performance and estimated future taxable income, a full valuation allowance has been established.

 

The Company accounts for uncertain tax provisions in accordance with ASC 740-10-05, “Accounting for Uncertainty in Income Taxes.” The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

16. Leases

 

In February 2016,accordance with ASC 842, Leases (ASC 842), the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases” (Topic 842), as amended (ASC 842).  The new standard establishesCompany records a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months and classifyclassifies them as either operating or finance leases. We adopted this standard effective January 1, 2019 using the modified retrospective approach for all leases entered into before the effective date.  Adoption of the ASC 842 had a significant effect on our balance sheet resulting in increased non-current assets and increased current and non-current liabilities.  There was no impact to retained earnings upon adoption of the new standard. We did not have any finance leases (formerly referred to as capital leases prior to the adoption of ASC 842), therefore there was no change in accounting treatment required.  For comparability purposes, the Company will continue to comply with the previous disclosure requirements in accordance with the existing lease guidance and prior periods are not restated.

 

The Company elected the package of practical expedients as permitted under the transition guidance, which allowed us: (1) to carry forward the historical lease classification; (2) not to reassess whether expired or existing contracts are or contain leases; and, (3) not to reassess the treatment of initial direct costs for existing leases.

In accordance with ASC 842, atAt the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of the lease including whether the contract involves the use of a distinct identified asset, whether we obtainthe Company obtains the right to substantially all the economic benefit from the use of the asset, and whether we havethe Company has the right to direct the use of the asset. Leases with a term greater than one year are recognized on the balance sheet as ROU assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less under practical expedient in paragraph ASC 842-20-25-2. For contracts with lease and non-lease components, the Company has elected not to allocate the contract consideration, and to account for the lease and non-lease components as a single lease component.

 

Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The implicit rate within our operating leases are generally not determinable and, therefore, the Company uses the incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The Company determines the incremental borrowing rate for each lease using our estimated borrowing rate, adjusted for various factors including level of collateralization, term and currency to align with the terms of the lease. The operating lease ROU asset also includes any lease prepayments, offset by lease incentives.

 

An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option. An option to terminate is considered unless it is reasonably certain we will not exercise the option.

 

For periods prior to the adoption of ASC 842, the Company recorded rent expense based on the term of the related lease. The expense recognition for operating leases under ASC 842 is substantially consistent with prior guidance. As a result, there are no significant differences in our results of operations presented.

The impact of the adoption of ASC 842 on the balance sheet was:

  

As reported

  

Adoption of ASC

  

Balance

 
  

December 31,

2018

  

842 - increase

(decrease)

  

January 1,

2019

 

Operating lease right-of-assets

 $-  $602,937  $602,937 

Prepaid expenses and other

 $150,811  $(12,595

)

 $138,216 

Total assets

 $11,692,332  $590,342  $12,282,674 

Operating lease liabilities, current portion

 $-  $135,519  $135,519 

Operating lease liabilities, net of current portion

 $-  $454,823  $454,823 

Total liabilities

 $1,226,110  $590,342  $1,816,452 

Total liabilities and stockholders’ equity

 $11,692,332  $590,342  $12,282,674 

In the third quarter of 2019, $116,875 was capitalized to operating lease right-of-use assets and operating lease liabilities in connection with signing a long-term lease for the Company's Minnesota office space.

16.17. Recent Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract(“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update to the standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Entities can choose to adopt the ASU 2018-15 prospectively or retrospectively. The Company has assessed that ASU 2018-15 currently does not have on its consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), referred to herein as ASU 2016-13, which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU 2016-13 credit impairment is recognized as an allowance for credit losses, rather than as a direct write-down of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13. ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies. Early adoption is permitted. The Company is currently assessing the impact ASU 2016-13 will have on its condensed consolidated financial statements.

 

Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.

 

50

 

 

NOTE B—BREVENUE FROM CONTRACTS WITH CUSTOMERS

 

The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption.

Disaggregation of Revenue

 

The following table summarizes revenue from contracts with customers for the years ended:

 

 

North

America

  

South

America

  

EMEA*

  

Asia

  

December 31,

2019

  

North

America

  

South

America

  

EMEA*

  

Asia

  

December

31,

2020

 
                                        

License fees

 $208,827  $46,717  $117,401  $69,704  $442,649  $842,307  $-  $46,922  $72,809  $962,038 

Hardware

  388,938   12,636   342,304   155,756   899,634   267,996   -   144,647   29,873   442,516 

Support and Maintenance

  780,288   8,514   96,911   18,502   904,215 

Professional services

  14,030   -   3,000   4,000   21,030 

Services

  1,296,696   18,300   94,124   23,108   1,432,228 

Total Revenues

 $1,392,083  $67,867  $559,616  $247,962  $2,267,528  $2,406,999  $18,300  $285,693  $125,790  $2,836,782 

 

 

North

America

  

South

America

  

EMEA*

  

Asia

  

December 31,

2018

  

North

America

  

South

America

  

EMEA*

  

Asia

  

December

31,

2019

 
                                        

License fees

 $318,271  $32,000  $278,516  $1,111,110  $1,739,897  $208,827  $46,717  $117,401  $69,704  $442,649 

Hardware

  439,480   53,200   477,674   321,715   1,292,069   388,938   12,636   342,304   155,756   899,634 

Support and Maintenance

  805,800   665   60,820   27,321   894,606 

Professional services

  115,970   -   2,000   -   117,970 

Services

  794,318   8,514   99,911   22,502   925,245 

Total Revenues

 $1,679,521  $85,865  $819,010  $1,460,146  $4,044,542  $1,392,083  $67,867  $559,616  $247,962  $2,267,528 

 

* EMEA – Europe, Middle East, Africa

 

Revenue recognized during the year ended December 31, 20192020 from amounts included in deferred revenue at the beginning of the period was approximately $147,000.$290,000. The Company did not recognize any revenue from performance obligations satisfied in prior periods. Total deferred revenue (contract liability) was $359,212$702,336 and $196,609$359,212 at December 31, 20192020 and December 31, 2018,2019, respectively.

 

Transaction Price Allocated to the Remaining Performance Obligations

ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as at December 31, 2019.2020. The guidance provides certain practical expedients that limit this requirement, which the Company’s contracts meet as follows:

 

 

The performance obligation is part of a contract that has an original expected duration of one year or less, in accordance with ASC 606-10-50-14.

 

At December 31, 20192020, deferred revenue represents ourthe Company’s remaining performance obligations related to prepaid support and maintenance, all of which is expected to be recognized withinfrom one year.to five years.

51

NOTE CPISTOLSTAR, INC. ACQUISITION

On June 30, 2020, the Company acquired PistolStar, Inc., a private company based in the United States, which provides enterprise-ready identity access management solutions, including multi-factor authentication, identity-as-a-service, single sign-on and self-service password reset to commercial, government and education customers throughout the United States and internationally.

From April 10, 2020 until the Company acquired PistolStar, it licensed PortalGuard®, PistolStar’s authentication software, which the Company combines with its biometric authentication solutions offered to existing and prospective customers.

The total purchase price of $2.5 million included cash payment of $2.0 million and the issuance of a $500,000 promissory note.

The acquisition of PistolStar has been accounted for as a business combination and, in accordance with ASC 805, the Company has recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following table summarizes the final purchase price allocation:

Purchase consideration:

    

Total cash paid, net of acquired cash

 $2,000,000 

Present value of 4% Promissory note

  464,000 

Total purchase price consideration

 $2,464,000 
     

Fair value of assets acquired and liabilities assumed:

    

Cash and cash equivalents

 $100,747 

Accounts receivable

  184,792 

Prepaid expenses and other current assets

  9,485 

Fixed assets

  36,467 

Intangible assets

  1,480,000 

Goodwill

  1,262,526 

Total assets acquired

  3,074,017 
     

Accrued expenses and other current liabilities

  738 

Accrued payroll

  19,279 

Deferred revenue

  590,000 

Total fair value of assets acquired and liabilities assumed

 $2,464,000 

 

The promissory note, which was issued to the previous owner of PistolStar, carries interest at 4% per annum and is payable in four installments over the 12-month period following the closing. The balance of the note at December 31, 2020 was $232,000, net of the unamortized debt discount. On January 21, 2021, the Company paid the $250,000 balance due on the note.

In the year ended December 31, 2020, acquisition-related expenses were immaterial. Acquisition-related expenses have been included primarily in general and administrative expenses in the consolidated statements of operations. The operating results of PistolStar have been included in the consolidated statements of operations beginning on July 1, 2020. Revenue from PistolStar for the period from July 1, 2020 through December 31, 2020 totaled $1,064,384. The income from PistolStar for the period from July 1, 2020 through December 31, 2020 was $202,558.

The significant intangible assets identified in the purchase price allocation discussed above include the trade name, proprietary software, and customer relationships. To value the trade name and proprietary software, the Company utilized the Relief from Royalty Method, which quantifies the cost savings associated with asset ownership via a discounted cashflow analysis. To value the customer relationships, the Company utilized the Excess Earnings Method, which isolates the value of the specific intangible asset by discounting its income stream to present value. 

The fair value of the assets acquired and liabilities assumed reflected in the tables above is less than the purchase price, resulting in the recognition of goodwill. The goodwill reflects the value of the synergies the Company expects to realize and the assembled workforce.

The following table presents the final fair values and useful lives of the identifiable intangible assets acquired:

  

Amount

  

Estimated useful

life

(in years)

 

Trade Name

 $130,000   15  

Proprietary Software

  420,000   5  

Customer relationships

  930,000   8-10 

Total identifiable intangible assets

 $1,480,000      

52

 

NOTE C—DFACTORING

 

Due from factor consisted of the following as of December 31:

 

 

Original Invoice

Value

  

Factored

Amount

  

Factored

Balance due

  

Original Invoice

Value

  

Factored

Amount

  

Factored

Balance due

 

Year Ended December 31, 2019

            

Year Ended December 31, 2020

            

Factored accounts receivable

 $233,005  $122,064  $110,941  $241,715  $181,262  $60,453 

Year Ended December 31, 2018

            

Year Ended December 31, 2019

            

Factored accounts receivable

 $221,120  $164,438  $56,682  $233,005  $122,064  $110,941 

 

The Company entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to October 31, 2020.2021. Pursuant to the terms of the arrangement, the Company, from time to time, sells to the Factor a minimum of $150,000 per quarter of certain of its 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 the Company (the “Advance Amount”), with the remaining balance, less fees, forwarded to the Company once the Factor collects the full accounts receivable balance from the customer. In addition, the Company, from time to time, receives 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. The cost of factoring is included in selling, general and administrative expenses. The cost of factoring was as follows:  

 

  

Years Ended December 31,

 
  

2019

  

2018

 
         

Factoring fees

 $203,950  $186,845 
  

Years Ended December 31,

 
  

2020

  

2019

 
         

Factoring fees

 $98,748  $203,950 

 

 

NOTE D—EFAIR VALUES OF FINANCIAL INSTRUMENTS

 

Cash and cash equivalents, accounts receivable, inventory, due from factor, accounts payable and accrued liabilities are carried at, or approximate, fair value because of their short-term nature. The carrying value of the Company’s notes and loan payables approximated fair value as the interest rates related to the financial instruments approximated market.

 

 

NOTE E—FCONCENTRATION OF RISK

 

Financial instruments which potentially subject the Company to risk primarily consist of cash, short-term investments,and cash equivalents, investment in debt security, and accounts receivables.

 

The Company maintains its cash and cash equivalents with various financial institutions, which, at times may exceed the amounts insured by the Federal Deposit Insurance Corporation.limits. The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions. No amounts wereThe Company was in excess of coverage of approximately $16,020,000 and $0 at December 31, 2020 and 2019, and 2018.respectively. The Company has not incurred any losses on these accounts.

 

The Company extends credit to customers on an unsecured basis in the normal course of business. The Company’s policy is to perform an analysis of the recoverability of its receivables at the end of each reporting period and to establish allowances where appropriate. The Company analyzes historical bad debts and contract losses, customer concentrations, and customer credit-worthiness when evaluating the adequacy of the allowances.

 

During the year ended December 31, 2020, one customer accounted for 18% of total revenue. During the year ended December 31, 2019, two customers accounted for 22% and 14% of total revenue, respectively. During the year ended

One customer accounted for 31% of total accounts receivable, as of December 31, 2018, three customers accounted for 27%, 14% and 13% of total revenue, respectively.

2020. Three customers accounted for 18%, 16% and 14% of total accounts receivable, respectively, as of December 31, 2019. One customer accounted for 70% of total accounts receivable, as of December 31, 2018.

 

 

NOTE F—GNOTE RECEIVABLE

During the third quarter 2020, the Company loaned $295,000 as an advance to Technology Transfer Institute (“TTI”) to aid in fulfilling the African contracts. The note does not bear any interest if paid within the nine (9) monthly installments beginning December 31, 2020.  The note bears a default rate of 5%. Currently, TTI is in the process of raising capital to repay the loan, and facilitate fulfilling the African contracts.

53

NOTE HINVENTORY

 

Inventory is stated at the lower of cost, determined on a first in, first out basis, or realizable value, and consists primarily of fabricated assemblies and finished goods. Inventory is comprised of the following as of December 31: 

 

 

2019

  

2018

  

2020

  

2019

 

                

Finished goods

  287,761   496,358  $221,130  $287,761 

Fabricated assemblies

  141,358   502,471   109,817   141,358 

Total inventory

 $429,119  $998,829  $330,947  $429,119 

 

 

NOTE G—IRESALABLE SOFTWARE LICENSESRIGHTS

 

On November 11, 2015, the Company entered into a license agreement for the rights to all software and documentation regarding the technology currently known as or offered under the FingerQ name. The license agreement grants the Company the exclusive right to reproduce, create derivative works and distribute copies of the FingerQ software and documentation, create new FingerQ related products, and grant sub-licenses of the licensed technology to end users. The license rights have been granted to the Company in perpetuity, with a stated number of end-user resale sub-licenses allowed under the contract for a total of $12,000,000.

 

The Company initially determined the software license rights to be a finite lived intangible asset and estimated that the software license rights shall be economically used over a 10 year10-year period, with a weighting towards the beginning years of that time-frame. The license rights were acquired during the fourth quarter of 2015, but the usage of such rights in the Company’s products was not generally available until January 2017. Accordingly, amortization began in the first quarter of 2017.

Through December 31, 2018, the license rights were amortized over the greater of the following amounts: 1) an estimate of the economic use of such license rights, 2) the amount calculated by the straight line method over ten years or 3) the actual cost basis of sales usage of such rights. After re-evaluation of the expected timeline of future license transactions, commencing January 1, 2019, the Company changed its amortization methodology to the greater of the straight-line methodology or actual unit cost per license sold based on net remaining software licenses as of January 1, 2019. The Company categorized the amortization expense under Cost of Sales as it more closely reflected the nature of the license right arrangement and the use of the technology.time frame.

 

During the fourth quarter of 2019, the Company re-evaluated the recoverability of the carrying amount of the balance of license rights and concluded that there were no significant undiscounted cashflowscash flows expected to be generated from the future sale of the license rights. Accordingly, an impairment charge of $6,957,516 was recorded in the fourth quarter of 2019, which reduced the carrying amount of the FingerQ license rights down to zero.  Throughout the year, the Company attempted to sell the technology into the mobile market in Asia, but due to, among other things, the trade tension between the US and China, management concluded that the future amortization would not represent an accurate cost to the ongoing business, without corresponding revenue.

A total of $843,888 (prior to the impairment charge detailed above), and $2,640,000charge) was expensed during the twelve month periods ended December 31, 2019 and 2018, respectively. Since the license purchase, a cumulative amount of $12,000,000 has been expensed, with a carrying balance of $0 as of December 31, 2019.

 

On December 31, 2015, the Company purchased third-party software licenses in the amount of $180,000 in anticipation of a large pending deployment that has yet to materialize. The Company is amortizing the total cost over the same methodology described above with the greatestgreater of the actual sales or straight-line methodtwo approaches being the actual sales through 2019.unit cost per license sold. A total of $14,920 and $40,404 and $18,198 was expensedcharged to cost of sales during the twelve month periodsyears ended December 31, 20192020 and 2018,2019, respectively. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $106,198 net of credits$121,118 has been expensed,charged to cost of sales, with a carrying balance of $58,882 and $73,802 as of December 31, 2019. 2020 and 2019, respectively.

The Company has classified the balance as non-current until a larger deployment occurs. Software license rights is comprised of the following as of:

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

Current software license rights

 

$

-

 

 

$

1,125,000

 

Non-current software license rights

 

 

73,802

 

 

 

6,790,610

 

Total software license rights

 

$

73,802

 

 

$

7,915,610

 

 

Estimated minimum amortization expense based on straight line amortization of the software license rights for each of the next five years and thereafter approximates the following:

 

Years ending December 31

        

2020

 $18,000 

2021

 $18,000  $18,000 

2022

 $18,000   18,000 

2023

 $18,000   18,000 

2024

 $1,802   4,882 
Total $58,882 

54

 

 

NOTE H—INVESTMENTSJINVESTMENT IN DEBT SECURITY

 

During 2019, the Company purchased a 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong. The Bond Certificate translatestranslated to $512,821 U.S. Dollars as of December, 2019.on the June 2019 purchase date. The bond hashad a one-year maturityterm which matured in June 2020, bearing interest at 5% per annum. The Company redeemed the bond and 5%recorded interest rate.income of approximately $25,800.

The Company then purchased a new 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong in June 2020. The new Bond Certificate translated to $512,821 U.S. Dollars, based on the exchange rate at the purchase date. The Company can invest up to a 20,000,000 Hong Kong dollars under the terms of the certificate.  The bond is recorded on the balance sheet as an investment – non-marketable security.certificate, bearing interest at 5% per annum. The investment is recorded at amortized cost which approximates fair value and is currently planned to be held to maturity.

 

 

NOTE KIEQUIPMENT AND LEASEHOLD IMPROVEMENTS

 

Equipment and leasehold improvements consisted of the following as of December 31:

 

 

2019

  

2018

  

2020

  

2019

 
                

Equipment

 $648,286  $619,533  $789,760  $648,286 

Furniture and fixtures

  164,079   164,079   164,079   164,079 

Software

  32,045   32,045   32,045   32,045 

Leasehold improvements

  23,403   23,403   25,135   23,403 
  867,813   839,060   1,011,019   867,813 
                
                

Less accumulated depreciation and amortization

  (772,304

)

  (690,452

)

  (929,226

)

  (772,304

)

                

Total

 $95,509  $148,608  $81,793  $95,509 

 

Depreciation was $85,751 and $81,852 for 2020 and $84,617 for 2019, and 2018, respectively. Amounts are recorded in Selling, General,selling, general, and Administrative Expense and Costadministrative expense as well as in cost of Services.services.

 

 

NOTE LJINTANGIBLE ASSETS

 

Intangible assets consisted of the following as of December 31:

 

      

2019

  

2018

 
  

Gross

Carrying

Amount

  

Accumulated

Amortization

  

Write-offs

 

  

Net

Carrying

Amount

  

Gross

Carrying

Amount

  

Accumulated

Amortization

  

Net

Carrying

Amount

 
                             

Patents and patents pending

 $380,080  $(210,694

)

 $(15,000) $154,386  $378,344  $(182,438

)

 $195,906 
  

2020

  

2019

 
  

Gross

Carrying

Amount

  

Accumulated

Amortization

  

Net

Carrying

Amount

  

Gross

Carrying

Amount

  

Accumulated

Amortization

  

Write-

offs

  

Net

Carrying

Amount

 
                             

Trade name

 $130,000  $(4,333

)

 $125,667  $-  $-  $-  $- 

Proprietary software

  420,000   (42,000)  378,000   -   -   -   - 

Customer relationships

  930,000   (51,667

)

  878,333   -   -   -   - 

Patents and patents pending

  365,080   (232,934

)

  132,146   380,080   (210,694

)

  (15,000

)

  154,386 

Total

 $1,845,080  $(330,934

)

 $1,514,146  $380,080  $(210,694

)

 $(15,000

)

 $154,386 

 

Aggregate amortization expense for 2020 and 2019 was $120,240 and 2018 was $28,256, and $15,596, respectively. In 2019, the Company recorded $15,000 of write offs of patents rejected. Amounts are recorded in Research, Development and engineering expense. The estimated aggregateEstimated minimum amortization expense based on straight line amortization of intangible assetsthe software license rights for each of the next five years following December 31, 2019 is approximately $20,000 per year for 2020 through 2022, $17,000 for 2023, $13,000 for 2024 and approximately $65,000 thereafter.thereafter approximates the following:

Years ending December 31

    

2021

 $216,000 

2022

  215,000 

2023

  213,000 

2024

  209,000 

2025

  165,000 

Thereafter

  496,146 
Total $1,514,146 

 

55

 

 

NOTE MKACCRUED LIABILITIES

 

Accrued liabilities consisted of the following as of December 31:

 

 

2019

  

2018

  

2020

  

2019

 
                

Compensation

 $193,823  $224,135  $87,015  $193,823 

Compensated absences

  155,962   154,169   227,147   155,962 

Accrued legal and accounting fees

  105,933   77,133   83,738   105,933 

Sales tax payable

  17,248   9,436   17,544   17,248 

Factoring fees

  31,458   19,000   5,495   31,458 

Other

  182,461   64,359   87,548   68,461 
                

Total

 $686,885  $548,232  $508,487  $572,885 

 

 

 

NOTE NLRELATED PARTY TRANSACTIONS

 

Licensing Agreement with Subsidiaries of China Goldjoy Group Limited.GSFG.

 

On November 11, 2015, BIO-key Hong Kong Limited, a subsidiary of the Company, entered into a license purchase agreement with certain subsidiaries of China Goldjoy Group Limited (“CGG”). The license agreement provides for the grant of a perpetual, irrevocable, exclusive, worldwide, fully-paidfully paid license to all software and documentation regarding the software code, toolkit, electronic libraries and related technology currently known as or offered under the name, together with perpetual license under all related patents held by the licensors and any other intellectual property rights owned by the licensors related to the forgoing software.  The Company made a one-time payment of $12,000,000 to the licensors. Mr. Yao Jianhu is the chairman and chief executive officer of CGG and served as a director of the Company.Company until August 6, 2020. Mr. Wong Kwok Fong served as the chief technology officer of CGG through October 2016 and is the beneficial owner of 21.6% of the Company’s common stock, andprincipal stockholder, a director and executive officer of the Company. During the fourth quarter of 2019, the Company recorded an impairment charge of approximately $7 million, bringing the carrying value of FingerQ license rights to zero. Refer to Note GI - Resalable License Rights for additional information.

Securities Purchase Agreements with Wong Kwok Fong

On April 3, 2018, Wong Kwok Fong converted 39,088 of the Series A-1 Shares at a conversion price of $3.60 per share and $330,552 of accrued dividends payable, resulting in the acquisition of 1,177,598 shares of the Company’s Common Stock.

On May 31, 2018 Wong Kwok Fong converted 23,508 of the Series A-1 Shares at a conversion price of $3.60 per share and $25,463 of accrued dividends payable, resulting in the acquisition of 660,073 shares of the Company’s Common Stock.

 

Non-Interest-Bearing Advances

 

During the 2019 fiscal year, the Company received a series of non-interest-bearing advances from Mr. Wong Kwok Fong, and Mr. Michael DePasquale, to pay current liabilities. The balance of the advances as at December 31, 2019 was $74,737 and $114,000, respectively, and was recordedwhich were both repaid in Accounts Payable and Accrued Liabilities (Other), respectively.

NOTE M—DEFERRED REVENUE

Deferred revenue represents unearned revenue from customer prepayments prior to maintenance contractual term. Maintenance contracts include provisions for unspecified when-and-if available product updates and customer telephone support services, and are recognized ratably over the term of the service period. At December 31, 2019 and 2018, amounts in deferred revenue were approximately $359,000 and $197,000, respectively.full during 2020.

 

 

NOTE NOCONVERTIBLE NOTES PAYABLE

 

On April 4,Convertible notes payable as of December 31, 2020 and December 31, 2019 the Company issued a $550,000 secured convertible debenture which had a maturity date of November 15, 2019 and was convertible into common stock at a conversion price of $1.50 per share. The note was redeemable at any time by payment of a premium to the principal balance starting at 5% and increasing to 25%.  The note was issued at approximately 7% ($40,000) original issue discount.  Subject to the mutual agreementconsist of the Company and the investor, the Company could issue two additional $550,000 principal amount notes on the same terms after 45 day intervals from the prior issuance, for additional net proceeds of $1,020,000.  The convertible note contained anti-dilution protections if the Company issued shares of common stock for less than the conversion price. The convertible note was secured by substantially all the assets of the Company.  At the closing, the Company issued 80,000 shares of common stock in payment of a $120,000 commitment fee and was obligated to issue 10,000 shares of common stock monthly in payment of a monthly commitment fee of $15,000 until the earlier of November 1, 2019 or the repayment or conversion of the note.following:

 

On June 14, 2019, the Company issued a $157,000 secured 10% convertible redeemable note which had a maturity date of November 14, 2019 and was convertible into common stock at a conversion price of $1.50 per share. The convertible redeemable note contained anti-dilution protections if the Company offered a conversion discount or other more favorable conversion terms while the note was outstanding.  The note was redeemable within the first five months by payment of a premium to the principal balance starting at 10% and increasing to 30% of principal plus interest.  At the closing, the Company agreed to issue 200,000 shares of common stock in lieu of payment of a $30,000 commitment fee which was reduced to 20,000 shares as the note was repaid prior to the maturity date.

  

December 31,

  

December 31,

 
  

2020

  

2019

 
         

Securities Purchase Agreement dated July 10, 2019

 $-  $2,255,454 

January 2020 Note

  -   - 

February 2020 Note

  -   - 

May 2020 Note

  -   - 

June 2020 Note

  -   - 

Convertible notes payable, net

 $-  $2,255,454 

 

Both notes were repaid in full on July 10, 2019.

For the two notes issued during the second quarter of 2019, the Company issued a total of 130,000 shares of common stock, amounting to $195,000 in commitment fees. $195,000 was recorded as an offset to notes payable – debt issuance costs and was amortized over the life of the loan.    The Company also incurred $17,000 of legal fees withheld from proceeds which was also recorded as an offset to notes payable – debt issuance costs and was amortized over the life of the loan. Amortization of the debt issuance costs and debt discount are included in interest expense on the statement of operations. 

56

 

Securities Purchase Agreement dated July 10, 2019

 

On July 10, 2019, the Company issued a $3,060,000 principal amount senior secured convertible note (the “Original Note”). At closing, a total of $2,550,000 was funded. The original issue discount was $510,000. The principal amount due of the Original Note was due and payable as follows: $918,000 was due 180 days after funding, $1,071,000 was due 270 days after funding, and the remaining balance due 12 months after the date of funding.

 

The Original Note iswas secured by a lien on substantially all of the Company’s assets and properties and iswas convertible at the option of the Investor in shares of common stock at a fixed conversion price of $1.50$12.00 per share. The Company has the right to prepay the Original Note in full at any time without penalty in which event, the Investor had the option of converting 25% of the outstanding principal amount of the Note into shares of common stock.

 

In connection with the closing of the Original Note, the Company issued a five-year warrant to the Investor to purchase 2,000,000250,000 shares of common stock at a fixed exercise price of $1.50$12.00 per share, paid a $50,000 commitment fee, and issued 266,66733,334 shares of common stock in payment of a $400,000 due diligence fee. The Company also paid banker fees of $193,500 and legal fees of $71,330. The valuation of the warrant of $595,662 was recorded to debt discount and iswas amortized over the life of the Original Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount are included in interest expense on the statement of operations.

 

On March 12, 2020, the Company issued a $3,789,000 principal amount senior secured convertible note (the “Amended Note”), which replaced the Original Note.Note and included an additional $729,000 in interest due to the debt restructuring. The principal amount was due and payable in full on April 13, 2020. The Amended Note was secured by a lien on substantially all of the Company’s assets and properties and was convertible at the option of the Investor into shares of common stock at a fixed conversion price of $0.65$5.20 per share.

the fees and unamortized discount associated with the Original Note were written off and included as loss on extinguishment of debt. On the day of the amendment, the closing stock price for the day was $6.08, which resulted in a beneficial conversion of $0.88 per share outstanding or $641,215 to be amortized to interest expense over the term of the Amended Note, as adjusted for any debt conversion.

 

On April 12, 2020, and May 6, 2020, the Company entered into amendments (the “Amendments”) to the Amended Note. The Amendments extended the maturity date to June 12, 2020 and extended the Investor’s right to convert the Amended Note into shares of the Company’s common stock at a price of $0.65$5.20 per share through June 12, 2020. All other provisions of the Amended Note remainremained the same. As of May 12, 2020, the Investor has converted $3,250,000 into 4,999,995 shares of common stock.

 

Until the second anniversary of the closing, the Investor hasinvestor had the right to purchase up to 20% of the securities the Company issues in any future private placement, subject to certain exceptions for, among other things, strategic investments.

 

On June 10, 2020, the investor converted the last of the remaining principal into shares of common stock for payment in full, and the remaining principal balance was $0. The Amended Note amount of $3,789,000 was converted into 728,654 shares of common stock.

Secured convertible note payable, relating to the Original Note, net of unamortized debt discount and debt issuance costs at December 31, 2019 consisted of:was:

 

 

December 31,

  

December 31,

 
 

2020

  

2019

 

Principal amount

 $3,060,000  $3,789,000  $3,060,000 

Less unamortized debt discount

  (574,330

)

Less unamortized debt issuance costs

  (230,216

)

Less: conversion of principal into shares of common stock

  (3,789,000

)

  - 

Net Principal amount

  -   3,060,000 
        

Less: unamortized debt discount and beneficial conversion feature

  -   (574,330

)

Less: unamortized debt issuance costs

  -   (230,216

)

Notes payable, net of unamortized debt discount and debt issuance costs

 $2,255,454  $-  $2,255,454 

 

January 2020 Note

Interest expense

On January 13, 2020, the Company issued a $157,000 principal amount secured 10% convertible redeemable note (the “January 2020 Note”) to an institutional investor with a maturity date of June 13, 2020 which was convertible into common stock at a conversion price of $12.00 per share. The January 2020 Note was redeemable at any time by payment of a premium to the principal balance starting at 10% and increasing to 30%. At the closing, the Company agreed to issue 81,250 shares of common stock in lieu of payment of a $75,000 commitment fee which was reduced to 6,250 shares as the January 2020 Note was repaid prior to the maturity date. The Company paid $7,000 of legal fees for the year ended December 31, 2019 consists of:January 2020 Note.

On June 12, 2020, the January 2020 Note was paid in full by payment of $211,984. The 75,000 shares were returned to the Company in July 2020.

 

April 4, 2019 debenture interest expense

 $55,000 

April 4, 2019 debenture discount amortized

  40,000 

April 4, 2019 debenture deferred costs amortized

  175,000 

June 14, 2019 convertible note interest expense

  17,822 

June 14, 2019 convertible note deferred costs amortized

  37,000 

July 10, 2019 convertible note discount amortized

  245,083 

July 10, 2019 convertible note deferred costs amortized

  212,980 

July 10, 2019 warrant valuation (debt discount) amortization

  286,249 

Total

 $1,069,134 
57

February 2020 Note

On February 13, 2020, the Company issued a $126,000 principal amount secured 10% convertible redeemable note (the “February 2020 Note”) to an institutional investor with a maturity date of July 13, 2020 which was convertible into common stock at a conversion price of $9.20 per share.  On March 12, 2020, the Original Note was amended to reduce the conversion price to $5.20 per share, which reduced the conversion price of the February Note to $5.20 and resulted in a deemed dividend of $70,998. The February 2020 Note was redeemable at any time by payment of a premium to the principal balance starting at 10% and increasing to 30%.   The Company issued 6,250 shares of common stock to the investor in lieu of payment of a $57,500 commitment fee. The Company paid $6,000 of legal fees in connection with the issuance of February 2020 Note.

The February 2020 Note was paid in full on July 10, 2020 by payment of $170,442.

May 2020 Note

On May 6, 2020, the Company issued a $2,415,000 principal amount senior secured convertible note (the “May 2020 Note”). At closing, $2,100,000 was funded. The principal amount was due and payable in five equal monthly installments of $268,333 beginning seven months after the funding date with the remaining balance due on the twelfth month after the date of funding. The May 2020 Note was convertible at a fixed convertible price of $9.28 per share. In connection with the issuance of the May 2020 Note, the Company paid a $133,333 due diligence fee by issuing 14,368 shares of common stock to the Investor priced at $9.28 per share. The Company also paid a placement fee of 7% of the gross proceeds to a placement agent. In connection with the closing of the May 2020 Note, the Company issued a five-year warrant to the investor to purchase 237,500 shares of common stock at a fixed exercise price of $9.28 and was immediately exercisable. The valuation of the warrant of $876,937 was recorded to debt discount and was amortized over the life of the May 2020 Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in-capital based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount were included in the interest expense on the statement of operations.

Following the completion of the underwritten offering in July 2020, the principal balance of $2,415,000 was paid in full during the third quarter of 2020.  As a result of the repayment, the Company expensed the remaining debt discounts and issuance costs of $1,218,163 in July 2020.

June 2020 Note

On June 29, 2020, the Company issued a $1,811,250 principal amount senior secured convertible note (the “June 2020 Note”).  At closing, $1,575,000 was funded. The principal amount was due and payable in nine equal monthly installments of $201,250 beginning four months after the funding date with the remaining balance due on the twelfth month after the date of funding. The June 2020 Note was convertible at a fixed convertible price of $9.28 per share. In connection with the issuance of the June 2020 Note, the Company paid a $100,000 due diligence fee by issuing 17,071 shares to the Investor priced at $5.86 per share. The Company also paid a placement fee of 7% of the gross proceeds to a placement agent.

In connection with the closing of the June 2020 Note, the Company issued a five-year warrant to the Investor to purchase 178,125 shares of common stock at a fixed exercise price of $9.28 per share, and was immediately exercisable. The valuation of the warrant of $511,402 was recorded to debt discount and was amortized over the life of the June 2020 Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount are included in interest expense on the statement of operations.

Following the completion of the underwritten offering in July 2020, the principal balance of $1,811,250 was paid in full during the third quarter of 2020. As a result of the repayment, the Company expensed the remaining debt discounts and issuance costs of $957,919 in July 2020.

58

 

 

NOTE OPLEASES

 

The Company’s leases office space in New Jersey, Hong Kong, Minnesota, and MinnesotaNew Hampshire with lease termination dates of 2023, 2020,2022, 2022, and 2022, respectively. The leases include non-lease components with variable payments. The following tables present the components of lease expense and supplemental balance sheet information related to the operating leases, were:

 

  

Year ended

December 31,

 
  

2019

 
     

Lease cost

    

Operating lease cost

 $186,246 

Short-term lease cost

  41,535 

Total lease cost

 $227,781 
     

Balance sheet information

 

Operating right-of-use assets

 $566,479 
     

Operating lease liabilities, current portion

 $170,560 

Operating lease liabilities, non-current portion

  390,466 

Total operating lease liabilities

 $561,026 
     

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

  3.33 

Weighted average discount rate – operating leases

  5.50

%

46

  Year ended

December 31,

2020

  Year ended

December 31,

2019

 
         

Lease cost

        

Operating lease cost

 $239,192  $186,246 

Short-term lease cost

  -   41,535 

Total lease cost

 $239,192  $227,781 
         

Balance sheet information

     

Operating right-of-use assets

 $487,325  $566,479 
         

Operating lease liabilities, current portion

 $234,309  $170,560 

Operating lease liabilities, non-current portion

  264,163   390,466 

Total operating lease liabilities

 $498,472  $561,026 
         

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

  2.26   3.33 

Weighted average discount rate – operating leases

  5.50

%

  5.50

%

 

Supplemental cash flow information related to leases were as follows, for the year ended December 31, 2019:follows:

 

Cash paid for amounts included in the measurement of operating lease liabilities

 $235,186$179,105 

 

Maturities of operating lease liabilities were as follows:follows as of December 31, 2020:

 

2020

 $197,724 

2021

  170,853  $256,977 

2022

  160,817   187,594 

2023

  89,226   89,225 

Total future lease payments

 $618,620  $533,796 

Less: imputed interest

  (57,594

)

  (35,324

)

Total

 $561,026  $498,472 

 

 

NOTE PQCOMMITMENTS AND CONTINGENCIES

Sales Incentive Agreement with TTI

On March 25, 2020, the Company entered into a sales incentive agreement Technology Transfer Institute (“TTI”). Terms of the agreement include the following:

1.

The term of the agreement is one year unless notice to terminate (as defined) is given. The agreement will be automatically extended for additional one-year terms unless terminated.

2.

For each $5,000,000 in revenue (up to a maximum of $20,000,000) TTI generates during the first year that results in net income of at least 20% (as defined), the Company will pay TTI a sales incentive fee of $500,000 payable by the issuance of 62,500 shares of common stock.

3.

In the event that TTI generates revenue in excess of $20,000,000 during the first year, the Company will issue TTI a five-year warrant to purchase 12,500 shares of Common Stock at an exercise price of $12.00 per share for each $1,000,000 of revenue in excess of $20,000,000 (up to a maximum of $25,000,000).

In no event will the Company be obligated to issue more than 250,000 shares of common stock or warrants to purchase more than 62,500 shares of common stock pursuant to this agreement. 

There has been no revenue generated nor sales incentive fees paid during the period ended December 31, 2020.

59

 

Litigation

 

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of December 31, 2019,2020, the Company was not a party to any pending lawsuits.

 

 

NOTE QR EQUITY

 

1. Preferred Stock

 

Within the limits and restrictions provided in the Company’s Certificate of Incorporation, the Board of Directors has the authority, without further action by the shareholders, to issue up to 5,000,000 shares of preferred stock, $.0001 par value per share, in one or more series, and to fix, as to any such series, any dividend rate, redemption price, preference on liquidation or dissolution, sinking fund terms, conversion rights, voting rights, and any other preference or special rights and qualifications. As of December 31, 2019, 100,000 shares of preferred stock have been designated as Series A-1 Convertible Preferred Stock, of which 90,000 were issued in 2015 and 0 remain outstanding, and 105,000 shares of preferred stock have been designated as Series B-1 Convertible Preferred Stock, of which 105,000 were issued in 2015 and 0 remain outstanding.  

Series A-1 Convertible Preferred Stock

On October 22 and 29, 2015, the Company issued 84,500 shares of Series A-1 Stock at a purchase price of $100.00 per share, for aggregate gross proceeds of $8,450,000. On November 11, 2015, 5,500 additional shares of Series A-1 Stock were issued at a purchase price of $100.00 per share, for gross cash proceeds of $550,000.

In 2017, the holder of the Series A-1 Stock converted $540,000 in accrued dividends payable into 150,000 shares common stock and converted 27,404 Series A-1 Stock into 761,222 shares of common stock. Between January 1, 2018 and May 31,2018, the holder of the Series A-1 Stock converted all remaining shares of the Series A-1 Stock into an aggregate of 1,738,778 shares of common stock and purchased an aggregate of 98,893 shares of common stock in consideration of the conversion of $356,015 of accrued dividends payable on the Series A-1 Stock.

As a result of the forgoing conversions, at December 31, 2018 and 2019 there are no longer any issued and outstanding shares of Series A-1 Stock.

Overall balances and conversion of Series A-1 Stock and accrued dividends into common stock has been as follows:

  

Series A-1

  

Accrued Dividends

 
         

Balance – January 1, 2017

  90,000  $270,000 

Accrual of dividends – Q1 2017

  -   135,000 

Accrual of dividends – Q2 2017

  -   135,000 

Accrual of dividends – Q3 2017

  -   135,000 

Conversion into common stock – September 2017

  -   (540,000

)

Conversion into common stock – October 2017

  (27,404

)

  - 

Accrual of dividends – Q4 2017

  -   101,658 

Balance – December 31, 2017

  62,596  $236,658 

Accrual of dividends – Q1 2018

  -   93,894 

Conversion into common stock – April 2018

  (39,088

)

  (330,552

)

Accrual of dividends – Q2 2018 (until final conversion)

  -   25,463 

Conversion into common stock – May 2018

  (23,508

)

  (25,463

)

Balance – December 31, 2018 and December 31, 2019

  -  $- 

Series B-1 Convertible Preferred Stock

On November 11, 2015, the Company issued 105,000 shares of Series B-1 Stock at a purchase price of $100.00 per share, for gross proceeds of $10,500,000.  

Between March 23, 2018 and May 23, 2018, holders of shares of Series B-1 Stock converted all shares of Series B-1 Stock into an aggregate of 2,916,668 shares of common stock and purchased an aggregate of 131,229 shares of common stock in consideration of the conversion of $472,426 of accrued dividends payable on the Series B-1 Stock.

As a result of the forgoing conversions, at December 31, 2018 and 2019 there are no longer any issued and outstanding shares of Series B-1 Stock.

Overall balances and conversion of Series B-1 Stock and accrued dividends into common stock has been as follows:

  

Series B-1

  

Accrued Dividends

 
         

Balance – January 1, 2017

  105,000  $131,250 

Accrual of dividends – Q1 2017

  -   65,625 

Accrual of dividends – Q2 2017

  -   65,625 

Accrual of dividends – Q3 2017

  -   65,625 

Accrual of dividends – Q4 2017

  -   65,625 

Balance – December 31, 2017

  105,000   393,750 

Conversion into common stock – March 2018

  (60,420

)

  (417,084

)

Accrual of dividends – Q1 2018

  -   62,268 

Accrual of dividends – Q2 2018 (until final conversion)

  -   16,408 

Conversion into common stock – May 2018

  (44,580

)

  (55,342

)

Balance – December 31, 2018 and December 31, 2019

  -  $- 

 

2. Common Stock

Effective November 20, 2020, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-8. The number of authorized shares and the par value of the Company's common stock and preferred stock were not affected by the reverse stock split. Stockholders who otherwise would be entitled to receive fractional shares were rounded up to the nearest whole share. The reverse stock split became effective at the opening of trading on November 20, 2020.

 

Holders of common stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Holders of common stock have one vote for each share held of record and do not have cumulative voting rights.

 

Holders of common stock are entitled, upon liquidation of the Company, to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of common stock are not redeemable and have no preemptive or similar rights. All outstanding shares of common stock are fully paid and nonassessable.

 

Issuances of Common Stock

See Note N for common stock issued as commitment fees for notes payable during the 2019 fiscal year. 

 

On August 22, 2018,July 23, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC (the “Underwriter”) with respect to the issuance and sale of an aggregate of 1,200,000 units (“Units”) with each unit consisting of one share of common stock and a warrant to purchase 0.75 shares of common stock at an exercise price of $1.50 per share, incompleted an underwritten public offering pursuant to the Underwriting Agreement. Each Unit was sold for a price of $1.50. The Warrants have a term of five years and are immediately exercisable. Pursuant to the Underwriting Agreement, the Company granted the Underwriters a 45-day option to purchase up to an additional 180,000 shares of Common Stock and/or 135,000 Warrants to cover over-allotments, if any (the “Over-Allotment”). On August 22, 2018, the Underwriter exercised its Over-Allotment option in full on both the Common Stock and the Warrants. Pursuant to this agreement, 1,380,000 shares of common stock and warrants to purchase 1,035,000 shares of stock were issued on August 24, 2018 for aggregate grossresulting in net proceeds of $2,070,000. The gross proceeds were reduced by a 7% commission ($144,900)approximately $22.7 million, after deducting underwriting discounts and $50,000 of underwriting expenses to net to $1,875,100 cash received.

Costs of $143,945 were incurred during 2018 in relation to the issuance of common stock.

Also see preferred stock section above for conversions of shares of preferred stockcommissions and accrued dividends intoestimated offering expenses. 4,264,313 shares of common stock were issued as a result of this offering, and a further 797,038 shares of common stock were issued upon the exercise of 512,500 prefunded warrants and 284,538 warrants exercised in 2018.conjunction with the offering.

 

common stock upon exercise of warrants at $12.00 per share, resulting in proceeds of $1,458,000 to the Company.

 

See Note O Convertible Notes Payable for common stock issuances related to conversion of convertible notes payable and shares of common stock issued for fees in connection with the agreements during fiscal 2020 and 2019. 

Issuances of Nonvested Stock

Nonvested stock consists of shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions. The fair value of nonvested shares is determined based on the market price of the Company's common stock on the grant date. Nonvested stock is expensed ratably over the term of the restriction period.

The Company issued 38,250 and 3,125 shares of restricted common stock in August and November of 2020, respectively to certain employees and directors of the Company. 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 $198,900, and $11,250, respectively. Nonvested stock compensation for the year ended December 31, 2020 was $23,764.

Issuances to Directors, Executive Officers & Consultants

 

During the year ended December 31, 2019,2020, the Company issued 36,8975,270 shares of common stock to its directors in lieu of payment of board fees, valued at $28,511. During the year ended December 31, 2019, the company issued 4,612 shares of common stock to its directors in lieu of payment of board fees, valued at $35,013.

 

During the year ended December 31, 2018, the Company issued 20,976 shares of common stock to its directors in lieu of payment of board fees, valued at $37,532.

Employees’Employees exercise options

 

During 20192020 and 2018,2019, no employee stock options were exercised.

60

3. Warrants

Securities Purchase Agreement dated November 13, 20142014:

 

Pursuant toAs part of a Securities Purchase Agreement, dated November 13, 2014, by and between the Company and a number of private and institutional investors, the Company issued to certain private investors 664,584warrants to purchase 124,610 shares of common stock.  The warrants expired in November 2019.

Securities Purchase Agreement dated September 23, 2015:

On September 23, 2015, the Company issued warrants (the “2015 Warrants”) to purchase 8,681 shares of common stock andin connection with the issuance of a promissory note. The warrants to purchasewere immediately exercisable at an additional 996,877 sharesinitial exercise price of common stock for aggregate gross proceeds of $1,595,000.

The warrants$28.80 per share and had a term of five years and an initial exercise price of $3.60 per share, and were fully exercisable since February 2015.years. The warrants2015 Warrants expired in September 2020.

The 2015 Warrants had customary anti-dilution protections including a “full ratchet”"full ratchet" anti-dilution adjustment provision which arecould be triggered in the event the Company sellssold or grantsgranted any additional shares of common stock, options, warrants or other securities that arewere convertible into common stock at a price lower than $3.60$28.80 per share. The anti-dilution adjustment provision was not triggered by certain “exempt issuances” which among other issuances, includes the issuance of shares of common stock, options or other securities to officers, employees, directors, consultants or service providers.

 

Anti-dilution features were triggered as follows:

On August 24, 2018February 14, 2020, the CompanyFebruary 2020 Note was issued Common Stock and Warrants to investors at a purchaseconversion price of $1.50 per unit which$9.20 that triggered the anti-dilution protectionprovisions included in the 2015 Warrants. In addition, the amendments to the Original Note reduced the conversion price of the Original Note to $5.20 which also triggered the anti-dilution provision under this Securities Purchase Agreement.of the 2015 Warrants. As a result of the totalforgoing transactions, the number of outstanding and fully vested warrantsshares of common stock issuable upon the full exercise of the 2015 Warrants increased to 48,078, the exercise was increased from 996,877reduced to 2,392,502,$5.20 per share, and the exercise price was reduced from $3.60 to $1.50 per share. The Company recognizedrecorded a non-cash deemed dividend in amount of $1,288,139 in 2018 in connection with these adjustments.$41,688.

 

The warrants expired in November 2019.Warrants Issued for Services:

 

Securities Purchase Agreement dated September 23, 2015

On September 23, 2015,During the second quarter of 2020, the Company issued a warrant to purchase 69,44515,625 shares of common stock to an investor in payment for a business referral valued at $94,655.

During the third quarter of 2020, the Company issued a warrant to purchase 3,125 shares of common stock to a former employee for a business referral valued at $12,921.

Warrants Issued with Convertible Notes:

In 2020, the Company issued warrants to purchase 415,625 shares in connection with the issuance of a promissory note. The warrants are immediately exercisable at an initial exercise price of $3.60 per shareMay 2020 and have a term of five years. 

The warrants have customary anti-dilution protections including a "full ratchet" anti-dilution adjustment provision which are triggered in the event the Company sells orgrants any additional shares of common stock, options, warrants or other securities that are convertible into common stock at a price lower than $3.60 per share. The anti-dilution adjustment provision was not triggered by certain "exempt issuances" which among other issuances, includes the issuance of shares of common stock, options or other securities to officers, employees, directors, consultants or service providers.

On August 24, 2018June 2020 Notes. In 2019, the Company issued Common Stock and Warrantsa warrant to the investors at a purchase price of $1.50 per unit which triggered the anti-dilution protection provision under this Securities Purchase Agreement. As a result, the total number of outstanding and fully vested warrants was increased from 69,445 to 166,668, and the exercise price was reduced from $3.60 to $1.50 per share. The Company recognized a non-cash deemed dividend of $140,827 in 2018250,000 shares in connection with these adjustments.  

In February 2020, the Company entered into a convertible note at a conversion price of $1.15 that triggered the anti-dilution feature under Securities Purchase Agreement dated September 23, 2015. Additionally, the Company entered into an amendment (as discussed in Note N) that reduced the conversion price of the Amended Note to $0.65, thus triggering the anti-dilution feature under the Securities Purchase Agreement dated September 23, 2015. In the first quarter of 2020, the total number of outstanding and fully vested warrants will increase, the exercise price will ultimately reduce to $0.65 per share, and the Company will record a non-cash deemed dividend in connection with both triggering events.July 10, 2019.

 

3. WarrantsValuation Assumptions for Warrants:

 

The Company has issuedrecords the warrants at their fair value which is determined using the Black-Scholes valuation model on the date of the grant. The fair value of each warrant was estimated with the following assumptions:

  

Year ended

December 31,

 
  

2020

  

2019

 

Weighted average Risk free interest rate

  0.33

%

  1.82%

Weighted average price

 $9.25  $12.00 

Weighted average exercise period

  5   5 

Weighted average Volatility of stock price

  110

%

  83%

The warrant volatility for each issuance is determined based on the review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected exercise period. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the years to certain creditors, investors, investment bankers and consultants. maturity.

61

A summary of warrant activity is as follows:

 

 

Total

Warrants

  

Weighted

average

exercise

price

  

Weighted

average

remaining

life

(in years)

  

Aggregate

intrinsic

value

  

Total

Warrants

  

Weighted

average

exercise

price

  

Weighted

average

remaining

life

(in years)

  

Aggregate

intrinsic

value

 
                                

Outstanding, as of December 31, 2017

  1,398,969   3.81   2.06     

Outstanding, as of December 31, 2018

  472,622   12.72   2.05     
                                

Granted

  1,035,000   1.50         

Increase due to trigger of anti-dilution provision feature

  1,492,848   1.50         

Exercised

              

Forfeited

              

Expired

  (145,841

)

  6.00         

Outstanding, as of December 31, 2018

  3,780,976   1.59   2.05    

Granted

  2,000,000   1.50           250,000   12.00         

Exercised

                            

Forfeited

                            

Expired

  (2,392,502

)

  1.50           (299,063

)

  12.00         

Outstanding, as of December 31, 2019

  3,388,474   1.60   3.94      423,559   12.80   3.94    

Vested or expected to vest at December 31, 2019

  3,388,474   1.60        

Exercisable at December 31, 2019

  3,388,474   1.60        

Granted – public offering

  4,264,313   5.20         

Granted – prefunded warrants from the public offering

  512,500   0.08         

Granted – other

  434,375   9.25         

Increase due to trigger of anti-dilution provision feature

  27,244   5.20         

Exercised – public offering

  (284,538

)

  5.20         

Exercised – prefunded warranted from the public offering

  (512,500

)

  0.08         

Exercised – other

  (121,500

)

  12.00         

Forfeited

              

Expired

  (54,066

)

  6.86         

Outstanding, as of December 31, 2020

  4,689,387   6.04   4.48    

62

 

 

NOTE RSSTOCK OPTIONS

 

2004 Stock Option Plan

 

On October 12, 2004, the Board of Directors of the Company approved the 2004 Stock Option Plan (the 2004 Plan)“2004 Plan”). The 2004 Plan was not presented to stockholders for approval and thus incentive stock options were not available under this plan. Under the terms of this plan, 166,66720,834 shares of common stock were reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which may not be below 85% of fair market value. The term of stock options granted may not exceed ten years. Options issued under the 2004 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, as defined, all options outstanding vest immediately. The 2004 Plan expired in October 2014.

 

2015 Stock Option Plan

 

On January 27, 2016, the shareholders approved the 2015 Equity Incentive Plan (the 2015 Plan)“2015 Plan”). Under the terms of this plan, 666,667187,500 shares of common stock are reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which may not be below 100-110% of fair market value. At our annual shareholders meeting in 2019, we adopted an amendment to the 2015 Plan which increases the number of shares of common stock authorized for issuance under the 2015 Plan from 83,334 shares to 187,500 shares and also effected certain changes in light of the Tax Cuts and Jobs Act of 2017 and its impact on Section 162(m) of the United States Internal Revenue Code of 1986, as amended. The term of stock options granted may not exceed ten years. Options issued under the 2015 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, certain stock awards issued under this plan may be subject to additional acceleration of vesting as may be provided in the participants’ written agreement. The 2015 Plan expires in December 2025.

 

Non-Plan Stock Options

 

Periodically, the Company has granted options outside of the 2004 and 2015 Plans to various employees and consultants. In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately.

 

Stock Option Activity

 

Information summarizing option activity is as follows:

 

 

Number of Options

  

Weighted

average

  

Weighted

average

remaining

  

Aggregate

  

Number of Options

  

Weighted

average

  

Weighted

average

remaining

  

Aggregate

 
 

2004

Plan

  

2015

Plan

  

Non

Plan

  

Total

  

exercise

price

  

life

(in years)

  

intrinsic

value

  

2004

Plan

  

2015

Plan

  

Non

Plan

  

Total

  

exercise

price

  

life

(in years)

  

intrinsic

value

 
                                                        

Outstanding, as of December 31, 2017

  52,296   82,086   1,343,111   1,477,493  $2.91         

Outstanding, as of December 31, 2018

  4,167   47,740   146,596   198,503  $21.76         

Granted

     30,167      30,167   9.36         

Exercised

                       

Forfeited

     (5,077

)

  (521

)

  (5,598

)

  18.16         

Expired

  (261

)

  (1,839

)

  (2,005

)

  (4,105

)

  24.64         

Outstanding, as of December 31, 2019

  3,906   70,991   144,070   218,967  $20.08   5.00  $0 
                                                        

Granted

     351,918      351,918   1.97              28,440      28,440   5.04         

Exercised

                                              

Forfeited

     (38,613

)

  (111,253

)

  (149,866

)

  2.63              (4,545

)

     (4,545

)

  17.34         

Expired

  (18,961

)

  (13,473

)

  (59,097

)

  (91,531

)

  3.03           (3,906

)

  (703

)

  (10,979

)

  (15,588

)

  29.17         

Outstanding, as of December 31, 2018

  33,335   381,918   1,172,761   1,588,014  $2.72   5.00  $0 
                            

Granted

     241,334      241,334   1.17         

Exercised

                       

Forfeited

     (40,615

)

  (4,168

)

  (44,783

)

  2.27         

Expired

  (2,084

)

  (14,717

)

  (16,040

)

  (32,841

)

  3.08         

Outstanding, as of December 31, 2019

  31,251   567,920   1,152,553   1,751,724  $2.51   4.30  $0 

Vested or expected to vest at December 31, 2019

              1,594,905  $2.59   4.17  $0 

Exercisable at December 31, 2019

              992,747  $2.88   3.63  $0 

Outstanding, as of December 31, 2020

     94,183   133,091   227,274  $17.61   3.87  $0 

Vested or expected to vest at December 31, 2020

              209,427  $18.51   3.68  $0 

Exercisable at December 31, 2020

              167,980  $20.77   3.21  $0 

63

 

The options outstanding and exercisable at December 31, 20192020 were in the following exercise price ranges:

 

 

 

 

 

Options Outstanding

 

Options Exercisable

 

     

Options Outstanding

  

Options Exercisable

 

Range of exercise prices

Range of exercise prices

 

Number of

shares

 

Weighted

average

exercise

price

 

Weighted

average

remaining

life (in years)

 

Number

exercisable

 

Weighted

average

exercise

price

 

Range of exercise prices

  

Number of

shares

  

Weighted

average

exercise

price

  

Weighted

average

remaining

life (in years)

  

Number

exercisable

  

Weighted

average

exercise

price

 

$

0.51

-

1.99

 

418,336

 

$

1.52

 

5.78

 

62,712

 

$

1.96

 

3.60-5.20   28,065  $5.01   6.67   84  $4.08 

$

2.00

-

3.50

 

1,164,841

 

2.56

 

4.28

 

761,488

 

2.58

 

5.21-15.68   49,919   12.16   4.82   23,814   13.30 

$

3.51

-

4.92

 

 

168,547

 

4.58

 

0.76

  

168,547

 

4.58

 

15.69-39.36   149,290   21.80   3.06   144,082   22.01 

$

0.51

-

4.92

 

 

1,751,724

 

 

 

   

992,747

  

 

3.60-39.36   227,274           167,980     

 

The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $0.50$3.52 as of December 31, 2019,2020, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of December 31, 20192020 was 0.

 

The weighted average fair value of options granted during the years ended December 31, 2020 and 2019 was $3.16 and 2018 was $1.03 and $1.53$8.24 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 20192020 and 20182019 was $0. The total fair value of shares vested during the years ended December 31, 2020 and 2019 was $899,750 and 2018 was $891,760, and $946,435, respectively.

 

As of December 31, 2019,2020, future forfeiture adjusted compensation cost related to nonvested stock options is $731,370$232,547 and will be recognized over an estimated weighted average period of 0.911.21 years.

 

 

NOTE STINCOME TAXES

 

There was no provision for federal or state taxes as at December 31, 20192020 and 2018.2019.

 

The Company has deferred taxes due to income tax credits, net operating loss carryforwards, and the effect of temporary differences between the carrying values of certain assets and liabilities for financial reporting and income tax purposes. Significant components of deferred taxes are as follows at December 31:

 

  

2019

  

2018

 
         

Accrued compensation

 $84,000  $91,000 

Accounts receivable allowance

  474,000   474,000 

Stock-based compensation

  894,000   644,000 

Basis differences in fixed assets

  (5,000

)

  (13,000

)

Basis differences in intangible assets

  62,000   50,000 

Net operating loss and credit carryforwards

  15,002,000   12,735,000 

Valuation allowances

  (16,511,000

)

  (13,981,000

)

         
  $  $ 

51

  

2020

  

2019

 
         

Accrued compensation

 $81,000  $84,000 

Accounts receivable allowance

  474,000   474,000 

Stock-based compensation

  1,073,000   894,000 

Basis differences in fixed assets

  (14,000

)

  (5,000

)

Basis differences in intangible assets

  65,000   62,000 

Net operating loss and credit carryforwards

  13,337,000   15,002,000 

Valuation allowances

  (15,016,000

)

  (16,511,000

)

         
  $  $ 

 

The Company has a valuation allowance against the full amount of its net deferred taxes due to the uncertainty of realization of the deferred tax assets due to operating loss history of the Company. The Company currently provides a valuation allowance against deferred taxes when it is more likely than not that some portion, or all of its deferred tax assets will not be realized. The valuation allowance could be reduced or eliminated based on future earnings and future estimates of taxable income. Similarly, income tax benefits related to stock options exercised have not been recognized in the financial statements.

 

As of December 31, 2019,2020, the Company has federal net operating loss carryforwards of approximately $70$63 million. Approximately $55$52 million are subject to expiration between 20222020 and 2037, and $15$11 million net operating loss carryforwards have no expiration date. These net operating loss carryforwards are subject to the limitations under Section 382 of the Internal Revenue Code due to changes in the equity ownership of the Company. The Company has 3.6 million of state net operating loss carryforwards.

64

 

A reconciliation of the effective income tax rate on operations reflected in the Statements of Operations to the US Federal statutory income tax rate is presented below.

 

 

2019

  

2018

  

2020

  

2019

 
                

Federal statutory income tax rate

  21

%

  21

%

  21

%

  21

%

Permanent differences

  (2

)

     (9

)

  (2

)

Effect of net operating loss

  (22

)

  (21

)

  (12

)

  (19

)

                

Effective tax rate

  

%

  

%

  

%

  

%

 

The Company has not been audited by the Internal Revenue Service (“IRS”) or any states in connection with income taxes. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The periods from 20162017 through 20192020 remain open to examination by the IRS and state jurisdictions. The Company believes it is not subject to any tax audit risk beyond those periods. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense incurred during the years ended December 31, 20192020 and 2018.2019.

 

 

NOTE TUPROFIT SHARING PLAN

 

The Company has established a savings plan under section 401(k) of the Internal Revenue Code. All employees of the Company, after completing one day of service, are eligible to enroll in the 401(k) plan. Participating employees may elect to defer a portion of their salary on a pre-tax basis up to the limits as provided by the IRS Code. The Company is not required to match employee contributions but may do so at its discretion. The Company made no contributions during the years ended December 31, 20192020 and 2018.2019.

 

 

NOTE UVEARNINGS PER SHARE (EPS)

 

The Company’s basic EPS is calculated using net income (loss) available to common shareholders and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of preferred stock.

 

The reconciliation of the numerator of the basic and diluted EPS calculations due to the inclusion of preferred stock dividends was as follows for the following fiscal years ended December 31:

 

  

2019

  

2018

 
         

Basic Numerator:

        

Net Loss

 $(14,588,700

)

 $(6,868,875

)

Deemed dividend from trigger of anti-dilution provision feature

  -   (1,428,966

)

Convertible preferred stock dividends

  -   (198,033

)

Net loss available to common stockholders (basic and diluted EPS)

 $(14,588,700

)

 $(8,495,874

)

52

  

2020

  

2019

 
         

Basic Numerator:

        

Net Loss

 $(9,673,987

)

 $(14,588,700

)

Deemed dividend from trigger of anti-dilution provision feature

  (112,686

)

  - 

Net loss available to common stockholders (basic and diluted EPS)

 $(9,786,673

)

 $(14,588,700

)

 

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.antidilutive due to net losses.

 

 

Years ended December 31,

  

Years ended December 31,

 
 

2019

  

2018

  

2020

  

2019

 
                

Stock options

  945   83   1,002   118 

Warrants

  -   697,879 

Restricted stock

  3,098   - 

Convertible notes

  -   182,343 

Potentially dilutive securities

  945   697,962   4,100   182,461 

 

Items excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:

 

 

Years ended December 31,

  

Years ended December 31,

 
 

2019

  

2018

  

2020

  

2019

 
                

Stock options

  1,749,724   1,583,014   223,899   218,716 

Warrants

  3,388,474   186,806   4,689,387   423,559 

Convertible notes

  1,458,740   - 

Preferred stock

  -   1,426,756 

Total

  6,596,938   3,196,576   4,913,286   642,275 

65

 

 

NOTE V—WSUBSEQUENT EVENTS

Refer to Note N for subsequent events related to convertible notes in effect as of December 31, 2019.

On January 13, 2020, the Company issued a $157,000 principal amount convertible note to an institutional investor with a maturity date of June 13, 2020 which is convertible into common stock at a conversion price of $1.50 per share. The note was redeemable at any time by payment of a premium to the principal balance starting at 10% and increasing to 30%. At the closing, the Company agreed to issue 650,000 shares of common stock in lieu of payment of a $75,000 commitment fee which would be reduced to 50,000 shares if the note is repaid prior to the maturity date.

On February 13, 2020, the Company issued a $126,000 principal amount convertible note to an institutional investor with a maturity date of July 13, 2020 which is convertible into common stock at a conversion price of $1.15 per share. The note is redeemable at any time by payment of a premium to the principal balance starting at 10% and increasing to 30%. At the closing, the Company agreed to issue 550,000 shares of common stock in lieu of payment of a $57,500 commitment fee which would be reduced to 50,000 shares if the note is repaid prior to the maturity date.  To date, the Company has only issued 50,000 shares at the request of the lender.

 

On March 25, 2020, the Company entered into a sales incentive agreement TTI.  The agreement provides that for each $5,000,000 in revenue (up to a maximum of $20,000,000) TTI generates for the Company during the first year, that generate net income (calculated under U.S. generally accepted accounting principles) of at least 20%, the Company will pay TTI a sales incentive fee of $500,000 payable by the issuance of 500,000 shares of Common Stock. In the event that TTI generates revenue for the Company in excess of $20,000,000 during first year, the Company will issue TTI a five-year warrant to purchase 100,000 shares of Common Stock at an exercise price of $1.50 per share (the “Warrants”) for each $1,000,000 of revenue in excess of $20,000,000 (up to a maximum of $25,000,000). In no event shall the Company be obligated to issue more than 2,000,000 shares of Common Stock or Warrants to purchase more than 500,000 shares of Common Stock pursuant to the Sales Agreement.

On March 30, 2020, 972,000 warrant shares were exercised at $1.50 for net proceeds to the Company of $1,458,000.

On April 2, 2020,4, 2021, the Company issued 6,8501,375 shares of common stock to its directors in payment of meetingboard fees. Additionally, the Company issued an aggregate of 1,250 shares of restricted common stock to two new employees which vest in equal annual installments over a warrant to a new employee for 5,000 shares with three -vesting period. three-year period from the date of grant.

 

On April 20, 2020, the Company entered into a Paycheck Protection Program Term Note (the “SVB Note”) with Silicon Valley Bank (“SVB”) pursuant to the Paycheck Protection Program (the “Program”) of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The Company received total proceeds of $340,000 which will be used in accordance with the requirements of the CARES Act.  The Company will apply to SVB for forgiveness of amounts due on the SVB Note to the extent they are used for eligible payroll costs, rent obligations, and covered utility payments incurred during the eight weeks following disbursement under the SVB Note.   Until the six-month anniversary of the date of the SVB Note (the “Deferral Expiration Date”), neither principal nor interest is due and payable. On the Deferral Expiration Date, the outstanding principal of the SVB Note that is not forgiven will convert to an amortizing term loan at an interest rate of 1% per annum requiring equal monthly payments of principal and interest through November 20, 2022.

On May 6, 2020,March 9, 2021, the Company issued a $2,415,000 principal amount senior secured convertible note (the “Note”) which provided for the funding of $2,100,000. The principal amount is due and payable in five equal monthly installments of $268,333 beginning seven months after the funding date with the remaining balance due on the twelfth month after the date of funding. The Note is convertible at a fixed convertible price of $1.16 per share. In connection with the issuance of the Note, the Company made a payment of a $133,333 due diligence fee by issuing 114,943 shares to the Investor priced at $1.16. The Company also issued a warrant to purchase 1,900,000 shares of common stock at a fixed exercise price of $1.16 and paid a placement fee of 7% of the gross proceeds to Maxim Group LLC.

On May 12, 2020, the Company issued 7,077278 shares of common stock to its directors in payment of meetingboard committee fees.

Subsequent to year-end, due to the effects of the worldwide coronavirus pandemic, the Company is closely monitoring its operations, liquidity, and capital resources. We are actively working to minimize the current and future impact of this unprecedented situation. As of the date of issuance of these financial statements, the full impact to the Company’s financial position is not known.

 

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

 

 

EXHIBITINDEX

 

Exhibit

Exhibit 

No.

 2.1

Stock Purchase Agreement by and among the Company, Thomas J. Hoey, and PistolStar, Inc. dated June 6, 2020 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed with the SEC on July 7, 2020).

3.1

Certificate of Incorporation of BIO-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on January 5, 2005)

3.2

Bylaws (incorporated by reference to Exhibit 3.3 to the current report on Form 8-K, filed with the SEC on January 5, 2005)

3.3

Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Appendix A to the definitive proxy statement, filed with the SEC on January 18, 2006)

3.4

Certificate of Amendment of Certificate of Incorporation of Bio-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.4 to the annual report on Form 10-K, filed with the SEC on March 31, 2015)

3.5

Certificate of Elimination of BIO-key International, Inc. filed October 6, 2015 (incorporated by reference to Exhibit 3.5 to the registration statement on Form S-1 File No. 333-208747 filed with the SEC on December 23, 2015)

3.6

Certificate of Designation of Preferences, Rights and Limitations of Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on November 2, 2015)

3.7

Certificate of Designation of Preferences, Rights and Limitations of Series B-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the quarterly report on Form 10-Q, filed with the SEC on November 16, 2015)

3.8

Certificate of Amendment of Certificate of Incorporation of Bio-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on December 28, 2016)

 3.9

Certificate of Amendment of Certificate of Incorporation of Bio-Key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on November 19, 2020)

4.1

Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the registration statement on Form SB-2, File No. 333-16451)

 4.2

Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registration Statement on Form S-1/A, filed with the SEC on July 17, 2020).

 4.3

Form of Warrant (incorporated by reference to Exhibit 4.3 to Amendment No. 1 to the Registration Statement on Form S-1/A, filed with the SEC on July 17, 2020).

 4.4

 Form of Warrant Agency Agreement (incorporated by reference to Exhibit 4.4 to Amendment No. 2 to the Registration Statement on Form S-1/A, filed with the SEC on July 20, 2020).

10.1

Employment Agreement by and between BIO-key International, Inc. and Mira LaCous dated November 20, 2001 (incorporated by reference to Exhibit 10.39 to the current report on Form 8-K, filed with the SEC on January 22, 2002)***

10.2

BIO-key International, Inc. 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.48 to amendment no. 1 the registrant’s registration statement on Form SB-2, File No. 33-120104, filed with the SEC on December 14, 2004)***

10.3

Employment Agreement, effective March 25, 2010, by and between the Company and Michael W. DePasquale (incorporated by reference to Exhibit 10.93 to the annual report on Form 10-K, filed with the SEC on March 26, 2010)***

10.4

Employment Agreement by and between BIO-key International, Inc. and Cecilia Welch dated May 15, 2013 (incorporated by reference to Exhibit 10.42 to the annual report on Form 10-K, filed with the SEC on March 31, 2014)***

10.5

Third Amendment to Lease Agreement by and between BIO-key International, Inc. and Victor AOP, Inc. dated June 30, 2013 (incorporated by reference to Exhibit 10.43 to the annual report on Form 10-K, filed with the SEC on March 31, 2014)

10.6

First Amendment to Lease Agreement by and between BIO-key International, Inc. and BRE/DP MN LLC dated September 12, 2013 (incorporated by reference to Exhibit 10.44 to the annual report on Form 10-K, filed with the SEC on March 31, 2014)

10.7

Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q, filed with the SEC on November 16, 2015)

 10.8

BIO-key International, Inc. 2015 Equity Incentive Plan (incorporated by reference to Appendix B to the definitive proxy statement filed with the SEC on December 15, 2015)***

 

 

10.9

Software License Purchase Agreement Dated November 11, 2015 by and among BIO-key Hong Kong Limited, Shining Union Limited, WWTT Technology China, Golden Vast Macao Commercial Offshore Limited, Giant Leap International Limited (incorporated by reference to Exhibit 10.36 to the registration statement on Form S-1 File No. 333-208747 filed with the SEC on December 23, 2015)**

10.10

Common Stock Purchase Agreement dated May 2, 2017 by and between Registrant and Xanthe Holdings Ltd. (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 8-K, filed with the SEC on May 3, 2017)

10.11

Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K, filed with the SEC on May 3, 2017)

10.12

Form Non-Plan Option Agreement between the Company and certain of its directors, officers, employees and contractors (incorporated by reference to Exhibit 10.4 to the quarterly report on Form 10-Q filed with the SEC on May 15, 2017)***

10.13

Securities Purchase Agreement dated April 3, 2018 by and between the Registrant and Wong Kwok Fong (Kelvin) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on April 4, 2018)2018)

10.14

Securities Purchase Agreement dated May 23, 2018 by and between the Registrant and Giant Leap International Limited (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on May 30, 2018)2018)

10.15

Securities Purchase Agreement dated May 23, 2018 by and between the Registrant and Micron Technology Development Limited (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K, filed with the SEC on May 30, 2018)2018)

10.16

Securities Purchase Agreement dated May 31, 2018 by and between the Registrant and Wong Kwok Fong (Kelvin) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on June 4, 2018)2018)

10.17

Underwriting Agreement dated August 22, 2018 by and between the Registrant and Maxim Group LLP (incorporated by reference to Exhibit 1.1 to the current report on Form 8-K, filed with the SEC on August 27, 2018)2018)

10.18

Form of Common Stock Purchase Warrant dated August 24, 2018 (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K, filed with the SEC on August 27, 2018)2018)

10.19

GLP 2nd Amendment to Lease dated July 27, 2018 (incorporated by reference to Exhibit 10.26 to the annual report on Form 10-K, filed with the SEC on April 1, 2019)

10.20

Marlen 4th Amendment to Lease dated June 2, 2018 (incorporated by reference to Exhibit 10.27 to the annual report on Form 10-K, filed with the SEC on April 1, 2019)

   

10.21

 

Securities Purchase Agreement dated July 10, 2019 by and between the Registrant and Lind Global Macro Fund, LP. (incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q, filed with the SEC on August 14, 2019)

   

10.22

 

Security Agreement dated July 10, 2019 by and between the Registrant and Lind Global Macro Fund, LP. (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q, filed with the SEC on August 14, 2019)

   

10.23

 

Collateral Sharing Agreement dated July 10, 2019 by and among the Registrant, Lind Global Macro Fund, LP and Versant Funding LLC (incorporated by reference to Exhibit 10.3 to the quarterly report on Form 10-Q, filed with the SEC on August 14, 2019)

   

10.24

 

$3,060,00 Senior Secured Convertible Promissory Note dated July 10, 2019 (incorporated by reference to Exhibit 10.4 to the quarterly report on Form 10-Q, filed with the SEC on August 14, 2019)

   

10.25

Common Stock Purchase Warrant dated July 10, 2019 (incorporated by reference to Exhibit 10.5 to the quarterly report on Form 10-Q, filed with the SEC on August 14, 2019)

   

10.26

 

BIO-key International, Inc. Amended and Restated 2015 Equity Incentive Plan (incorporated by reference to Appendix A to the definitive proxy statement filed with the SEC on April 30, 2019)***

   

21.110.27

Sales Incentive Agreement with Technology Transfer Institute dated March 25, 2020. (incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020)

10.28

Form of Technology Transfer Institute Warrant. (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020)

68

10.29

Amended and Restated Senior Secured Convertible Promissory Note, due April 13, 2020 issued by the Company to Lind Global Macro Fund, LP. (incorporated by reference to Exhibit 10.3 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020)

10.30

Amendment to Amended and Restated Senior Secured Convertible Promissory Note, due April 13, 2020 by and between the Company and Lind Global Macro Fund, LP dated April 12, 2020. (incorporated by reference to Exhibit 10.4 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020)

10.31

Securities Purchase Agreement dated May 6, 2020 by and between the Company and Lind Global Macro Fund, LP. (incorporated by reference to Exhibit 10.5 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020)

10.32

$2,415,000 Senior Secured Convertible Promissory Note dated May 6, 2020. (incorporated by reference to Exhibit 10.6 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020)

10.33

Common Stock Purchase Warrant dated May 6, 2020. (incorporated by reference to Exhibit 10.7 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020)

10.34

Amended and Restated Security Agreement dated May 6, 2020 by and between the Company and Lind Global Macro Fund, LP. (incorporated by reference to Exhibit 10.8 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020)

10.35

Amendment No. 2 to Amended and Restated Senior Secured Convertible Promissory Note, due April 13, 2020 by and between the Company and Lind Global Macro Fund, LP dated May 13, 2020. (incorporated by reference to Exhibit 10.9 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020)

10.36

Securities Purchase Agreement dated June 29, 2020 by and between the Company and Lind Global Macro Fund, LP (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on July 1, 2020)

10.37

$1,811,250 Senior Secured Convertible Promissory Note dated June 29, 2020. (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K, filed with the SEC on July 1, 2020)

10.38

Common Stock Purchase Warrant dated May 6, 2020. (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K, filed with the SEC on July 1, 2020)

10.39

Second Amended and Restated Security Agreement dated June 29, 2020 by and between the Company and Lind Global Macro Fund, LP (incorporated by reference to Exhibit 10.4 to the current report on Form 8-K, filed with the SEC on July 1, 2020)

10.40

 $500,000 Promissory note, dated June 30, 2020 (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed with the SEC on July 7, 2020).

10.41

Form of Restricted Stock Award Agreement under the BIO-key International, Inc. Amended & Restated 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on August 28, 2020)***

10.42*

Employment Agreement by and between BIO-key International, Inc. and James Sullivan dated April 5, 2017 ***

21.1*

List of subsidiaries of BIO-key International, Inc. (incorporated by reference to Exhibit 21.1 to the annual report on Form 10-K, filed with the SEC on March 30, 2016)

23.1*

Consent of RMSBG

 

 

31.1*

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101.INS*

XBRL Instance

101.SCH*

XBRL Taxonomy Extension Schema

101.CAL*

XBRL Taxonomy Extension Calculation

101.DEF*

XBRL Taxonomy Extension Definition

101.LAB*

XBRL Taxonomy Extension Labels

101.PRE*

XBRL Taxonomy Extension Presentation

 

*  filed herewith

 

** Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted sections have been filed separately with the Securities and Exchange Commission

 

*** Management compensatory plan.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

BIO-KEY INTERNATIONAL, INC.

Date: May 14, 2020March 29, 2021

By:

/s/  MICHAEL W. DEPASQUALE

Michael W. DePasquale

CHIEF EXECUTIVE OFFICER

(Principal Executive Officer)

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated.

 

 

Signature

Title

Date

/s/  MICHAEL W.

DEPASQUALE

Chairman of the Board of Directors, Chief Executive Officer and Director

(Principal Executive Officer)

May 14, 2020March 29, 2021

Michael W. DePasquale

/s/  CECILIA WELCH

Chief Financial Officer (Principal Financial and Accounting Officer)

May 14, 2020March 29, 2021

Cecilia Welch

/s/ROBERT J. MICHEL

Director

May 14, 2020March 29, 2021

Robert J. Michel

/s/  THOMAS E. BUSH III

Director

May 14, 2020March 29, 2021

Thomas E. Bush

/s/  THOMAS GILLEY

Director

May 14, 2020March 29, 2021

Thomas Gilley

/s/  WONG KWOK FONG

Director

May 14, 2020March 29, 2021

Wong Kwok Fong

/s/  YAO JIANHUI

Director

May 14, 2020

Yao Jianhui

/s/  FABIAN SHIN

Director

May 14, 2020

Fabian Shin

/s/  PIETER KNOOK

Director

May 14, 2020March 29, 2021

Pieter Knook

/s/  MANNY ALIA

Director

May 14, 2020March 29, 2021

Manny Alia

 


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BIO-KEY INTERNATIONAL, INC.

Date: March 29, 2021

By:

/s/ Michael DePasquale

Michael DePasquale

Chief Executive Officer

 

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