Table of Contents

As filed with the Securities and Exchange Commission on July 17, 2020June 15, 2023

Registration No. 333-239782333-

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


Amendment No. 2 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


BIO-key International,, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

8071

41-1741861

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification Number)

(I.R.S. Employer

Identification Number)

3349 HIGHWAYHIGHWAY 138, BUILDING A, SUITE E

WALL, NJ 07719

(732) 359-1100

(Address, including zip code, and telephone number,

including area code, of registrant’sregistrants principal executive offices)

 


 

Michael DePasquale

Chief Executive Officer

BIO-keyBIO-key International,, Inc.

3349 HIGHWAYHIGHWAY 138, BUILDING A, SUITE E

WALL, NJ 07719

(732) 359-1100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


 

Copies to:

Vincent A. Vietti

Fox Rothschild LLP

Princeton Pike Corporate Center

997 Lenox Drive Building 3

Lawrenceville, NJ 0864808648-2311

(609) 896-3600

Barry I. Grossman

Sarah E. Williams

Ellenoff Grossman & Schole LLP

1345 Avenue of the Americas

New York, NY 10105

(212) 370-1300


 


 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.


 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 7(a)(2)(B) of the Securities Act.  ☐

 


 

CALCULATION OF REGISTRATION FEE

Title of Securities

being Registered

 

Proposed

Maximum

Aggregate

Offering

Price (1) (2) (3)

Amount of

Registration Fee

Shares of common stock, $0.0001 par value per share

$20,700,000

$2,686.86

Warrants to purchase shares of common stock(4)

  

Shares of common stock issuable upon exercise of the Warrants

$20,700,000

$2,686.86

Pre-Funded Warrants to purchase shares of common stock

(5)

 

Shares of common stock issuable upon exercise of the Pre-Funded Warrants (4)

 

 

Total

$41,400,000

$5,373.72(6)

(1)

Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended, or the Securities Act.

(2)

Pursuant to Rule 416, the securities being registered hereunder include such indeterminate number of additional securities as may be issuable to prevent dilution resulting from stock splits, stock dividends or similar transactions.

(3)

Includes the offering price of any additional shares of common stock and warrants to purchase shares of common stock that the underwriters have the right to purchase from the Registrant.

(4)

No fee is required pursuant to Rule 457(i) under the Securities Act.

(5)

The proposed maximum aggregate offering price of the common stock proposed to be sold in the offering will be reduced on a dollar-for-dollar basis based on the offering price of any Pre-Funded Warrants offered and sold in the offering, and, as such, the proposed maximum aggregate offering price of the common stock and Pre-Funded Warrants (including the common stock issuable upon exercise of the Pre-Funded Warrants), if any, is $20,700,000.

(6)$4,724.40 previously paid.



The Registrantregistrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective dateuntil the Registrantregistrant shall file a further amendment thatwhich specifically states that this registration statement shall thereafter become effective in accordance with Section8(a) of the Securities Act of 1933 as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section8(a), may determine. 

 



 

 

The information in this prospectus is not complete and may be changed. WeThe selling stockholder may not sell these securities until the registration statement filed with the Securities and Exchange Commission isdeclares our registration statement effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED JUNE 15, 2023JULY 17, 2020

 

bkyi20230607_s1img001.jpg

 

15,000,000900,000 Shares of Common Stock

 

Pre-Funded Warrants to Purchase up to 15,000,000Shares of Common Stock

Warrants to Purchase up to 15,000,000 Shares of Common Stock

 


 

We are offering 15,000,000

This prospectus relates to the resale, from time to time, by the selling stockholder identified in this prospectus under the caption “Selling Stockholder,” of up to 900,000 shares of common stock, and warrants to purchase up to 15,000,000 shares of our common stock at a combined public offering price of $___par value $0.0001 per share, of common stockBIO-key International, Inc. issued and accompanying warrant.

We are also offeringsold by us in a private placement transaction, consisting of up to those purchasers whose purchase700,000 issued and outstanding shares and 200,000 shares issuable upon exercise of our common stock in this offering would otherwise result in such purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding common stock immediately followingpurchase warrants.

All of the consummationproceeds from the sale of the shares covered by this offering, the opportunity, in lieu of purchasing common stock, pre-funded warrants to purchase 15,000,000 shares of our common stock, or Pre-Funded Warrants. Each Pre-Funded Warrantprospectus will be exercisable for one sharereceived by the selling stockholder. We will not receive any proceeds from the sale of our common stock (subject to adjustment as provided for therein) at any time at the option of the holder until such Pre-Funded Warrant is exercised in full, provided that the holder will be prohibited from exercising Pre-Funded Warrants for shares of our common stock if, as a result of such exercise, the holder, together with its affiliates, would own more than 4.99% of the total number of shares of our common stock then issued and outstanding. However, any holder may increase such percentage to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after such notice to us. The combined purchase price of each Pre-Funded Warrant and accompanying warrant to purchase common stock will equal $___, and the exercise price of each Pre-Funded Warrant will equal $0.01 per share of common stock. Pursuant to this prospectus, we are also offering the shares of common stock issuable upon the exercise of the warrants and Pre-Funded Warrants offered hereby.

Each share of our common stock, or Pre-Funded Warrant in lieu thereof, is being sold together with a warrant to purchase one share of our common stock. Each warrant will have an exercise price of $__ per share, will be immediately exercisable and will expire on the fifth anniversary of the original issuance date. The shares of our common stock and warrants are immediately separable and will be issued separately, but will be purchased together in this offering.these shares.

 

Our common stock is listed on Thethe Nasdaq Capital Market under the symbol “BKYI.” On July 16, 2020,June 9, 2023, the last reported saleclosing price of our common stock on The Nasdaq Capital Market was $1.20$0.72 per share. The final public offering price

We will bear all costs, expenses and fees in connection with the registration of the securities offered hereby, as well asshares. See “Plan of Distribution” beginning on page 22 for more information about how the exercise priceselling stockholder may sell or dispose of the warrants to purchaseshares of common stock will be determined through negotiation between us and the underwriter in this offering and the recent market price used throughout the prospectus may not be indicative of the actual offering price. There is no established trading market for the warrants or Pre-Funded Warrants and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the warrants or Pre-Funded Warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the warrants and the Pre-Funded Warrants will be limited.offered hereby. 

 


 

Investing in our securities involves a high degree of risk. See INVESTING IN OUR SECURITIES INVOLVES RISKS. YOU SHOULD REVIEW CAREFULLY THE RISKS AND UNCERTAINTIES DESCRIBED HEREIN UNDER THE HEADING RISK FACTORSRisk Factors beginning on page 7 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities.BEGINNING ON PAGE 5 OF THIS PROSPECTUS AND UNDER SIMILAR HEADINGS IN THE OTHER DOCUMENTS THAT ARE INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Per Share and
Accompanying
WarrantNEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

Per Pre-Funded Warrant and

Accompanying Warrant

Total

Public offering price

$$$

Underwriting discounts and commissions(1)

$$$

Proceeds, before expenses, to us

$$$


(1)

See “Underwriting” beginning on page 62 for additional disclosure regarding underwriting discounts and commissions and reimbursement of expenses.

We have granted the underwriters an option for a period of 45 days from the date of this prospectus to purchase up to an additional 2,250,000 shares of common stock and/or warrants to purchase 2,250,000 shares of common stock at the public offering price, less the underwriting discounts.

We anticipate that delivery of the shares, Pre-Funded Warrants and warrants against payment will be made on or about [•], 2020.


Sole Book-Running Manager

Maxim Group LLC

 

 

 

The date of this prospectus is [•], 2020.2023.



 

  


bkyi20230607_s1img002.jpg

 


TABLE OF CONTENTS

Summary

2

Page

Risk FactorsSUMMARY

7

1

Special Note Regarding Forward-Looking StatementsRISK FACTORS

18

5

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS17

Use of ProceedsTHE OFFERING

18

Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity SecuritiesDETERMINATION OF OFFERING PRICE

19

DilutionSELLING STOCKHOLDER

19

20

Management’s Discussion And Analysis Of Financial Condition And Results Of OperationsUSE OF PROCEEDS

2021

BusinessPLAN OF DISTRIBUTION

32

22

Directors and Executive OfficersMARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

42

23

Executive CompensationMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

48

24

Director CompensationCHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

52

34

Equity Compensation Plan InformationBUSINESS

53

35

Security Ownership Of Certain Beneficial Owners And ManagementDIRECTORS AND EXECUTIVE OFFICERS

53

44

Certain Relationships And Transactions With Related PersonsEXECUTIVE COMPENSATION

55

48

Description of Capital StockDIRECTOR COMPENSATION

57

52

Description of The Securities We Are OfferingEQUITY COMPENSATION PLAN INFORMATION

53

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

54

CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH RELATED PERSONS

55

DESCRIPTION OF CAPITAL STOCK

56

LEGAL MATTERS

59

EXPERTS

59

MARKET AND INDUSTRY DATA

59

FINANCIAL STATEMENTS

60

UnderwritingWHERE YOU CAN FIND MORE INFORMATION

62

107

Legal Matters

65

Experts

65

Market and Industry Data

66

Where You Can Find More Information

67

 

 

  

We have not, and the underwriters have not authorized anyone to provide you with information that is different from that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. Neither the delivery of this prospectus nor the sale of our securities means that the information contained in this prospectus or any free writing prospectus is correct after the date of this prospectus or such free writing prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy our securities in any circumstances under which the offer or solicitation is unlawful.

 

The information in this prospectus is accurate only as of the date on the front cover of this prospectus and the information in any free writing prospectus that we may provide you in connection with this offering is accurate only as of the date of that free writing prospectus. Our business, financial condition, results of operations and prospects may have changed since those dates. No person is authorized in connection with this prospectus to give any information or to make any representations about us, the securities offered hereby or any matter discussed in this prospectus, other than the information and representations contained in this prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us.

 

For investors outside the United States: We have not and the underwriters have not, taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the securities covered hereby and the distribution of this prospectus outside the United States.

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source, and we have not independently verified any third-party information. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “SpecialSpecial Note Regarding Forward-Looking Statements.Statements.

 

We further note that the representations, warranties and covenants made by us in any agreement that is filed as an exhibit to the registration statement of which this prospectus is a part were made solely for the benefit of the parties to such agreement, including, in some cases, for the purpose of allocating risk among the parties to such agreements, and should not be deemed to be a representation, warranty or covenant to you. Moreover, such representations, warranties or covenants were accurate only as of the date when made. Accordingly, such representations, warranties and covenants should not be relied on as accurately representing the current state of our affairs.

 

We have registered our trademarks “BIO-key”, “True User Identification”, “Intelligent Image Indexing”, “WEB-key”, “SideSwipe,“SideSwipe”, “SidePass”, “EcoID”, “PistolStar®”, “PortalGuard”, “MobileAuth”, “PASSIVEKEY®” and “The Biometric of Things” (application pending)“PISTOLSTAR®” with the U.S. Patent & Trademark Office, as well as many foreign countries, protecting the names of our namecompanies and PistolStar, Inc. (“PistolStar”)our key technology offering namesofferings discussed later in this prospectus. This prospectus also includes trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, trademarks and tradenames referred to in this prospectus may 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.

 

1

 

SUMMARY

 

This summary highlights information contained in other parts of this prospectus or incorporated by reference into this prospectus from our filings with the Securities and Exchange Commission, or SEC, listed in the section of the prospectus entitled “Incorporation of Certain Information by Reference.”SEC. Because it is only a summary, it does not contain all of the information that you should consider before purchasing our securities in this offering and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere or incorporated by reference into this prospectus. You should read the entire prospectus, the registration statement of which this prospectus is a part, and the information incorporated by reference herein in their entirety, including the “Risk Factors”Risk Factors and our financial statements and the related notes incorporated by reference into this prospectus, before purchasing our securities in this offering. Unless the context requires otherwise, references in this prospectus to BIO-key, the Company, “we,we, “us”us and “our”our refer to BIO-key International, Inc. and our subsidiaries.

 

Overview

 

We developBIO-key International, Inc. is a leading identity and market advanced fingerprintaccess management, or 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, PINsafe, WEB-key® biometric identificationcivil and identity verification technologies, as well as related identity managementlarge-scale ID infrastructure, and credentialingaccessory hardware to provide a complete solution for identity-innovating customers.

Millions of people use BIO-key every day to securely access a variety of cloud, mobile and software solutions. We were pioneersweb applications, on-premise and cloud-based servers from all of their devices. Employees, contractors, students and faculty sign in developing automated, finger identification technologythrough PortalGuard to seamlessly and securely access the applications they need to do their 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.

BIO-key PortalGuard and hosted PortalGuard IDaaS are platforms that supplementsenable our customers to securely and easily assure that only the right people can access the right systems by utilizing our world-class biometric core platform among 17 other authentication factors. PortalGuard goes beyond traditional multi-factor authentication, or compliments other methods of identification and verification,MFA, solutions by addressing sizeable gaps, such as personal inspection identification, passwords,allowing roving users to biometrically authenticate at any workstation without using their phones or tokens, smart cards, ID cards, PKI, credit card, passports, driver’s licenses, OTP or other formeliminating unauthorized account delegation, detecting duplicate users, and accommodating in-person identification.

PortalGuard is used by our customers to manage and secure IT access by their employees, contractors and partners, which we call workforce identity. PortalGuard is also used to manage and secure the identities of possession or knowledge-based credentialing. Wean organization’s customers through integration of APIs we have developed whatand industry-standard federation standards, which we believecall customer identity.

In 2022, we expanded our product offerings and customer base when we acquired Swivel Secure, a Madrid, Spain based provider of IAM solutions. Swivel Secure is the most discriminatingexclusive distributer of AuthControl Sentry, AuthControl Enterprise, and effective commercially available finger-based biometric technology.AuthControl MSP product line in Europe, Africa and the Middle East, or EMEA, excluding the United Kingdom and Ireland. These solutions include a patented one-time-code extraction technology, helping enterprises manage the increasing data security risks posed by cloud services and bring your own device policies.

 

Our primary market focus includes enterprise security, mobile paymentsLarge-scale customer and credentialing, healthcare recordscivil ID customers use our scalable biometric management platform and data security, among other things. Our secondary focus includes government markets,FBI-certified scanner hardware to manage enrollment, de-duplication and authentication for millions of users. One large scale identity projects such as voter’s registration, national ID programs,bank has enrolled and SIM card registration.identifies over 19 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 also developed a robust products business.single vendor providing all components of their IAM solution. Our lineNIST-certified fingerprint biometric platform is unique in that it supports interoperable mixing and matching combinations of finger print readers, which we market underdifferent manufactures’ fingerprint scanners in a deployment, so that the brand names SideSwipe®, EcoID® and SideTouch™,right scanner can be used on any laptop, tablet or other device which containsselected for the right use case, without mandating the user of a USB port.

We maintain a direct sales force and under our Channel Alliance Program utilize distributors, resellers, integrators and partners with substantial experience in selling technology solutions to government and corporate customers. We have built a global footprint which includes our executive offices in Wall, NJ, our research and development facility in Eagan, MN, and international operations in Hong Kong and Africa.

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 $75,000,000, 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®.

We continue to develop advancements in our capabilities and explore potential strategic relationships, including business combinations and acquisitions, which could help us leverage our capability to deliver our solutions.  In furtherance of this strategy, in June, 2020 we acquired PistolStar, a New Hampshire based provider of 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. PistolStar has over 200 active customer subscribers to their products, which include PortalGuard™ multi-factor authentication (MFA), Nebula™ identity-as-a-service (IDaaS), PortalGuard single sign-on (SSO) and PortalGuard self-service password reset (SSPR).

PistolStar’s PortalGuard MFA offers customers flexible policy-driven choices among 15 different methods of authentication, including BIO-key biometrics, FIDO U2F/2FA tokens, WebAuthn, Windows Hello, Google Authenticator, Microsoft Authenticator, RSA SecureID, Phone Push, OTP, SMS, phone-call, and bar-code, so every user can always be securely authenticated with whichever factor is most appropriate.  For enterprises with existing IAM platforms, PortalGuard can be seamlessly integrated to add its complete MFA by supporting SAML, OpenID Connect, OAuth, WS-Federation, CAS, and Shibboleth, among other standards. 

Combining PistolStar’s proprietary authentication software with our biometric solutions creates an integrated turn-key multi-factor solution which we believe is unparalleled in the industry, and will allow us to provide a unified MFA solution that is differentiated in the market by our biometric user experience and who-you-are strong authentication.particular scanner.

 

21

 

Finger-based Biometric IdentificationWe operate a SaaS business model with customers subscribing to term use of our software resulting in annual recurring revenue. We sell our products directly through our field and Personal Identity Verification

We are a leader in finger-based biometric identification and personal identity verification,inside sales teams, as well as authentication-transaction security. Stand-alone,indirectly through our network of channel partners including resellers, system integrators, master agents and other distribution partners. Our subscription fees include a term license of hosted or on-premise product and technical support and maintenance of our platform. We base subscription fees primarily on the products used and the number of users enrolled in partnershipsour platform. We generate subscription fees pursuant to noncancelable contracts 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 facilities and services, in either the logical or physical domain. Our solutions positively identify individuals and verify, or confirm, their identity before granting access to, among other things, corporate resources, subscribed data and services, web portals, applications, physical locations or assets.a weighted average duration of approximately one year.

 

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 ID cards, 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.Strategic Outlook

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 and across Windows, Linux, and the Android mobile operating systems enabling application developers, value added resellers, and channel partners to integrate our fingerprint biometrics into their applications, while dramatically reducing maintenance, upgrade and life-cycle costs. 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.

We support industry standards, such as FIDO, BioAPI, and have received National Institute of Standards 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.

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, users can replace their PIN or password to access their device without any special software downloads by using our finger scanners which are plug and play compatible with the Microsoft platforms. We were the exclusive biometric partner at the Microsoft “Ignite your Business” Windows 10 and Office 2016 launch events, which generated a number of opportunities for both our hardware and software offerings.

Our Authentication Transaction Security Solution and Markets

Our authentication-transaction security technology, WEB-key®, provides the ability to conduct identification and identity verification transactions in potentially insecure environments, including the World Wide Web or in off-site cloud environments. We have developed our technology to enable on-device authentication as well as network or cloud-based authentication and believe we may be one of the few if not only technology vendors capable of providing this flexibility and capability.

WEB-key makes cloud-based biometric user-authentication viable and eliminates technology constraints on online service providers, who are otherwise dependent on handset provider hardware and software platform decisions. It extends all features and functionalities of the VST algorithm to customers looking to add an enhanced level of security to their thin client and client/server applications. WEB-key is currently supported by both Windows and Linux operating systems. Clients are available on Windows and Android operating systems.

3

 

Historically, our largest market has been access control within highly regulated industries such as government, financial services, and healthcare. DuringIn 2019 we became athe go-to biometric authentication provider for board of election offices as eight offices, in two states, deployedwhich continue to deploy our hardware and software to secure internal access to the voter registration database. Upon acquiring PortalGuard in 2020, we now serve the higher education vertical.

We will seekexpect to grow our business within these highly-regulated industries and expect to continue to extend this footprint in 20202023 and beyond. We believe that continued heightened security and privacy requirements in these industries, and as colleges and universities continue operating in remote environments, we will generate increased demand for security solutions, including biometrics. In addition, we expect that the compatible, yet superior portable biometric user experience offered by our technology for Windows 10 users will accelerate the demand for our computer network log-on solutions and fingerprint readers. Through value add-offerings via direct sales, resellers, and strategic partnerships with leading higher education platform providers, we expect to continue to grow our installed base. With the integration of Swivel Secure, we expect to expand our business into EMEA.

 

Our two primary sales strategies are focused on expanding(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 includes more than one hundred and fifty participants and continues to generate incremental revenues.

 

Our Products

We offer a full lineA second component of easyour growth strategy is to use finger scanners for both enterprisepursue 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,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 well as through their on-line channel, on Amazon,to whether we will be able to complete any acquisition and throughif completed, successfully integrate any business we acquire into our website.

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.operations.

 

General

 

Our principal executive office is located at 3349 Highway 138, Building A, Suite E, Wall, New Jersey 07719 and our telephone number is (732) 359-1100. Our website is located at www.bio-key.com.www.bio-key.com. The information on our website or any other website is not incorporated by reference into this prospectus supplement or the accompanying base prospectus. Our website address is included as an inactive textual reference only.

 

The BIO-key logo is our trademark. This prospectus and the documents we incorporate by reference into this prospectus may also contain trademarks and trade names of others. 

2

The Offering

 

Issuer:

BIO-key International, Inc.

Common stock offered by usselling stockholder:

15,000,000 shares.900,000 shares of common stock

Pre-Funded Warrants offered by us

We are also offering to those purchasers whose purchaseShares of common stock inoutstanding before this offering would otherwise result in such purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99%offering:

9,234,833 shares of our outstandingcommon stock

Shares of common stock immediately following the consummationoutstanding after completion of this offering the opportunity, in lieu(assuming full exercise of purchasingthe common stock to purchase Pre-Funded Warrants to purchase up to 15,000,000 shares of our common stock. The purchase price of each Pre-Funded Warrant will equal the price per share at which thewarrants that are exercisable for shares of common stock and accompanying warrants to purchaseoffered hereby):

9,434,833 shares of common stock are being sold to the public in

Terms of this offering, minus $0.01,offering:

The selling stockholder, including its transferees, donees, pledgees, assignees and the exercise pricesuccessors-in-interest, may sell, transfer or otherwise dispose of each Pre-Funded Warrant will be $0.01 per share of common stock. Each Pre-Funded Warrant will be exercisable immediately upon issuance and will not expire. This prospectus also relates to the offeringany or all of the shares of common stock issuable upon exerciseoffered by this prospectus from time to time on the Nasdaq Capital Market or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. The shares of such Pre-Funded Warrants. See “Descriptioncommon stock may be sold at fixed prices, at market prices prevailing at the time of sale, at prices related to prevailing market price, or at negotiated prices.

Use of proceeds:

The proceeds from the sale of the Securities we are Offering–Pre-Funded Warrants” for a discussion onsecurities covered by this prospectus will be received by the termsselling stockholder. We will not receive any of the Pre-Funded Warrants. 

Each Pre-Funded Warrant is exercisable for one share of our common stock (subject to adjustment as provided therein) atproceeds from any time at the option of the holder, provided that the holder will be prohibited from exercising its Pre-Funded Warrant for shares of our common stock if, as a result of such exercise, the holder, together with its affiliates, would own more than 4.99% of the total number of shares of our common stock then issued and outstanding. However, any holder may increase such percentage to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after such notice to us.

4

Warrants offered by us

Warrants to purchase up to 15,000,000 shares of our common stock. Each share of our common stock, or Pre-Funded Warrant in lieu thereof, is being sold together with a warrant to purchase one share of our common stock. Each warrant will have an initial exercise price of $__ per share, will be immediately exercisable and will expire on the fifth anniversary of the original issuance date. This prospectus also relates to the offeringsale of the shares of common stock issuable upon exerciseoffered by this prospectus. If all of such warrants. 

Each warrant is exercisable for one share of ourthe 200,000 common stock (subject to adjustment as provided therein) at any time at the option of the holder, provided that the holder will be prohibited from exercising its warrantpurchase warrants exercisable for shares of our common stock if, as a result of such exercise, the holder, together with its affiliates, would own more than 4.99% of the total number of shares of our common stock then issued and outstanding. However, any holder may increase such percentage to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after such notice to us.

Option to purchase additional shares and/or warrants

We have granted the underwriters an option for a period of 45 days from the date of this prospectus to purchase up to an additional 2,250,000 shares of common stock and/or warrantsoffered hereby are exercised, we will receive aggregate gross proceeds of $600,000 which we expect to purchase 2,250,000 sharesuse for working capital purposes. See “Use of common stock at the public offering price, less the underwriting discounts.

Common stock outstanding after this offering

37,181,315 shares (including the shares of common stock underlying the Pre-Funded Warrants but assuming none of the warrants to purchase common stock issued in this offering are exercised)Proceeds.

Listing of common stock:

Use of proceeds

We currently expect to useOur common stock is listed on the net proceeds from this offering to (i) repay $4,226,250 of secured convertible notes and (ii)Nasdaq Capital Market under the balance for general corporate purposes and to fund ongoing operations and expansion of our business.  For additional information, please refer to the section entitled “Use of Proceeds” of this prospectus.ticker symbol “BKYI”.

Risk Factorsfactors:

Investing in our securities involves a high degree of risk. You should carefully reviewrisk and considerpurchasers of our securities may lose their entire investment. See the “Risk Factors” sectioninformation under the caption “Risk Factors” beginning on page 5 of this prospectus and the other information included elsewhere in this prospectus and incorporated by reference herein for a discussion of factors toyou should consider before deciding to purchase any ofinvest in our securities in this offering.securities.

Market Symbol and trading

Our common stock is listed on The Nasdaq Capital Market under the symbol “BKYI.” There is no established trading market for the warrants or Pre-Funded Warrants and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the warrants or Pre-Funded Warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the warrants and Pre-Funded Warrants will be limited.

 

Unless otherwise stated, all information contained in this prospectus assumes the exercise in full of all Pre-Funded Warrants sold in lieu of common stock in this offering and no exercise by the underwriters of their option to purchase additional shares and/or warrants in this offering.

3

 

The number of shares of our common stock to be outstanding after this offering is based on 22,181,3159,234,833 shares of our common stock outstanding as of July 15, 2020June 9, 2023 and excludes as of such date:

 

 

1,610,054172,734 shares of our common stock issuable upon the exercise of stock options, with a weighted-average exercise price of $2.42$16.84 per share;

 

6,036,5074,872,025 shares of our common stock issuable upon the exercise of outstanding warrants, with a weighted-average exercise price of $1.30$5.81 per share; and

 

3,643,320264,006 other shares of our common stock issuable upon the conversion of $4,226,250 principal amount of outstanding convertible notes with a conversion price of $1.16 per share; and

859,926 other shares of our common stock reserved for future issuance under our 2015 Equity Incentive Plan.

 

5
4

 

CAPITALIZATION

The following table summarizes our unaudited capitalization and cash and cash equivalents as of March 31, 2020 to reflect:

on an actual basis; and

on an as adjusted basis to give effect to the issuance of shares of common stock by us in this offering and the receipt of approximately $16,360,000 in net proceeds from the sale of such shares, assuming an initial public offering price of $1.20 per share, the closing price on July 16, 2020 of the Company’s traded common shares listed on Nasdaq, after deducting underwriting discounts and commissions and estimated offering expenses.

You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” as well as our financial statements and related notes and the other financial information, incorporated by reference into this prospectus supplement.

 

 

As of March 31, 2020

(Unaudited)

 

 

 

Actual

 

 

As Adjusted

 

Cash and cash equivalents

 

$

661,937

 

 

$

17,021,937

 

Convertible notes payable - net

 

$

2,301,956

 

 

$

2,301,956

 

Common stock, $0.0001 par value, 170,000,000 shares authorized, 18,391,122, issued and outstanding, pro forma, and 33,391,122 issued and outstanding, as adjusted

 

$

1,839

 

 

$

3,339

 

Additional paid in capital

 

$

91,793,124

 

 

$

108,151,624

 

Accumulated deficit

 

 

(93,205,984

)

 

 

(93,205,984

)

Total stockholders’ equity (deficit)

 

$

(1,411,021

)

 

$

14,948,979

 

Total capitalization

 

$

890,935

 

 

$

17,250,935

 

6

RISK FACTORS

 

Investing in our securities involves a high degree of risk. You should consider carefully the risks described below, together with all of the other information included or incorporated by reference in this prospectus. The risks described below are material risks currently known, expected or reasonably foreseeable by us. However, the risks described below are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business, operating results, prospects or financial condition. If any of these risks actually materialize, our business, prospects, financial condition, and results of operations could be seriously harmed. This could cause the trading price of our common stock and the value of the warrants to decline, resulting in a loss of all or part of your investment.

 

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 audit opinion as to the substantial doubt about our ability to continue as a going concern.

 

Due to, among other factors, our history of losses limitedand insufficient revenue, and negative cash flows from operations, our independent registered public accounting firm has included an explanatory paragraph in their audit opinion for the year ended December 31, 20192022 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 March 31, 2020, we had an accumulated deficit of approximately $93.2 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.

We may 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 $798,000 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation. During 2022, we generated approximately $7.0 million 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. 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.

Our $2.2 million principal amount secured note matures on December 22, 2023 and we may not have sufficient cash flow from our business or the ability to raise sufficient funds to repay this note when due which may expose us to the risk of default which would materially and adversely affect our financial condition.

5

On December 22, 2022, we issued a $2.2 million secured promissory note (the “Note”) to an investor which is due six months following the date of issuance, subject to one six-month extension by us. Interest under the Note accrues at a rate of 10% per annum, payable monthly through month six increasing to 12% per annum if we extend the term of the Note for an additional six months. The Note is secured by a lien on substantially all of our assets and properties. In addition to current interest payment obligations, the Note contains various covenants. Upon the occurrence of any event of default (as defined in the Note), whether for payment or covenant breach, and expiration of any applicable cure periods, all amounts due under the Note will immediately become due and payable in full, interest will accrue at the higher of 18% per annum or the maximum amount permitted by applicable law, the outstanding principal amount due under the Note will be increased by 30%, and the investor will have the right to convert all amounts due under the Note into shares of common stock at a conversion price equal to the 10 day volume weighted average sales price of our stock. Although the aggregate number of shares of common stock issuable upon conversion of the Note is capped at 985,576 shares, any such conversion could cause substantial dilution to existing stockholders and cause the price of our stock to drop. In April of 2023, we were in default under the Note due to our failure to timely file our annual report and timely file this registration statement covering the public resale of the shares issued to the holder of the Note in connection with the financing. We obtained a waiver and as of the date of this registration statement are not in default.

We plan to satisfy our obligations under the Note through a combination of cash from operations, liquidation of existing inventory, and proceeds from the issuance of additional debt or equity securities. Such payments will reduce the funds available to us for working capital, capital expenditures and other corporate purposes which may in turn limit our ability to implement our business strategy, heighten our vulnerability to downturns in our business, the industry, or in the general economy, and prevent us from taking advantage of business opportunities as they arise. While we believe that our plans to repay and or refinance this indebtedness are reasonable, as of the date of this report, we can provide no assurances that we will have cash resources from operations or be able to obtain the necessary financing on attractive terms or at all to repay the Note in full. Any plans to refinance are subject to the conditions in the capital and credit markets, which have been volatile due to, among other things, increases in interest rates. As a result, we may be forced to obtain capital on terms that are unattractive or that are dilutive to our stockholders and may need to pursue other alternatives to satisfy our obligation under the Note if we are unable to access the capital markets.

 

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;

 

national or international events which may affect the need for or interest inperformance and reliability of biometric solutions;

 

the performancemarketing efforts and reliability of biometricpublicity regarding these solutions;

 

marketing efforts and publicitypublic perception regarding these solutions;privacy concerns;

 

public perception regarding privacy concerns;costs involved in adopting and integrating biometric solutions;

 

costs involved in adoptingproposed or enacted legislation related to privacy of information; 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.

 

76

 

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.

 

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 may contain 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 may be 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 application developersmarket products and applications which developcan then be sold to end users; and market products and applications which can then be sold to end users; and

 

Companiescompanies 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.

 

87

 

We face intense competition and may not have the financial and human resources necessary to keep up with rapid technological changes, which may result 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 materialrecognized revenues from Africa beginningand the European Union in 2020.2021 and 2022 and expect continued revenues from these regions in future periods. Our financial performance will be subject to risks associated with changes in the value of the U.S. dollar versus local currencies.

 

Owing to the international scope of our operations, including our recent acquisition of Swivel Secure Europe, SA, we are exposed to foreign exchange risk. 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. As a result, our business and the price of our common stock may be affected by fluctuations in foreign exchange rates, which may have a significant impact on our results of operations and cash flows from period to period. Currently, we do not have any exchange rate hedging arrangements in place.

 

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 were written off in full in the years ended December 31, 2018 and December 31, 2019, respectively and negatively impacted our financial position and results of operation.

We recently announced that we secured two contracts with our partner TTI.  These contracts are for large-scale identification projects in Africa. 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 we 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, Chief Financial Officer, and our Chief TechnologyLegal 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,Cecilia C. Welch, our Chief TechnologyFinancial Officer, and James D. Sullivan, our Chief Legal Officer, expire annually, and renew automatically for successive one yearone-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.

 

98

 

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.

 

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.

 

109

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 will 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 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation. During 2019, we generated approximately $2,268,000 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. 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.

Wehave secured debt outstanding, which subjects us to potential defaults, that could adversely affect our ability to raise additional capital to fund our operations.

We have previously issued secured convertible notes in the aggregate amount of $4,226,250 to Lind Global Macro Fund, L.P (“Lind”). The notes are secured by all of our assets, including our intellectual property. 

Our indebtedness could:

require us to dedicate a substantial portion of our cash flow from operations to payments of principal, interest on, and other fees related to such indebtedness, thereby reducing the availability of our cash flow to fund working capital and capital expenditures, and for other general corporate purposes;

limit our flexibility in planning for, or reacting to, changes in our business and the biometric authentication industry, which may place us at a competitive disadvantage compared to our competitors that have less debt; and

limit among other things, our ability to borrow additional funds.

We plan to use a portion of the proceeds of this offering to repay amounts owed to Lind under these notes.  To the extent we are unable to pay off our outstanding indebtedness with proceeds from this offering, our ability to make scheduled principal payments, to pay interest on or to refinance our indebtedness, depends on our future financial performance, which is subject to several factors including economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to satisfy our obligations under our indebtedness or any future indebtedness we may incur as well as our ability to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional capital on terms that may be onerous or highly dilutive. Our ability to refinance our existing or future indebtedness will depend on the conditions in the capital markets and our financial condition prior to maturity of the indebtedness.  Any failure to make required principal or interest payments, or satisfy any other non-monetary obligations, including maintaining listing on the Nasdaq Capital Market, would result in an event of default and permit acceleration of all amounts due, and other remedies, including foreclosure on our assets.

11

 

We may not 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.

 

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.

 

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 remainsWe are subject to shut-downrisks and shelter at home orders. 

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 onuncertainties associated with the continued impact of the crisis, further actions may be required.  Our recent experience is that due to circumstances related to COVID-19, somegrowth of our customers have experienced delays in processing of orders for our products,international operations, which may delay certain anticipated revenues.

The extent to which the COVID-19 outbreak ultimately impactsharm 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. business.

 

We have taken measuresinternational operations and recently expanded our international operations when we acquired Swivel Secure Europe SA, and plan 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 impactscontinue expanding abroad. Accordingly, our business salesis subject to risks and resultsuncertainties associated with doing business outside of operations will depend on future developments, which are highly uncertainthe United States 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 Company’s customers, the Company’s 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, disruptiona variety of factors, including:

multiple, conflicting and changing laws and regulations such as privacy, security, and data use regulations, tax laws, export and import restrictions, economic and trade sanctions and embargoes, employment laws, anticorruption laws, regulatory requirements, reimbursement or payer regimes and other governmental approvals, permits and licenses;

failure by us, our collaborators or our distributors to obtain regulatory clearance, authorization or approval for the use of our product candidates in various countries;

additional potentially relevant third-party patent rights;

complexities and difficulties in obtaining intellectual property protection and enforcing our intellectual property;

difficulties in staffing and managing foreign operations;

financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our product candidates and exposure to foreign currency exchange rate fluctuations;

natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions;

regulatory and compliance risks that relate to maintaining accurate information and control over sales and distributors’ activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act (FCPA), its books and records provisions, or its anti-bribery provisions, or laws similar to the FCPA in other jurisdictions in which we may now or in the future operate; and

anti-bribery requirements of several Member States in the European Union and other countries that may change and require disclosure of information to which U.S. legal privilege may not extend.

Any of these factors could significantly harm our business, operating results, financial condition 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.prospects.

 

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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 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,Our customers use our solutions to access their business systems and store data related to their employees, contractors, partners and customers. Our systems’ integrity is essential to their use of our platform, which stores, transmits and processes customers’ proprietary information and users’ personal data. If the confidentiality, integrity or availability of our customers’ data or systems is disrupted, we face variouscould incur significant liability to our customers and to individuals or businesses whose information was being stored by our customers, and our platform may be perceived as less desirable, which could negatively affect our business and damage our reputation. We, our third-party service providers, and our customers may be unable to anticipate these techniques or to implement adequate preventive measures. Further, because we do not control our third-party service providers, or the processing of data by our third-party service providers, we cannot ensure the integrity or security threats, including cybersecurity threatsof measures they take to gain unauthorized accessprotect customer information and prevent data loss beyond evaluating and relying on their representations as to sensitive information.their security methods and posture. 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. As a technology company, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information. on an ongoing basis.

 

In addition to threats from traditional computer “hackers,” malicious code (such as malware, viruses, worms and ransomware), employee or contractor theft or misuse, password spraying, phishing and denial-of-service attacks, we and our third-party service providers now also face threats from sophisticated nation-state and nation-state-supported actors who engage in attacks (including advanced persistent threat intrusions) that add to the risks to our systems (including those hosted on AWS’ systems), internal networks, our customers’ systems and the information that they store and process. Cybersecurity attacks in particular are evolving, we expect that they will continue, and include but are not limitedwe expect the scope and sophistication of these efforts may increase in future periods. As a result, we and our third-party service providers may be unable to malicious software, attemptsanticipate these techniques or implement adequate preventative measures quickly enough to gain unauthorized access toprevent either an electronic intrusion into our systems or services or a compromise of customer data, andemployee data or other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. information.

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 function as expected or may not be effective.sufficient to protect our internal networks and platform against certain attacks. 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.

 

We maintain cybersecurity insurance, but our insurance may be insufficient to cover all liabilities incurred in any such incident, and any incident may result in loss of, or increased costs of, that cybersecurity insurance. Any breach, or any perceived breach, of our systems, our customers’ systems, or other systems or networks secured by our products, without regard to whether any breach is due to a vulnerability in our platform, may also undermine confidence in our platform or the identity as a service industry and could result in damage to our reputation and brand, negative publicity, loss of partners, customers and sales, increased costs to correct any problem, costly litigation and other liabilities. In addition, a breach of the security measures of one of our partners could result in the disclosure of confidential information or other data that may provide additional avenues of attack, and if a high profile security breach occurs with respect to a comparable cloud technology provider, our customers and potential customers may lose trust in the security of the cloud business model generally, which could adversely impact our ability to retain existing customers or attract new ones. Any of these negative outcomes could adversely impact market acceptance of our products and could harm our business, results of operations, and financial condition.

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Our failure to comply with applicable privacy, data protection and information security laws or related contractual obligations could subject us to significant liability and negatively impact our financial position and results of operation.

There are numerous laws and regulations in various jurisdictions regarding privacy, data protection, information security, and the storing, sharing, use, processing, transfer, disclosure and protection of personal data. In light of the increasing pace of new technology development, including with respect to biometric data, the scope of these data protection and privacy-related laws and regulations are expanding, subject to differing interpretations, and may be inconsistent among jurisdictions, or conflict with other rules that we are subject to. These evolving laws and regulations may result in increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. We are also subject to the terms of our privacy policies and contractual obligations to third parties related to privacy, data protection and information security.

Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or other third parties, or applicable laws or regulations relating to privacy, data protection, or information security may result in governmental investigations or enforcement actions, litigation, claims or public statements against us by consumer advocacy groups or others, and could result in significant liability or cause our customers to lose trust in us, which could cause them to cease or reduce use of our products and services and otherwise have an adverse effect on our reputation and business. Any similar failure or perceived failure by users of our products or services may also have an adverse effect on our reputation and business. In addition, legal, regulatory, contractual and other obligations as well as public concerns relating to privacy, data protection or information security could restrict our ability to store and process data as part of our solutions or otherwise impact our ability to provide our solutions in certain jurisdictions and may result in the loss of business opportunities from customers operating in, or seeking to expand into, those jurisdictions. Additionally, in 2022, the SEC proposed new rules related to cybersecurity risk management, which may further increase our regulatory burden and the cost of compliance in such events.

Our failure to maintain appropriate environmental, social, and governance (ESG) practices and disclosures could result in reputational harm, a loss of customer and investor confidence, and adverse business and financial results.

There is an increasing focus from certain investors, employees, customers and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance matters (“ESG”). Some investors may use these non-financial performance factors to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies and actions relating to corporate responsibility are inadequate. The growing investor demand for measurement of non-financial performance is addressed by third-party providers of sustainability assessment and ratings on companies. The criteria by which our corporate responsibility practices are assessed may change due to the constant evolution of the sustainability landscape, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. If we elect not to or are unable to satisfy such new criteria, investors may conclude that our policies and/or actions with respect to corporate social responsibility are inadequate. We may face reputational damage in the event that we do not meet the ESG standards set by various constituencies.

Furthermore, if our competitors’ corporate social responsibility performance is perceived to be better than ours, potential or current investors may elect to invest with our competitors instead. In addition, in the event that we communicate certain initiatives and goals regarding environmental, social and governance matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. If we fail to satisfy the expectations of investors, employees and other stakeholders or our initiatives are not executed as planned, our reputation and business, operating results and financial condition could be adversely impacted.

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New climate disclosure rules, if adopted by the SEC, may increase our costs and litigation risks, which could materially and adversely affect our future results of operations and financial condition.

During 2022, the SEC proposed new climate disclosure rules, which, if adopted, would require new climate-related disclosure in SEC filings, including certain climate-related metrics and greenhouse gas emissions data, information about climate-related targets and goals, transition plans, if any, and extensive attestation requirements. In addition to requiring public companies to quantify and disclose direct emissions data, the new rules also would require disclosure of climate impact arising from the operations and uses by the company’s business partners and contractors and end-users of the company’s products and/or services. We are currently assessing the impact of the new rules, if adopted as proposed, but at this time, we cannot predict the costs of implementation or any potential adverse impacts resulting from the new rules if adopted. However, we may incur increased costs relating to the assessment and disclosure of climate-related risks and increased litigation risks related to disclosures made pursuant to the new rules, either of which could materially and adversely affect our future results of operations and financial condition.

The war in Ukraine and the international communitys response have created substantial political and economic disruption, uncertainty, and risk.

Russia’s military intervention in Ukraine in late February 2022, Ukraine’s widespread resistance, and the NATO led and United States coordinated economic, financial, communications, and other sanctions imposed by other countries have created significant political and economic world uncertainty. There is significant risk of expanded military confrontation between Russia and other countries. It is not possible to predict the broader consequences of the conflict, including related geopolitical tensions, and the measures and retaliatory actions taken by the U.S. and other countries in respect thereof, as well as any counter measures or retaliatory actions by Russia in response. At a minimum, the continuing conflict is likely to cause regional instability, geopolitical shifts and could materially adversely affect global trade, currency exchange rates, regional economies and the global economy, which could materially adversely affect our financial condition or results of operations. Current and likely additional international sanctions against Russia may contribute to higher costs, particularly for petroleum-based products. These and related actions, responses, and consequences that cannot now be predicted or controlled may contribute to world-wide economic reversals.

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 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.

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We may experience difficulties in integrating the operations, personnel and assets of PistolStarany business we acquire which we acquired in June 2020.may disrupt our business, dilute stockholder value, and adversely affect our operating results.

 

We recently acquired PistolStar.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 PistolStar’s businessbusinesses or successfully integrate acquired businesses into the business with our historic operationsCompany without substantial costs, delays or other operational or financial problems. In addition, we cannot assure you that we will be 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 positon and results of operations.Such acquisitions also involve numerous operational risks, including:

 

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We may pursue strategic acquisitions, including acquiring other identity access management companies, as part of our growth strategy and that may disrupt our growth.

We may pursue strategic acquisitions in the future. Risks in acquisition transactions include difficulties in the integration of acquired businesses into our operations and control environment, difficulties in assimilating and retaining employees and intermediaries, difficulties in retaining the existing clients of the acquired entities, assumed or unforeseen liabilities that arise in connection with the acquired businesses, the failure of counterparties to satisfy any obligations to indemnify us against liabilities arising from the acquired businesses, and unfavorable market conditions that could negatively impact our growth expectations for the acquired businesses. Fully integrating an acquired company or business into our operations may take a significant amount of time. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered with acquisitions and other strategic transactions. These risks may prevent us from realizing the expected benefits from acquisitions and could result in the failure to realize the full economic value of a strategic transaction or the impairment of goodwill and/or intangible assets recognized at the time of an acquisition. These risks could be heightened if we complete a large acquisition or multiple acquisitions within a short period of time.  Additional risks may include:

difficulties in integrating operations, technologies, services and personnel;

the diversion of financial and management resources from existing operations;

the risk of entering new markets;

the potential loss of existing customers following an acquisition;

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

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

difficulties in integrating operations, technologies, services and personnel;

the diversion of financial and management resources from existing operations;

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 departures;

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.

 

Risks Related To the extent we make any material acquisitions, our earnings may adversely 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 prospectus, approximately 11,300,0005,045,000 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.

 

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The availability

Upon an event of a substantial number ofdefault under our $2.2 million principal amount secured note, all amounts then due under the note plus all resulting default sums will be convertible into up to 985,576 shares of our common stock for public sale mayat conversion price equal to the 10-day volume weighted average closing price of our stock. Any such conversion could cause substantial dilution to our existing stockholders and cause the price of our common stock to decline.

 

Our most recent registration statement, which was declared effectiveUpon the occurrence of any event of default (as defined) under our $2.2 million principal amount secured note, whether for payment or covenant breach, and expiration of any applicable cure periods, all amounts then due under the note, will immediately become due and payable in September 2019, coveredfull, interest will accrue at the public resalehigher of 2,040,00018% per annum or the maximum amount permitted by applicable law, the outstanding principal amount due under the Note will be increased by 30% to approximately $2.86 million, and the holder of the note will have the right to convert all amounts then due under the Note into shares of common stock conversion price equal to the 10-day volume weighted average sales price of our common stock underlying a convertible note and 2,000,000 shares underlying warrants which we issued in a July 2019 private offering. Inon the first quarterdate of 2020, we amendedconversion. Although the convertible note to reduce the conversion price to $0.65 per share which increased theaggregate number of shares of common stock issuable upon conversion of the note. AsNote is capped at 985,576 shares, any conversion of the note could cause substantial dilution to our existing stockholders and cause the price of our stock to decline. During April 2023, we were in default under the Note due to our failure to timely file our annual report and timely file this registration statement covering the public resale of the shares issued to the holder of the Note in connection with the financing. We obtained a waiver and as of the date of this prospectus, 5,829,225 shares have been converted under the note.  In addition, on May 6, 2020 and June 29, 2020, we issued convertible notes and warrants convertible and exercisable, respectively, into approximately an aggregate of 6,968,319 shares of common stock.  We have agreed to register the public resale of these shares which represent approximately 31% of our outstanding shares. The availability of these shares for sale to the public, whether orregistration statement  are 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.default.

 

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 and the minimum shareholders’ equity requirements of the Nasdaq or other Nasdaq requirements for continued listing, our common stockCommon Stock may be delisted and the price of our common stockCommon 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 and minimum stockholders’ agreement. On January 12, 2023, we received a letter from the Nasdaq advising us that we have failed to satisfy the $1.00 minimum bid requirement due to the fact that the closing bid price for 30our Common Stock for thirty consecutive business days.days was less than $1.00. We have 180 calendar days, or until July 11, 2023, to regain compliance. If we are unable to regain compliance during this period, we may be eligible for an additional 180 calendar day period to satisfy the minimum bid requirement. 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, we 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 have until December 4, 2020, to regain compliance with the Minimum Bid Price Requirement.

On May 18, 2020, we received notice (the “Notice”) from the Nasdaq that the Company’s stockholders’ equity reported in the Company’s Annual Report on Form 10-K for the period ended December 31, 2019 does not satisfy the Nasdaq Capital Market continued listing requirement set forth in Nasdaq Listing Rule 5550(b)(1) (the “Rule”). We had 45 calendar days from the date of the Notice to submit to the Nasdaq a plan to regain compliance with the Rule. We have timely submitted our plan to the Nasdaq Capital Market. We expect that a combination of the proceeds of this offering, execution of existing contracts, and the acquisition of PistolStar will allow us to regain compliance within the next sixty (60) days. On, July 10, 2020, our plan to regain compliance was accepted and the Nasdaq Capital Market granted us an extension of 180 calendar days from the date of the Notice for us to provide evidence of compliance. If we are unable to regain compliance, then we may request a hearing before a Nasdaq Hearings Panel. In the event a hearing is requested, all suspension and delisting action would be stayed pending the conclusion of the hearing process. There can be no assurance that we will be able to regain compliance with the Rule. Failure to regain compliance with the Rule and delisting of our shares from the Nasdaq Capital Market this would result in an event of default under the secured convertible promissory notes issued to Lind.

We expectneed 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.

 

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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.

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

Our directors, officers and principal stockholders, beneficially own approximately 33% 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.

 

Risks Relating to This OfferingRISK RELATED TO THIS TRANSACTION

 

If you purchase our securities in this offering, you may incur immediate andSales of a substantial dilution in the book valuenumber of your shares.

The combined public offering price per share of our common stock and accompanying warrant will be substantially higher than the net tangible book value per share of our common stock immediately prior to the offering. After giving effect to the sale of 15,000,000 shares of our common stock and accompanying warrants in this offering, at an assumed combined public offering price of $1.20 per share and accompanying warrant, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and attributing no value to the warrants sold in this offering, purchasers of our common stock in this offering will incur immediate dilution of $0.78 per share in the net tangible book value ofpublic market, including the commonshares offered under this prospectus, could lower our stock they acquire. In the event that you exercise your warrants, you may experience additional dilutionprice and impair our ability to the extent that the exercise price of the warrants is higher than the tangible book value per share of our common stock. For a further description of the dilution that investorsraise funds in this offering may experience, see “Dilution.”

16

In addition, to the extent that outstandingnew stock options or warrants have been or may be exercised or other shares issued, you may experience further dilution.offerings.

 

We have broad discretion in the use of the net proceeds we receive from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds we receive in this offering, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whetherIf our management is using the net proceeds appropriately. Because of the number and variability of factors that will determine our use of our net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business and cause the price of our common stock to decline. Pending their use, we may invest our net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders.

Future sales ofstockholders sell substantial amounts of our common stock could adversely affectshares, the market price of our common shares could decrease. We had 9,234,833 common shares outstanding as of June 9, 2023. Under this registration statement, we are registering the resale of 900,000 common shares held by the selling stockholder, which represents approximately 10% of our outstanding common stock. In addition, we may sell additional common shares in subsequent offerings.

 

We cannot predict the size of future issuances of common shares or the effect, if any, that future issuances and sales of common shares, including the shares offered under this registration statement, other registration statements, and shares available for resale under Rule 144 under the Securities Act, or the perception that such sales could occur, may choosehave on the market price of our common shares or our ability to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. If additional capital is raised through the sale of equity or convertible debt securities, or perceptions that those sales could occur, thesecurities. With any additional issuance of these securities could result in furthercommon shares, investors will suffer dilution to investors purchasing our common stock in this offering or result in downward pressure on the price of our common stock, and our ability to raise capital in the future.

Holders of our warrants and Pre-Funded Warrants will have no rights as a common stockholder until they acquire our common stock.

Until you acquire shares of our common stock upon exercise of your warrants or Pre-Funded Warrants, you will have no rights with respect to shares of our common stock issuable upon exercise of your warrants or Pre-Funded Warrants. Upon exercise of your warrants or Pre-Funded Warrants, you will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise date.

There is no public market for the warrants to purchase shares of our common stock or Pre-Funded Warrants being offered in this offering.

There is no established public trading market for the warrants or Pre-Funded Warrants being offered in this offering, and we do not expect a market to develop. In addition, we do not intend to apply to list the warrants or Pre-Funded Warrants on any national securities exchange or other nationally recognized trading system, including The Nasdaq Capital Market. Without an active trading market, the liquidity of the warrants and Pre-Funded Warrants will be limited.may experience dilution in our earnings per share.

 

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16

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

ThisAll statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial position, business strategy and the documents incorporated herein by reference containplans and objectives of management for future operations, are forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” in this prospectus. In some cases, you can identify these statements by terms such aswords “anticipate,” “believe,” “should,” “estimate,” “will,” “may,” “future,” “plan,” “intend” and “expect” or the negative of those terms, and similar expressions that convey uncertaintygenerally identify forward-looking statements. These statements are not guarantees of future eventsperformance or outcomes. These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this prospectus and are subject to risks and uncertainties.

Particular uncertainties that couldmay cause our actual results to bediffer materially different thanfrom those expressed in ourincluded within or implied by such forward-looking statements include:statements. These risks and uncertainties include, without limitation, our history of losses and limited revenue; our ability to raise additional capital; our ability to repay our outstanding secured indebtedness; our ability to protect our intellectual property; changes in business conditions; changes in our sales strategy and product development plans; changes in the marketplace; continued services of our executive management team; security breaches; competition between us and other companies in the biometric technology industry;and identity access management industries; market acceptance of biometric products generally and our products under development; our ability to execute and deliver on contracts in Africa,Africa; our ability to expand into Asia, Africa and other foreign markets,markets; our ability to integrate the operations and personnel of Pistol StarSwivel Secure into our business; fluctuations in foreign currency exchange rates; the duration and severityextent of the current coronavirus COVID-19 pandemiccontinued hostilities in Ukraine and its effectimpact on our business operations, sales cycles, personnel, and the geographic markets in which we operate;European customers; delays in the development of products, and statements of assumption underlying any of the foregoing, as well asand numerous other factorsmatters of national, regional and global scale, including those set forth under the caption “Risk Factors”Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 filedthis prospectus and other filings with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing.

SEC. 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.

 

You should carefully read this prospectus and the documents we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements.

 

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, whether as a result of new information, future events or otherwise.

 

This prospectus also refers to estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.

 

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THE OFFERING

This prospectus covers the public sale of 900,000 shares of common stock to be sold by AJB Capital Investments, LLC, consisting of 700,000 issued and outstanding shares of common stock and 200,000 shares of common stock issuable upon the exercise of warrants. This prospectus also covers any additional shares of our common stock that we may issue or that may be issuable by reason of any stock split, stock dividend or similar transaction involving our common stock. The selling stockholder may sell the shares covered by this prospectus through public or private transactions at prevailing market prices or at privately negotiated prices. We will not receive any proceeds from this offering. If all of the 200,000 common stock purchase warrants exercisable for shares of common stock offered hereby are exercised, we will receive aggregate gross proceeds of $600,000.

On December 22, 2022, we issued a senior secured promissory note to AJB Capital Investments, LLC in the principal amount of $2,200,000 (the “Note”). In connection with the issuance of the Note, we issued to AJB Capital Investments, LLC 700,000 shares of common stock (the “Commitment Shares”) and a warrant (the “Warrant”) to purchase 200,000 shares of common stock (the “Warrant Shares”) at an exercise price of $3.00 per share with a term of five years. The Warrant is exercisable on a cashless basis if at any time there is no effective registration statement covering the resale of the Warrant Shares. In the event the Note is paid in full within six months after the date of issuance, we will exercise our right to repurchase 350,000 of the Commitment Shares for aggregate payment of $1.00.

Upon the occurrence of standard and customary events of default and expiration of any applicable cure periods, all amounts due under the Note will immediately and automatically become due and payable in full, interest will accrue at the higher of 18% per annum or the maximum amount permitted by applicable law, the outstanding principal amount due under the Note will be increased by 30%, and the investor will have the right to convert all amounts due under the Note into shares of common stock (the “Conversion Shares”) at a conversion price equal to the 10 day volume weighted average sales price our common stock on the date of conversion, subject to the share cap described in the paragraph below.

The aggregate number of shares of common stock issuable in the forgoing transaction consisting of the Commitment Shares, the Warrant Shares, and the Conversion Shares are capped at 1,684,576 which is equal to 19.9% of our issued and outstanding shares of common stock on December 22, 2022, the date the definitive transaction documents were executed.

The Note and the Warrant also contain “blocker provisions” which prohibit conversion or exercise, as applicable, if such conversion or exercise would result in the Investor being the beneficial owner of in excess of 9.99% of our common stock.

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DETERMINATION OF OFFERING PRICE

The selling stockholder will offer common stock at the prevailing market prices or privately negotiated prices.  The offering price of our common stock does not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value.  Our common stock may not trade at the market prices in excess of the offering prices for common stock in any public market will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity.

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SELLING STOCKHOLDER

When we refer to the selling stockholder in this prospectus, we mean the persons or entities specifically identified in the table below, as well as the permitted transferees, pledges, donees, assignees, successors and other successors-in-interest who may subsequently hold any of the selling stockholders interests other than through a public sale.

The selling stockholder identified in the following table is offering for resale 900,000 shares of our common stock. All of the securities were previously issued to the selling stockholder in private placement transactions described above under the section entitled “The Offering”.

The following table sets forth:

The name of the selling stockholder and any material relationship between us and the selling stockholder based upon information currently available to us;

The number of shares owned beneficially by the selling stockholder before the offering;

The percentage ownership of the selling stockholder prior to the offering;

The number of shares offered hereunder by the selling stockholder;

The number of shares owned beneficially by the selling stockholder after the offering; and

The percentage ownership of the selling stockholder after the offering.

  

Shares Beneficially Owned

Prior to the Offering

     

Shares Beneficially

Owned After

Completion of the

Offering

 

Name of Selling Stockholder

 

Number

  

Percent

  

Number of

Shares Being

Offered

 

Number(1)

 

Percent

 

AJB Capital Investments LLC(2)

  900,000   9.54%  900,000 

  - 

TOTAL:

          900,000      


(1)

Assumes that (i) all of the shares of common stock to be registered by the registration statement of which this prospectus is a part are sold in this offering and (ii) the selling stockholder does not acquire additional shares of our common stock after the date of this prospectus and prior to completion of this offering.

(2)

AJB Capital Managers LLC, is the manager AJB Capital Investments. LLC, has sole voting and dispositive power with respect to the shares. AJB Managers LLC is managed by a board of managers which operates by majority vote such that no individual member of the board of managers has voting or dispositive control over the shares.

The beneficial ownership set forth above has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), based on 9,234,833, shares of our common stock outstanding on June 9, 2023. Except as indicated by footnote, and subject to applicable community property laws, we believe that the beneficial owners of the common stock listed below have sole voting power and investment power with respect to their shares. The selling stockholder is not affiliated with a broker-dealer registered under the Exchange Act of 1934, as amended.

The registration of these shares of common stock does not mean that the selling stockholder will sell or otherwise dispose of all or any of those securities. The selling stockholder may sell or otherwise dispose of all, a portion or none of such shares from time to time. We do not know the number of shares, if any, that will be offered for sale or other disposition by the selling stockholder under this prospectus. Furthermore, the selling stockholder may have sold, transferred or disposed of the shares of common stock covered hereby in transactions exempt from the registration requirements of the Securities Act since the date on which we filed this prospectus.

Information about the selling stockholder may change over time. Any changed information will be set forth in an amendment to the registration statement (of which this prospectus forms a part) or a supplement to this prospectus, to the extent required by law.

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USE OF PROCEEDS

The selling stockholder will receive all proceeds from the sale of the shares of common stock offered hereby. We will not receive any proceeds from the sale of common stock by the selling stockholder.

 

We estimatewill, however, receive cash proceeds equal to the exercise price of the Warrant. Accordingly, we may receive aggregate gross proceeds of up to $600,000 assuming that the netWarrant is exercised in full at an exercise price of $3.00 per share. We expect to use any proceeds of this offering will be approximately $16,360,000, after deducting the underwriting discounts and commissions and estimated offering expenses payablereceived by us and excluding the proceeds, if any, from the exercise of the warrants. IfWarrant for working capital purposes.

We will bear all costs, expenses and fees in connection with the underwriters exercise their option to purchase additional shares and warrants in full, our net proceeds from this offering will be approximately $18,844,000, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and excluding the proceeds, if any, from the exerciseregistration of the warrants. We currently intend to use $2,415,000 of the net proceeds of the offering to repay in full a secured convertible promissory note in the principal amount of $2,415,000, payable to Lind, due May 6, 2021, of which $2,100,000 was funded to us representing an original issue discount of 15%. The proceeds of this note were used for general working capital purposes. Principal payments on this note are due on a monthly basis commencing December 6, 2020. We intend to use $1,811,250 of the net proceeds from this offering to repay in full a secured convertible promissory note in the principal amount of $1,811,250, payable to Lind, due June 30, 2021, of which $1,575,000 was funded to us representing an original issue discount of 15%.  The proceeds of this note were used to fund the acquisition of PistolStar. Principal payments on this note are due on a monthly basis commencing October 30, 2020. We intend to use the balance of the net proceeds of this offering for general corporateshares, including, without limitation, all registration and working capital purposesfiling fees and to fund ongoing operationsfees and expansionexpenses of our business. We cannot currently allocate specific percentages of the net proceeds to us from this offering that we may use for these purposescounsel and our management will have broad discretion in the allocation of such net proceeds.accountants.

 

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21

PLAN OF DISTRIBUTION

We are registering 900,000 shares of our common stock for possible sale by the selling stockholder. The selling stockholder will act independently of us in making decisions with respect to the timing, manner and size of each sale. The selling stockholder may, from time to time, sell any or all of its shares of common stock on the Nasdaq Capital Market or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholder may use any one or more of the following methods when selling shares:

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

an exchange distribution in accordance with the rules of the Nasdaq Capital Market or any other applicable national securities exchange;

privately negotiated transactions;

short sales;

through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

broker-dealers may agree with the selling stockholder to sell a specified number of such shares at a stipulated price per share;

a combination of any such methods of sale; and

any other method permitted pursuant to applicable law.

The selling stockholder may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus supplement and accompanying prospectus.

Broker-dealers engaged by the selling stockholder may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholder (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling stockholder does not expect these commissions and discounts to exceed what is customary in the types of transactions involved. Any profits on the resale of shares of common stock by a broker-dealer acting as principal might be deemed to be underwriting discounts or commissions under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by the selling stockholder.

The selling stockholder may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares if liabilities are imposed on that person under the Securities Act. If we are notified by the selling stockholder that any arrangement has been entered into with a broker-dealer for the sale of shares of common stock, if required, we will file an amendment to this prospectus. If the selling stockholder uses this prospectus for any sale of the shares of common stock, the selling stockholder will be subject to the prospectus delivery requirements of the Securities Act.

The selling stockholder and any broker-dealer or agents participating in the distribution of the shares of common stock may be deemed to be “underwriters” within the meaning of Section 2(11) of the Securities Act in connection with such sales. In such event, any commissions paid, or any discounts or concessions allowed to, any such broker-dealer or agent and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. If the selling stockholder is an “underwriter” within the meaning of Section 2(11) of the Securities Act, it will be subject to the applicable prospectus delivery requirements of the Securities Act and may be subject to certain statutory liabilities of, including but not limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act.

The selling stockholder also may transfer the shares of common stock in other circumstances, in which case the transferees or other successors in interest will be the selling beneficial owners for purposes of this prospectus and may sell the shares of common stock from time to time under this prospectus after we have filed an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act supplementing or amending the list of selling stockholders to include the transferees or other successors in interest as selling stockholders under this prospectus.

We will bear all costs, expenses and fees in connection with the registration of the shares.

We will indemnify the selling stockholder against certain liabilities, including liabilities under the Securities Act, or the selling stockholder will be entitled to contribution. We may be indemnified by the selling stockholder against civil liabilities, including liabilities under the Securities Act, that may arise from any written information furnished to us by the selling stockholder specifically for use in this prospectus or we may be entitled to contribution.

Table of Contents22

 

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 July 15, 2020,June 9, 2023, the number of stockholders of record of our common stock was 58.131.

 

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 terms of our secured promissory note issued in December 2022 prohibits us from paying or declaring any dividends or without the consent of the lender. 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.

 

DILUTION

If you purchase our securities in this offering, you may experience dilution to the extent of the difference between the combined public offering price per share and accompanying warrant in this offering and our as adjusted net tangible book value per share immediately after this offering, assuming no value is attributed to the warrants, and such warrants are accounted for and classified as equity. Net tangible book value per share is equal to the amount of our total tangible assets, less total liabilities, divided by the number of outstanding shares of our common stock. As of March 31, 2020, our net tangible book value was approximately $(2,440,295), or approximately $(0.13) per share.

After giving effect to the sale by us of 15,000,000 shares of our common stock (including the shares of common stock underlying the Pre-Funded Warrants) and warrants to purchase up to 15,000,000 shares of our common stock in this offering at an assumed combined public offering price of $1.20 per share and accompanying warrant, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value as of March 31, 2020 would have been $13,919,705, or approximately $0.42 per share. This represents an immediate increase in net tangible book value of $0.55 per share to existing stockholders and an immediate dilution of $0.78 per share to new investors purchasing shares of our common stock and accompanying warrants in this offering, attributing none of the combined public offering price to the warrants offered hereby. The following table illustrates this per share dilution:

Combined public offering price per share and accompanying warrant

 $1.20 

Net tangible book value per share as of March 31, 2020

 $ (0.13

Increase in net tangible book value per share after this offering

 $0.55 
     

As adjusted net tangible book value per share after this offering

 $0.42 
     

Dilution per share to new investors

 $0.78 

The discussion and table above assume (i) no exercise of the underwriters’ option to purchase up to an additional 2,250,000 shares of common stock and/or warrants to purchase 2,250,000 shares of common stock, (ii) no exercise of warrants offered in this offering, and (iii) the immediate exercise in full of all Pre-Funded Warrants in this offering.

The foregoing discussion and table do not take into account further dilution to new investors that could occur upon the exercise of outstanding options or warrants having a per share exercise price less than the combined public offering price per share of common stock and accompanying warrants sold in this offering. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

The table and discussion above are based on 18,391,122 shares of our common stock outstanding as of March 31, 2020 and exclude as of such date:

1,642,964 shares of our common stock issuable upon the exercise of stock options, with a weighted-average exercise price of $2.44 per share;

2,586,507 shares of our common stock issuable upon the exercise of outstanding warrants, with a weighted-average exercise price of $1.49 per share;

3,737,192 shares of our common stock issuable upon conversion of outstanding convertible notes at a conversion price of $0.65 per share;

122,547 shares of our common stock issuable upon conversion of outstanding convertible notes at a conversion price of $1.50 per share; and

866,476 other shares of our common stock reserved for future issuance under our 2015 Equity Incentive Plan.

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23

 

MANAGEMENT’SMANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’sManagements Discussion and Analysis of Financial Condition and Results of Operations, and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this prospectus 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 FACTORSRisk Factors and elsewhere in this prospectus. The following should be read in conjunction with our audited financial statements included elsewhere herein.

 

The following Management’sManagements 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, 2022 and 2021 and the three months ended March 31, 2023 and 2022 and the accompanying notes.notes included elsewhere in this prospectus.

 

OVERVIEWOverview

 

We developare a leading identity access management (IAM) platform provider enabling secure work-from-anywhere for enterprise, education, and market advancedgovernment customers using secure multi-factor authentication (MFA). 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, MobileAuth® mobile phone authentication application for iOS and Android, and high-quality, low-cost accessory fingerprint biometric identificationscanner and identity verification technologies, as well as related identity managementFIDO-compliant hardware to provide a full and credentialing fingerprint biometric hardwarecomplete solution for identity-innovating customers.

BIO-key PortalGuard and software solutions. We were pioneers in developing automated, finger identification technologyhosted PortalGuard IDaaS are platforms that supplements or compliments other methods of identificationenable our customers to securely and verification,easily assure that only the right people can access the right systems. PortalGuard goes beyond traditional MFA solutions by addressing functional gaps, such as personal inspection identification, passwords,allowing roving users to biometrically authenticate at any workstation without using their phones or 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 beeneliminating unauthorized account delegation, detecting duplicate users, and is used 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 and 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 into their applications. accommodating in-person identification.

 

Our biometric identification technology improves bothcustomers use BIO-key every day to securely access a variety of cloud, mobile and web applications, on-premise and cloud-based servers from all of their devices. Employees, contractors, students and faculty sign in through PortalGuard to seamlessly and securely access the accuracyapplications 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 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 scalablepartners, and to handle databases containingprovide 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 fingerprints. We achieveusers. One large bank has enrolled and identifies over 21.7 million of their customers using BIO-key fingerprint biometrics in branches on a daily basis.

PortalGuard and hosted PortalGuard IDaaS are platforms that enable our customers to securely and easily assure that only the highest levels of discrimination without requiring anyright people can access the right systems by utilizing our world-class biometric core platform among 17 other identifying data (multi-factor)authentication factors. PortalGuard goes beyond traditional multi-factor authentication, or MFA, solutions by addressing sizeable gaps, such as a user ID, smart cards,allowing roving users to biometrically authenticate at any workstation without using their 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.

 

Our WEB-key solution isPortalGuard and IBB deliver unique value to enterprises who find that mainstream MFA solutions do not adequately address their workforce use cases. PortalGuard operates as a client server suitesingle MFA user experience, providing a rich set of authentication choices to meet every use case. We sell our branded biometric and FIDO authentication hardware as accessories to our IAM platforms, so that customers can be integrated into virtually any application, whether web based or desktop application based on Windows. The WEB-key solution ishave a security solution that protectssingle vendor providing all components of their IAM solution. We do not mandate the biometric data in processing, transmission and storage. WEB-key provides a turn-key solution for biometric as well as multi-factor authentication across an enterprise, government system or any user population.

We also develop and distributeuse of BIO-key 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.services. Our products are interoperable with majorNIST-certified fingerprint reader and hardware manufacturers, supporting Windows, Linux, Mac OS X, and Android operating systems enabling application developers, value added resellers, and channel partners to integrate our fingerprint biometrics into their applications, while dramatically reducing maintenance, upgrade and life-cycle costs. This interoperabilitybiometric platform is unique in that it supports interoperable mixing and matching combinations of different manufactures’ fingerprint scanners in a deployment, so that the industry, andright scanner can be selected for the right use case, without mandating the user of a key differentiator for our products in the biometric market. In our opinion, these features make our technology more viable than competing technologies and expands the size of the overall market for our products.particular scanner.

 

2024

 

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

In partnerships with OEMs, VARs, integrators,2022, we expanded our product offerings and solution providers,customer base when we marketacquired Swivel Secure, a Madrid, Spain based provider of IAM solutions. Swivel Secure is the exclusive distributer of AuthControl Sentry, AuthControl Enterprise, and sell biometric hardwareAuthControl MSP product line in Europe, Africa and softwarethe Middle East, or EMEA, excluding the United Kingdom and Ireland. These solutions to SMBs,include a patented one-time-code extraction technology, helping enterprises manage the Fortune 500increasing data security risks posed by cloud services and government agencies.bring your own device policies.

 

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 certificationoperate a SaaS business model with customers subscribing to term use of our ability to support Homeland Security Presidential Directive #12 (HSPD-12)software for annual recurring revenue. We sell our products directly through our field and ANSI/INCITS-378 templates,inside sales teams, as well as validationindirectly through our network of channel partners including resellers, system integrators, master agents and other distribution partners. Our subscription fees include a term license of hosted or on-premise product and technical support and maintenance of our fingerprint match speedplatform. We base subscription fees primarily on the products used and accuracythe number of users enrolled in large database environments.our platform. We generate subscription fees pursuant to noncancelable contracts with a weighted average duration of approximately one year.

 

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.Strategic Outlook

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 OUTLOOK

Historically, our largest market has been access control within highly regulated industries such as government, financial services, and healthcare.  During 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 2020 and beyond.

Working with our partner TTI, we expect to begin deploying several large-scale identity and access 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 $45M and $30M. 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, 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, the COVID-19 pandemic has and may continue to delay the rollout of these programs.

21

 

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.

22

We also plan on expandingglobe and (iii) growing our new Channel Alliance Programchannel alliance program which now haswe have grown to more than twentyone hundred and fifty participants and startedcontinues to generate modest initialincremental revenues.

 

RECENT DEVELOPMENTSA 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.

 

COVID-19Recent Developments

 

As discussed under “Risk Factors” above, an outbreakRisk Factors” given the uncertainty of the duration and severity of a novel strain ofpossible economic recession and 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, citiesconflict between Ukraine and other geographic regions have taken preventative or protective actions,  including imposing restrictionsRussia and their effects on travel andour business operations, sales cycles, personnel, and requiring individuals to limit or forego their time outsidethe geographic markets in which we operate, and numerous other matters of their homes. Given the uncertainty regarding the spreadnational, regional and global scale, including those of this coronavirus,a political, economic, business and competitive nature, the related financial impact cannot be reasonably estimated at this time.

 

25

The complications caused by COVID-19 has forced organizations to quickly adapt to acurrent trend of continued remote work from home remote business model. Thisenvironments 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 continue to play a key role in remote user authentication.

 

Acquisition of PistolStar

In June, 2020 we acquired PistolStar, a New Hampshire based provider of 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. PistolStar has over 200 active customer subscribers to their products, which include PortalGuard™ multi-factor authentication (MFA), Nebula™ identity-as-a-service (IDaaS), PortalGuard single sign-on (SSO) and PortalGuard self-service password reset (SSPR). Combining PistolStar’s proprietary authentication software with our biometric solutions creates an integrated turn-key multi-factor solution which we believe is unparalleled in the industry, and will allow us to provide a unified MFA solution that is differentiated in the market by our biometric user experience and who-you-are strong authentication.RESULTS OF OPERATIONS

 

THREE MONTHS ENDED MARCH 31, 20202023 AS COMPARED TO MARCH 31, 20192022

 

Consolidated Results of Operations - Percent Trend

 

 

Three Months Ended March 31,

  

Three Months Ended

March 31,

 
 

2020

  

2019

  

2023

  

2022

 

Revenues

            

Services

  40

%

  44

%

 17

%

 20

%

License fees

  45

%

  15

%

 81

%

 75

%

Hardware

  15

%

  41

%

  2

%

  5

%

Total Revenues

  100

%

  100

%

 100

%

 100

%

Costs and other expenses

            

Cost of services

  14

%

  17

%

 5

%

 11

%

Cost of license fees

  2

%

  68

%

 20

%

 4

%

Cost of hardware

  8

%

  25

%

  1

%

  3

%

Total Cost of Goods Sold

  24

%

  110

%

  26

%

  17

%

Gross profit

  76

%

  -10

%

  74

%

  83

%

         

Operating expenses

            

Selling, general and administrative

  264

%

  249

%

 63

%

 93

%

Research, development and engineering

  64

%

  68

%

  22

%

  41

%

Total Operating Expenses

  329

%

  317

%

  85

%

  134

%

Operating loss

  -253

%

  -327

%

  -11

%

  -51

%

         

Other income (expenses)

  -392

%

  -

%

  2

%

  -

%

         

Net loss

  -645

%

  -327

%

  -9

%

  -51

%

Revenues and Cost of Goods Sold

  

Three months ended

         
  

March 31,

         
  

2023

  

2022

  

$ Change

  

% Change

 
                 

Revenues

                

Service

 $532,522  $395,804  $136,718   35

%

License

  2,478,556   1,460,183   1,018,373   70

%

Hardware

  72,689   85,184   (12,495

)

  -15

%

Total Revenue

 $3,083,767  $1,941,171  $1,142,596   59

%

                 

Cost of goods sold

                

Service

 $154,801  $210,913  $(56,112

)

  -27

%

License

  620,881   73,230   547,651   748

%

Hardware

  44,592   53,298   (8,706

)

  -16

%

Total Cost of goods sold

 $820,274  $337,441  $482,833   143

%

 

2326

 

Revenues and cost of goods sold

  

Three months ended

         
  

March 31,

         
  

2020

  

2019

  

$ Change

  

% Change

 
                 

Revenues

                

Service

 $207,523  $241,610  $(34,087

)

  -14

%

License

  235,345   83,208   152,137   183

%

Hardware

  79,617   226,805   (147,188

)

  -65

%

Total Revenue

 $522,485  $551,623  $(29,138

)

  -5

%

                 

Cost of goods sold

                

Service

 $70,445  $90,829  $(20,384

)

  -22

%

License

  10,456   377,216   (366,760

)

  -97

%

Hardware

  43,362   136,005   (92,643

)

  -68

%

Total COGS

 $124,263  $604,050  $(479,787

)

  -79

%

Revenues

 

For the three months ended March 31, 2020,2023 and 2022, service revenues were $207,523included approximately $292,000 and $317,000 respectively, of recurring maintenance and support revenue, and approximately $240,000 and $79,000, respectively, of non-recurring custom services revenue. Recurring service revenue decreased 13% in the first quarter of 2023 as compared to $241,610 during the three months ended March 31, 2019, a decreasefirst quarter of $34,087, or 14%. The decrease was2022 due largely to the recognition of annual SaaS revenue versus maintenance renewal contracts. Non-recurring custom services increased due to a decline in recurringservices provided by Swivel Secure. As our customer base continues to grow, we expect the service revenue due to the timing of payments received for year-end renewals.increase in future periods.

 

For the three months ended March 31, 2020,2023, license revenue increased 70% to $235,345 or 183%$2,478,556 from $83,208$1,460,183 during the three months ended March 31, 2019. The increase was due to an increase2022. We increased both the variation and number of customers, including additional revenue from Swivel Secure which generated 63% of its license revenue from a customer in new customers,Central America, one large SaaS renewal, and for continued expansion of biometric ID deployments with several commercial partners, and several healthcare facilities, voter registration offices, and banks.cloud migrations.

 

Hardware sales decreased $12,495 during the three months ended March 31, 2020 by approximately $147,188, or 65%,2023 to $79,617$72,689 from $226,805$85,184 during the three months ended March 31, 2019.2022. The decrease resulted from an approximate $34,000 reductionwas attributable to the mix of installations and other projects completed in the shipment of locks and an approximate $113,000 reduction in shipments of fingerprint readers due to smaller orders in 2020 as compared to 2019.periods.

 

Costs of goods soldGoods Sold

 

For the three months ended March 31, 2020,2023, cost of service decreased approximately $20,000$56,000 or 22%27% to $70,445 as a result of reduced support required$154,801 from $210,913 for ongoing maintenance, compared to the three months ended March 31, 2019 where2022 due to reduced personnel costs are reclassed from researchassociated with the direct support for BIO-key support and development resources to cost of goods sold as needed.maintenance. For the three months ended March 31, 2020,2022, license fees decreasedincreased to $10,456$620,881 from $377,216$73,230 during the three months ended March 31, 2019,2022, due largely due to decrease of approximately $281,000 in amortization of the software rights which is included in cost ofcosts related to the license fees onfor the statement of operations.Swivel Secure product line. For the three months ended March 31, 2020,2023, hardware costs decreased to $43,362$44,592 from $136,005$53,298 during the three months ended March 31, 2019, related2022, corresponding to lower costs associated with lessthe decrease in hardware revenue.

 

Selling, generalGeneral and administrativeAdministrative

 

  

Three months ended

         
  

March 31,

         
  

2020

  

2019

  

$ Change

  

% Change

 
                 

Selling, general and administrative

 $1,381,399  $1,377,033  $4,366   0

%

  

Three months ended

         
  

March 31,

         
  

2023

  

2022

  

$ Change

  

% Change

 
                 

Selling, general and administrative

 $1,931,732  $1,797,998  $133,734   7

%

 

Selling, general and administrative expenses for the three months ended March 31, 20202023 increased less than 1%7% to $1,381,399$1,931,732 as compared to $1,377,033$1,797,998 for the corresponding period in 2019. The2022. This increase was dueattributable largely to travel costs associated with securing contracts in Africa, marketinga full quarter of Swivel Secure sales expenses and shareholder relations.a reserve for doubtful accounts of $50,000. These amountsincreases were offset, in part, by a decreases in Hong Kong business costs, factoring fees, show attendance,marketing personnel and booth costs.expenses, and non-cash compensation.

Research, Development and Engineering

  

Three months ended

         
  

March 31,

         
  

2023

  

2022

  

$ Change

  

% Change

 
                 

Research, development and engineering

 $690,159  $805,266  $(115,107

)

  -14

%

 

2427

Research, development and engineering

  

Three months ended

         
  

March 31,

         
  

2020

  

2019

  

$ Change

  

% Change

 
                 

Research, development and engineering

 $336,889  $374,118  $(37,229

)

  -10

%

 

For the three months ended March 31, 2020,2023, research, development and engineering expenses decreased 10%14% to $336,889$690,159 as compared to $374,118$805,266 for the corresponding period in 2019.2022. Included in the decrease were reductions in personnel expensecosts, and reducedoutside services related to the completed development expenses byof our Hong Kong subsidiary.MobileAuth application.

 

Other income (expense)Income (Expense)

 

  

Three months ended

         
  

March 31,

         
  

2020

  

2019

  

$ Change

  

% Change

 
                 

Other income (expense)

 $(2,050,215

)

 $70  $(2,050,286

)

  -2.9M

%

  

Three months ended

         
  

March 31,

         
  

2023

  

2022

  

$ Change

  

% Change

 
                 

Other income (expenses)

                

Interest income

 $4  $131  $(127

)

  -97

%

Loss on foreign currency transactions

  (15,000

)

  -   (15,000

)

  -100

%

Change in fair value of convertible note

  141,991   -   141,991   100

%

Interest expense

  (56,919

)

  -   (56,919

)

  -100

%

Other income (expense)

 $70,076  $131  $69,945   553,931

%

 

Other income (expense) for the 2020three month period related to theended March 31, 2023 consisted of interest expense which includedof $54,999 on the amortizationsecured note payable and the government loan through the BBVA bank net of a beneficial conversion featureinterest income, change in fair value of $141,991 on the convertible note payable, and amortization of debt discounts and debt issuance costs in approximate amount of $1,551,000 and a loss on foreign currency transactions. Other income (expense) for the extinguishmentthree month period ending March 31, 2022 consisted of a convertible debt financing in an approximate amount of $500,000.interest income.

 

YEAR ENDED DECEMBER 31, 20192022 AS COMPARED TO YEAR ENDED DECEMBER 31, 20182021

 

Consolidated Results of Operations

 

Two Year % trend

 

 

Years ended

December 31,

  

Years ended

December 31,

 
 

2019

  

2018

  

2022

  

2021

 

Revenues

            

Services

  40

%

  25

%

 26

%

 25

%

License fees

  20

%

  43

%

 65

%

 50

%

Hardware

  40

%

  32

%

  9

%

  25

%

  100

%

  100

%

 100

%

 100

%

Costs and other expenses

            

Cost of services

  12

%

  11

%

 10

%

 13

%

Cost of license fees

  41

%

  76

%

 13

%

 4

%

Cost of hardware

  56

%

  16

%

  12

%

  16

%

  109

%

  103

%

  35

%

  33

%

Gross Profit (Loss)

  -9

%

  -3

%

Gross Profit

  65

%

  67

%

         

Operating expenses

            

Selling, general and administrative

  222

%

  132

%

 133

%

 118

%

Research, development and engineering

  58

%

  35

%

 46

%

 46

%

Total operating expenses before impairment

  280

%

  167

%

Impairment of resalable software license rights

  307

%

  - 

Reversal of earnout payable-Swivel acquisition

 -7

%

 - 

Impairment of goodwill

  34

%

  - 

Total operating expenses

  206

%

  164

%

Operating loss

  -596

%

  -170

%

 -141

%

 -97

%

         

Other income (expense)

            

Total other income (expense)

  -47

%

  0

%

  -29

%

  -2

%

 

Loss before provision for income tax benefit

  -170

%

  -99

%

 

Provision for income tax benefit

  -   - 
 

Net loss

  -643

%

  -170

%

  -170

%

  -99

%

 

2528

 

Revenues and Costs and other expenses

 

         

2022-2021

 
         2019 - 2018  

2022

  

2021

  

$ Chg

  

% Chg

 
 2019  2018  $ Chg  % Chg  

Revenues

                        

Services

 $925,245  $1,012,576  $(87,331

)

  -9

%

 $1,789,720  $1,273,354  $516,366  41

%

License fees

  442,649   1,739,897   (1,297,248

)

  -75

%

 4,584,052  2,555,809  2,028,243  79

%

Hardware

  899,634   1,292,069   (392,435

)

  -30

%

  646,486   1,285,326   (638,840

)

  -50

%

Total Revenue

 $2,267,528  $4,044,542  $(1,777,014

)

  -44

%

 $7,020,258  $5,114,489  $1,905,769   37

%

                 

Costs and other expenses

                        

Services

 $272,318  $443,210  $(170,892

)

  -39

%

 $722,152  $686,175  $35,977  5

%

License fees

  916,112   3,072,356   (2,156,244

)

  -70

%

 906,417  183,199  723,218  395

%

Hardware

  1,272,815   648,624   624,191   96

%

  811,001   803,555   7,446   1

%

Total Costs and other expenses

 $2,461,245  $4,164,190  $(1,702,945

)

  -41

%

 $2,439,570  $1,672,929  $766,641   46

%

 

Revenues

 

Revenue decreased $1,777,014increased $1,905,769 or 44%37% to $2,267,528$7,020,258 in 20192022 as compared to $4,044,542$5,114,489 in 20182021 due to the factors stated below.

 

For the years ended December 31, 20192022, and 2018,2021, service revenues included approximately $904,000$1,243,000 and $895,000,$1,100,000, respectively, of recurring maintenance and support revenue, and approximately $21,000$546,000 and $118,000,$173,000, respectively, of non-recurring custom services revenue. Recurring service revenue increased 1%13% from 20182021 to 2019 as2022 due largely to the increased maintenance related to increased license revenue. Non-recurring custom services increased 216% due to increased new customer installations, Swivel service fees, and conversion to the cloud platform. Although inflation has negatively impacted many industries, we moved from a perpetual licensehave continued to subscription based licensing.see our pipeline increase for the cybersecurity protection software and services that we offer. 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, 20192022 and 2018,2021, license revenue decreased 75%increased $2,028,243 or 79% to $442,649. The decrease was$4,584,052, due primarily due to one large international order receivednew customer orders, revenues from Swivel Secure for approximately $1.9 million, and existing recurring revenue contracts. We expect the recurring revenue to continue to grow in the fourth quarter of 2018 in amount of approximately $1,111,000 without a comparable transaction  in the fourth quarter of 2019.2023.

 

Hardware sales decreased by approximately $392,000,$638,840, or 30%50%, to $899,634$646,486 in 2019 as a result2022 from $1,285,326 in 2021. The decrease was attributable largely to Q1 2021 sales in Nigeria to an international government agency, which did not recur in 2022 due to delayed roll out of fewer large customer deployments, and primarily reduced lock sales.  Fingerprint reader sales decreased approximately $158,000, or 16%, while the biometric locks decreased approximately $235,000, or 84% from 2018.government project.

 

Costs of goods sold

 

For the year ended December 31, 2019,2022, cost of service decreasedservices increased approximately 39%5% to $272,318,$722,152, due to a completed special software requirement from an existing customer in the first quarter of 2018.increased costs to support for the PortalGuard deployments.

29

 

License costsfees for the year ended December 31, 2019 decreased2022 increased $732,218, or approximately 70%395%, to $916,112. The decrease was attributable primarily$906,417 related to the amortizationincreased license revenue and actual deployments of thelicense fees payable for third-party software rights in the approximate amount of $884,000 in 2019 compared to $2,658,000 in 2018.distributed by Swivel Secure.

 

Hardware costs for the year ended December 31, 20192022 increased $7,446, or approximately 96%1%, to $1,272,815.$811,001. The increase was attributable primarily toassociated with the write down of lock inventorydecreased hardware sales and parts as a result of the discontinuance of lock sales in the US,hardware mix described above, offset by a decrease in factory coststhe $400,000 reserve on inventory due to reduced lock sales.slow moving inventory purchased for projects in Nigeria. The Company is looking into other markets and opportunities to sell or return the product.

 

Selling, general and administrative

 

          

2019 - 2018

 
  

2019

  

2018

  

$ Chg

  

% Chg

 

 

                
  $5,036,820  $5,333,906  $(297,086

)

  -6

%

        2022 - 2021 

2022

  

2021

  

$ Chg

  % Chg 
               
$9,364,887  $6,028,360  $3,336,527   55%

 

Selling, general and administrative costs for year ended December 31, 20192022 were $5,036,820$9,364,887 representing a 6% decrease55% increase from over 2018. Decreases2021. The increase included higher sales and marketing expenses incurred by Swivel Secure which we acquired in costs included non-cash share-based compensation2022, increased legal, professional, and other fees and expenses decreasedincurred in connection with the acquisition of Swivel Secure and the AJB Capital loan, bad debt expense marketing personnel and related costs, and travel. These amounts were offset by increases in factoring fees, legal and accounting fees related to capital raising transactions,a reserve on a note receivable, and insurance costs.

26

$360,000.

 

Research, development and engineering

 

          

2019 - 2018

 
  

2019

  

2018

  

$ Chg

  

% Chg

 
                 

 

 $1,331,667  $1,415,401  $(83,734

)

  -6

%

        

2022 - 2021

 

2022

  

2021

  

$ Chg

  

% Chg

 
               
$3,252,236  $2,355,056  $897,180   38

%

 

For the year ended December 31, 2019,2022, research, development and engineering costs were $1,331,667$3,252,236 representing a 6% decrease38% increase over 2018, as a result of decreased2021. Included in the increase were personnel non-cash share-based compensation expenses, and costs associated with retaining outside services related to the development of our Hong Kong subsidiary. These amounts were offset by increased recruiting costs.MobileAuth application, and wages and benefits for new engineering employees.

 

ImpairmentReversal of earnout payable Swivel acquisition

 

          

2019 - 2018

 
  

2019

  

2018

  

$ Chg

  

% Chg

 

Impairment of resalable software license rights

 $(6,957,516

)

  -  $(6,957,516

)

  n/a 
        

2022 - 2021

 

2022

  

2021

  

$ Chg

  

% Chg

 
               
$(500,000) $-  $(500,000)  100

%

 

 Impairment of assets relates to

For the write-downyear ended December 31, 2022, we recognized income on the elimination of the FingerQ resalable software license rights to zero inearnout payable on the fourth quarteracquisition of 2019.Swivel Secure as the certain requirements for the payout were not achieved.

 

Impairment of goodwill

        

2022 - 2021

 

2022

  

2021

  

$ Chg

  

% Chg

 
               
$2,387,193  $-  $2,387,193   100

%

For the year ended December 31, 2022, we recognized an impairment of our goodwill balances due to the decrease in market value of our common stock compared to the carrying value of our net assets.

30

Other income (expense)

 

         

2019 - 2018

          

2022-2021

 
 

2019

  

2018

  

$ Chg

  

% Chg

  

2022

  

2021

  

$ Chg

  

% Chg

 
                 

Interest income

  154   80   74   93

%

 $233  $4,075  $(3,842

)

 -94

%

Foreign currency loss

 -  (50,000

)

 50,000  100

%

Investment-debt security reserve

 (452,821

)

 (60,000

)

 (392,821

)

 -655

%

Loan transaction costs

 (1,147,456

)

 -  (1,147,456

)

 -100

%

Change in fair value of convertible note

 (396,203

)

 -  (396,203

)

 -100

%

Interest expense

  (1,069,134

)

  -   (1,069,134

)

  n/a   (10,462

)

  (18,000

)

  7,538   42

%

 $(1,068,980

)

 $80  $(1,069,060

)

     $(2,006,709

)

 $(123,925

)

 $(1,882,784

)

  -1519

%

 

Interest expenseThe amounts for other income (expense) for the 2019 period related to theyear ended December 31, 2022 consisted of interest expense on convertible debt financings and amortizationincome of $233, a write-off of the debt discountinvestment-debt security as the Company received the proceeds and debt issuancethe bond issuer defaulted on repayment, loan transactions costs incurredexpensed for the convertible note payable as a resultthe Company elected to value the convertible note payable under the fair value option, the change in the fair value of the convertible note payable, and interest expense of $10,462 on the convertible note payable and the government loan through the BBVA bank. The amounts for the year ended December 31, 2021, related to a loss on a reserve on the investment in the debt financings.security due to a delay in receiving the funds, interest expense from the amortization of debt discounts, and a foreign currency adjustment to an accounts receivable invoice, offset by interest income.

 

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

 

Operating activities overview

 

Net cash used for operations during the three months ended March 31, 20202023 was approximately $1,023,000.$1,928,811. Items of note included:

 

 

Net positive cash flows related to accounts receivable,payable, prepayments, inventory and deferred revenue of approximately $91,000. $276,000.

 

 

Net positive cash flows related to adjustments for non-cash expenses for including depreciation, amortization of intangible assets and debt discounts and issuance costs, loss on extinguishment of debt, the amortization of a beneficial conversion feature, non-cash interest expense, and share-based compensation of approximately $2,672,000.$128,000.

 

 

Negative cash flows related to changes in contract costs, factoring, prepayments, accounts payables,receivable, amount due from factor, and accrualsaccrued liabilities of approximately $377,000,$2.3 million, due to working capital management.

 

Net cash used for operations during the year ended December 31, 20192022 was approximately $1,850,000.$6,229,034. 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. $5,980,000.

 

 

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, accruals, lease liabilities, and factoringdeferred revenue in the aggregate amount of approximately $105,000, due to working capital management.$299,000 and our net loss for the period.

 

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Investing activities overview

 

Approximately $543,000 was usedWe did not use or generate any cash for investing activities during the three months ended March 31, 2023.

Net cash used in investing activities during the year ended December 31, 2019 related2022 was $696,618. This consisted of approximately $82,000 of capital expenditures, $9,000 of receipts from a note receivable and $624,000 (net of cash acquired and currency adjustment) to fund the cash portion of the purchase of a non-marketable bondprice for approximately $513,000 and capital expenditures of $30,000.Swivel Secure.

31

 

Financing activities overview

 

Approximately $1,606,000 was provided byNet cash used for financing activities during the three months ended March 31, 2020 from the issuance of convertible notes, less fees, and exercise of warrants net of approximately $122,000 from the net2023 was $34,289 for repayment of related party loans.the government loan through the BBVA bank.

 

Approximately $2,149,000Net cash from financing activities was provided by financing activities$1,903,240 during the year ended December 31, 20192022 consisting of proceeds of $2,002,000 from the issuance of a convertible note, costs paid to acquire the convertible note of $155,140 and repaymentproceeds of debt, including convertible notes, less fees.$56,380 from sales of common stock under the employee stock purchase plan.

 

We had negative net working capital at March 31, 2020Sources of approximately $2,087,000 as compared to negative net working capital of approximately $3,000,000 at December 31, 2019.

Capital ResourcesLiquidity

 

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:

In December 2022, we entered into and closed a securities purchase agreement (the “Purchase Agreement”) with AJB Capital Investments, LLC under which we issued a $2,200,000 principal amount senior secured promissory note (the “Note”). The principal amount of the Note is due six months following the date of issuance, subject to one six-month extension. Interest under the Note accrues at a rate of 10% per annum, payable monthly through month six. In the event the maturity date of the Note is extended, interest will accrue at the rate of 12% per annum in months seven through twelve, payable monthly. The Note is secured by a lien on substantially all of the Company’s assets and properties can be prepaid in whole or in part without penalty at any time.

In March 2022, in connection with the acquisition of Swivel Secure, we assumed a €500,000 government loan that was issued through BBVA Bank during the COVID-19 pandemic. The loan bears interest at the rate of 1.75% per annum and is payable in monthly installments of approximately $11,900 inclusive of interest from May 2022 through maturity in April 2026. Upon closing of the acquisition, Swivel Secure had cash equal to the outstanding balance.

 

We entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has since been extended throughto October 31, 2020.2023 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.  During the quarter ending March 31, 2020, 972,000 of the warrants were converted to common stock at $1.50 resulting in proceeds of $1,428,000 to the Company.

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 Note was 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 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 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 amount of the Amended Note is $0.

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 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%.  This note was paid in full in the amount of $211,984 on June 12, 2020.

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 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%. This note was paid in full in the amount of $170,442 on June 12, 2020.

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. We received total proceeds of $340,000 which will be 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 “covered period” 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. While these are the initial guidelines, we are monitoring the announcements for the issuance of the final guidelines.

28

On May 6, 2020, we issued a $2,415,000 principal amount senior secured convertible note (the “Note”).  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 twelve months after the date of funding.  The Note is convertible at a fixed convertible price of $1.16.

On June 29, 2020, we issued a $1,811,250 principal amount senior secured convertible note. At closing, a total of $1,575,000 was funded with the proceeds to be used for the acquisition of PistolStar. The principal amount due of this note is due and payable in nine (9) equal monthly installments of $201,250 beginning four (4) months after the funding date.  This note is convertible at a fixed convertible price of $1.16.

 

Liquidity outlookOutlook

 

At March 31, 2020,2023, our total cash and cash equivalents were $722,335, as compared to approximately $2,635,522 at December 31, 2022. At March 31, 2023, we had working capital of approximately $3,359,000.

At December 31, 2022, our total cash and cash equivalents were approximately $662,000,$2,600,000, as compared to approximately $79,000$7,800,000 at December 31, 2019.2021. At December 31, 2022, we had working capital of approximately $3,529,000.

 

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 estimate that we currently require approximately $525,000$798,000 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation. During the first quarterthree months of 20202023, we generated $3,083,767 of revenue which did not generate enough cash to fully fund our average monthly requirements. During 2022, we generated approximately $522,000$7,020,000 of revenue, which is belowdid not generate enough cash to fully fund our average monthly cash requirements. We expect that Swivel Secure will continue to generate positive cash flow in 2023. We also have approximately $3.8 million of inventory purchased for projects in Nigeria. We are looking into other markets and opportunities to sell or return the product to generate additional cash.

32

 

If we are unable to generate sufficient revenue to meetfund current operations and execute our goals,business plan, we may need to obtain additional third-party financing. Our second note is due on June 22, 2023, which we expect to extend for an additional six months. Unless we generate sufficient positive cash flow from operations or liquidation of existing inventory, we expect that we will need to obtain additional third-party financing during the next twelve months to (i) conduct the sales, marketing and technical support necessarybe used in part 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. repay out outstanding secured note.

 

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.

 

29

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 AND ESTIMATES

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements as of and for the year ended December 31, 2022 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 our financial statements for the year ended December 31, 2019 and three months ended March 31, 2020 included in this prospectus.

 

We believe that of our significant accounting policies, which are described in Note A of the notes to our consolidated financial statements included in in this prospectus, for the year ended December 31, 2019, 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 RecognitionBusiness Combinations

We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. Acquired customer relationships, proprietary software, and trade names are recognized at fair value. The Company accounts for revenue underpurchase price allocation process requires management to make significant estimates and assumptions, especially at the guidanceacquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of ASC 606. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which the Company expects tomay 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 licenses

Software license revenue consist of fees for perpetual and software as a service (SaaS) software licenses for one or more of the Company’s 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.

30

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 primarilyfrom the acquisition date. We include the results 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 valueoperations of the contracts,business that we have acquired in our consolidated results prospectively from the cloud applications sold, customer demographics, geographic locations, and the number and typesdate 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 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 condensed consolidated statements of operations.acquisition.

 

2. Impairment or Disposal of Long Lived Assets, including Intangible AssetsGoodwill

We review our long-lived assets, including intangible assets subject to amortization, Goodwill is not amortized, but is evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying amount of such an assetvalue may not be recoverable. RecoverabilityThe Company has determined that there is a single reporting unit for the purpose of these assets is measured by comparisonconducting this goodwill impairment assessment. For purposes of their carryingassessing 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 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 assetsreporting unit. If the Company determines that the carrying value of the reporting unit exceeds theirits fair value, determined by eitheran impairment charge would be required. The effect of any impairment would be reflected in operating income in the consolidated statement of operations. The annual goodwill impairment test is performed as of December 31st of each year.

3. Income Taxes We account for income taxes under the asset and liability method, based on the income tax laws and rates in the jurisdictions in which operations are conducted and income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using expected rates in effect for the tax year in which the differences are expected to reverse. Developing the provision for income taxes requires significant judgment including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. The Company has recorded a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. In assessing recoverability,valuation allowance in the current and prior years to reduce net deferred tax assets to zero. If we must make assumptions regarding estimated future cash flows and discount factors. If these estimates or related assumptions changewere to subsequently determine that we would be able to realize deferred tax assets in the future we may be requiredin excess of its net recorded amount, an adjustment to record impairment charges. Intangibledeferred tax assets with determinable lives are amortized over their estimated useful lives, based uponwould increase net income for the patternperiod in which such determination was made. We will continue to assess the expected benefits will be realized, oradequacy of the valuation allowance on a straight-line basis, whichever is greater. We recorded an impairment charge for the 2019 year with respectquarterly basis. Our judgments and tax strategies are subject to the FingerQ Resalable License Rights. Refer Note G – Resalable License Rights for additional information.

31

3. 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 providedaudit 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.various taxing authorities.

 

4. Income TaxesFair Value of Convertible Note Payable

We elected the fair value option to account for the convertible note payable. The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income forfair value option provides an election that allows a company to irrevocably elect to record certain 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. 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 awardsliabilities at fair value on date of grantan instrument-by-instrument basis at initial recognition. We elected the fair value option to better depict the ultimate liability associated with the note, including all features and recognition of compensation over the service periodembedded derivatives. The note accounted 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 treatsfair value option election represents the debt host financial instrument containing certain embedded features that would otherwise be required to be bifurcated from the debt host and recognized as separate derivative liabilities subject to initial and subsequent periodic fair value measurement in accordance with U.S. GAAP. When the fair value option election is applied to financial liabilities, bifurcation of embedded derivatives is not required, and the financial liability in totality is recorded at its issue-date estimated fair value and then subsequently remeasured at estimated fair value on a recurring basis as of each vesting tranche as if it were an individual grant. Thebalance sheet date thereafter. We estimated the fair value of stock options is determinedthe note using a probability-weighted discounted cash flow model with significant assumptions including the Black-Scholes valuation model,present value discount rate and requires the inputlikelihood of highly subjective assumptions. These assumptions include estimatingdefault.

33

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Effective February 1, 2022, the length of time employees will retain their vested stock options before exercising them (the “expected option term”Company’s independent registered public accounting firm, Rotenberg Meril Solomon Bertiger & Guttilla, P.C. Certified Public Accountants (“Rotenberg”), 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 recognizedcombined with Marcum LLP. Rotenberg continued to operate as an expense in the consolidated statements of operations. As required under theindependent registered public accounting rules, we review our valuation assumptions at each grant date and,firm 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, netwholly-owned subsidiary 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.Marcum LLP.

 

Rotenberg continued to serve as the Company’s independent registered public accounting firm through the filing of the Company’s Report on Form 10-Q for the quarter ended March 31, 2022. On July 20, 2022, the Audit Committee of BIO-key approved the engagement of Marcum LLP to serve as the independent registered public accounting firm of the Company for the year ended December 31, 2022.

During the two years ended December 31, 2021 and through July 20, 2022, the Company did not consult Marcum LLP with respect to any of (i) the application of accounting principles to a specified transaction, either completed or proposed; (ii) the type of audit opinion that might be rendered on the Company’s financial statements; or (iii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K) or an event of the type described in Item 304(a)(1)(v) of Regulation S-K.

Rotenberg formally resigned on July 20, 2022, as our independent registered public accounting firm and the services previously provided by Rotenberg are now provided by Marcum LLP.

Rotenberg’s report on our financial statements for the fiscal years ended December 31, 2021 and 2020 did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to audit scope or accounting principles.

During the years ended December 31, 2021 and 2020 and the subsequent interim period through the quarter ended March 31, 2022 (i) we did not have any disagreements with Rotenberg on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to Rotenberg’s satisfaction, would have caused them to make reference thereto in their reports on the Company’s financial statements for such periods, and (ii) there were no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K.

34

BUSINESS

Solely for convenience, trademarks and tradenames referred to in this prospectus 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., is a Delaware corporation (the “Company,” “BIO-key,” “we,”leading identity and access management (IAM) platform provider enabling secure work-from-anywhere for enterprise, education, and government customers using secure multi-factor authentication (MFA). Our vision is to enable any organization to secure streamlined and passwordless workforce, customer, citizen and student access to any online service, workstation, or “us),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, MobileAuth® mobile phone authentication application for iOS and Android, and high-quality, low-cost accessory fingerprint scanner and FIDO-compliant hardware to provide a full and complete solution for identity-innovating customers.

BIO-key PortalGuard and hosted PortalGuard IDaaS are platforms that enable our customers to securely and easily assure that only the right people can access the right systems. PortalGuard goes beyond traditional MFA solutions by addressing functional gaps, such as allowing roving users to biometrically authenticate at any workstation without using their phones or tokens, eliminating unauthorized account delegation, detecting duplicate users, and accommodating in-person identification.

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

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

PortalGuard and hosted PortalGuard IDaaS are platforms that enable our customers to securely and easily assure that only the right people can access the right systems by utilizing our world-class biometric core platform among 17 other authentication factors. PortalGuard goes beyond traditional multi-factor authentication, or MFA, solutions by addressing sizeable gaps, such as allowing roving users to biometrically authenticate at any workstation without using their phones or tokens, eliminating unauthorized account delegation, detecting duplicate users, and accommodating in-person identification.

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

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

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In 2022, we expanded our product offerings and customer base when we acquired Swivel Secure, a Madrid, Spain based provider of IAM solutions. Swivel Secure is the exclusive distributer of AuthControl Sentry, AuthControl Enterprise, and AuthControl MSP product line in Europe, Africa and the Middle East, or EMEA, excluding the United Kingdom and Ireland. These solutions include a patented one-time-code extraction technology, helping enterprises manage the increasing data security risks posed by cloud services and bring your own device policies.

We operate a SaaS business model with customers subscribing to term use of our software for annual recurring revenue. We sell our products directly through our field and inside sales teams, as well as indirectly through our network of channel partners including resellers, system integrators, master agents and other distribution partners. Our subscription fees include a term license of hosted or on-premise product and technical support and maintenance of our platform. We base subscription fees primarily on the products used and the number of users enrolled in our platform. We generate subscription fees pursuant to noncancelable contracts with a weighted average duration of approximately one year.

Development of Business

BIO-key was 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 pioneersBIO-key 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, 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”). 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.

On March 8, 2022, we expanded our sales and support operation into Europe, Africa and the Middle East (“EMEA”) by acquiring Swivel Secure Europe, SA. Swivel Secure Europe is a Madrid, Spain based provider of IAM solutions serving over 300 customers through a network of dozens of channel partners throughout EMEA. Swivel Secure Europe is the exclusive distributer of AuthControl® Sentry, AuthControl Enterprise and AuthControl MSP product line in Europe, Middle East, and Africa, excluding the United Kingdom. Swivel Secure maintains a direct sales force with offices in Madrid, Spain and Lisbon, Portugal.

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. PortalGuard integrates BIO-key’s Identity Bound Biometric (IBB) authentication as what-you-are authentication options that are not tied to a device or “what you have” authentication, allowing our customers to positively identify who is accessing their systems, not the device they might have handed off to another user. Our three-way IAM neutrality consists of:

seventeen MFA authentication factor choices, including our server-secured IBB via fingerprint scanners, or using a palm scan, facial selfie, or voice biometric via our MobileAuth app on a mobile phone;

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, Open ID Connect (OIDC), OAUTH, CAS and WS-Fed.

 

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These capabilities allow 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.

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 market and sell through distributors and directly to end users via Amazon, our SideSwipe®, EcoID® and SideTouch™ finger readers which can be used on any laptop, tablet or other device which contains a USB port.

We continue 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 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®.

In June 2020, we expanded our business though the acquisition of PistolStar. PistolStar has over 200 active customer subscribers to their products, which include PortalGuard multi-factor authentication (MFA), Nebula identity-as-a-service (IDaaS), PortalGuard single sign-on (SSO) and PortalGuard self-service password reset (SSPR).

PistolStar’s PortalGuard MFA offers customers flexible policy-driven choices among 15 different methods of authentication, including BIO-key biometrics, FIDO U2F/2FA tokens, WebAuthn, Windows Hello, Google Authenticator, Microsoft Authenticator, RSA SecureID, Phone Push, OTP, SMS, phone-call, and bar-code, so every user can always be securely authenticated with whichever factor is most appropriate.  For enterprises with existing IAM platforms, PortalGuard can be seamlessly integrated to add its complete MFA by supporting SAML, OpenID Connect, OAuth, WS-Federation, CAS, and Shibboleth, among other standards. 

Combining PistolStar’s proprietary authentication software with our biometric solutions creates an integrated turn-key multi-factor solution which we believe is unparalleled in the industry, and will allow BIO-key to provide a unified MFA solution that is differentiated in the market by our biometric user experience and who-you-are strong authentication.

Since April 10, 2020, we have licensed PortalGuard®, PistolStar’s authentication software, which we combine with our biometric authentication solutions offered to existing and prospective customers. We acquired PistolStar for an aggregate purchase price of $2.5 million, subject to adjustment based on PistolStar’s closing date working capital, consisting of a $250,000 deposit, cash payment of $1.75 million, and $500,000 by issuance of a 4% promissory note payable in four installments over the 12-month period following the closing, the first installment due on or before September 28, 2020 and the remaining installments due on or before the first day of each quarter thereafter (January 1, April 1, July 1) with the final installment to be paid on or before July 1, 2021. Additionally, if the Company faces an event of default because it fails to make a full, punctual payment of any amount due, which is not cured on or before the 5th day after the founder of PistolStar’s written notice to the Company, the Company will deliver to the founder, all gross cash proceeds received by the Company from the sales of the Company’s PortalGuard®, Password PowerTM and ScoochTM products until the amount of such cash proceeds delivered to the founder equals 100% of any missed and unsatisfied payment(s). For any other event of default, the founder may accelerate the indebtedness, which shall be immediately due and payable. At closing, we entered into a consulting agreement with the founder of PistolStar to provide technology development, product development, customer relations and other services to the Company for a period of one year.

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 caused 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 continue to monitor the situation closely 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 able to access inventory to fulfill orders and ship products as required.  The 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.  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.

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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.

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, we 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.

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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.

Products

Finger-based Biometric Identification and Personal Identity Verification

Our biometric identification technology improves both the accuracy and speed of authenticating or identifying individuals, by extracting unique landmarks and other characteristics from a fingerprint and comparing it to the landmarks from previously enrolled fingerprints to determine a match. The technology is 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 ID cards, 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.

We support industry standards, such as SAML, FIDO, BioAPI, and have received National Institute of Standards 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.

Our fingerprint identification algorithm, Vector Segment Technology (VST™), and WEB-key biometric service manager are the core intellectual property behind our full suite of biometric products that include:

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 customers the ability to implement and operate a biometric-centric multi-factor authentication (MFA) solutions with their Microsoft Active Directory and Azure Cloud platforms.

ID Director for SAML allows for simplified integration with many applications and identity and access management (IAM) platforms, without coding, 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 security 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.

ID Director for EPIC adds BIO-key authentication to EPIC EHR environments, simplifying strong authentication for access, as well as meeting electronic prescribing regulations for authentication.

Vector Segment Technology SDK (VST)—Our biometric software development kit (“SDK”) provides developers with the ability to incorporate our biometric capabilities into 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 Windows and Linux as well as within WEB-key on iOS and Android systems.

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Intelligent Image Indexing®—Our biometric identification solution offers both large-scale one-to-many and one-to-one user identification. This solution enables customers to perform false alias and fast entry checks, including preventing fraudulent access to systems 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.

Biometric Service Provider—We provide support for the BioAPI (a standards-based solution meeting worldwide needs) for 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.

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

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AuthControl Sentry; AuthControl Enterprise; AuthControl MSP

Swivel Secure is the exclusive distributer of AuthControl Sentry, AuthControl Enterprise, and AuthControl MSP product line in Europe, Africa and the Middle East, or EMEA, excluding the United Kingdom and Ireland. These solutions include a patented one-time-code extraction technology, helping enterprises manage the increasing data security risks posed by cloud services and bring your own device policies.

Fingerprint Readers

Our series of compact fingerprint readers, we from both commercial companies use SidePass®, SideSwipe® or EcoID scanners are plugII® to replace their Windows passwords and play compatible with Microsoftenable Windows Hello for Business without replacing or upgrading laptops or tablets.

Identity and Access Management, User Multi-Factor Authentication, Single Sign On, Privilege Entitlement and Access Control

Our products simplify the authentication process for enterprise users and consumers, while raising security levels. This allows our Q-180 Touch reader iscustomers to meet new, stronger authentication requirements and security best practices across many industries, while delivering a Micro USB compatible fingerprint reader for Android devices. The readers are currently soldsuperior 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. 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 stores,have encouraged entities to enhance 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.

Our Markets

Historically, our largest market has been identity and access management for 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 and MFA as a security and workflow solution. Millions of users have been successfully using biometrics in phones from Apple and Samsung and they welcome the same user experience to access applications without passwords or tokens.

Our acquisition of PistolStar added a large customer base in the state and local government and higher education (SLED) vertical. Colleges and universities throughout the United States use our PortalGuard MFA and SSO platform. As governments, colleges and universities continue to operate in remote environments, we have seen additional demand for our solutions.

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

Enterprise MFA for access to computer networks, and applications.

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

Government funded initiatives, including 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 Hello for Business users and Fortune 2000 companies.

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

Remote authentication challenges, including those created by the remote work shift resulting from the pandemic.

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Business Model

Our business model is focused on the following key areas:

Market

Drivers

Enterprise needs are not being met by mainstream MFA’s phone app or token approach. Supply chain breaches, ransomware attacks, and administrative access compromises highlight 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’s biometric authentication process prevents human error and human nature from undermining secure authentication, while making the end user’s access easier than ever. The current climate of broad enterprise adoption of MFA to replace passwords presents opportunities for us to 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

We continue to prioritize securing agreements with OEM customers. The history of success supporting NCR, McKesson, 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, and frees them from investing in R&D to manage an IAM infrastructure of their own. OEM customers’ ordering patterns are more predictable and OEM customers generally require lower service and support resourcing.

Highly

Regulated

Industries

Government ID projects and healthcare organizations, including hospitals, clinics, and small private practices present a strong opportunity for us. Additionally, the financial services industry, including banks and credit unions has grown substantially.

Partner

Model

In 2022, we continued to grow our Channel Alliance Partner program (CAP) focused on partnering with select value added resellers, integrators, and distributors. We partner with leading application, managed service and infrastructure vendors, such as Intelisys, Insight, NGEN, Amazon Web Services, Pathify (formerly UCROO Campus), Software House International (SHI), Virtual Graffiti, Atlassian, and ProCirrus. 

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 9% of our revenue in 2022. EcoID II® has emerged as our most popular scanner for enterprise deployments. For customers that require the highest level of security, PIV-Pro is a FIPS compliant fingerprint scanner, suitable for highly regulated industries and organizations that want a best-in-class solution.

We have grown our business through a combination of organic growth and the strategic acquisitions of PistolStar and Swivel Secure Europe. We expect to continue 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. Please see the section captioned “Risk Factors” for additional information regarding acquisition risks.

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Marketing and Distribution

We sell our products directly through our field and inside sales teams, as well as through their on-line channel, on Amazon, andindirectly through our website.network of channel partners. Through our Channel Alliance Program, we have partnered with more than 40 resellers, system integrators and other distribution partners. We are committed to continue to aggressively grow this program in 2023.

 

In 2015, Microsoft announced native support for biometrics in the Windows 8.1We partner with leading application, managed service and Windows 10 Operating platformsinfrastructure vendors, such 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, SideTouchIntelisyss, Insight, NGEN, Amazon Web Services, Pathify (formerly UCROO Campus), Software House International (SHI), Virtual Graffiti, Atlassian, and EcoID, which are plug and play (PnP) 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.ProCirrus.

 

In 2018, we continuedWe offer our software under a SaaS term license and generate annual recurring revenue (ARR) primarily by selling multi-year subscriptions to investour software. We employ a customer success team, focused on customer satisfaction 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.early remediation.

 

In 2018, we also introduced OmniPass Consumer, a secure biometric-enabled application to manage multiple passwords for online apps, services or accounts.

Authentication Transaction Security

Our authentication-transaction security technology, WEB-key, provides the ability to conduct identification and identity verification transactions in potentially unsecure environments, including the World Wide Web or in off-site cloud environments. 

WEB-key makes cloud-based biometric user-authentication viable and eliminates technology constraints on online service providers, who are otherwise dependent on handset provider hardware and software platform decisions. It extends all features and functionalities of the VST algorithm to customers looking to add an enhanced level 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. 

Intellectual Property Rights

 

We develop and own significant intellectual property and believe that our intellectual property is fundamental to our biometric and IAM product 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.

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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.Patents

 

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.

 

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.

 

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.

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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.

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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.

 

In June 2020, through our acquisition of PistolStar,On September 3, 2019, we acquiredwere issued U.S. Patent No. 8,397,07710,400,481 for “Client side authentication redirection”“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. 8,196,19310,410,040 for “Fingerprint Lock Control method and Fingerprint Lock System”, a “Methodlock design method of the control process of scanning, and server communications for retrofitting password enabled computer softwareuser profile management. With the payment of all maintenance fees, this patent will expire on July 26, 2037.

On April 20, 2021, we were issued U.S. Patent No. 10,984,085 for “Biometric Recognition for Uncontrolled Acquisition Environments”, expected to be deployed in mobile devices, the patent provides a method of continuous capture of the users biometric data before the need of the authentication or enrollment, as well as during an active session with a redirection user, authentication method.”to assure the user has not changed. With the payment of all maintenance fees, this patent will expire on March 13, 2039.

 

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”, “MobileAuth”, “PASSIVEKEY®” and “The Biometric of Things” (application pending)“PISTOLSTAR®” with the U.S. Patent & Trademark Office, as well as many foreign countries, protecting the names of our companies name and our key technology offering names.offerings.

 

Through our acquisition of PistolStar in June 2020, we acquired the following registered trademarks: “PortalGuard®”, “PASSIVEKEY®”, and “PISTOLSTAR®”. We also acquiredown the following unregistered trademarks: “PortalGuard NebulaTMNebula™”, “Password PowerTMPower™” and “ScoochTM“Scooch™”.

 

Copyrights and trade secrets

 

We take measures to ensure copyright and license protection for our software releases prior to 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.

 

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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 to address concerns caused by 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. A significant new authentication factor set will come via our MobileAuth application for users to experience multiple biometric platform issecure authentication via their mobile phone devices. Our VST and WEB-key biometric platforms are mature, stable, and widely-deployed and wewidely-deployed. 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, 20192022 and 2018,2021, we incurred $1,331,667expenses of $3,252,236 and $1,415,401,$2,355,056, respectively, onfor 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, MobileAuth, WEB-key and VST. These products are critical to support the anticipated growth in large-scale ID projects.enterprise IAM.

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Competition

 

In addition to companiesThe IAM, MFA and SSO market is characterized by multiple solution providers of solutions in either standalone or IAM suite delivery models. We believe that provide existing commonplace methodsour unique differentiator in this market is the incorporation of restricting access to facilities and logical access points such as pass cards, PIN numbers, passwords, locks and keys, therean unparalleled server-secured biometric authentication capability among our 17 authentication factors. 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),IDEMIA, Thales, NEC, Neurotechnology, and MorphoTrak.Innovatrics.

 

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 keyhardware token device that stores and protectsacts as a credential for access. FIDO officially recommends enterprises purchase two or more keys for every user, to prevent lockout in the user’s passwords. Keysevent of a lost or misplaced FIDO token. These hardware tokens alone do not meet the needs of large organizations for which key sharing and lost keys are concerns, establishing the opportunity for our Identity Bound Biometric differentiation. Where FIDO is needed, we offer the security benefitsa line of biometric technology as they can be easily lost or stolenequivalent function and replacement costs / managing the product becomes a growing expense.quality, but lower-cost FIDO 2.0 keys.

 

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 expensive, technique-sensitive,viewed as accurate, but the hardware is significantly more expensive; 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 is typically highly dependent on ambient lighting conditions, angle of view, and other factors.

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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 prospectus, 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 July 17, 2020,the date of this prospectus, we employed twenty-twofifty-two individuals consisting of fifty-one individuals on a full-time basis as follows: (i) eleventwenty in engineering, customer support, and research and development; (ii) fournine in finance and administration; and (iii) seventwenty-two in sales and marketing. We also use thehave two part time employees, one who provides engineering services, of three consultants (part-time)and one who provide engineeringprovides administrative services, and technical services. Additionally, our Hong Kong subsidiary employs two individuals on a full-time basis as follows: (i) one in research and development, and (ii) one in finance and administration. We also use the services of two factory contractors (full-time) in China.

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our employees are represented by a labor union and we believe that our relationship with our employees is good. 

 

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), andin Jiangmen, China (3,267 square feet) and in Madrid, Spain (1,504 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. Our Madrid, Spain office serves as our sales organization for Europe, the Middle East, and parts Africa.

 

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 prospectus, we are not a party to any pending lawsuit.

 

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DIRECTORS AND EXECUTIVE OFFICERS

 

The following chart sets forth certain information about each director and executive officer of our directors, executive officers and key employees.the Company.

 

NameNAME

AgeAGE

Positions HeldPOSITIONS HELD

Michael W. DePasquale

6568

Chairman of the Board of Directors and Chief Executive Officer

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

6870

Director

Robert J. Michel(a)Michel (a) (b)*

6366

Director

Thomas Gilley (c)*

60

Director

Wong Kwok Fong (Kelvin)

5659

Director and Vice-Chairman of the Board of Directors

Emmanuel Alia (Manny) (b) (c)

58

Director

Yao Jianhui

48

Director

Pieter KnookCameron E. Williams (b)

6176

Director

Fabian Shin(b)

51

Director

Emmanual Alia (Manny)

55

Director

Cecilia C. Welch

6063

Chief Financial Officer

Mira K. LaCous

5861

Chief Technology Officer

James D. Sullivan

5255

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, 65, 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. DePasqualehas held sales and marketingexecutive management positions with McGraw-Hill, and Digital Equipment Corporation.Corporation, and other companies in the software and professional services industries. 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 and as Treasurer 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.

 

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Wong Kwok Fong (Kelvin), 56,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 Co-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.

Robert J. Michel, 63,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 operating in five reportable segments in the United States, with the consumer receivables segment also operating in South America. Mr. Michel 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 Price Waterhouse in New York, the predecessor firm of pwc. 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.

Thomas E. Bush, III,68, 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. During this time, Mr. Bush is known for providingprovided 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.

 

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Pieter KnookRobert J. Michel , 61, has served as a Director of the Company since May 2, 2016. Mr. KnookApril 10, 2017. He has over 30 years of experience in mobilityaccounting and software technology in Europe, Asia and the United States.financial management experience. Since 2010, Mr. KnookSeptember, 2018, he has served on the boards of a number of private equity backed and publicly traded early stage technology companies, including Altitude Angel in Reading, Pulsant in the UK, and Coromatic in Sweden. Mr. Knook served as the DirectorChief Financial Officer of Internet Services at Vodafone GroupDaxor Corporation (Nasdaq: DXR), a medical device manufacturing company specializing in London from March 2008 through October 2010.blood volume analysis. Prior to joining Vodafone,Daxor, from November, 2017 until September 2018, Mr. KnookMichel served as the CFO of Roadway Moving, Inc., a transportation, moving and storage company located in New York City. Mr. Michel spent 1815 years at Microsoft. As President of Microsoft AsiaAsta Funding, Inc. (Nasdaq: ASFI), a diversified financial services company, including serving as its Chief Financial Officer from 1997 to 2001,2009 until 2017 where he was responsible for all financial matters and SEC reporting. Mr. Knook led the company’s effortsMichel is a certified public accountant, earned an MBA in openingTaxation from St. John’s University, and expanding Asian markets. He subsequently served as Senior Vice President of Microsoft’s mobile communication businessa BS in Business Administration from 2001 through 2008.Villanova University. We believe Mr. Knook’s qualifications to sit on the board of directors include his extensive industry experience, particularly in serving the Asian markets, which further broaden and strengthen the board’s collective qualifications, skills, and experience.

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Thomas Gilley, 60, has served as a Director of the Company since January 29, 2014. Mr. Gilley is an entrepreneur, investor and advisor for mobile and connected product (IoT) industry, digital media, and social computing. After founding his Enterprise Software IoT company in 2012 and selling it in 2016, Mr. Gilley has been making investments in early stage technology companies and serving as a growth strategy advisor 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 from 1988 to 1996. 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’sMichel’s qualifications to sit on the board of directors include his substantial experience in starting, operatingaccounting and financing technologyfinancial management for public companies which providesprovide the board with a deep knowledge of financial and SEC reporting and strengthen the salesboard’s collective qualifications, skills, and development cycles applicable to growth businesses in the technology industry.experience.

 

Fabian ShinWong Kwok Fong (Kelvin) , 51, was appointedhas served as a Director of the Company on November 20, 2017.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 currently an independent non-executive directorthe co-founder of severalChina Goldjoy Group (previously World Wide Touch Technology Holdings Limited), a company listed on The Stock Exchange of Hong Kong-listed companies including: iron ore mining company Newton Resources Ltd., apparel company Pak Tak Int’l Ltd., computer peripheral manufacturerKong. From 1997 until August, 2015, Mr. Wong served as the Chairman of China Goldjoy Group and financial services provider Huabang Financial Holdings Ltd., supermarket operator China Shun Ke Long Holdings Ltd, and plastic and metal household product designer and manufacturer Lisi Group (Holdings).  Mr. Shin hasserved 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 25 years of senior management experience in advising companies asmanufacturing, supply chain, and marketing functions in the electronics and technology industries, including establishing manufacturing plants in Hong Kong and China, and building an investment banker, financial consultant,extensive network in the electronics and independent director. During his investment banking career, Mr. Shin was Deputy Chief Executive Officer at CMB International Capital Limited and head of investment banking at a unit of the Industrial and Commercial Bank of China.technology industries. We believe Mr. Shin’sKelvin’s qualifications to sit on the board of directors include his businesssubstantial experience in the technology industry, including biometrics and financial experience, network of relationshipspayment systems, and record of accomplishment,serving the Asian markets, which strengthensbroaden and strengthen the board’s collective qualifications, skills, and experience.

 

MannyEmmanuel Alia (Manny), 55, was appointed as Director of the Company on April 3, 2020. Since 2018, Mr. Alia has over fifteen (15) years of experience in advising companies inbeen providing management consulting services as an advisor to businesses seeking market entry strategies to emerging markets such as Africa and the financial and banking industries. Since July 2019, he has served as the President of Exponential Launch Partners LLC, a corporate development, advisory and investment firm. Mr. Alia is also the Chief Executive Officer of Technology Transfer Institute, a company specializing in the delivery of technology solutions, since its establishment in 2019.Caribbean. From 2011 through 2019,to 2018, Mr. Alia served as an Executive Director at JP Morgan Bankthe 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 industriesindustry and opportunities in Africa. Prior to serving as an Executive Director at JP Morgan,During Mr. AliaAlia’s tenure with JPMorgan, he served as Headhead of WholesaleWholeSale Operations in the Receivables Operations of JP Morgan’s Corporatethe Global banking operations in the US and InvestmentCanada, head of Retail Banking in the U.S.Greater Detroit area, and Canada from 2007 through 2011.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 particularlyand connections and networking abilities in serving the African communities and markets which further broaden and strengthen the board’s collective qualifications, skills, and experience.

 

Yao JianhuiCameron E. Williams, 48, has served as a was appointed Director of the Company since December 4, 2015. Heon June 2, 2023. Mr. Williams has over 40 years of financial and executive management experience. Since 2014, he has served as the Chairmanprincipal of CEW Advisory Services, a consulting firm he founded which provides strategic planning and related services to the Boardconsumer lending industry. He previously founded CEW Solutions which provided fraud investigation services to insurance companies, law firms, and third-party administrators. From 2007 to 2009, Mr. Williams served as COO of Directors and Chief Executive Officer of the China Goldjoy Group Ltd.Asta Funding, Inc., a Company listed on The Stock Exchangepublicly traded diversified financial services company where he was responsible for the sourcing and financial analysis of Hong Kong, since August 2015. Since June 2006,distressed consumer assets. From 1998 to 2007, Mr. Yao hasWilliams served as the ChairmanPresident of the BoardPopular Financial Holdings, an affiliate of Directors of Baoneng Holding (China) Co. Ltd.Popular, Inc., a company principally engaged in property development. From July 2010 to October 2014,$36 billion banking organization. Mr. Yao was the General Manager and Chairman of the Board of Directors of Baocheng Investment Co. Ltd., a company listed on Shanghai Stock Exchange principally engagedWilliams began his career in the manufacturing of cables as well as the hotel and trading business. Mr. Yao has held seniorbanking industry holding financial management positions with Security Pacific Financial Services, BankAmerica Financial, Inc., and Security Pacific Financial Services System, Inc. Mr. Williams earned a number of enterprisesBachelor’s in Accounting and listed companies acrosscompleted graduate coursework at San Diego State University. We believe Mr. Williams’ extensive financial and executive management experience in a wide rangevariety of industries including food, construction materials, real estate, commerce, agriculture and forestry, logistics, technology and finance. Mr. Yao’s extensive industry experience, particularly in serving the Asian markets, further broadens and strengthens the Board’s collective qualifications, skills, and experience.

 

4445

 

Non-director Executive Officers

 

Cecilia C. Welchhas 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, defenseMs. Welch has held senior financial management positions in various industries, including software 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.manufacturing. Ms. Welch has a Bachelor’s degree in Accounting from Franklin Pierce University.

 

Mira K. LacousLaCous has served as Chief Technology Officer of the Company since March 13, 2014. Prior to her appointment as Chief Technology Officer, she served2014, as Senior Vice President of Technology & Development since 2012, and as our Vice President of Technology and Development since 2000. Ms. LaCous has over 3035 years of product/project management, solution architecture, software development, team leadership and customer relations experience, with a background that includes successfully bringing numerous innovative products and technologies to market, including automated voice response systems, automated building control systems, software piracy protection, intranetinternet training materials and testing, WYSIWYG page layout and design software, image scanning / recognition software and systems, biometric security systems and algorithms, automated national ID systems using biometrics, and mobile applications with secure frameworks. Ms. LaCous has been a speaker at multiple events/conferences and has worked with teams around the globe bringing biometric algorithms.technology deployments to life. Ms. LaCous is also the author of sixeight (8) US patented technologies, multiple international patents and lead the engineering team in developing other patent pending solutions.patents and inventive technologies. Ms. LaCous hasearned a Bachelor’s in Computer Science, with mathematics and physics from North Dakota State University.

Significant Employee

 

James D. Sullivan ishas served as BIO-key’s Senior Vice President of Strategy and Compliance and BIO-key’s Chief Legal Officer. Mr. Sullivan servedOfficer since February 2020, as Senior Vice President of Strategy and Business Development the Company from April 2012 through December 2018, and athe dual role as Senior Vice President of Global Sales from August 2015 through December of 2016. Mr. Sullivan is a recognized expert in privacy, cybersecurity, and biometric authentication cyberlawfor workforce and privacy for consumer and mobile applications. During over 17his twenty 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 laudewith Honors from Georgia State University College of Law, is a member of the Georgia Bar, and enrolled to practice before the IRS. Mr. Sullivan hasearned 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), Emmanuel Alia and Cameron E. Williams, who each 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.

46

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.

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, 2022, all Section 16(a) filing requirements applicable to our officers, directors and ten percent (10%) stockholders were satisfied in a timely fashion, except for four late Form 4 filings consisting of one late Form 4 filing by Mr. Michel for payment for a BOD committee meeting, and one late filing for each of Mr. Sullivan, Mr. DePasquale and Ms. LaCous reporting shares acquired under the BIO-key International, Inc. 2021 Employee Stock Purchase Plan.

47

EXECUTIVE COMPENSATION

The following table sets forth a summary of the compensation paid to or accrued by our chief executive officer and the two most highly compensated executive officers other than our chief executive officer, for the fiscal years ended December 31, 2022 and 2021:

SUMMARY COMPENSATION TABLE

Name and Principal

Position

Year

 

Salary

($)

  

Stock

Awards

($) (1)

  

All Other

Compensation

($) (2)

 

Total

($)

 
                 

Michael W. DePasquale

2022

  295,833   75,250   997  372,080 

Chief Executive Officer

2021

  275,000   -   1,944  276,944 
                 

Mira K. LaCous

2022

  223,000   16,125   1,301  240,426 

Chief Technology Officer

2021

  216,333   -   3,092  219,425 
                 

James D. Sullivan

2022

  233,333   64,500   134,157(3) 431,990 

Chief Legal Officer

2021

  225,000   -   10,241(4) 235,241 

(1)

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.

(2)

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

(3)

Consists of $132,826 of sales commissions and $1,331 of life insurance premiums paid by the Company.

(4)

Consists of $8,987 of sales commissions and $1,254 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. Effective January 1, 2021, we 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. Effective January 1, 2022, we increased the base compensation of Mr. DePasquale, Mr. Sullivan and Ms. LaCous.

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 the achievement of specific business goals by placing a higher proportion of annual cash compensation at risk, thereby aligning executive opportunity with the interests of stockholders.

48

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. We did not issue any stock options or restricted stock awards to our named executive officers during 2021. In 2022, we issued restricted stock awards to each of our named executive officers in recognition of the revenue growth of the Company in 2021 and successful integration of Portal Guard.

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. Mr. DePasquale’s annual base salary is 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. Mr. Sullivan’s annual base salary is subject to adjustment by the compensation committee. 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. Furthermore, option agreements and restricted stock award agreements contain change of control provisions as described under the caption “Change in Control Provisions” below.

49

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

The following table sets forth for each named executive officer, information regarding outstanding equity awards as at December 31, 2022. 

  

Option Awards

 

Stock Awards

 

Name

 

Number of

securities

underlying

unexercised

options

exercisable

(#)

  

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

  31,250   21.20 

3/16/2024

  36,375   21,461 
   4,167   15.68 

3/23/2025

        
   4,167   9.44 

3/21/2026

        
                  

Mira K. LaCous

  12,500   21.20 

3/16/2024

  8,875   5,236 
   1,563   15.68 

3/23/2025

        
   1,563   9.44 

3/21/2026

        
                  

James D. Sullivan

  12,500   21.20 

3/16/2024

  31,375   18,511 
   3,125   15.68 

3/23/2025

        
   3,125   9.44 

3/21/2026

        

(1)

Calculated based on the closing market price of the Company’s common stock on December 31, 2022 of $0.59 per share.

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.

50

Change in Control Provisions

Our 2015 Equity Incentive Plan (the “2015 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 2015 Plan 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 2015 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 2015 Plan contain change in control provisions substantially similar to those contained in the 2015 Plan.

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.

51

DIRECTOR COMPENSATION

The following table sets forth for each director, information regarding their compensation for the year ended December 31, 2022:

Name (1)

 

Stock Awards

($) (2)

  

Total

($)

 

Thomas E. Bush, III (3)

  14,007   14,007 

Thomas Gilley (3)(4)

  14,007   14,007 

Pieter Knook (3)(5)

  16,008   16,008 

Robert J. Michel (3)

  16,008   16,008 

Emmanuel Alia (6)

  16,008   16,008 

(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, 2022, Messrs. Bush, Gilley, Knook and Michel each held options to purchase 2,064 shares of common stock and each held 5,000 shares restricted common stock.

(4)

Mr. Gilley resigned from the Board of Directors on February 9, 2023.

(5)

Mr. Knook resigned from the Board of Directors effective May 13, 2023.

(6)

At December 31, 2022, Mr. Alia held options to purchase 313 shares of common stock and held 5,000 shares restricted common stock.

Narrative Disclosure to Director Compensation Table

During 2022, we had a policy to pay each non-employee director $3,000 per board meeting and $1,000 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 2022. 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.

52

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth, as of December 31, 2022, information with respect to securities authorized for issuance under equity compensation plans.

On January 27, 2016, the stockholders approved the 2015 Equity Incentive Plan, which was amended on June 13, 2019 by vote of stockholders, and amended and restated by vote of stockholders on June 18, 2021 (as amended and restated, the “2015 Plan”). The 2015 Plan reserves 789,000 shares of common stock for issuance of options, restricted stock, and other equity based awards to employees, officers, directors, and consultants of the Company. Options are issued at exercise prices which may not be below 100-110% of fair market value and have terms not to 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.

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. The terms of these outstanding options are substantially similar to the provisions of the 2015 Plan and options issued thereunder. In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately.

On June 18, 2021, the stockholders approved the 2021 Employee Stock Purchase Plan (“ESPP”). Under the terms of this plan, 789,000 shares of common stock are reserved for issuance and sale to employees and officers of the Company at a purchase price equal to 85% of the lower of the closing price of our common stock as reported on the Nasdaq Capital Market on the first day or the last day of the offering period. Eligible employees are granted an option to purchase shares of common stock funded by payroll deductions. The Board may suspend or terminate the plan at any time, otherwise the plan expires June 17, 2031. 

Plan Category

 

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

  90,808(1) (2)  10.79   989,032 (3)

Equity compensation plans not approved by security holders

  112,188   $21.18    

Total

  202,996 (1)(2) $16.53   989,032 (3)

(1)

Consists of shares of common stock issuable upon the exercise of options outstanding as of December 31, 2022 under the 2015 Plan.

(2)

Excludes employee stock purchase rights accruing under the ESPP.

(3)

Amount includes 280,065 shares of common stock available as of December 31, 2022 for future issuance under the 2015 Plan and 708,967 shares of common stock available as of December 31, 2022 for future issuance under the ESPP.

53

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of June 9, 2023, information with respect to the securities holdings of all 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 our common stock by all of our current executive officers and directors, both individually and as a group.

The beneficial owners and amount of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as awarded, and, in accordance therewith, include all shares of our common stock that may be acquired by such beneficial owners within 60 days of June 9, 2023 upon the exercise or conversion of any options, warrants or other convertible securities. This table has been prepared based on 9,234,833 shares of common stock outstanding on June 9, 2023. 

Name and Address of Beneficial Owner (1)

 

Amount and Nature

of Beneficial

Ownership

  

Percentage

of

Class

 
         

Directors and Executive Officers

        
         

Michael W. DePasquale

  128,227(2)   1.4

%

Cecilia C. Welch

  69,375 (3)  * 

Mira K. LaCous

  40,001 (4)  * 

James D. Sullivan

  110,500 (5)  1.2

%

Robert J. Michel

  32,760 (6)  * 

Thomas E. Bush, III

  29,869 (7)  * 

Emmanuel Alia

  27,360 (8)  * 

Wong Kwok Fong (Kelvin)

  589,464 (9)  6.4

%

Cameron E. Williams

  0   * 
All officers and directors as a group (nine (9) persons)  1,047,472   11.3

%

         

Beneficial Owners

        
         

Lind Global Micro Fund, LP (10)

  833,125   9.0

%

AJB Capital Investments LLC (11)

  900,000   9.5

%

* 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 39,584 shares issuable on exercise of options and 39,125 shares of restricted stock of which 24,709 remain subject to vesting.

(3)

Includes 22,500 of shares issuable upon exercise of options and 34,125 shares of restricted stock of which 21,375 remain subject to vesting.

(4)

Includes 15,626 of shares issuable upon exercise of options and 11,625 shares of restricted stock of which 6,375 remain subject to vesting.

(5)

Includes 18,750 of shares issuable on exercise of options and 34,125 shares of restricted stock of which 21,375 remain subject to vesting.

(6)

Includes 1,960 of shares issuable on exercise of options and 5,000 shares of restricted stock of which 3,334 remain subject to vesting. Does not include 104 shares issuable upon exercise of options subject to vesting.

(7)

Includes 1,960 of shares issuable on exercise of options and 5,000 shares of restricted stock of which 3,334 remain subject to vesting. Does not include 104 shares issuable upon exercise of options subject to vesting.

(8)

Includes 209 of shares issuable on exercise of options and 5,000 shares of restricted stock of which 3,334 remain subject to vesting. Does not include 104 shares issuable upon exercise of options subject to vesting.

(9)

Includes 27,084 of shares issuable on exercise of options and 9,125 shares of restricted stock of which 4,709 remain subject to vesting. The address of Kelvin is Flat C, 27/F, Block 5, Grand Pacific Views, Siu Lam, Hong Kong N7.

(10)

Consists of 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.

(11)

Includes 200,000 shares issuable upon exercise of warrants. The address of AJB Capital Investments LLC is 4700 Sheridan Street, Suite J, Hollywood, FL 33021.

54

CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH RELATED PERSONS

Standstill Agreement with Principal Stockholder

Pursuant to separate securities purchase agreements dated October 29, 2015 and November 11, 2015 with Wong Kwok Fong (Kelvin), we issued and sold shares of series A-1 stock to Kelvin which were subsequently converted into shares of our common stock. The forgoing agreements contain a standstill provision (the “Standstill”) which prohibits Kelvin 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.

Director IndependenceTerm of Office

 

As required underOur directors are elected at the NASDAQ Marketplace Rules, a majorityannual meeting of stockholders and hold office until the annual meeting of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determinedstockholders 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 of directors. Our board considered certain relationships between our directorsBoard and us when determining each director’s status as an “independent director” under Rule 5605(a)(2) ofhold office until the NASDAQ Marketplace Rules. Based upon such definition and SEC regulations, we have determined that Robert Michel, Pieter Knook, Thomas Bush, III, Thomas Gilley and Fabian Shin are “independent” under NASDAQ standards.

Board Leadership Structure and Role in Risk Oversight

We do not have a policy regarding the separation of the roles of Chief Executive Officer and Chairmanannual meeting of the Board as our board believes it is in the best interests of the Companynext succeeding his or her election, and until his or her successor shall have been duly elected and qualified, subject to make that determination based on the position and direction of the Company and the membership of the board. The board has determined that having our Chief Executive Officer serve as Chairman is in the best interest of our stockholders at this time. This structure makes the best use of the Chief Executive Officer’s extensive knowledge of the Company and our industry, as well as fostering greater communication between our management and the board.earlier termination by his or her death, resignation or removal.

 

Our corporate governance guidelines provide that the board of directors is responsible for reviewing the process for assessing the major risks facing us and the options for their mitigation. This responsibility is largely satisfied by our audit committee, which is responsible for reviewing and discussing with management and our independent registered public accounting firm our major risk exposures and the policies management has implemented to monitor such exposures, including our financial risk exposures and risk management policies.

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Committees of the Board of DirectorsDelinquent Section 16(a) Reports

 

Audit Committee

Our audit committee is comprisedReports of Robert J. Michel (Chair), Fabian Shinall transactions in our common stock by officers, directors and Pieter Knook, allten percent (10%) stockholders are required to be filed with the SEC pursuant to Section 16(a) 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 boardBased solely on our review of directors in its oversightcopies of the integrityreports received, or representations 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 determinedsuch reporting persons, we believe 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. The audit committee held four meetings during the year ended December 31, 2019.2022, all Section 16(a) filing requirements applicable to our officers, directors and ten percent (10%) stockholders were satisfied in a timely fashion, except for four late Form 4 filings consisting of one late Form 4 filing by Mr. Michel for payment for a BOD committee meeting, and one late filing for each of Mr. Sullivan, Mr. DePasquale and Ms. LaCous reporting shares acquired under the BIO-key International, Inc. 2021 Employee Stock Purchase Plan.

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EXECUTIVE COMPENSATION

The following table sets forth a summary of the compensation paid to or accrued by our chief executive officer and the two most highly compensated executive officers other than our chief executive officer, for the fiscal years ended December 31, 2022 and 2021:

SUMMARY COMPENSATION TABLE

Name and Principal

Position

Year

 

Salary

($)

  

Stock

Awards

($) (1)

  

All Other

Compensation

($) (2)

 

Total

($)

 
                 

Michael W. DePasquale

2022

  295,833   75,250   997  372,080 

Chief Executive Officer

2021

  275,000   -   1,944  276,944 
                 

Mira K. LaCous

2022

  223,000   16,125   1,301  240,426 

Chief Technology Officer

2021

  216,333   -   3,092  219,425 
                 

James D. Sullivan

2022

  233,333   64,500   134,157(3) 431,990 

Chief Legal Officer

2021

  225,000   -   10,241(4) 235,241 

(1)

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.

(2)

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

(3)

Consists of $132,826 of sales commissions and $1,331 of life insurance premiums paid by the Company.

(4)

Consists of $8,987 of sales commissions and $1,254 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. Effective January 1, 2021, we 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. Effective January 1, 2022, we increased the base compensation of Mr. DePasquale, Mr. Sullivan and Ms. LaCous.

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 the achievement of specific business goals by placing a higher proportion of annual cash compensation at risk, thereby aligning executive opportunity with the interests of stockholders.

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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. We did not issue any stock options or restricted stock awards to our named executive officers during 2021. In 2022, we issued restricted stock awards to each of our named executive officers in recognition of the revenue growth of the Company in 2021 and successful integration of Portal Guard.

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.

 

Compensation CommitteeEmployment 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. Mr. DePasquale’s annual base salary is 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. Mr. Sullivan’s annual base salary is subject to adjustment by the compensation committee. 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. Furthermore, option agreements and restricted stock award agreements contain change of control provisions as described under the caption “Change in Control Provisions” below.

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

The following table sets forth for each named executive officer, information regarding outstanding equity awards as at December 31, 2022. 

  

Option Awards

 

Stock Awards

 

Name

 

Number of

securities

underlying

unexercised

options

exercisable

(#)

  

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

  31,250   21.20 

3/16/2024

  36,375   21,461 
   4,167   15.68 

3/23/2025

        
   4,167   9.44 

3/21/2026

        
                  

Mira K. LaCous

  12,500   21.20 

3/16/2024

  8,875   5,236 
   1,563   15.68 

3/23/2025

        
   1,563   9.44 

3/21/2026

        
                  

James D. Sullivan

  12,500   21.20 

3/16/2024

  31,375   18,511 
   3,125   15.68 

3/23/2025

        
   3,125   9.44 

3/21/2026

        

(1)

Calculated based on the closing market price of the Company’s common stock on December 31, 2022 of $0.59 per share.

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 compensation committee2015 Equity Incentive Plan (the “2015 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 compriseddefined in the 2015 Plan to include (i) a sale or transfer of Thomas Bush, III (Chair)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 Robert Michel, bothafter which the prior stockholders of whom meet the independence standards established by NASDAQ andCompany 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. The compensation committee’s duties include overseeing our overall compensation philosophy, policiesIn the event of a “Change In Control” the 2015 Plan provides for the immediate vesting of all options issued thereunder and programs. This includes reviewing and analyzing the design and functiontermination of our various compensation components, establishing salaries, incentives and other forms of compensation forall forfeiture provisions applicable to restricted stock award issued thereunder. Options issued to executive 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 subcommitteeoutside of the compensation committee.2015 Plan contain change in control provisions substantially similar to those contained in the 2015 Plan.

 

Our compensation committee operates underemployment agreement with Mr. DePasquale contains a written charterchange in control provision that is reviewed annually. 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.

51

DIRECTOR COMPENSATION

The charter is available on our website at www.bio-key.com. Thefollowing table sets forth for each director, information regarding their compensation committee held one meeting duringfor the year ended December 31, 2019.2022:

Name (1)

 

Stock Awards

($) (2)

  

Total

($)

 

Thomas E. Bush, III (3)

  14,007   14,007 

Thomas Gilley (3)(4)

  14,007   14,007 

Pieter Knook (3)(5)

  16,008   16,008 

Robert J. Michel (3)

  16,008   16,008 

Emmanuel Alia (6)

  16,008   16,008 

(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, 2022, Messrs. Bush, Gilley, Knook and Michel each held options to purchase 2,064 shares of common stock and each held 5,000 shares restricted common stock.

(4)

Mr. Gilley resigned from the Board of Directors on February 9, 2023.

(5)

Mr. Knook resigned from the Board of Directors effective May 13, 2023.

(6)

At December 31, 2022, Mr. Alia held options to purchase 313 shares of common stock and held 5,000 shares restricted common stock.

Narrative Disclosure to Director Compensation Table

 

NominatingDuring 2022, we had a policy to pay each non-employee director $3,000 per board meeting and Corporate Governance Committee

Our nominating$1,000 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 corporate governance committee is comprisedpayments for the last meeting of Thomas Gilley (Chair) and Thomas Bush, III, boththe year are paid in cash or, at the option of whom meet the independence standards establisheddirector, in shares of common stock. All of our directors elected to receive payment in common stock for the last board meeting in 2022. All directors will be indemnified by NASDAQ andus for actions associated with being a director to the fullest extent permitted under the Exchange Act. The nominating and corporate governance committee is responsibleDelaware law. We reimburse each of our non-employee directors for making recommendations totheir reasonable expenses incurred in connection with attending meetings of the board of directors regarding candidatesand related committees.

52

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth, as of December 31, 2022, information with respect to securities authorized for directorshipsissuance under equity compensation plans.

On January 27, 2016, the stockholders approved the 2015 Equity Incentive Plan, which was amended on June 13, 2019 by vote of stockholders, and amended and restated by vote of stockholders on June 18, 2021 (as amended and restated, the size“2015 Plan”). The 2015 Plan reserves 789,000 shares of common stock for issuance of options, restricted stock, and compositionother equity based awards to employees, officers, directors, and consultants of the board. In addition,Company. Options are issued at exercise prices which may not be below 100-110% of fair market value and have terms not to exceed ten years. Options issued under the nominating and corporate governance committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations2015 Plan vest pursuant to the board concerning corporate governance matters.

Our nominating and corporate governance committee operatesterms of stock option agreements with the recipients. In the event of a change in control, certain stock awards issued under athis plan may be subject to additional acceleration of vesting as may be provided in the participants’ written charter that is reviewed annually.agreement. The charter is available on our website at www.bio-key.com. The nominating and corporate governance committee held one meeting during the year ended2015 Plan expires in December 31, 2019.

Considerations in Evaluating Director Nominees2025.

 

In selecting nominees for director, without regardaddition 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. The terms of these outstanding options are substantially similar to the sourceprovisions of the recommendation, our nominating2015 Plan and corporate governance uses a varietyoptions issued thereunder. In the event of methods for identifying and evaluating director nominees. In its evaluation of director candidates, our nominating and corporate governance committee may consider, among other things, the current size and composition of our board of directors, the needs of our board of directors, and the respective committees of our board of directors. Somechange in control, as defined, certain of the qualifications that our nominatingnon-plan options outstanding vest immediately.

On June 18, 2021, the stockholders approved the 2021 Employee Stock Purchase Plan (“ESPP”). Under the terms of this plan, 789,000 shares of common stock are reserved for issuance and corporate governance committee may consider include, without limitation, issuessale to employees and officers of character, integrity, judgment, diversitythe Company at a purchase price equal to 85% of experience, independence, areathe lower of expertise, corporate experience, lengththe closing price of service, leadership skills, potential conflicts of interest, and other commitments. Director candidates must have sufficient time available in the judgment of our nominating and corporate governance committee to perform all board of director and committee responsibilities. In addition, our nominating and corporate governance committee considers all applicable statutory and regulatory requirements and the requirements of any exchange upon which our common stock is listedas reported on the Nasdaq Capital Market on the first day or the last day of the offering period. Eligible employees are granted an option to which itpurchase shares of common stock funded by payroll deductions. The Board may apply insuspend or terminate the foreseeable future.plan at any time, otherwise the plan expires June 17, 2031. 

Plan Category

 

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

  90,808(1) (2)  10.79   989,032 (3)

Equity compensation plans not approved by security holders

  112,188   $21.18    

Total

  202,996 (1)(2) $16.53   989,032 (3)

(1)

Consists of shares of common stock issuable upon the exercise of options outstanding as of December 31, 2022 under the 2015 Plan.

(2)

Excludes employee stock purchase rights accruing under the ESPP.

(3)

Amount includes 280,065 shares of common stock available as of December 31, 2022 for future issuance under the 2015 Plan and 708,967 shares of common stock available as of December 31, 2022 for future issuance under the ESPP.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Although our boardThe following table sets forth, as of directors does not maintain a specific policyJune 9, 2023, information with respect to board diversity,the securities holdings of all persons that we, believe that our board of directors should be a diverse body,pursuant to filings with the SEC and our nominatingstock 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 our common stock by all of our current executive officers and corporate governance committee considersdirectors, both individually and as a broad rangegroup.

The beneficial owners and amount of backgroundssecurities beneficially owned have been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as awarded, and, experiences in reviewing candidates for nomination toaccordance therewith, include all shares of our common stock that may be acquired by such beneficial owners within 60 days of June 9, 2023 upon the boardexercise or conversion of directors. In making determinations regarding nominationsany options, warrants or other convertible securities. This table has been prepared based on 9,234,833 shares of directors, our nominating and corporate governance committee may take into account the benefits of diverse viewpoints. Our nominating and corporate governance committee also considers these and other factors as it oversees the annual board of director and committee evaluations. After completing its review and evaluation of director candidates, our nominating and corporate governance committee recommends to our full board of directors the director nominees for selection.common stock outstanding on June 9, 2023. 

Name and Address of Beneficial Owner (1)

 

Amount and Nature

of Beneficial

Ownership

  

Percentage

of

Class

 
         

Directors and Executive Officers

        
         

Michael W. DePasquale

  128,227(2)   1.4

%

Cecilia C. Welch

  69,375 (3)  * 

Mira K. LaCous

  40,001 (4)  * 

James D. Sullivan

  110,500 (5)  1.2

%

Robert J. Michel

  32,760 (6)  * 

Thomas E. Bush, III

  29,869 (7)  * 

Emmanuel Alia

  27,360 (8)  * 

Wong Kwok Fong (Kelvin)

  589,464 (9)  6.4

%

Cameron E. Williams

  0   * 
All officers and directors as a group (nine (9) persons)  1,047,472   11.3

%

         

Beneficial Owners

        
         

Lind Global Micro Fund, LP (10)

  833,125   9.0

%

AJB Capital Investments LLC (11)

  900,000   9.5

%

* 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 39,584 shares issuable on exercise of options and 39,125 shares of restricted stock of which 24,709 remain subject to vesting.

(3)

Includes 22,500 of shares issuable upon exercise of options and 34,125 shares of restricted stock of which 21,375 remain subject to vesting.

(4)

Includes 15,626 of shares issuable upon exercise of options and 11,625 shares of restricted stock of which 6,375 remain subject to vesting.

(5)

Includes 18,750 of shares issuable on exercise of options and 34,125 shares of restricted stock of which 21,375 remain subject to vesting.

(6)

Includes 1,960 of shares issuable on exercise of options and 5,000 shares of restricted stock of which 3,334 remain subject to vesting. Does not include 104 shares issuable upon exercise of options subject to vesting.

(7)

Includes 1,960 of shares issuable on exercise of options and 5,000 shares of restricted stock of which 3,334 remain subject to vesting. Does not include 104 shares issuable upon exercise of options subject to vesting.

(8)

Includes 209 of shares issuable on exercise of options and 5,000 shares of restricted stock of which 3,334 remain subject to vesting. Does not include 104 shares issuable upon exercise of options subject to vesting.

(9)

Includes 27,084 of shares issuable on exercise of options and 9,125 shares of restricted stock of which 4,709 remain subject to vesting. The address of Kelvin is Flat C, 27/F, Block 5, Grand Pacific Views, Siu Lam, Hong Kong N7.

(10)

Consists of 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.

(11)

Includes 200,000 shares issuable upon exercise of warrants. The address of AJB Capital Investments LLC is 4700 Sheridan Street, Suite J, Hollywood, FL 33021.

 

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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, or 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.

Involvement in Certain Legal Proceedings

To the best of our knowledge, none of our directors or executive officers has, during the past ten years:

been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;

been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;

been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Except as set forth in our discussion below in “CERTAINCERTAIN RELATIONSHIPS AND TRANSACTIONS WITH RELATED PERSONS” none

Standstill Agreement with Principal Stockholder

Pursuant to separate securities purchase agreements dated October 29, 2015 and November 11, 2015 with Wong Kwok Fong (Kelvin), we issued and sold shares of series A-1 stock to Kelvin which were subsequently converted into shares of our directorscommon stock. The forgoing agreements contain a standstill provision (the “Standstill”) which prohibits Kelvin either alone or executive officers has been involved intogether with any transactions with usother person, from acquiring additional shares of our common stock or any of our directors, executive officers, affiliatesassets, soliciting proxies, or associates which are required to be disclosed pursuant toseeking representation on our board of directors. Kelvin is the rules and regulationsCo-Chairman of the SEC.board of directors and an executive officer.

 

47

Term of Office

 

Our directors are appointedelected at the annual meeting of shareholdersstockholders and hold office until the annual meeting of the shareholdersstockholders 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) Beneficial Ownership Reporting ComplianceReports

 

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, 2019,2022, all Section 16(a) filing requirements applicable to our officers, directors and ten percent (10%) stockholders were satisfied in a timely fashion.fashion, except for four late Form 4 filings consisting of one late Form 4 filing by Mr. Michel for payment for a BOD committee meeting, and one late filing for each of Mr. Sullivan, Mr. DePasquale and Ms. LaCous reporting shares acquired under the BIO-key International, Inc. 2021 Employee Stock Purchase Plan.

 

47

EXECUTIVE COMPENSATION

 

The following table sets forth a summary of the compensation paid to or accrued by our chief executive officer and the two most highly compensated executive officers other than our chief executive officer, for the fiscal years ended December 31, 20192022 and 2018:2021:

 

Summary Compensation TableSummary Compensation TableSUMMARY COMPENSATION TABLE

 

Name

 

Year

 

Salary

($)

 

 

Bonus $

 

 

Option

Awards

($) (1)

 

 

All Other

Compensation

($)(2)

 

 

Total ($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael W. DePasquale

 

2019

 

275,000

 

 

-

 

 

34,510

 

 

 

1,127

 

 

310,637

 

Chief Executive Officer

 

2018

 

275,000

 

 

-

 

 

57,362

 

 

 

739

 

 

333,101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cecilia Welch

 

2019

 

175,000

 

 

-

 

 

25,883

 

 

 

1,194

 

 

202,077

 

Chief Financial Officer

 

2018

 

175,000

 

 

-

 

 

43,020

 

 

 

614

 

 

218,634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mira LaCous

 

2019

 

213,075

 

 

-

 

 

12,941

 

 

 

1,401

 

 

227,417

 

Chief Technology Officer

 

2018

 

213,000

 

 

-

 

 

21,510

 

 

 

739

 

 

235,249

 


Name and Principal

Position

Year

 

Salary

($)

  

Stock

Awards

($) (1)

  

All Other

Compensation

($) (2)

 

Total

($)

 
                 

Michael W. DePasquale

2022

  295,833   75,250   997  372,080 

Chief Executive Officer

2021

  275,000   -   1,944  276,944 
                 

Mira K. LaCous

2022

  223,000   16,125   1,301  240,426 

Chief Technology Officer

2021

  216,333   -   3,092  219,425 
                 

James D. Sullivan

2022

  233,333   64,500   134,157(3) 431,990 

Chief Legal Officer

2021

  225,000   -   10,241(4) 235,241 

 

(1)

The aggregate grant date fair value of the option awards was estimated usingrestricted shares is calculated by the Black-Scholes option pricing model, withmultiplying the assumptions listed in Note A toquantity of shares issued by the Company’s financial statements. The amount shown in this column representsclosing trading price of the grantshares on the date fair valueof issuance calculated under FASB ASC 718.

(2)

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

(3)

Consists of $132,826 of sales commissions and $1,331 of life insurance premiums paid by the Company.

(4)

Consists of $8,987 of sales commissions and $1,254 of life insurance premiums paid by the Company.

48

 

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. Through 2017, theThe base salary of our CEO has not been increased since 2005. In light of this fact and in order to motivate and retain these key officers, the compensation committee2018. Effective January 1, 2021, we increased the base salariessalary of our CEOMr. 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. Effective January 1, 2022, we increased the base compensation of Mr. DePasquale, Mr. Sullivan and CFO to $275,000 and $175,000, respectively, in 2018.Ms. LaCous.

 

Performance-based bonuses are generallyhave 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 the achievement of specific business goals by placing a higher proportion of annual cash compensation at risk, thereby aligning executive opportunity with the interests of stockholders.

 

For 2018, we adopted an incentive bonus plan for our named executive officers, our other executive officers, and certain key employees. The plan provided for the payment of a cash bonus equal to 10% of our EBITDA in the event that our 2018 revenue exceeded $11,900,000, 12% of our EBITDA in the event that our 2018 revenue exceeded $15,800,000, and 15% of our EBITDA in the event that our 2018 revenue exceeded $18,900,000. As these targets were not achieved, no bonuses were paid under this plan.

We did not adopt an incentive bonus plan in 2019. Based on the performance of the Company in 2019, we did not award any discretionary incentive compensation to our named executive officers in 2019.

48

 

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. We did not issue any stock options or restricted stock awards to our named executive officers during 2021. In March 2018,2022, we issued optionsrestricted stock awards to Mr. DePasquale to purchase 33,334 shares of common stock, to Ms. Welch to purchase 25,000 shares of common stock, and to Ms. LaCous to purchase 12,500 shares of common stock. The foregoing options have an exercise price of $1.96 per share, the last sales priceeach of our common stock onnamed executive officers in recognition of the daterevenue growth of grant, have a termthe Company in 2021 and successful integration of seven years, and vest in three equal annual installments commencing March 23, 2019. In March 2019, we issued options to Mr. DePasquale to purchase 33,334 shares of common stock, to Ms. Welch to purchase 25,000 shares of common stock, and to Ms. LaCous to purchase 12,500 shares of common stock. The foregoing options have an exercise price of $1.18 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.Portal Guard.

 

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.

 

49

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. Under the agreement, Mr. DePasquale’s initial annual base salary was $250,000,is 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 yearone-year period thereafter. This agreement also contains a number of termination and change in control provisions as described under the captions Termination Arrangements”ArrangementsandChange in Control Arrangements below.

 

On May 15, 2013,April 5, 2017, we entered into an employment agreement with Cecilia Welch to serve as our Chief Financial Officer until May 2014.James Sullivan. 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 ofCompany upon at least two months prior written notice which is treated as termination without cause. Mr. Sullivan’s annual base salary is subject to adjustment by the agreement.compensation committee. The employment agreement contains standard and customary confidentiality, technical invention provisions as well as a covenant not to compete,non-competition and non-solicitation covenants which prohibits Ms. Welchprohibit Mr. Sullivan from doing business with any current or prospective customer of the Company or engaging in aany business competitive with that of the Company during the term of heror his employment and for the one yearone-year period thereafter. ThisThe agreement also contains a number of termination provisions as described under the caption “Termination ArrangementsAgreements” 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 monthone-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 yearone-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 in a manner to be determined in the sole discretion of the board.adjusted. Furthermore, these option agreements and restricted stock award agreements contain change of control provisions as described under the caption “Change in Control Provisions” below.

 

5049

 

Outstanding Equity Awards at December 31, 2019OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

 

The following table sets forth for each named executive officer, information regarding outstanding equity awards as at December 31, 2019.2022. 

 

 

 

Option Awards

 

 

Name

 

Number of securities

underlying unexercised

options exercisable (#)

 

 

Number of securities

underlying unexercised

options unexercisable (#)

 

 

Option

Exercise Price ($)

 

Option

expiration date

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael W. DePasquale

 

41,667

 

 

 

 

4.18

 

      3/27/2020

 

 

 

20,834

 

 

 

 

4.92

 

3/13/2021

 

 

 

20,834

 

 

 

 

2.16

 

8/13/2022

 

 

 

166,666

 

 

83,334(1)

 

 

2.65

 

3/16/2024

 

 

 

11,111

 

 

22,223 (2)

 

 

1.96

 

3/23/2025

 

 

 

-

 

 

33,334 (3)

 

 

1.18

 

3/21/2026

 

 

 

 

 

 

 

 

 

 

 

 

 

Cecilia Welch

 

6,250

 

 

 

 

4.18

 

       3/27/2020

 

 

 

12,500

 

 

 

 

4.92

 

3/13/2021

 

 

 

8,334

 

 

 

 

2.16

 

8/13/2022

 

 

 

86,666

 

 

43,334 (1)

 

 

2.65

 

3/16/2024

 

 

 

8,333

 

 

16,667 (2)

 

 

1.96

 

3/23/2025

 

 

 

-

 

 

25,000 (3)

 

 

1.18

 

3/21/2026

 

 

 

 

 

 

 

 

 

 

 

 

 

Mira LaCous

 

5,209

 

 

 

 

4.18

 

3/27/2020

 

 

 

12,500

 

 

 

 

4.92

 

3/13/2021

 

 

 

8,334

 

 

 

 

2.16

 

8/13/2022

 

 

 

66,666

 

 

33,334 (1)

 

 

2.65

 

3/16/2024

 

 

 

4,166

 

 

8,334 (2)

 

 

1.96

 

3/23/2025

 

 

 

-

 

 

12,500 (3)

 

 

1.18

 

3/21/2026

 

 


  

Option Awards

 

Stock Awards

 

Name

 

Number of

securities

underlying

unexercised

options

exercisable

(#)

  

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

  31,250   21.20 

3/16/2024

  36,375   21,461 
   4,167   15.68 

3/23/2025

        
   4,167   9.44 

3/21/2026

        
                  

Mira K. LaCous

  12,500   21.20 

3/16/2024

  8,875   5,236 
   1,563   15.68 

3/23/2025

        
   1,563   9.44 

3/21/2026

        
                  

James D. Sullivan

  12,500   21.20 

3/16/2024

  31,375   18,511 
   3,125   15.68 

3/23/2025

        
   3,125   9.44 

3/21/2026

        

 

(1)

The options vest in three equal annual installments commencing March 16, 2018.Calculated based on the closing market price of the Company’s common stock on December 31, 2022 of $0.59 per share.

(2)

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

(3)

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

 

Narrative Disclosure to Outstanding Equity Awards at December 31, 2019Fiscal 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 Ms. WelchMr. Sullivan at any time with or without cause. In the event of termination by us without cause, we will continue to pay Ms. Welch herMr. 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.

 

5150

 

Change in Control Provisions

 

Our 2004 Stock Incentive Plan and 2015 Equity Incentive Plan (the “Plans”“2015 Plan”) provideprovides for the acceleration of the 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 Plans2015 Plan 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 shareholdersstockholders 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” eachthe 2015 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 Plans2015 Plan contain change in control provisions substantially similar to those contained in the Plans.2015 Plan.

 

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.

 

51

DIRECTOR COMPENSATION

 

The following table sets forth for each director, information regarding their compensation for the year ended December 31, 2019:2022:

 

Name (1)

 

Stock Awards ($)

(2)

 

 

Options Awards

($) (3)

 

 

Total

($)

 

 

 

 

 

 

 

 

 

 

 

Thomas E. Bush, III (4)

 

7,004

 

 

2,588

 

 

9,592

 

Thomas Gilley(4)

 

5,502

 

 

2,588

 

 

8,090

 

Yao Jianhui (5)

 

-

 

 

-

 

 

-

 

Pieter Knook (6)

 

8,003

 

 

2,588

 

 

10,591

 

Robert J Michel (6)

 

8,504

 

 

2,588

 

 

11,092

 

Fabian Shin (7)

 

6,002

 

 

2,588

 

 

8,590

 


Name (1)

 

Stock Awards

($) (2)

  

Total

($)

 

Thomas E. Bush, III (3)

  14,007   14,007 

Thomas Gilley (3)(4)

  14,007   14,007 

Pieter Knook (3)(5)

  16,008   16,008 

Robert J. Michel (3)

  16,008   16,008 

Emmanuel Alia (6)

  16,008   16,008 

 

(1)

Mr. DePasquale and Mr.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)

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 ASC 718.

(4)

At December 31, 2019,2022, Messrs. Bush, Gilley, Knook and GilleyMichel each held options to purchase 19,2092,064 shares of common stock and each held 5,000 shares restricted common stock.

(4)

Mr. Gilley resigned from the Board of Directors on February 9, 2023.

(5)

At December 31, 2019, Mr. Jianhui held options to purchase 1,500 sharesKnook resigned from the Board of common stock.Directors effective May 13, 2023.

(6)

At December 31, 2019, Messrs. Knook and Michel each2022, Mr. Alia held options to purchase 14,000313 shares of common stock.

(7)

At December 31, 2019, Mr. Shinstock and held options to purchase 4,0005,000 shares ofrestricted common stock.

 

Narrative Disclosure to Director Compensation Table

 

During 2019,2022, we had a policy to pay to each non-employee director $3,000 per board meeting $1,000 per telephonic board meeting, and $500$1,000 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 paymentpayments 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 2019.2022. 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.

 

52

 

EQUITY COMPENSATION PLAN INFORMATION

 

The following table provides certainsets forth, as of December 31, 2022, information with respect to all of oursecurities authorized for issuance under equity compensation plans in effect as of December 31, 2019.

  

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

  381,918   2.15   236,037 
             

Equity compensation plans not approved by security holders

  1,206,096  $2.89    
             

Total

  1,588,014  $2.72   236,037 

As of December 31, 2019, there were outstanding options under the 2015 Plan to purchase 567,920 shares of common stock, and 846,471 shares were available for future grants.

On October 12, 2004, we adopted the 2004 Stock Option Plan (the 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, 166,667 shares of common stock were reserved for issuance to employees, officers, directors, and consultants 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. As of December 31, 2019, there were outstanding options under the 2004 Plan to purchase 31,251 shares of common stock and no shares were available for future grants.plans.

 

On January 27, 2016, the shareholdersstockholders approved the 2015 Equity Incentive Plan, (thewhich was amended on June 13, 2019 by vote of stockholders, and amended and restated by vote of stockholders on June 18, 2021 (as amended and restated, the “2015 Plan”). The 2015 Plan). Under the original terms of this plan, 666,667Plan reserves 789,000 shares of common stock were reserved for issuance of options, restricted stock, and other equity based awards to employees, officers, directors, and consultants of the CompanyCompany. Options are issued at exercise prices which may not be below 100-110% of fair market value. At our annual shareholders meeting in 2019, we adopted an amendmentvalue and have terms not to the 2015 Plan which increases the number of shares of common stock authorized for issuance under the 2015 Plan from 666,667 shares to 1,500,000 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.

 

In addition to options issued under the 2004 and 2015 Plans,Plan, we have issued options to purchase common stock to employees, officers, directors and consultants outside of the plans. As of December 31, 2019, there were outstanding non-plan options to purchase 1,152,553 shares of common stock.plan. The terms of these outstanding options are substantially similar to the provisions of the 2014 and 2015 PlansPlan and options issued thereunder. In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately.

 

On June 18, 2021, the stockholders approved the 2021 Employee Stock Purchase Plan (“ESPP”). Under the terms of this plan, 789,000 shares of common stock are reserved for issuance and sale to employees and officers of the Company at a purchase price equal to 85% of the lower of the closing price of our common stock as reported on the Nasdaq Capital Market on the first day or the last day of the offering period. Eligible employees are granted an option to purchase shares of common stock funded by payroll deductions. The Board may suspend or terminate the plan at any time, otherwise the plan expires June 17, 2031. 

Plan Category

 

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

  90,808(1) (2)  10.79   989,032 (3)

Equity compensation plans not approved by security holders

  112,188   $21.18    

Total

  202,996 (1)(2) $16.53   989,032 (3)

(1)

Consists of shares of common stock issuable upon the exercise of options outstanding as of December 31, 2022 under the 2015 Plan.

(2)

Excludes employee stock purchase rights accruing under the ESPP.

(3)

Amount includes 280,065 shares of common stock available as of December 31, 2022 for future issuance under the 2015 Plan and 708,967 shares of common stock available as of December 31, 2022 for future issuance under the ESPP.

53

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Common Stock

 

The following table sets forth, as of July 16, 2020,June 9, 2023, information with respect to the securities holdings of all 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 our common stock by all of our current executive officers and directors, both individually and as a group.

 

The beneficial owners and amount of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as awarded, and, in accordance therewith, include all shares of our common stock that may be acquired by such beneficial owners within 60 days of July 16, 2020June 9, 2023 upon the exercise or conversion of any options, warrants or other convertible securities. This table has been prepared based on 22,181,3159,234,833 shares of common stock outstanding on July 16, 2020.June 9, 2023. 

 

53

Name and Address of Beneficial Owner (1)

Amount and Nature of

Beneficial Ownership

 

Percent of Class

 

 

 

 

 

 

Michael W. DePasquale

 

345,418 (2)

 

 

1.5%

Cecilia Welch

 

175,833 (3)

 

 

*

Mira LaCous

 

133,333 (4)

 

 

*

Thomas Gilley

 

41,660 (5)

 

 

*

Thomas E. Bush, III

 

37,044 (5)

 

 

*

Pieter Knook

 

32,311 (6)

 

 

*

Robert J. Michel

 

35,723 (6)

 

 

*

Fabian Shin

 

15,061 (7)

 

 

*

Emmanuel Alia

 

                      1,011 (8)

 

 

*

Wong Kwok Fong (Kelvin)

 

4,574,041 (9)

 

 

20.6%

Yao Jianhui

 

6,268 (10)

 

 

*

Micron Technology Development Limited

 

2,178,484 (11)

 

 

9.8%

 

 

 

 

 

 

All officers and directors as a group (11) persons

 

5,397,703

 

 

24%

Name and Address of Beneficial Owner (1)

 

Amount and Nature

of Beneficial

Ownership

  

Percentage

of

Class

 
         

Directors and Executive Officers

        
         

Michael W. DePasquale

  128,227(2)   1.4

%

Cecilia C. Welch

  69,375 (3)  * 

Mira K. LaCous

  40,001 (4)  * 

James D. Sullivan

  110,500 (5)  1.2

%

Robert J. Michel

  32,760 (6)  * 

Thomas E. Bush, III

  29,869 (7)  * 

Emmanuel Alia

  27,360 (8)  * 

Wong Kwok Fong (Kelvin)

  589,464 (9)  6.4

%

Cameron E. Williams

  0   * 
All officers and directors as a group (nine (9) persons)  1,047,472   11.3

%

         

Beneficial Owners

        
         

Lind Global Micro Fund, LP (10)

  833,125   9.0

%

AJB Capital Investments LLC (11)

  900,000   9.5

%

*

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 325,00139,584 shares issuable on exercise of options. Does not include 33,335options and 39,125 shares issuable upon exercise of optionsrestricted stock of which 24,709 remain subject to vesting.

(3)

ConsistsIncludes 22,500 of shares issuable upon exercise of options. Does not include 25,001options and 34,125 shares issuable upon exercise of optionsrestricted stock of which 21,375 remain subject to vesting.

(4)

ConsistsIncludes 15,626 of shares issuable upon exercise of options. Does not include 12,501options and 11,625 shares issuable upon exercise of optionsrestricted stock of which 6,375 remain subject to vesting.

(5)

Includes 17,04118,750 of shares issuable on exercise of options. Does not include 2,168options and 34,125 shares issuable upon exercise of optionsrestricted stock of which 21,375 remain subject to vesting.

(6)

Includes 11,8321,960 of shares issuable on exercise of options.options and 5,000 shares of restricted stock of which 3,334 remain subject to vesting. Does not include 2,168104 shares issuable upon exercise of options subject to vesting.

(7)

Includes 1,8321,960 of shares issuable on exercise of options.options and 5,000 shares of restricted stock of which 3,334 remain subject to vesting. Does not include 2,168104 shares issuable upon exercise of options subject to vesting.The address of Mr. Shin is Flat B, 23/F, Tower 2B, 19 Tong Yin Street, The WINGS IIIA, Tseung Kwan O New Territories, Hong Kong.

(8)

ConsistsIncludes 209 of shares issuable on exercise of common stock.options and 5,000 shares of restricted stock of which 3,334 remain subject to vesting. Does not include 104 shares issuable upon exercise of options subject to vesting.

(9)

Includes 183,33327,084 of shares issuable on exercise of options. Does not include 33,335options and 9,125 shares issuable upon exercise of optionsrestricted stock of which 4,709 remain subject to vesting. The address of Kelvin is Flat C, 27/F, Block 5, Grand Pacific Views, Siu Lam, Hong Kong N7.

(10)

Includes 999 shares issuableConsists of exercise of options. Does not include 501 shares issuable upon exercise of options subject to vesting. Does not include 958,289 shares of common stock owned of record by Giant Leap International, Ltd (“Giant Leap”), or 2,178,484 shares of common stock owned of record by Micron Technology Development Limited (“Micron”). Also does not include 88,875 shares of common stock owned by GSFG Group Limited (f/k/a China Goldjoy Group Limited) (“GSFG”). Giant is an indirect wholly-owned subsidiary, and Micron is an indirect wholly-owned subsidiary of GSFG. As the chairman of the board of directors of GSFG, Mr. Yao shares voting and dispositive power over these shares.warrants. The address of Mr. YaoLind Global Capital Micro Fund, LP is Suites 2601-2, 26/F Tower 2, Nina Tower, 8 Yeung UK Road, Tsuen Wan, Hong Kong TWTL 353.444 Madison Ave, Floor 41, New York, NY 10022.

(11)

Includes 200,000 shares issuable upon exercise of warrants. The address of MicronAJB Capital Investments LLC is Unit 1903, 19/F, Tower 2, Lippo Centre NO. 89 Queensway, Hong Kong.4700 Sheridan Street, Suite J, Hollywood, FL 33021.

 

54

 

CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH RELATED PERSONS

 

Standstill Agreement with Principal StockholdersStockholder

 

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 investorsKelvin 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 further representation on our board of directors. Kelvin is the Co-Chairman of the board of directors and an executive officer, andofficer.

Director Independence

As required under the Nasdaq Marketplace Rules, a principal stockholdermajority of the Company. Micron ismembers of a principal stockholderlisted company’s board of the Company. Yao Jianhui, a director of the Company, is chairman ofdirectors must qualify as “independent,” as affirmatively determined by the board of directors. Our board considered certain relationships between our directors and a principal shareholder of GSFG, the parent company of Giant Leap and Micron, and may, therefore, be deemed to haveus when determining each director’s status as an interest in transactions between us and Giant Leap or Micron.

Licensing Agreement with Subsidiaries of GSFG Group Limited.

On November 11, 2015 our subsidiary BIO-key Hong Kong Limited entered into a license purchase agreement with certain subsidiaries of GSFG. The license agreement provides for the grant 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“independent director” under the Finger Q 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. We made a one-time payment of $12,000,000 to the licensors. In the fourth quarter of 2019, we re-evaluated the recoverabilityRule 5605(a)(2) of the carrying amount of the balance of these license rightsNasdaq Marketplace Rules. Based upon such definition and recorded an impairment charge equal to the full carrying amount of such license rights. Yao Jianhu is the chairmanSEC regulations, we have determined that Robert Michel, Emmanuel Alia, Thomas Bush, III, and chief executive officer and principal shareholder of GSFG and a director of the Company. Kelvin served as the chief technology officer of GSFG through October 2016 and is the Co-Chairman of the Board, an executive officer, and a principal stockholder of the Company.

Stock Purchase Agreements and Related Transactions with Wong Kwok Fong (Kelvin)

On April 3, 2018, Kelvin converted 39,088 shares of series A-1 stock at a conversion price of $3.60 per share resulting in the acquisition of 1,085,778 shares of common stock. On April 3, 2018, we entered into a securities purchase agreement with Kelvin to purchase 91,820 shares of common stock in consideration of the conversion of an accrued dividend payable on the shares of series A-1 stock owned by Kelvin in the amount of $330,552 resulting in a per share purchase price of $3.60. In connection with this transaction, we waived the Standstill Provision for the sole purpose of permitting him to purchase the forgoing securities.

On May 31, 2018, Kelvin converted the 23,508 remaining shares of series A-1 stock held by him at a conversion price of $3.60 per share resulting in the acquisition of 653,000 shares of common stock. On May 31, 2018, we entered into a securities purchase agreement with Kelvin to purchase 7,073 shares of common stock in consideration of the conversion of an accrued dividend payable on the series A-1 stock in the amount of $25,463 resulting in a per share purchase price of $3.60. In connection with this transaction, we waived the Standstill Provision for the sole purpose of permitting him to purchase the forgoing securities.

Stock Purchase Agreements and Related Transactions with Giant Leap International, Ltd.

On March 23, 2018, Giant Leap converted 29,280 shares of series B-1 stock at a conversion price of $3.60 per share into 813,334 shares of common stock. On March 23, 2018, we entered into a securities purchase agreement with Giant Leap to purchase 33,102 shares of common stock in consideration of the conversion of an accrued dividend payable on the shares of series B-1 stock owned by Giant Leap in the amount of $119,167 resulting in a per share purchase price of $3.60. Giant Leap was a principal stockholder of the Company. Yao Jianhui, a director of the Company, is chairman of the board of directors of GSFG, the parent company of Giant Leap, and may, therefore, be deemed to have an interest in the forgoing transactions.

On May 23, 2018, we received a conversion notice from Giant Leap to convert the 720 remaining shares of series B-1 stock held by it at a conversion price of $3.60 per share. The forgoing conversion resulted in the issuance of 20,000 shares of common stock. On May 23, 2018, we entered into a securities purchase agreement with Giant Leap to purchase 2,978 shares of common stock in consideration of the conversion of an accrued dividend payable on the shares of series B-1 Stock owned by Giant Leap in the amount of $10,721 resulting in a per share purchase price of $3.60. In connection with this transaction, we waived the Standstill Provision for the sole purpose of permitting Giant Leap to purchase the forgoing securities.Cameron E. Williams are “independent” under Nasdaq standards. 

 

55

 

Stock Purchase Agreements and Related Transactions with Micron Technology Development Limited 

On March 23, 2018, Micron converted 31,140 shares of series B-1 stock at a conversion price of $3.60 per share into 865,000 shares of common stock. On March 23, 2018, we received notice from Micron of its desire to increase the cap on the maximum percentage of shares of common stock issuable upon conversion of its shares of series B-1 stock from 9.99% to 19.9% of our outstanding shares. In connection with this request, we entered into a securities purchase agreement with Micron to purchase 82,755 shares of common stock in consideration of the conversion of an accrued dividend payable on the shares of series B-1 stock owned by Micron in the amount of $297,917 resulting in a per share purchase price of $3.60. In connection with the forgoing transactions, we waived the Standstill for the sole purpose of permitting Micron to purchase the forgoing securities and to increase the cap. Micron is a principal stockholder of the Company.

On May 23, 2018, we received a conversion notice from Micron to convert the 43,860 remaining shares of series B-1 stock held by it at a conversion price of $3.60 per share. The forgoing conversion resulted in the issuance of 1,218,334 shares of common stock. On May 23, 2018, we entered into a securities purchase agreement with Micron to purchase 12,395 shares of Common Stock in consideration of the conversion of an accrued dividend payable on the shares of series B-1 stock owned by Micron in the amount of $44,621 resulting in a per share purchase price of $3.60. In connection with this transaction, we waived the Standstill Provision for the sole purpose of permitting Micron to purchase the forgoing securities.

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 balance of the advances owed to Kelvin as of the date of this prospectus is $66,466. Kelvin serves as the Co-Chairman of the Board, an executive officer, and is also 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. All amounts advanced have been repaid in full. Mr. DePasquale serves as the Chairman of the Board and Chief Executive Officer of the Company.

Sales Incentive Agreement with 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 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, we will issue TTI a five-year warrant to purchase 100,000 shares of Common Stock at an exercise price of $1.50 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 2,000,000 shares of common stock or warrants to purchase more than 500,000 shares of common stock pursuant to this agreement. Manny Alia, a member of our board of directors, is the Chief Executive Officer of TTI.

56

DESCRIPTION OF CAPITAL STOCK

 

As of the date of this prospectus, our amended certificate of incorporation authorizes us to issue 170,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share.

Common Stock

 

The following summary description of our common stock is based on the provisions of our certificate of incorporation and bylaws, which are incorporated by reference into the registration statement which includes this prospectus, and the applicable provisions of the Delaware General Corporation Law (“DGCL”).Law. This information may not be complete in all respects and is qualified in its entirety by reference to the provisions of our certificate of incorporation, bylaws and the DGCL.Delaware General Corporation Law. For information on how to obtain copies of our certificate of incorporation and bylaws, see the information below under the heading “Where You Can Find More Information.Additional Information.

 

Authorized. We currently have authority to issue up to 170,000,000 shares of common stock, $0.0001 par value per share. As of July 16, 2020,June 9, 2023, we had 22,181,3159,234,833, shares of common stock outstanding. From time to time we may amend our certificate of incorporation to increase the number of authorized shares of common stock. Any such amendment would require the approval of the holders of a majority of the voting power of the shares entitled to vote thereon.

 

Voting. For all matters submitted to a vote of stockholders, each holder of common stock is entitled to one vote for each share registered in the holder’s name on our books. Our common stock does not have cumulative voting rights. Holders of a plurality of our outstanding common stock can elect all of the directors who are up for election in a particular year. Holders of a majority of our outstanding common stock act by a majority for all other matters, except as limited by our certificate of incorporation, bylaws and the DGCL.Delaware General Corporation Law.

 

Dividends. If our boardBoard of directorsDirectors declares a dividend, holders of common stock will receive payments from our funds that are legally available to pay dividends. However, this dividend right is subject to any preferential dividend rights we may grant to the persons who hold preferred stock, if any is outstanding.

 

Liquidation and Dissolution. If we are liquidated or dissolve, the holders of our common stock will be entitled to share ratably in all the assets that remain after we pay our liabilities and any amounts we may owe to the persons who hold preferred stock, if any is outstanding.

 

Fully Paid and Nonassessable. Nonassessable. All shares of our outstanding common stock are fully paid and nonassessable and any additional shares of common stock that we issue will be fully paid and nonassessable.

 

Other Rights and Restrictions. Holders of our common stock do not have preemptive or subscription rights, and they have no right to convert their common stock into any other securities. Our common stock is not subject to redemption by us. The rights, preferences and privileges of common stockholders are subject to the rights of the stockholders of any series of preferred stock which we may designate in the future. Our chartercertificate of incorporation and bylaws do not restrict the ability of a holder of common stock to transfer his or her shares of common stock.

 

Listing. Our common stock is listed on The Nasdaq Capital Market under the symbol “BKYI.”

 

Transfer Agent and Registrar. The transfer agent and registrar for our common stock is Broadridge Corporate Issuer Solutions, Inc.

 

Preferred Stock

 

The following summary description of our preferred stock is based on the provisions of our certificate of incorporation and bylaws, which are incorporated by reference into the registration statement which includes this prospectus, and the applicable provisions of the DGCL.Delaware General Corporation Law. This information may not be complete in all respects and is qualified in its entirety by reference to the provisions of our certificate of incorporation, bylaws and the DGCL.Delaware General Corporation Law. For information on how to obtain copies of our certificate of incorporation and bylaws, see the information below under the heading “Where You Can Find MoreAdditional Information.”

 

5756

 

General. We currently have authority to issue up to 5,000,000 shares of preferred stock, $0.0001 par value per share, none of which are outstanding. We may amend from time to time our certificate of incorporation to increase the number of authorized shares of preferred stock or to designate a new classseries of preferred stock. Unless required by law, the authorized shares of preferred stock will be available for issuance without further action by you. Our Board of Directors is able to determine, with respect to any series of preferred stock, the powers (including voting powers), preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, including, without limitation:

 

 

the designation of the series;

 

the number of shares of the series, which our Board of Directors may, except where otherwise provided in the preferred stock designation, increase (but not above the total number of authorized shares of the class) or decrease (but not below the number of shares then outstanding);

 

whether dividends, if any, will be cumulative or non-cumulative and the dividend rate of the series;

 

the dates at which dividends, if any, will be payable;

 

the redemption rights and price or prices, if any, for shares of the series;

 

the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series;

 

the amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding-up of our affairs;

 

whether the shares of the series will be convertible into shares of any other class or series, or any other security, of the Company or any other corporation, and, if so, the specification of the other class or series or other security, the conversion price or prices or rate or rates, any rate adjustments, the date or dates as of which the shares will be convertible and all other terms and conditions upon which the conversion may be made;

 

restrictions on the issuance of shares of the same series of any other class or series; and

 

the voting rights, if any, of the holders of the series.

 

We could issue a series of preferred stock that could, depending on the terms of the series, impede or discourage an acquisition attempt or other transaction that some, or a majority, of the holders of our common stock might believe to be in their best interests or in which the holders of our common stock might receive a premium for their common stock over the market price of that common stock. Additionally, the issuance of preferred stock may adversely affect the holders of our common stock by restricting dividends on the common stock, diluting the voting power of the common stock, or subordinating the liquidation rights of the common stock. As a result of these or other factors, the issuance of preferred stock could have an adverse impact on the market price of our common stock.

 

Anti-Takeover ProvisionsCertain Effects of the Company’sDelaware Law and Certificate of Incorporation; Incorporation and Bylaw Provisions

Authorized But Unissued Stock. We are authorized to issue 175,000,000 shares of capital stock, consisting of 170,000,000 shares of common stock and 5,000,000 shares of preferred stock. We have shares of common stock and preferred stock available for future issuance without stockholder approval, subject to any limitations imposed by the listing standards of The Nasdaq Capital Market. We may use these additional shares for a variety of corporate purposes, including for future public or private offerings to raise additional capital or facilitate corporate acquisitions or for payment as a dividend on our capital stock. The existence of unissued and unreserved common stock and preferred stock may enable our Board of Directors to issue shares to persons friendly to current management that could render more difficult or discourage a third-party attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise, thereby protecting the continuity of our management.

Blank Check Preferred Stock. As described above, ourOur Board of Directors is authorized without further stockholder action, to designate any number of series of preferred stock with such rights, preferences and designations as determined by the Board of Directors. Shares of preferred stock issued by the Board of Directors could be utilized, under certain circumstances, to make an attempt to gain control of the Company more difficult or time-consuming. For example, shares of preferred stock could be issued with certain rights that might have the effect of diluting the percentage of common stock owned by a significant stockholder or issued to purchasers who might side with management in opposing a takeover bid that the Board of Directors determines is not in the best interests of the Company and its stockholders. The existence of the preferred stock may, therefore, be viewed as having possible anti-takeover effects.

 

Certain Effects of Authorized But Unissued Stock

As described in above, we have shares of common stock and preferred stock available for future issuance without stockholder approval, subject to any limitations imposed by the listing standards of the Nasdaq Capital Market. We may use these additional shares for a variety of corporate purposes, including for future public or private offeringsto raise additional capital or facilitate corporate acquisitions or for payment as a dividend on our capital stock. The existence of unissued and unreserved common stock and preferred stock may enable our board of directors to issue shares to persons friendly to current management that could render more difficult or discourage a third-party attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise, thereby protecting the continuity of our management.

5857

 

Delaware LawLimitations on Written Consent of Stockholders. Except as may be approved in advance by the Board of Directors, any action required or permitted to be taken by our stockholders at any annual or special meeting must be effected at a duly called annual or special meeting of stockholders and Charter and Bylaw Provisionsmay not be taken or effected by a written consent of stockholders in lieu thereof.

 

Limitations on Special Meetings of Stockholders. Except as otherwise required by statute, special meetings of the stockholders may be called only by the Board of Directors.

Advance Notice Requirements for Stockholder Proposals and Director Nominations. Our bylaws provide that stockholders who desire to nominate a person for election to our Board of Directors must comply with specified notice and information provisions. Our bylaws contain similar advance notice provisions for stockholder proposals for action at stockholder meetings. These provisions prevent stockholders from making nominations for directors and stockholder proposals from the floor at any stockholder meeting and require any stockholder making a nomination or proposal to submit the name of the nominees for board seats or the stockholder proposal, together with specified information about the nominee or any stockholder proposal, prior to the meeting at which directors are to be elected or action is to be taken. These provisions ensure that stockholders have adequate time to consider nominations and proposals before action is required, and they may also have the effect of delaying stockholder action.

Supermajority Vote Requirements. Any director may be removed from office only with cause and only by the affirmative vote of the holders of 75% or more of our shares then entitled to vote at an election of directors. Additionally, our bylaws may be amended or repealed by the affirmative vote of at least 75% of the outstanding shares entitled to vote on such amendment or repeal, voting together as a single class. These provisions may prevent stockholders from removing existing directors and amending our bylaws, each of which could have the effect of delaying or preventing a change in control of the Company.

Indemnification. Our certificate of incorporation and bylaws contain provisions to indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law. These provisions do not limit or eliminate our right or the right of any stockholder of ours to seek non-monetary relief, such as an injunction or rescission in the event of a breach by a director or an officer of his duty of care to us.

Business Combinations. We are subject to the provisions of Section 203 of the DGCL.Delaware General Corporation Law. Subject to certain exceptions, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to exceptions, an “interested stockholder” is a person who, together with affiliates and associates, owns, or within the prior three years did own, 15% or more of the corporation’s voting stock. This provision could have the effect of delaying or preventing a change in control of our company.

Indemnification. Our charter and bylaws contain provisions to indemnify our directors and officers to the fullest extent permitted by the DGCL. These provisions do not limit or eliminate our right or the right of any stockholder of ours to seek non-monetary relief, such as an injunction or rescission in the event of a breach by a director or an officer of his duty of care to us.

Advance Notice Requirements for Stockholder Proposals and Director Nominations. Our bylaws provide that stockholders who desire to nominate a person for election to our board of directors must comply with specified notice and information provisions. Our bylaws contain similar advance notice provisions for stockholder proposals for action at stockholder meetings. These provisions prevent stockholders from making nominations for directors and stockholder proposals from the floor at any stockholder meeting and require any stockholder making a nomination or proposal to submit the name of the nominees for board seats or the stockholder proposal, together with specified information about the nominee or any stockholder proposal, prior to the meeting at which directors are to be elected or action is to be taken. These provisions ensure that stockholders have adequate time to consider nominations and proposals before action is required, and they may also have the effect of delaying stockholder action.

Potential Effects of Authorized but Unissued Stock

We have shares of common stock and preferred stock available for future issuance without stockholder approval. We may utilize these additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, to facilitate corporate acquisitions or payment as a dividend on the capital stock.

The existence of unissued and unreserved common stock and preferred stock may enable our board of directors to issue shares to persons friendly to current management or to issue preferred stock with terms that could render more difficult or discourage a third-party attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise, thereby protecting the continuity of our management. In addition, the board of directors has the discretion to determine designations, rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of each series of preferred stock, all to the fullest extent permissible under the DGCL and subject to any limitations set forth in our certificate of incorporation. The purpose of authorizing the board of directors to issue preferred stock and to determine the rights and preferences applicable to such preferred stock is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing desirable flexibility in connection with possible financings, acquisitions and other corporate purposes, could have the effect of making it more difficult for a third-party to acquire, or could discourage a third-party from acquiring, a majority of our outstanding voting stock.

Nasdaq Listing

Our common stock is listed on The Nasdaq Capital Market under the symbol “BKYI.”

Transfer Agent

The transfer agent of our common stock and warrant agent for the warrants being offered hereby is Broadridge Corporate Issuer Solutions, Inc.Company. 

 

59
58

 

DESCRIPTION OF THE SECURITIES WE ARE OFFERING

We are offering (i) 15,000,000 shares of our common stock or Pre-Funded Warrants and (ii) warrants to purchase up to an aggregate of 15,000,000 shares of our common stock. Each share of common stock or Pre-Funded Warrant is being sold together with a warrant to purchase one share of common stock. The shares of common stock or Pre-Funded Warrants and accompanying warrants will be issued separately. We are also registering the shares of common stock issuable from time to time upon exercise of the Pre-Funded Warrants and warrants offered hereby.

Common Stock

The material terms and provisions of our common stock and each other class of our securities which qualifies or limits our common stock are described under the caption “Description of Capital Stock” in this prospectus.

Pre-Funded Warrants

The following summary of certain terms and provisions of the Pre-Funded Warrants that are being offered hereby is not complete and is subject to, and qualified in its entirety by the provisions of, the Pre-Funded Warrant. Prospective investors should carefully review the terms and provisions of the form of Pre-Funded Warrant for a complete description of the terms and conditions of the Pre-Funded Warrants.

The term “pre-funded” refers to the fact that the purchase price of our common stock in this offering includes almost the entire exercise price that will be paid under the Pre-Funded Warrants, except for a nominal remaining exercise price of $0.01. The purpose of the Pre-Funded Warrants is to enable investors that may have restrictions on their ability to beneficially own more than 4.99% (or, upon election of the holder, 9.99%) of our outstanding common stock following the consummation of this offering the opportunity to invest capital into the Company without triggering their ownership restrictions, by receiving Pre-Funded Warrants in lieu of our common stock which would result in such ownership of more than 4.99% (or 9.99%), and receive the ability to exercise their option to purchase the shares underlying the Pre-Funded Warrants at such nominal price at a later date.

Duration. The Pre-Funded Warrants offered hereby will entitle the holders thereof to purchase shares of our common stock at a nominal exercise price of $0.01 per share, commencing immediately on the date of issuance.

Exercise Limitation. A holder will not have the right to exercise any portion of the Pre-Funded Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% (or, upon election of the holder, 9.99%) of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Pre-Funded Warrants. However, any holder may increase or decrease such percentage, provided that any increase will not be effective until the 61st day after such election.

Exercise Price. The Pre-Funded Warrants will have an exercise price of $0.01 per share. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock and also upon any distributions of assets, including cash, stock or other property to our stockholders.

Transferability. Subject to applicable laws, the Pre-Funded Warrants may be offered for sale, sold, transferred or assigned without our consent.

Exchange Listing. There is no established trading market for the Pre-Funded Warrants and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the Pre-Funded Warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the Pre-Funded Warrants will be limited.

Fundamental Transactions. If a fundamental transaction occurs, then the successor entity will succeed to, and be substituted for us, and may exercise every right and power that we may exercise and will assume all of our obligations under the Pre-Funded Warrants with the same effect as if such successor entity had been named in the Pre-Funded Warrant itself. If holders of our common stock are given a choice as to the securities, cash or property to be received in a fundamental transaction, then the holder shall be given the same choice as to the consideration it receives upon any exercise of the Pre-Funded Warrant following such fundamental transaction.

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Rights as a Stockholder. Except as otherwise provided in the Pre-Funded Warrants or by virtue of such holder’s ownership of shares of our common stock, the holder of a Pre-Funded Warrant does not have the rights or privileges of a holder of our common stock, including any voting rights, until the holder exercises the Pre-Funded Warrant.

Warrants

The following summary of certain terms and provisions of the warrants offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the warrant, the form of which has been filed as an exhibit to the registration statement of which this prospectus is a part. Prospective investors should carefully review the terms and provisions of the form of warrant for a complete description of the terms and conditions of the warrants.

The warrants will be issued pursuant to the terms of a warrant agency agreement between us and Broadridge Issuer Solutions, Inc., as warrant agent.  The warrants will be issued in book-entry form and will initially be represented only by one or more global warrants deposited with the warrant agent, as custodian on behalf of DTC and registered in the name of Cede & Co., a nominee of DTC, or as otherwise directed by DTC. Prospective investors should review a copy of the form of warrant agency agreement, which is included as an Exhibit to the registration statement to which this prospectus forms a part, for a complete description of the terms and conditions applicable to the warrants.  The warrants will have a five-year term and will initially be exercisable for shares of our common stock at an exercise price of $__ per share. The holder of a warrant will not be deemed a holder of our underlying common stock until the warrant is exercised, except as set forth in the warrants.

Subject to limited exceptions, a holder of warrants will not have the right to exercise any portion of its warrants if the holder (together with such holder’s affiliates, and any persons acting as a group together with such holder or any of such holder's affiliates) would beneficially own a number of shares of common stock in excess of 4.99% of the shares of our common stock then outstanding after giving effect to such exercise (the “Beneficial Ownership Limitation”); provided, however, that upon notice to us, the holder may increase or decrease the Beneficial Ownership Limitation, provided that in no event will the Beneficial Ownership Limitation exceed 9.99% and any increase in the Beneficial Ownership Limitation will not be effective until 61 days following notice of such increase from the holder to us.

The exercise price and the number of shares issuable upon exercise of the warrants is subject to appropriate adjustment in the event of recapitalization events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting our common stock.

The warrant holders must pay the exercise price in cash upon exercise of the warrants, unless such warrant holders are utilizing the cashless exercise provision of the warrants, which is only available in certain circumstances such as if the underlying shares are not registered with the SEC pursuant to an effective registration statement. If a warrant is exercised via the “cashless” exercise provision, the holder will receive the number of shares equal to the quotient obtained by dividing (i) the difference between the VWAP (as determined pursuant to the terms of the warrants) and the exercise price of the warrant multiplied by the number of shares issuable under the warrant by (ii) the VWAP. We intend to use commercially reasonable efforts to have the registration statement of which this prospectus supplement forms a part, effective when the warrants are exercised.

In addition, in the event we consummate a merger or consolidation with or into another person or other reorganization event in which our common shares are converted or exchanged for securities, cash or other property, or we sell, lease, license, assign, transfer, convey or otherwise dispose of all or substantially all of our assets or we or another person acquire 50% or more of our outstanding shares of common stock (a “fundamental transaction”), then following such event, the holders of the warrants will be entitled to receive upon exercise of the warrants the same kind and amount of securities, cash or property which the holders would have received had they exercised the warrants immediately prior to such fundamental transaction. Any successor to us or surviving entity is required to assume the obligations under the warrants.

Upon the holder’s exercise of a warrant, we will issue the shares of common stock issuable upon exercise of the warrant within two trading days following our receipt of a notice of exercise, provided that payment of the exercise price has been made (unless exercised via the “cashless” exercise provision).

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Prior to the exercise of any warrants to purchase common stock, holders of the warrants will not have any of the rights of holders of the common stock purchasable upon exercise, including the right to vote, except as set forth therein.

Warrant holders may exercise warrants only if the issuance of the shares of common stock upon exercise of the warrants is covered by an effective registration statement, or an exemption from registration is available under the Securities Act and the securities laws of the state in which the holder resides. We intend to use commercially reasonable efforts to have the registration statement of which this prospectus supplement forms a part effective when the warrants are exercised. The warrant holders must pay the exercise price in cash upon exercise of the warrants unless there is not an effective registration statement or, if required, there is not an effective state law registration or exemption covering the issuance of the shares underlying the warrants (in which case, the warrants may only be exercised via a “cashless” exercise provision).  

We have not applied, and do not intend to apply, for listing of the warrants on any securities exchange or other trading system.

UNDERWRITING

We have entered into an underwriting agreement with Maxim Group LLC (“Maxim”), as representative of the underwriters named below with respect to the shares of our common stock and accompanying warrants and Pre-Funded Warrants and accompanying warrants subject to this offering. Subject to certain conditions, we have agreed to sell to the underwriters, and the underwriters have agreed to purchase, the number of shares of our common stock, Pre-Funded Warrants and corresponding warrants provided below opposite each underwriter’s name.

Underwriter

Maxim Group LLC

The underwriters are offering the shares of our common stock and accompanying warrants and Pre-Funded Warrants and accompanying warrants subject to their acceptance of our common stock, the Pre-Funded Warrants and the warrants from us and subject to prior sale. The underwriting agreement provides that the obligations of the underwriters to pay for and accept delivery of the shares of our common stock and accompanying warrants and Pre-Funded Warrants and accompanying warrants offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of our common stock and accompanying warrants and Pre-Funded Warrants and accompanying warrants if any such shares of our common stock and accompanying warrants or Pre-Funded Warrants and accompanying warrants are taken.

We have granted the underwriters an option for a period of 45 days from the date of this prospectus to purchase up to an additional 2,250,000 shares of common stock and/or warrants to purchase 2,250,000 shares of common stock (equal to 15% of the number of shares and warrants underlying the securities sold in the offering) at the public offering price, less the underwriting discount.

Underwriter Compensation

We have agreed to pay the underwriters an aggregate fee equal to 8% of the gross proceeds of this offering and expect the net proceeds from this offering to be approximately $16,360,000 after deducting approximately $1,440,000 in underwriting commissions and other offering expenses. We have agreed to pay the underwriters an accountable expense allowance for certain of the underwriters’ expenses relating to the offering up to a maximum aggregate amount of $80,000, including the underwriters’ legal fees incurred in this offering.

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Discounts and Expenses

The underwriters have advised us that they propose to offer the shares of our common stock, Pre-Funded Warrants and accompanying warrants to the public at the respective public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $[•] per share of our common stock and accompanying warrant or $[•] per Pre-Funded Warrant and accompanying warrant. After this offering, the public offering price and concession to dealers may be changed by the representative. No such change shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The shares of our common stock, Pre-Funded Warrants and accompanying warrants are offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters have informed us that they do not intend to confirm sales to any accounts over which they exercise discretionary authority.

The following table shows the public offering price, underwriting discount payable to the underwriters by us and proceeds before expenses to us, assuming no exercise of the underwriters’ option to purchase additional shares of common stock and/or warrants. The underwriting commissions are equal to the combined public offering price per share, Pre-Funded Warrants and accompanying warrants, less the amount per share the underwriters pay us for the shares of common stock, Pre-Funded Warrants and warrants:

Per Share and

Accompanying Warrant

Per Pre-

Funded

Warrant and

Accompanying Warrant

Total

(No Exercise of Over-

allotment Option)

Total

(Full Exercise of Over-

allotment Option)

Public offering price

$$$

Underwriting discounts and commissions

$$$

Proceeds, before expenses, to us

$$$

In addition, we have agreed to reimburse the underwriters for reasonable out-of-pocket expenses not to exceed $80,000 in the aggregate. We estimate that total expenses payable by us in connection with this offering, other than the underwriting discount referred to above, will be approximately $100,000.

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Indemnification

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.

Lock-up Agreements

We, as well as our officers and directors, and greater than five percent (5%) shareholders, have agreed, subject to limited exceptions, for a period of 90 days after the closing of this offering, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of, directly or indirectly any shares of common stock or any securities convertible into or exchangeable for our common stock either owned as of the date of the underwriting agreement or thereafter acquired without the prior written consent of Maxim. Maxim may, in its sole discretion and at any time or from time to time before the termination of the lock-up period, without notice, release all or any portion of the securities subject to lock-up agreements.

Price Stabilization, Short Positions and Penalty Bids

In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act:

Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market.

Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. A naked short position occurs if the underwriters sell more shares than could be covered by the over-allotment option. This position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be discontinued at any time.

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Neither we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our shares of common stock. In addition, neither we nor the underwriters make any representation that the underwriters will engage in these transactions or that any transaction, if commenced, will not be discontinued without notice.

Electronic Distribution

This prospectus in electronic format may be made available on websites or through other online services maintained by the underwriters, or by their affiliates. Other than this prospectus in electronic format, the information on the underwriters’ websites and any information contained in any other websites maintained by the underwriters is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriters in their capacity as underwriters, and should not be relied upon by investors.

Other

From time to time, the underwriters and/or their affiliates have provided, and may in the future provide, various investment banking and other financial services for us for which services it has received and, may in the future receive, customary fees.

Except for the services provided in connection with this offering and as described below, the underwriters have not provided any investment banking or other financial services during the 180-day period preceding the date of this prospectus.

Maxim acted as placement agent in connection with the issuance of a $2,415,000 senior secured convertible note as described in our Current Report on Form 8-K filed with the SEC on May 7, 2020, the issuance of a $1,811,250 senior secured convertible note as described in our Current Report on Form 8-K filed with the SEC on July 2, 2020 and as financial advisor in connection with the issuance and amended and restated senior secured convertible promissory note as described in our Current Report on Form 8-K filed with the SEC on March 12, 2020, for which Maxim was paid a placement fee equal to 7% of the aggregate gross proceeds raised in the transaction.  

Offers Outside the United States

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

LEGAL MATTERS

 

The validity of the shares of common stock and warrants beingsecurities offered by this prospectus has beenhereby will be passed upon for us by Fox Rothschild LLP, Lawrenceville, New Jersey. The underwriters are being represented by Ellenoff Grossman & Schole LLP, New York, New York.

 

EXPERTS

 

Rotenberg Meril Solomon Bertiger & Guttilla, P.C., ourThe financial statements as of and for the year ended December 31, 2022 included in this prospectus have been so included in reliance on the report of Marcum LLP, the Company’s current independent registered public accounting firm, has audited our balance sheetsgiven on the authority of said firm as of December 31, 2019experts in auditing and 2018, andaccounting. Such report included an explanatory paragraph describing conditions that raise substantial doubt about the related statements of operations, stockholders’ equity (deficit) and cash flows for each of the two years then ended, as set forth in their report, which report expresses the uncertainty of ourCompany’s ability to continue as a going concern. We have included suchconcern as disclosed in Note A to the financial statements.

The financial statements as of and for the year ended December 31, 2021 included in this prospectus and in this registration statementhave been so included in reliance on the report of Rotenberg Meril Solomon Bertiger & Guttilla, P.C., the Company’s former independent registered public accounting firm, given on theirthe authority of said firm as experts in accountingauditing and auditing. The balance sheets of PistolStar, Inc. as of December 31, 2019 and 2018 and the related statements of income and retained earnings and cash flows for each of the two years then ended, as set forth in their reports are included in this prospectus and registration statement in reliance on the reports of Penchansky & Co., PLLC.accounting.

 

65

MARKET AND INDUSTRY DATA

 

Unless otherwise indicated, information contained in this prospectus concerning the biometric technology industry, including our market opportunity, is based on information from independent industry analysts, third-party sources and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us based on such data and our knowledge of such industry and market, which we believe to be reasonable. In addition, while we believe the market opportunity information included in this prospectus is generally reliable and is based on reasonable assumptions, such data involves risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors.Risk Factors.

 

66
59

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 (Marcum LLP, Saddle Brook, NJ, PCAOB ID:688)

F-261

Report of Independent Registered Public Accounting Firm (Rotenberg Meril Solomon Bertiger & Guttilla, P.C., Saddle Brook, NJ, PCAOB ID:361)

63

Consolidated Balance Sheets as atof December 31, 20192022 and 20182021

F-364

Consolidated Statements of Operations—Operations and Comprehensive Loss—Years ended December 31, 20192022 and 20182021

F-465

Consolidated Statements of Stockholders’ Equity (Deficit) —YearsEquity—Years ended December 31, 20192022 and 20182021

F-566

Consolidated Statements of Cash Flows—Years ended December 31, 20192022 and 20182021

F-667

Notes to the Consolidated Financial Statements—December 31, 20192022 and 20182021

F-869

  

Condensed Consolidated Financial Statements (unaudited):

 

Condensed Consolidated Balance Sheets as of March 31, 20202023 (unaudited) and December 31, 20192022

F-28

93

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 20202023 and 20192022

F-29

94

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three months ended March 31, 20202023 and 20192022

F-30

95

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 20202023 and 20192022

F-32

97

Notes to Condensed Consolidated Financial Statements — Statements—March 31, 20202023 and 20192022

F-34

99

 

F-1
60

 

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 sheetssheet of BIO-key International, Inc. and Subsidiaries (the “Company”) as of December 31, 2019 and 2018,2022, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit) and cash flows for the yearsyear 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, 2019 and 2018,2022, and the results of its operations and its cash flows for the yearsyear then ended in conformity with accounting principles generally accepted in the United States of America.

 

Revision to Correct Previously Issued Financial Statements

As discussed in Note S to the financial statements, the 2021 financial statements have been revised to correct certain previously issued disclosures related to the reconciliation of the Company’s income tax rate for the year ended December 31, 2021 and the components of the Company’s deferred tax assets and liabilities and valuation allowance as of December 31, 2021 and 2020. The financial statements of the Company for the year ended December 31, 2021, before the effects of the adjustments to correct the errors discussed in Note S to the financial statements, were audited by other auditors whose report, dated March 31, 2022, expressed an unqualified opinion on those statements. We have also audited the adjustments described in Note S that were applied to revise the 2021 financial statements to correct the errors. In our opinion, such adjustments are appropriate and have been properly applied. Except for the corrections to revise the tax footnote we were not engaged to audit, review, or apply any procedures to the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended, other than stated above and, accordingly, we do not express an opinion or any other form of assurance on the 2021 financial statements taken as a whole.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in Note A of the consolidated financial statements, the Company has suffered substantial net losses and negative cash flows from operations 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 O 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'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.audit. 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 auditsaudit 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 auditsaudit 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 provideaudit provides a reasonable basis for our opinion.

 

/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

May 14, 2020

F-261

 

Critical Audit Matters

Critical audit matters 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) involved our especially challenging, subjective, or complex judgements. We determined that there are no critical audit matters.

/s/ Marcum LLP

Marcum LLP

We have served as the Company’s auditor since 2010 (such date takes into account the acquisition of Rotenberg Meril Solomon Bertiger & Guttilla, P.C., by Marcum LLP effective February 1, 2022).

Saddle Brook, New Jersey

June 1, 2023 

62

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, before the effects of the adjustment for the correction of the errors described in Note S, the accompanying consolidated balance sheets of BIO-key International, Inc. and Subsidiaries (the “Company”) as of December 31, 2021, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for the year 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, 2021, 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.

We were not engaged to audit, review, or apply any procedures to the adjustments for the correction of the errors described in Note S, and accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by Marcum LLP.

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 audit. 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.

/s/ ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.

ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.

We have served as the Company’s auditors from 2010 to 2022.

Saddle Brook, New Jersey

March 31, 2022

63

BIO-key International,Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

  

December 31,

 
  

2019

  

2018

 

ASSETS

        

Cash and cash equivalents

 $79,013  $323,943 

Accounts receivable, net

  126,000   1,574,032 

Due from factor

  110,941   56,682 

Inventory

  429,119   998,829 

Resalable software license rights

  -   1,125,000 

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 

Capitalized contract costs, net

  231,519   319,199 

Deposits and other assets

  8,712   8,712 

Operating lease right-of-use assets

  566,479   - 

Intangible assets, net

  154,386   195,906 

Total non-current assets

  1,130,407   7,463,035 

TOTAL ASSETS

 $2,496,698  $11,692,332 
         

LIABILITIES

        

Accounts payable

 $919,294  $481,269 

Accrued liabilities

  686,885   548,232 

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

  2,255,454   - 

Deferred revenue

  359,212   196,609 

Operating lease liabilities, current portion

  170,560   - 

Total current liabilities

  4,391,405   1,226,110 

Operating lease liabilities, net of current portion

  390,466   - 

Total non-current liabilities

  390,466   - 

TOTAL LIABILITIES

  4,781,871   1,226,110 
         

Commitments and Contingencies

        
         

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 

Additional paid-in capital

  87,436,402   85,599,140 

Accumulated deficit

  (89,723,016

)

  (75,134,316

)

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)

  (2,285,173

)

  10,466,222 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 $2,496,698  $11,692,332 
  

December 31,

 
  

2022

  

2021

 

ASSETS

        

Cash and cash equivalents

 $2,635,522  $7,754,046 

Accounts receivable, net

  1,522,784   970,626 

Due from factor

  49,500   49,500 

Note receivable, net of allowance

  -   82,000 
Inventory, net of reserve  4,434,369   4,940,660 

Prepaid expenses and other

  342,706   216,041 

Total current assets

  8,984,881   14,012,873 

Resalable software license rights

  -   48,752 

Investment – debt security, net

  -   452,821 

Equipment and leasehold improvements, net

  107,413   69,168 

Capitalized contract costs, net

  283,069   249,012 

Deposits and other assets

  8,712   8,712 

Note receivable, net of allowance

  -   113,000 

Operating lease right-of-use assets

  197,355   254,100 

Intangible assets, net

  1,762,825   1,298,077 

Goodwill

  -   1,262,526 

Total non-current assets

  2,359,374   3,756,168 

TOTAL ASSETS

 $11,344,255  $17,769,041 
         

LIABILITIES

        

Accounts payable

 $1,108,279  $427,772 

Accrued liabilities

  1,009,123   828,997 

Convertible note payable

  2,596,203   - 

Government loan – BBVA Bank, current portion

  120,000   - 

Deferred revenue – current

  462,418   565,355 

Operating lease liabilities, current portion

  159,665   177,188 

Total current liabilities

  5,455,688   1,999,312 

Deferred revenue, net of current portion

  52,134   67,300 
Deferred tax liability  170,281   - 

Government loan – BBVA Bank, net of current portion

  326,767   - 

Operating lease liabilities, net of current portion

  37,829   86,974 

Total non-current liabilities

  587,011   154,274 

TOTAL LIABILITIES

  6,042,699   2,153,586 
         
Commitments (Note O)        
         

STOCKHOLDERS EQUITY

        

Common stock — authorized, 170,000,000 shares; issued and outstanding; 9,190,504 and 7,853,759 of $.0001 par value at December 31, 2022 and December 31, 2021, respectively

  919   786 

Additional paid-in capital

  122,028,612   120,190,139 

Accumulated other comprehensive loss

  (242,602

)

  - 

Accumulated deficit

  (116,485,373)  (104,575,470

)

TOTAL STOCKHOLDERS EQUITY

  5,301,556   15,615,455 

TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

 $11,344,255  $17,769,041 

 

The accompanying notes are an integral part of these statements.

 

F-364

BIO-key International,Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

  

Years ended December 31,

 
  

2022

  

2021

 
         

Revenues

        

Services

 $1,789,720  $1,273,354 

License fees

  4,584,052   2,555,809 

Hardware

  646,486   1,285,326 

Total revenues

  7,020,258   5,114,489 
         

Costs and other expenses

        

Cost of services

  722,152   686,175 

Cost of license fees

  906,417   183,199 

Cost of hardware

  811,001   803,555 

Total costs and other expenses

  2,439,570   1,672,929 

Gross Profit

  4,580,688   3,441,560 
         

Operating expenses

        

Selling, general and administrative

  9,364,887   6,028,360 

Research, development and engineering

  3,252,236   2,355,056 
Reversal of earnout payable – Swivel acquisition  (500,000)  - 

Impairment of goodwill

  2,387,193   - 

Total operating expenses

  14,504,316   8,383,416 

Operating loss

  (9,923,628

)

  (4,941,856

)

         

Other income (expense)

        

Interest income

  233   4,075 

Loss on foreign currency transactions

  -   (50,000

)

Investment-debt security reserve

  (452,821)  (60,000

)

Loan transaction costs  (1,147,456)  - 
Change in fair value of convertible note  (396,203)  - 

Interest expense

  (10,462)  (18,000)

Total other income (expense)

  (2,006,709)  (123,925

)

         
Loss before provision for income tax benefit  (11,930,337)  - 
         
Provision for income tax benefit  20,434   - 
         

Net loss

 $(11,909,903)  (5,065,781

)

         
Comprehensive loss:        

Net loss

 $(11,909,903) $(5,065,781

)

Other comprehensive loss- Foreign translation adjustment

  (242,602)  - 
Comprehensive loss $(12,152,505

)

 $(5,065,781

)

         

Basic and Diluted Loss per Common Share

 $(1.47

)

 $(0.65

)

         
Weighted Average Shares Outstanding:        

Basic and Diluted

  8,100,785   7,791,741 

The accompanying notes are an integral part of Contentsthese statements.

65

 

BIO-key International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONSSTOCKHOLDERS EQUITY

 

  

Years ended December 31,

 
  

2019

  

2018

 
         

Revenues

        

Services

 $925,245  $1,012,576 

License fees

  442,649   1,739,897 

Hardware

  899,634   1,292,069 

Total revenues

  2,267,528   4,044,542 
         

Costs and other expenses

        

Cost of services

  272,318   443,210 

Cost of license fees

  916,112   3,072,356 

Cost of hardware

  1,272,815   648,624 

Total costs and other expenses

  2,461,245   4,164,190 

Gross Profit (Loss)

  (193,717

)

  (119,648

)

         

Operating expenses

        

Selling, general and administrative

  5,036,820   5,333,906 

Research, development and engineering

  1,331,667   1,415,401 

Total operating expenses before impairment

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

Operating loss

  (13,519,720

)

  (6,868,955

)

         

Other income (expense)

        

Interest income

  154   80 

Interest expense

  (1,069,134

)

  - 

Total other income (expense)

  (1,068,980

)

  80 

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

  (14,588,700

)

  (8,495,874

)

         

Basic and Diluted Loss per Common Share

 $(1.03

)

 $(0.73

)

         

Weighted Average Shares Outstanding:

        

Basic and Diluted

  14,223,685   11,607,933 
  

Common Stock

  

Additional

Paid-in

  Accumulated
Other
Comprehensive
  Accumulated     
  

Shares

  

Amount

  

Capital

  Income (Loss)  

Deficit

  Total 

Balance as of December 31, 2020

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

)

 $20,335,119 

Issuance of common stock for directors’ fees

  7,828   1   25,535   -   -   25,536 

Issuance of restricted common stock to employees

  13,125   1   (1)  -   -   - 

Forfeiture of restricted stock

  (1,250)  -   -   -   -   - 

Legal fees

  -   -   (5,228)  -   -   (5,228

)

Issuance of common stock for Employee stock purchase plan

  19,484   2   36,628   -   -   36,630 

Share based compensation for employee stock purchase plan

  -   -   10,680   -   -   10,680 

Share-based compensation

  -   -   278,499   -   -   278,499 

Net loss

  -   -   -   -   (5,065,781)  (5,065,781

)

Balance as of December 31, 2021

  7,853,759  $786  $120,190,139  $-  $(104,575,470

)

 $15,615,455 

Issuance of common stock for directors’ fees

  39,636   4   76,039   -   -   76,043 

Issuance of restricted common stock to employees

  278,000   27   (27)  -   -   - 

Forfeiture of restricted stock

  (10,500)  (1)  -   -   -   (1

)

Issuance of common stock pursuant to Swivel purchase agreement

  269,060   27   599,977   -   -   600,004 

Issuance of common stock for note issuance fees

  700,000   70   699,930   -   -   700,000 

Issuance of warrant in conjunction with note payable

  -   -   94,316   -   -   94,316 

Issuance of common stock for employee stock purchase plan

  60,549   6   56,374   -   -   56,380 

Share based compensation for employee stock purchase plan

  -   -   18,787   -   -   18,787 

Foreign currency translation adjustment

  -   -   -   (242,602)  -   (242,602

)

Share-based compensation  -   -   293,077   -   -   293,077 

Net loss

  -   -   -   -   (11,909,903

)

  (11,909,903

)

Balance as of December 31, 2022

  9,190,504  $919  $122,028,612  $(242,602) $(116,485,373

)

 $5,301,556 

 

The accompanying notes are an integral part of these statements.

 

 

BIO-key International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

  

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

)

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 
  

Years ended December 31,

 
  

2022

  

2021

 
         

CASH FLOW FROM OPERATING ACTIVITIES:

        

Net loss

 $(11,909,903

)

 $(5,065,781

)

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

        

Depreciation

  43,794   54,649 
Impairment of goodwill  2,387,193   - 
Reversal of earnout payable – Swivel acquisition  (500,000)  - 

Amortization of intangible assets and write-off

  298,113   216,069 

Amortization of resalable software license rights

  48,752   10,130 
Loan transaction costs  1,147,456   - 

Loss on foreign currency

  -   50,000 

Reserve for investment security

  452,821   60,000 
Reserve for inventory  400,000   - 

Reserve for note receivable

  186,000   100,000 

Allowance for doubtful account

  360,000   200,000 

Amortization of debt discount

  -   18,000 

Amortization of capitalized contract costs

  106,624   110,681 

Share based and warrant compensation for employees and consultants

  311,864   289,179 

Stock based fees to directors

  76,043   25,536 
Bad debt expense  130,111   - 
Change in fair value of convertible note  396,203   - 
Deferred income tax benefit  (20,434)  - 

Amortization of operating lease right-of-use assets

  155,353   233,225 

Change in operating assets and liabilities:

        

Accounts receivable

  (339,383

)

  (672,577

)

Due from factor

  -   10,953 

Capitalized contract costs

  (131,969

)

  (194,378

)

Inventory

  106,291   (4,609,713

)

Prepaid expenses and other

  (46,655

)

  (14,534

)

Accounts payable

  239,144   183,614 

Accrued liabilities

  167,614   320,510 

Deferred revenue

  (120,078

)

  (69,681

)

Operating lease liabilities

  (173,988

)

  (234,310

)

Net cash used for operating activities

  (6,229,034

)

  (8,978,428

)

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Purchase of Swivel Secure, net of cash acquired of $729,905

  (623,578)  - 
Receipt of cash from note receivable  9,000   - 
Capital expenditures  (82,040)  (42,024)

Net cash used for investing activities

  (696,618

)

  (42,024

)

CASH FLOWS FROM FINANCING ACTIVITIES:

        
Proceeds from issuance of convertible notes  2,002,000   - 
Costs incurred for issuance of convertible note  (155,140)  - 

Proceeds from Employee Stock Purchase Plan

  56,380   36,630 

Repayment of note payable – PistolStar

  -   (250,000

)

Legal fees

  -   (5,228

)

Net cash (used in) provided by financing activities

  1,903,240   (218,598

)

Effect of exchange rate changes  (96,112)  - 

NET DECREASE IN CASH AND CASH EQUIVALENTS

  (5,118,524

)

  (9,239,050

)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

  7,754,046   16,993,096 

CASH AND CASH EQUIVALENTS, END OF YEAR

 $2,635,522  $7,754,046 

 

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  $- 
  

Years ended December 31,

 
  

2022

  

2021

 
         

Cash paid during the year for:

        
Taxes $25,682  $- 

Interest

 $10,462  $- 
         

Noncash investing and financing activities:

        
         

Accounts receivable acquired from Swivel Secure

 $702,886  $- 

Equipment acquired from Swivel Secure

 $65,640  $- 

Other assets acquired from Swivel Secure

 $20,708  $- 

Intangible assets acquired from Swivel Secure

 $762,860  $- 

Goodwill resulting from the acquisition from Swivel Secure

 $1,258,087  $- 

Accounts payable and accrued expenses acquired from Swivel Secure

 $431,884  $- 

Government loan acquired from Swivel Secure

 $544,000  $- 
Deferred tax liability from the acquisition of Swivel Secure $190,715  $- 

Common stock issued for acquisition of Swivel Secure

 $600,004  $- 
Common stock issued for acquisition of note payable $700,000  $- 
Issuance of warrant for acquisition of note payable $94,316  $- 
Operating lease right-of-use asset and liability for new lease $105,893  $- 

 

The accompanying notes are an integral part of these statements.

 

 

BIO-key International,Inc. and Subsidiaries

NOTES TO THE FINANCIAL STATEMENTS

December 31, 20192022 and 20182021

 

 

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 hashistorically 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 Company currently requires approximately $525,000 per month to conduct operations, a monthly amount that it has been unable to consistently achieve through revenue generation.  

IfAs of the date of this report, the Company is unable to generate sufficient revenue to meetdoes not have enough cash for twelve months of operations. The history of significant losses, the negative cash flow from operations, the limited cash resources on hand and the dependence by the Company on its goals, it will needability, to obtain additional third-party financing to (i) conductfund its operations after the sales,current cash resources are exhausted raises substantial doubt about the Company’s ability to continue as a going concern. The Company has lowered our expenses through decreasing spending in marketing, and technical support necessary to execute its plan to substantially grow operations, increase revenueresearch 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 todevelopment. In addition, the Company that adequate financing will be obtained byhas purchased inventory for projects in Nigeria, which have been delayed in deployment, and therefore is looking into other markets and opportunities to sell or return the Company in orderproduct to meet its needs, or that such financing would not be dilutive to existing shareholders.generate additional cash.

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"(“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 describedCompany has suffered substantial net losses and negative cash flows from operations in the preceding paragraphsrecent years 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. Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon the Company’s ability to increase its revenue and meet its financing requirements 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.

 

ReclassificationForeign Currency

Reclassifications occurred

The Company accounts for foreign currency transactions pursuant to certain prior year amountsASC 830, Foreign Currency Matters (“ASC 830”). The functional currency of the Company is the U.S. dollar, which is the currency of the primary economic environment in orderwhich it operates. In accordance with ASC 830, monetary balances denominated in or linked to conform toforeign currency are stated on the basis of the exchange rates prevailing at the applicable balance sheet date. For foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used. Gains or losses arising from changes in the exchange rates used in the translation of such transactions and from the remeasurement of the monetary balance sheet items are recorded as gain (loss) on foreign currency transactions.

The functional currency of Swivel Secure Europe, SA is the Euro. Under ASC 830, all assets and liabilities are translated into U. S. dollars using the current year presentation to segregate costexchange rate at the end of sales for licenseseach fiscal period. Revenues and hardware. The reclassifications have no effect onexpenses are translated using the reported netaverage exchange rates prevailing throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated in Euros are reflected in the statement of operations as appropriate. Translation adjustments are included in accumulated other comprehensive loss.

69

 

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. Principles of 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 GAAPaccounting principles generally accepted in the United States of America (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,goodwill, fair value of convertible note payable, 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

 

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'sCompany’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 consistconsists 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.

70

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.of the contract begins. Revenue is recognized over time on a ratable basis over the contract term. Support and Maintenancemaintenance contracts are upone to one yearfive 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 customers 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, 2022 and 2021, amounts in deferred revenue were approximately $515,000 and $633,000, respectively.

71

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.

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. Refer Note K for more information regarding the impairment of goodwill in 2022.

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, 20192022 and 2018,2021, 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, 2019 and 2018, 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.

72

 

Accounts receivable at December 31, 20192022 and 20182021 consisted of the following:

 

  

December 31,

 
  

2019

  

2018

 
         

Accounts receivable - current

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

Allowance for doubtful accounts - current

  (13,785

)

  (13,785

)

Allowance for doubtful accounts - non current  (1,720,000)  (1,720,000)
   (1,733,785)  (1,733,785)
         

Accounts receivable, net of allowances for doubtful accounts

 $126,000  $1,574,032 

 

The allowance for doubtful accounts for the years ended December 31, 2019 and 2018 is as follows:

  

Balance at

Beginning

of Year

  

Charged to

Costs

and

Expenses

  

Deductions

From

Reserves

  

Balance at

End of Year

 

Year Ended December 31, 2019

                

Allowance for Doubtful Accounts

 $1,733,785  $-  $-  $1,733,785 

Year Ended December 31, 2018

                

Allowance for Doubtful Accounts

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

December 31,

 
  

2022

  

2021

 
         

Accounts receivable

 $2,096,569  $1,234,411 
Loss on foreign currency  -   (50,000

)

Allowance for doubtful accounts

  (573,785

)

  (213,785

)

Accounts receivable, net of allowances for doubtful accounts

 $1,522,784  $970,626 

 

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 ofallowance for doubtful accounts for the software license rights was initially allocated pro-rata to the maximum number of resalable end-user licenses in the rights contract. Throughyears ended 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.2022 and 2021 is as follows:

 

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.

  

Balance at

Beginning

of Year

  

Charged to

Costs

and

Expenses

  

Deductions

from

Reserves

  

Balance at

End of

Year

 
                 

Year ended December 31, 2022 Allowance for Doubtful Accounts

 $213,785  $360,000  $-  $573,785 

Year ended December 31, 2021 Allowance for Doubtful Accounts

 $1,733,785  $200,000  $(1,720,000) $213,785 

 

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 andDepreciation 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

 

  

Years

 

Equipment and leasehold improvements

      

Equipment

  3

-

5 

Furniture and fixtures

  3

-

5 

Software

   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 the 2019 year with respect to the FingerQ Resalable Software License Rights. Refer to Note G – Resalable License Rights for additional information.There were no impairments in 2022 and 2021.

 

73

9. 

10. Advertising Expense

 

The Company expenses the costs of advertising as incurred. Advertising expenses for 20192022 and 20182021 were approximately $317,000$842,000 and $309,000,$527,000, 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.

 

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

 

The Company’s EPS is calculated by dividing net income (loss)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 subjectivecertain 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,

 
  

2019

  

2018

 
         

Selling, general and administrative

 $828,981  $855,125 

Research, development and engineering

  118,739   125,099 
  $947,720  $980,224 

Valuation Assumptions for Stock Options

For 2019 and 2018, 241,334 and 351,918 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,

 
  

2019

  

2018

 

Weighted average Risk free interest rate

  2.33

%

  2.70

%

Expected life of options (in years)

  4.50   4.50 

Expected dividends

  0

%

  0

%

Weighted average Volatility of stock price

  84

%

  143

%

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.

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.

  

Year ended

December 31,

 
  

2022

  

2021

 
         

Selling, general and administrative

 $310,017  $269,368 

Research, development and engineering

  77,890   45,347 
  $387,907  $314,715 

 

 

15. 14. 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.”740. 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.

 

1615. . 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.

 

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For periods prior

16. The Fair Value Measurement Option

The Company has elected the fair value measurement option for convertible debt with embedded derivatives that require bifurcation, and record the entire hybrid financing instrument at fair value under the guidance of ASC 825, Financial Instruments. As a result, the convertible promissory note was recorded at fair value upon issuance and will subsequently be remeasured at each reporting date until settled or converted. The Company recognized the note initially at fair value, which exceeded the proceeds received resulting in a day one loss that has been recognized in net loss. The Company reports interest expense, including accrued interest, related to the adoptionconvertible debt under the fair value option, separately from within the change in fair value of ASC 842, the Company recorded rent expense based onconvertible debt in the accompanying consolidated statement of operations.

17. Fair Value Measurements

Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active or inputs which are observable either directly or indirectly for substantially the full term of the related lease. asset or liability; and

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

The expensefollowing table summarizes our financial instruments measured at fair value at December 31, 2022:

  Total  Level 1  Level 2  Level 3 
Convertible note at fair value $2,596,203  $-  $-  $2,596,203 

The Company issued a convertible note to which included an original issue discount, conversion features and a detachable warrant, as further discussed in Note M. The detachable warrant represents a freestanding, separable equity-linked financial instrument recorded at fair value. The fair value of the detachable warrant was calculated using a Black-Scholes valuation model. The Company elected the fair value option for the convertible debt which was determined based on significant unobservable inputs including the likelihood of default, the estimated date at which the default could take place, and the present value discount rate, which causes it to be classified as a Level 3 measurement within the fair value hierarchy. The fair value option requires recognition for operating leases under ASC 842 is substantially consistent with prior guidance.at fair value upon issuance and on each balance sheet date thereafter. Changes in the estimated fair value are recognized as change in fair value of convertible note in the consolidated statements of operations. As a result there are noof applying the fair value option, direct costs and fees related to the issuance of the convertible note were expensed and not deferred.

         The Company estimated the fair value of the convertible note using a probability-weighted discounted cash flow model with the following assumptions and significant differences in our resultsterms of operations presented.the convertible note at December 22, 2022:

1.

Face amount - $2,200,000

2.

Nominal interest rate – 10% - 12%

3.

Default interest rate – 18%

4.

Increase in principal upon a default – 30%

5.

Present value discount rate – 15.18%

6.

Likelihood of default – estimated to be 50% at the extended maturity date

 

 

The impact offollowing table shows the adoption of ASC 842 onchanges in fair value measurements for the balance sheet was:convertible note using significant unobservable inputs (Level 3) during the year ended December 31, 2022:

 

  

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 
Beginning balance $- 
Purchases and issuances  2,200,000 
Day one loss on value of hybrid instrument  396,203 
Ending balance $2,259,203 

 

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.

16.18. 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 2016-13,2016- 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-downwritedown 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 the Company for annual periods, including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies. Early adoption is permitted.on January 1, 2023. 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.

 

 

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:ended December 31, 2022 and 2021:

 

 

North

America

  

South

America

  

EMEA*

  

Asia

  

December 31,

2019

  

North

America

 

Africa

 

EMESA*

 

Asia

 

December

31,

2022

 
                     

License fees

 $208,827  $46,717  $117,401  $69,704  $442,649  $1,856,814  $517,161  $2,124,088  $85,989  $4,584,052 

Hardware

  388,938   12,636   342,304   155,756   899,634  422,275  25,833  19,914  178,464  646,486 

Support and Maintenance

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

Professional services

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

Services

  1,270,067  83,306  436,293  54  1,789,720 

Total Revenues

 $1,392,083  $67,867  $559,616  $247,962  $2,267,528  $3,549,156  $626,300  $2,580,295  $264,507  $7,020,258 

 

 

North

America

  

South

America

  

EMEA*

  

Asia

  

December 31,

2018

  

North

America

 

Africa

 

EMESA*

 

Asia

 

December

31,

2021

 
                     

License fees

 $318,271  $32,000  $278,516  $1,111,110  $1,739,897  $1,854,088  $521,751  $105,314  $74,656  $2,555,809 

Hardware

  439,480   53,200   477,674   321,715   1,292,069  278,655  698,264  265,996  42,411  1,285,326 

Support and Maintenance

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

Professional services

  115,970   -   2,000   -   117,970 

Services

  1,162,526  42,000  54,918  13,910  1,273,354 

Total Revenues

 $1,679,521  $85,865  $819,010  $1,460,146  $4,044,542  $3,295,269  $1,262,015  $426,228  $130,977  $5,114,489 

 

* EMEAEMESA – Europe, Middle East, AfricaSouth America

 

F-1477

 

Revenue recognized during the year ended December 31, 20192022 from amounts included in deferred revenue at the beginning of the periodyear was approximately $147,000. The Company did not recognize any$489,000. Revenue recognized during the year ended December 31, 2021 from amounts included in deferred revenue from performance obligations satisfied in prior periods.at the beginning of the year was approximately $529,000. Total deferred revenue (contract liability) was $359,212approximately $515,000 and $196,609$633,000 at December 31, 20192022 and December 31, 2018,2021, 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.satisfied. 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, 2019 deferredDeferred 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.

NOTE CSWIVEL SECURE EUROPE, SA ACQUISITION

 

NOTE C—FACTORING

Due from factor consistedOn March 8, 2022, the Company completed the acquisition of 100% of the following asissued and outstanding capital stock of December 31:

  

Original Invoice

Value

  

Factored

Amount

  

Factored

Balance due

 

Year Ended December 31, 2019

            

Factored accounts receivable

 $233,005  $122,064  $110,941 

Year Ended December 31, 2018

            

Factored accounts receivable

 $221,120  $164,438  $56,682 

The Company entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to October 31, 2020. PursuantSwivel Secure based in Madrid, Spain, pursuant to the terms of a stock purchase agreement. The aggregate purchase price consisted of a base purchase price of $1.75 million, subject to closing adjustments based on the arrangement,closing date working capital, indebtedness and unpaid transaction expenses, and an earn-out of $500,000. The earn-out was payable based on Swivel Secure generating $3,000,000 of revenue and $1,000,000 of operating profit during an earn-out period commencing on the closing date and ending on January 31, 2023, which was not attained. At the closing, the Company from timemade a cash payment of $1.27 million and issued 269,060 shares of common stock of which 89,687 shares were held back by the Company to time, sellssecure certain indemnification obligations under the stock purchase agreement. The shares of Company common stock were priced at $2.23, the contractual 20 day volume-weighted average price of the Company’s common stock immediately prior to the Factor a minimum of $150,000 per quarter of certain of its accounts receivable balancespayment date as reported on a non-recourse basisthe Nasdaq Capital Market.

The business combination has been accounted for credit approved accounts.as an acquisition and, in accordance with ASC 805. The Factor remits 35%Company recorded the assets acquired and liabilities assumed at their respective fair values as of the foreign and 75% ofacquisition date. The following table summarizes the domestic accounts receivable balance to the Company (the “Advance Amount”),purchase price allocation, 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 faceno earnout payment:

Purchase consideration:    

Total cash paid, including working capital adjustment

 $1,273,483 
Earnout payable  500,000 

Common stock issued

  600,004 

Total purchase price consideration

 $2,373,487 
     
Fair value of assets acquired and liabilities assumed:    

Cash and cash equivalents

 $729,905 

Accounts receivable

  702,886 

Equipment acquired

  65,640 

Other assets

  20,708 

Intangible assets

  762,860 

Goodwill

  1,258,087 

Total estimated assets acquired

  3,540,086 
     

Accounts payable and accrued expenses

  431,884 

Government loan

  544,000 
Deferred tax liability  190,715 

Total liabilities assumed

  1,166,599 

Total estimated fair value of assets acquired and liabilities assumed

 $2,373,487 

78

The fair value of the invoice factored,assets acquired and are determined byliabilities assumed was less than the numberpurchase price, resulting in the recognition of days required for collectiongoodwill. The goodwill reflected the value of the invoice. The costsynergies the Company expected to realize and the assembled workforce. Refer to Note K for more information regarding the impairment 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 

goodwill.

 

The significant intangible asset identified in the purchase price allocation discussed above was Customer Relationships. 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 government loan was issued through BBVA Bank during the COVID-19 pandemic. The loan bears interest at the rate of 1.75% per annum and is payable in monthly installments of approximately $11,900 inclusive of interest from May 2022 through April 2026. The installment payments have been paid monthly as per the schedule, as of the date of this report.

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

  

Amount

  

Estimated

useful

life

(in years)

 

Customer relationships

 $762,860   7 

Total identifiable intangible assets

 $762,860     

As discussed above, the earnout payable was not achieved. As such, the Company reversed the earnout payable of $500,000 and recognized the income on the reversal of the earnout payable.

For the period from March 8, 2022 to December 31, 2022, revenue from Swivel Secure amounted to $2,351,975 and net loss amounted to $720,691.

NOTE D—DFAIR 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—ECONCENTRATION 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 $2,000,000 and $7,057,000 at December 31, 20192022 and 2018.2021, 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.

 

79

During

For the year ended December 31, 2019, two customers2022 no customer accounted for 22% and 14%10% of total revenue, respectively. Duringrevenue. For the year ended December 2021, one customer accounted for 13% of total revenue.

At December 31, 2018, 2022, one customer accounted for 35% of the total accounts receivable. At December 31, 2021, three customers accounted for 27%, 14% and 13% of total revenue, respectively.

Three customers accounted for 18%, 16% and 14%87% of total accounts receivable, respectively,receivable.

NOTE FNOTE RECEIVABLE

During the third quarter of 2020, the Company loaned $295,000 as ofan advance to Technology Transfer Institute (“TTI”) to aid in fulfilling the African contracts. The note did not bear any interest if paid within the nine (9) monthly installments beginning December 31, 2019. One customer accounted2020. The note bore a default rate of 5%. Due to the ongoing delays in payment, the Company reserved $186,000 of the note as an allowance. On February 17, 2022, the Company amended the note to modify the payment terms to provide for 70%lower monthly payments, with an updated maturity date on or before December 6, 2023. On May 5, 2022, the Company amended the note to modify the payment terms to eight biweekly installments of total accounts receivable,$1,000 beginning February 25, 2022, nineteen consecutive monthly installments of $15,000 beginning on July 6, 2022, and $2,000 on or before February 6, 2024. Currently, the payments are several months behind schedule. Due to the delay in payments, the Company has increased the allowance for the remainder of the balance owed under the note. We are continuing to pursue payment and expect that we will start to receive funds in the second quarter of 2023. A member of our board of directors served as Chief Executive Officer of December 31, 2018.TTI until August 12, 2020.

 

  

December 31,

  

December 31,

 
  

2022

  

2021

 
         

Note receivable

 $195,000  $295,000 

Repayment of note

  (9,000)  - 

Allowance for doubtful account

  (186,000)  (100,000

)

Note receivable, net of allowance

  -   195,000 
Current portion, net of allowance $-  $82,000 
Noncurrent portion, net of allowance $-  $113,000 

 

NOTE F—GINVENTORY

 

Inventory is stated at the lower of cost, determined on a first in, first out basis, or realizable value. The Company periodically evaluates inventory items and establishes reserves for obsolescence accordingly. The Company also reserves for excess quantities, slow moving goods, and for other impairment of value based upon assumptions of future demand and consists primarily of fabricated assembliesmarket conditions. The $400,000 reserve on inventory is due to slow moving inventory purchased for projects in Nigeria. The Company is looking into other markets and finished goods. opportunities to sell or return the product.

Inventory is comprised of the following as of December 31:

 

 

2019

  

2018

  

2022

  

2021

 

         

Finished goods

  287,761   496,358  $4,764,643  $4,798,203 

Fabricated assemblies

  141,358   502,471   69,726   142,457 
Reserve on finished goods  (400,000)  - 

Total inventory

 $429,119  $998,829  $4,434,369  $4,940,660 

 

80

  

NOTE G—HRESALABLE SOFTWARE LICENSES RIGHTS

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 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.

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 cashflows 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 $2,640,000 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 iswas amortizing the total cost overat the same methodology described above with the greatestgreater of the actual salesunit cost per license sold or straight-line method approaches being the actual sales through 2019. A total of $40,404, and $18,198 was expensed during the twelve month periods ended December 31, 2019 and 2018, respectively.amortization over 10 years. 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$141,190 has been expensed, withcharged to cost of sales. Since we have not received any sales for the license within the last two years, we accelerated the amortization for the balance of the licenses in 2022, leaving a carrying balance of $73,802$0 and $48,752 as of December 31, 2019. 2022 and 2021, respectively. A total of $48,752 and $10,130 was charged to cost of sales during the years ended December 31, 2022 and 2021, respectively.

NOTE IINVESTMENT IN DEBT SECURITY

The Company has classifiedpurchased a 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong in September 2020 bearing interest at 5% per annum. The Bond Certificate translated to $512,821 U.S. Dollars, based on the balanceexchange rate at the purchase date. The investment was originally recorded at amortized cost and was scheduled to mature in June 2021. The Company never received the proceeds and accrued interest from the investment and as non-current until a larger deployment occurs. Software license rights is comprisedsuch, wrote off the investment during 2022 as the bond issuer defaulted on repayment, and the Company had no recourse.

NOTE JEQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

 

 

 

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

 

 

  

2022

  

2021

 
         

Equipment

 $825,058  $831,784 

Furniture and fixtures

  225,978   164,079 

Software

  49,143   32,045 

Leasehold improvements

  34,903   25,135 
   1,135,082   1,053,043 
         
         

Less accumulated depreciation and amortization

  (1,027,669

)

  (983,875

)

         

Total

 $107,413  $69,168 

Depreciation was $43,794 and $54,649 for 2022 and 2021, respectively. Amounts are recorded in selling, general, and administrative expense as well as in cost of services.

NOTE KINTANGIBLE ASSETS AND GOODWILL

Intangible assets consisted of the following as of December 31:

  

2022

  

2021

 
         

Trade name

 $130,000  $130,000 

Proprietary software

  420,000   420,000 

Customer relationships

  1,692,860   930,000 

Patents and patents pending

  365,080   365,080 
   2,607,940   1,845,080 
         
         

Less accumulated amortization

  (845,115

)

  (547,003)
         

Total

 $1,762,825  $1,298,077 

81

Aggregate amortization expense for 2022 and 2021 was approximately $298,000 and $216,000, respectively. 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 

2022

 $18,000 

2023

 $18,000  $320,000 

2024

 $1,802  320,000 

2025

 280,000 

2026

 230,000 

2027

 220,000 

Thereafter

  392,825 

Total

 $1,762,825 

 

Goodwill

 

NOTE H—INVESTMENTSThe Company conducted its annual impairment analysis of its goodwill balances as at December 31, 2022. The Company noted the noted the cyclical downturn in technology stock values over the 2022 period, since our previous annual impairment assessment.

 

During 2019,The analysis showed the carrying value of the Company’s reporting segment was in excess of the Company’s market valuation as at December 31, 2022 based on a fair valuation measure as the quoted market price for the Company’s publicly traded stock as of that date.

Accordingly, the Company purchased a 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institutionconcluded the amounts in Hong Kong. The Bond Certificate translates to $512,821 U.S. Dollarsgoodwill had been fully impaired and accordingly wrote-off the entire balance in full as ofat December 2019. The bond has a one-year maturity and 5% interest rate. 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. The investment is recorded at amortized cost which approximates fair value, and is currently planned to be held to maturity.

NOTE I—EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

  

2019

  

2018

 
         

Equipment

 $648,286  $619,533 

Furniture and fixtures

  164,079   164,079 

Software

  32,045   32,045 

Leasehold improvements

  23,403   23,403 
   867,813   839,060 
         
         

Less accumulated depreciation and amortization

  (772,304

)

  (690,452

)

         

Total

 $95,509  $148,608 

Depreciation was $81,852 and $84,617 for 2019 and 2018, respectively. Amounts are recorded in Selling, General, and Administrative Expense and Cost of Services.31, 2022.

 

F-17

NOTE LJ—INTANGIBLE 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 

Aggregate amortization expense for 2019 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 aggregate amortization expense of intangible assets for the 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.

NOTE KACCRUED LIABILITIES

 

Accrued liabilities consisted of the following as of December 31:

 

 

2019

  

2018

  

2022

  

2021

 
         

Compensation

 $193,823  $224,135  $377,958  $254,433 

Compensated absences

  155,962   154,169  378,874  293,297 

Accrued legal and accounting fees

  105,933   77,133  110,008  95,738 
Franchise taxes 7,000  40,000 
Employee expenses reimbursement 114,209  76,000 

Sales tax payable

  17,248   9,436  17,594  18,548 

Factoring fees

  31,458   19,000 

Other

  182,461   64,359   3,480   50,981 
         

Total

 $686,885  $548,232  $1,009,123  $828,997 

 

NOTE ML—RELATED PARTYCONVERTIBLE NOTE PAYABLE

 

LicensingSecurities Purchase Agreement with Subsidiaries of China Goldjoy Group Limited.dated December 22, 2022

 

On November 11, 2015, BIO-key Hong Kong Limited, a subsidiary ofDecember 22, 2022, the Company entered into and closed a licensesecurities purchase agreement with certain subsidiaries of China Goldjoy Group Limited (“CGG”(the “Purchase Agreement”). The license agreement provides for the grant 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 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 a director of the Company. 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, and 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 Note G - 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 recorded 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.

NOTE N—CONVERTIBLE NOTES PAYABLE

On April 4, 2019, the Company which 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 agreement 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.

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.

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. 

Securities Purchase Agreement dated July 10, 2019

On July 10, 2019, the Company issued a $3,060,000$2,200,000 principal amount senior secured convertiblepromissory note (the “Original Note”“Note”). At closing, a total of $2,550,000$2,002,000 was funded. The original issue discount was $510,000. The principal amount due offunded, with 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.proceeds to be used for general working capital.

 

The Originalprincipal amount of the Note is due six months following the date of issuance, subject to one six-month extension by the Company. Interest under the Note accrues at a rate of 10% per annum, payable monthly through month six. In the event the maturity date of the Note is extended, interest will accrue at the rate of 12% per annum in months seven through twelve, payable monthly. The Note is secured by a lien on substantially all of the Company’s assets and properties and is convertiblecan be prepaid in whole or in part without penalty at any time.

82

In connection with the optionissuance of the Investor inNote, the Company issued to the investor 700,000 shares of Common Stock (the “Commitment Shares”) valued at $1.00 per share and a warrant (the “Warrant”) to purchase 200,000 shares of common stock (the “Warrant Shares”) at a fixed conversionan exercise price of $1.50$3.00 per share.share, exercisable commencing on the date of issuance with a term of five years. The warrant was valued at $94,316 (see Note P. #3). In the event the Note is paid in full within six months after the date of issuance, the Company has thewill exercise its right to prepayrepurchase 350,000 of the OriginalCommitment Shares for aggregate payment to the Investor of $1.00.

Upon issuance, the Note is not convertible into common stock or any other securities of the Company. Only after a date that is six (6) months following the issuance date of the Note and upon the occurrence of any events of default (as defined) and expiration of any applicable cure periods, all amounts due under the Note will immediately and automatically become due and payable in full, interest will accrue at any time without penalty in which event, the Investor hadhigher of 18% per annum or the option of converting 25% ofmaximum amount permitted by applicable law, the outstanding principal amount ofdue under the Note will be increased by 30%, and the Investor will have the right to convert all amounts due under the Note into shares of common stock.

In connection with the closing of the Original Note, the Company issuedstock (the “Conversion Shares”) at a five-year warrantconversion price equal to the Investor to purchase 2,000,000 shares of common stock at a fixed exercise10 day volume weighted average sales price of $1.50 per share, paid a $50,000 commitment fee, and issued 266,667 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 is amortized over the life of the 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. 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 per share.

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 priceon the date of $0.65 per share through June 12, 2020. All other provisionsconversion, subject to the Share Cap described in the paragraph below.

The aggregate number of the Amended Note remain the same. As of May 12, 2020, the Investor has converted $3,250,000 into 4,999,995 shares of common stock.stock issuable in the forgoing transaction consisting of the Commitment Shares, the Warrant Shares, and the Conversion Shares are capped at 1,684,576 which is 19.9% of the Company’s issued and outstanding shares of common stock on December 22, 2022, the date the definitive transaction documents were executed (the “Share Cap”).

 

UntilDuring April 2023, we were in default under the second anniversaryNote due to our failure to timely file this annual report and timely file a registration statement covering the public resale of the closing,shares issued to the Investor has the right to purchase up to 20%holder of the securitiesNote in connection with the Company issuesfinancing. We have obtained a waiver and, therefore, as of the date of this report we are not in any future private placement, subject to certain exceptions for, among other things, strategic investments.default.

 

Secured convertible note payable relating to the Original Note, netAs of unamortized debt discount and debt issuance costs at December 31, 2019 consisted of:2022, the Note with principal balance of $2,200,000, at fair value, was recorded at $2,596,203.

 

Principal amount

 $3,060,000 

Less unamortized debt discount

  (574,330

)

Less unamortized debt issuance costs

  (230,216

)

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

 $2,255,454 

Interest expense for the year ended December 31, 2019 consists of:

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 

NOTE ONLEASES

 

The Company’s leases office space in New Jersey, Hong KongMinnesota, New Hampshire, Madrid and MinnesotaHong-Kong with lease termination dates ofin 2023 2020, and 2022, respectively.2024. The leases include non-lease components with variable payments.property leased in China is paid monthly as used, without a formal agreement. 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

 
     

Year ended

December 31,

2022

  

Year ended

December 31,

2021

 

Lease cost

        

Operating lease cost

 $186,246  $254,649  $255,892 

Short-term lease cost

  41,535 

Total lease cost

 $227,781  $254,649  $255,892 
     

Balance sheet information

Balance sheet information

 

Balance sheet information

  

Operating right-of-use assets

 $566,479  $197,355  $254,100 
     

Operating lease liabilities, current portion

 $170,560  $159,665  $177,188 

Operating lease liabilities, non-current portion

  390,466   37,829   86,974 

Total operating lease liabilities

 $561,026  $197,494  $264,162 
     

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

  3.33  0.96  1.45 

Weighted average discount rate – operating leases

  5.50

%

 5.50

%

 5.50

%

 
Supplemental cash flow information related to leases were as follows: 
 

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

 $259,558  $256,977 
 
Maturities of operating lease liabilities were as follows as of December 31, 2022: 
 

2023

 $164,596    

2024

  38,808    

Total future lease payments

 $203,404    

Less: imputed interest

  (5,910

)

   

Total

 $197,494    

 

  

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

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

$179,105

Maturities of operating lease liabilities were as follows:

2020

 $197,724 

2021

  170,853 

2022

  160,817 

2023

  89,226 

Total future lease payments

 $618,620 

Less: imputed interest

  (57,594

)

Total

 $561,026 

NOTE POCOMMITMENTS AND CONTINGENCIES

 

Distribution Agreement

Swivel Secure has a distribution agreement with Swivel Secure Limited (“SSL”). Terms of the agreement include the following:

1.

The initial term of the agreement ends on January 31, 2027 and will be automatically extended for additional one-year terms thereafter unless either party provides written notice to the other party not later than 30 days before the end of the term that it does not wish to extend the term.

2.

SSL appoints Swivel Secure as the exclusive distributor of SSL’s products, to market, sell and distribute in the EMEA (Europe, Middle East and Africa), excluding the United Kingdom and Republic of Ireland, for a defined discount on the sale price.

3.

Swivel Secure is expected to generate a certain minimum level of orders of SSL products each year during the term of the agreement. If Swivel Secure fails to meet such minimum level of orders in any year, the exclusive distribution rights will terminate and Swivel Secure will serve as a non-exclusive distributer of SSL Products.

The Company expects the revenue targets to continue to be met based on historical performance and increasing distribution by Swivel Secure.

Litigation

 

From time to time, wethe Company may be involved in litigation relating to claims arising out of ourits operations in the normal course of business. As of December 31, 2019,2022, the Company was not a party to any pending lawsuits.

 

NOTE QPEQUITY

 

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, $.0001$.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

 

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,June 18, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC (the “Underwriter”) with respect tostockholders approved the issuance and sale2021 Employee Stock Purchase Plan (“ESPP”). Under the terms of an aggregate of 1,200,000 units (“Units”) with each unit consisting of one share of common stock and a warrant to purchase 0.75this plan, 789,000 shares of common stock are reserved for issuance to employees and officers of the Company at an exercise85% of the lower of the closing price of $1.50 per share, inthe common stock as reported on the Nasdaq Capital Market at the first day or the last day of the offering period. Eligible employees are granted 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 under the plan funded by payroll deductions. The Board may suspend or terminate the plan at any time, otherwise the plan expires June 17, 2031.

Issuances of Common Stock and/or 135,000 Warrants to cover over-allotments, if any (the “Over-Allotment”).

On AugustDecember 22, 2018,2022, the Underwriter exercised its Over-Allotment option in full on bothCompany issued the Common Stock andCommitment Shares. See Note M – Convertible Note Payable for more information.

On March 8, 2022, the Warrants. Pursuant to this agreement, 1,380,000Company issued 269,060 shares of common stock and warrantsof which 89,687 shares were held back by the Company to secure certain indemnification obligations under the Swivel Secure stock purchase 1,035,000agreement. The shares of Company common stock were issued at a total cost of $600,004, priced at $2.23, based on August 24, 2018 for aggregate gross proceedsthe contractual 20-day volume-weighted average price of $2,070,000. The gross proceeds were reduced by a 7% commission ($144,900) and $50,000 of underwriting expensesthe Company’s common stock immediately prior to net to $1,875,100 cash received.the payment date as reported on the Nasdaq Capital Market.

 

CostsOn June 18, 2021, the stockholders approved the 2021 Employee Stock Purchase Plan. Under the terms 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 stock and accrued dividends intothis plan, 789,000 shares of common stock are reserved for issuance to employees and officers of the Company at 85% of the lower of the closing price of the common stock as reported on the Nasdaq Capital Market at the first day or the last day of the offering period. Eligible employees are granted an option to purchase shares under the plan funded by payroll deductions. The Board may suspend or terminate the plan at any time, otherwise the plan expires June 17, 2031. During 2022 and 2021, 60,549, and 19,484 shares respectively were issued under the ESPP to employees, which resulted in 2018.a $18,787, and $10,680 non-cash compensation expense respectively for the Company.

 

Restricted Stock

 

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

The Company issued 278,000 shares of restricted common stock to certain employees of the Company and 10,500 of shares of restricted common stock were forfeited during fiscal year 2022. The Company issued 13,125 shares of restricted common stock to certain employees of the Company and 1,250 of shares of restricted common stock were forfeited during fiscal year 2021. These shares vest in equal annual installments over a three-year period from the date of grant.

Restricted stock compensation for the years ended December 31, 2022 and 2021 was $218,552 and $71,819, respectively.

Issuances to Directors, Executive Officers & Consultants

 

During the year ended December 31, 2019,2022 and 2021 years, the Company issued 36,89739,636 and 7,828 shares of common stock respectively 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’ exercise options

During 2019$76,043 and 2018, no employee stock options were exercised.

Securities Purchase Agreement dated November 13, 2014

Pursuant to 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 664,584 shares of common stock and warrants to purchase an additional 996,877 shares of common stock for aggregate gross proceeds of $1,595,000.

The warrants had a term of five years and an initial exercise price of $3.60 per share, and were fully exercisable since February 2015. The warrants had customary anti-dilution protections including a “full ratchet” anti-dilution adjustment provision which are triggered in the event the Company sells or grants 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, 2018 the Company issued Common Stock and Warrants to 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 996,877 to 2,392,502, and the exercise price was reduced from $3.60 to $1.50 per share. The Company recognized a non-cash deemed dividend of $1,288,139 in 2018 in connection with these adjustments.

The warrants expired in November 2019.

Securities Purchase Agreement dated September 23, 2015

On September 23, 2015, the Company issued a warrant to purchase 69,445 shares of common stock in connection with the issuance of a promissory note. The warrants are immediately exercisable at an initial exercise price of $3.60 per share 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, 2018 the Company issued Common Stock and Warrants 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 2018 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.$25,536 respectively.

 

 

3. Warrants

There were no warrants issued during 2021.

Warrants Issued with Convertible Note:

See Note M – Convertible Note Payable for the warrant issued with a convertible note in 2022.

Valuation Assumptions for Warrants:

 

The Company hasrecords 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 the warrant issued warrantsin 2022 was estimated with the following assumptions:

  

Years ended

December 31,

 
  

2022

  

2021

 

Weighted average risk-free interest rate

  3.70

%

  -

%

Weighted average exercise price

 $3.00  $- 

Weighted average exercise period

  5   - 

Weighted average Volatility of stock price

  108.60

%

  -

%

The 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.

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     
                

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    

Outstanding, as of December 31, 2020

 4,689,387  $6.04  4.48   

Granted

  2,000,000   1.50              

Exercised

                   

Forfeited

                   

Expired

  (2,392,502

)

  1.50                

Outstanding, as of December 31, 2019

  3,388,474   1.60   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        

Outstanding, as of December 31, 2021

 4,689,387  6.04  3.48   

Granted

 200,000  3.00      

Exercised

   

  

Forfeited

     

Expired

  (17,362)  

28.80

      

Outstanding, as of December 31, 2022

  4,872,025  $5.83  2.59   

 

The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $0.59, $2.21, and $3.52 as of December 31, 2022, 2021 and 2020, respectively, which would have been received by the warrant holders had all warrant holders exercised their options as of that date. There were no in-the-money warrants exercisable as of December 31, 2022, 2021 and 2020.

86

NOTE RQSTOCK 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). 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, 166,667 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 shareholdersstockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan). Under the terms of this plan, 666,667Plan initially reserved 187,500 shares of common stock are reserved for issuance of options, restricted stock, and other equity based awards to employees, officers, directors, and consultants of the Company atCompany. In 2021, the stockholders approved an amendment to the 2015 to increase the shares of common stock authorized for issuance under the 2015 Plan from 187,500 shares to 789,000 shares together with other technical changes. The term of stock options granted under the 2015 Plan, may not exceed ten years, 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 the terms of stock optionvalue, and vesting occurs over time periods set forth in written agreements with the recipients. In the event of a change in control, certain stock awards issued under this planthe 2015 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 PlansPlan 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

  

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, 2020

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

Granted

     351,918      351,918   1.97                  

Exercised

                                

Forfeited

     (38,613

)

  (111,253

)

  (149,866

)

  2.63          (3,291) 

  (3,291) 

3.87

      

Expired

  (18,961

)

  (13,473

)

  (59,097

)

  (91,531

)

  3.03           (84

)

  (11,438

)

  (11,522

)

  39.13      

Outstanding, as of December 31, 2018

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

Outstanding, as of December 31, 2021

  90,808   121,653   212,461  $16.65   3.03  $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              (9,465

)

  (9,465

)

  17.28        

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, 2022

  90,808   112,188   202,996  $16.63   2.14  $0 

Vested or expected to vest at December 31, 2022

          201,271  $16.72   2.12  $0 

Exercisable at December 31, 2022

          194,561  $17.12   2.03  $0 

87

 

The options outstanding and exercisable at December 31, 20192022 were in the following exercise price ranges:

 

 

 

 

 

 

 

Options Outstanding

 

 

Options Exercisable

 

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

 

$

2.00

-

3.50

 

 

 

1,164,841

 

 

 

2.56

 

 

 

4.28

   

761,488

   

2.58

 

$

3.51

-

4.92

 

 

 

168,547

 

 

 

4.58

 

 

 

0.76

   

168,547

   

4.58

 

$

0.51

-

4.92

 

 

 

1,751,724

 

 

 

 

 

 

 

    

992,747

    

 

       

Options Outstanding

  

Options Exercisable

 
 

Range of exercise prices

  

Number of

shares

  

Weighted

average

exercise

price

  

Weighted

average

remaining

life (in years)

  

Number

exercisable

  

Weighted

average

exercise

price

 
 $4.08-5.84   25,565  $5.20   4.63   17,130  $5.20 
 $5.85-28.00   177,431   18.27   1.81   177,431   18.27 
 $4.08-28.00   202,996           194,561     

 

The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $0.50$0.59, $2.21, and $3.52 as of December 31, 2019,2022, 2021 and 2020, respectively, which would have been received by the option holders had all option holders exercised their options as of that date. The total number ofThere were no in-the-money options exercisable as of December 31, 2019 was 0.2022, 2021 and 2020.

 

The weighted average fair value of options granted during the years ended December 31, 20192022 and 20182021 was $1.03 and $1.53 per share, respectively.$0 as no options were granted in either year. The total intrinsic value of options exercised during the years ended December 31, 20192022 and 20182021 was $0.$0 as no options were exercised in either year. The total fair value of shares vested during the years ended December 31, 20192022 and 20182021 was $891,760$100,668 and $946,435,$252,874, respectively.

 

As of December 31, 2019,2022, future forfeiture adjusted compensation cost related to nonvested stock options is $731,370$17,630 and will be recognized over an estimated weighted average period of 0.910.64 years.

 

NOTE SRINCOME TAXES

The components of net loss consist of the following:

  

Year ended

December 31,

2022

  

Year ended

December 31,

2021

 
         

United States

 $(10,416,593) $(4,507,071)

Hong Kong

  (458,839)  (439,814)

Nigeria

  (143,499)  (118,896)

Spain

  (890,972)  - 

Total

 $(11,909,903) $(5,065,781)

 

There was no provision for current federal, foreign or state taxes as atfor both of the years ended December 31, 20192022 and 2018.2021 as a result of taxable losses incurred in these jurisdictions. The provision for income tax benefits consist of the following (in thousands):

 

  

Year ended

December 31,

2022

  

Year ended

December 31,

2021

 
         

Current – federal, states, and foreign

 $-  $- 

Deferred- Federal

  1,175,000   128,000 

Deferred – States

  122,000   47,000 

Deferred – Foreign

  (20,000

)

  - 

Total

  1,277,000   175,000 

Change in valuation allowance

  (1,297,000

)

  (175,000

)

         

Provision for income tax benefits

 $(20,434

)

 $ 

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.

88

Significant components of deferred taxestax assets and liabilities are as follows at December 31:31, 2022 and 2021 (in thousands):

  

December 31,

2022

  

December 31,

2021

As Revised

 
         

Accrued compensation

 $113,000  $110,000 

Allowance for doubtful accounts

  169,000   70,000 
Research and development expenses  633,000   - 
Capital loss carry forward  114,000   - 

Stock-based compensation

  456,000   486,000 

Equipment and leasehold improvements

  (19,000

)

  1,000 

Intangible assets – US

  341,000   61,000 
Intangible assets – Foreign  (170,000)  - 
Inventory reserve  89,000   - 
Interest expense  44,000   - 
Operating lease liabilities  44,000   59,000 
Reserve on debt security  -   13,000 
Operating lease right-of-use assets  (44,000)  (57,000)

Net operating loss and research and credit carryforwards

  15,248,000   15,148,000 

Valuation allowance

  (17,188,000

)

  (15,891,000

)

         
Net deferred tax liability $(170,000) $ 

 

  

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

)

         
  $  $ 

deferred tax assets and liabilities were incorrect for December 31, 2021 and 2020. See Note S for further information.

 

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 recognizedWith a full valuation allowance, any change in the financial statements.deferred tax asset or liability is fully offset by a corresponding change in the valuation allowance. At December 31, 2022 and 2021, the Company provided a valuation allowance on its net deferred tax assets of $17,188,000 and $15,891,000, respectively.

 

As of December 31, 2019,2022, the Company has U.S. federal net operating loss carryforwards of approximately $70$61.3 million. Approximately $55$43.1 million are subject to expiration between 20222023 and 2037, and $15$18.2 million net operating loss carryforwards have no expiration date. These net operating loss carryforwards arecould be subject to the limitations under Section 382 of the Internal Revenue Code due to changes in the equity ownership of the Company. TheIn addition, the Company has 3.6 million of state net operating loss carryforwards.carry forwards from various states of approximately $6.87 million which expire from 2026 through 2042.

 

A reconciliation of the effective income tax rate on operations reflected in the Statementsstatements of Operationsoperations to the US Federalfederal statutory income tax rate is presented below.

 

 

2019

  

2018

  

Year ended

December 31,

2022

  

Year ended

December 31,

2021

As Revised

 
         

Federal statutory income tax rate

  21

%

  21

%

 21.0

%

 21.0

%

State taxes, net of federal benefit

 0.9  1.1 

Permanent differences

  (2

)

    (4.7

)

 (1.0

)

Effect of net operating loss

  (22

)

  (21

)

Expiration of net operating loss and research credit carryforwards

 (5.7

)

 (13.8

)

Expiration and forfeiture of stock options

 (0.3

)

 (1.5

)

Other

 (0.5) (2.4

)

Valuation allowance

  (10.9

)

  (3.4

)

         

Effective tax rate

  

%

  

%

  (0.2)

%

  

%

89

 

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 20162019 through 20192022 remain open to examination by the IRS and state jurisdictions.

Our subsidiary in Nigeria has not filed its required returns since inception. Management believes that when the returns are filed, no taxes will be owed due to the losses incurred during those periods. We are also not subject to minimum tax during the first four years of operations. As a result, management could not calculate the amount of net operating loss carryforwards that are available to offset future taxable income.

Our subsidiary in Hong Kong has not filed its required returns in several years. Management believes that when the returns are filed, no taxes will be owed due to losses incurred during those periods. As a result, management could not calculate the amount of net operating loss carryforwards are available to offset future taxable income.

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, 20192022 and 2018.2021.

In August 2022, the Inflation Reduction Act of 2022 was signed into law which includes a stock buyback excise tax of 1% on share repurchases, which will apply to net stock buybacks after December 31, 2022. We do not expect this to have a material impact if and when share repurchases occur.

NOTE SREVISION OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

Due to errors discovered in the Company’s 2020 and 2021 tax provisions, the Company revised certain previously issued disclosures related to the components of its deferred tax assets and liabilities and valuation allowance as of December 31, 2021 and 2020. Additionally, the Company has revised the reconciliation of its income tax rate computed using the federal statutory rate for the year ended December 31, 2021. The errors related primarily to the calculation of available net operating loss carryforwards and to stock based compensation. Since the Company provided a full valuation allowance on its net deferred tax assets, there was no impact to the Consolidated Balance Sheet as of December 31, 2021 and the consolidated statements of operations, stockholders’ equity and cash flows as of and for the year ended December 31, 2021.

The Company further reviewed its disclosure of the rate reconciliation and deferred tax calculation along with the valuation allowance of its net deferred tax assets. Other items that were corrected in the disclosure included allowance for doubtful accounts, equipment and leasehold improvements and operating lease liability along with the associated operating lease ROU assets.

The below table summarizes the revisions to the reconciliation of our income tax rate computed using the federal statutory rate to our actual income tax rate for the year ended December 31, 2021:

  

December 31,

 
  

2021

As Reported

  Adjustments  

2021

As Revised

 
             

U.S. statutory income tax rate

  21.0

%

  -%  21.0%

State taxes, net of federal benefit

  -   1.1   1.1 

Permanent differences

  -   (1.0

)

  (1.0

)

Expiration of net operating loss and research credit carryforwards

  -   (13.8

)

  (13.8

)

Expiration and forfeiture of stock options

  -   (1.5

)

  (1.5

)

Other

  -   (2.4

)

  (2.4

)

Valuation allowance  -   (3.4)  (3.4)

Effect of net operating loss

  (21.0)%  21.0   - 

Total

  -

%

  -

%

  -

%

90

The table below summarizes the revisions to the attributes of the deferred tax assets and liabilities as of December 31, 2021 (in thousands):

  

December 31,

 
  

2021

As Reported

  

Adjustments

  

2021

As Revised

 
             

Accrued compensation

 $135,000  $(25,000) $110,000 

Allowance for doubtful accounts

  75,000   (5,000

)

  70,000 

Stock based compensation

  1,149,000   (663,000

)

  486,000 

Equipment and leasehold improvements

  (10,000

)

  11,000   1,000 

Intangible assets

  75,000   (14,000)  61,000 

Operating lease liability

  -   59,000   59,000 

Reserve on debt security

  -   13,000   13,000 

Operating lease right-of -use assets

  -   (57,000

)

  (57,000)

Net operating loss and research credit carryforwards

  14,467,000   681,000   15,148,000 

Valuation allowance

  (15,891,000

)

  -   (15,891,000

)

Net deferred tax assets

 $-  $-  $- 

 

 

The table below summarizes the revisions to the attributes of the deferred tax assets and liabilities as of December 31, 2020 (in thousands):

  

December 31,

 
  

2020

As Reported

  

Adjustments

  

2020

As Revised

 
             
             
Accrued compensation $81,000  $(15,000) $66,000 

Allowance for doubtful accounts

  474,000   (471,000

)

  3,000 

Stock based compensation

  1,073,000   (511,000

)

  562,000 

Equipment and leasehold improvements

  (14,000

)

  19,000   5,000 

Intangible assets

  65,000   (12,000)  53,000 

Operating lease liability

  -   111,000   111,000 
Operating lease right-of-use assets  -   (109,000

)

  (109,000)

Net operating loss and research credit carryforwards

  13,337,000   1,688,000   15,025,000 

Valuation allowance

  (15,016,000

)

  (700,000

)

  (15,716,000

)

Net deferred tax assets

 $-  $-  $- 

NOTE TPROFIT 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 matching contributions during the years ended December 31, 20192022 and 2018.2021.

 

91

  

NOTE UEARNINGS 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

)

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

  

Years ended December 31,

 
  

2019

  

2018

 
         

Stock options

  945   83 

Warrants

  -   697,879 

Potentially dilutive securities

  945   697,962 

 

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

  

2022

  

2021

 
         

Stock options

  1,749,724   1,583,014  202,996  212,461 

Warrants

  3,388,474   186,806   4,872,025   4,689,387 

Convertible notes

  1,458,740   - 

Preferred stock

  -   1,426,756 

Total

  6,596,938   3,196,576   5,075,021   4,901,848 

 

NOTE V—VSUBSEQUENT 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, 2020,16, 2023, the Company issued 6,85015,388 shares of common stock to its directors in payment of meetingboard fees.  Additionally,

On March 16, 2023, the Company issued an aggregate of 40,000 shares of restricted common stock to new employees which vest in equal annual installments over a warrant to a new employee for 5,000 shares with three-year vesting period. 

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 period from 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.grant.

 

On May 6, 2020,5, 2023, 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 7,0772,858 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,On May 5, 2023, the Company is closely monitoring its operations, liquidity, and capital resources. We are actively working to minimizereceived 13,959 shares of restricted common stock from employees who left the current and future impact of this unprecedented situation. As ofCompany before the date of issuance of these financial statements, the full impact to the Company’s financial position is not known.vesting period was completed.

 

TheOn May 11, 2023, the Company has reviewed subsequent events throughissued 17,392 shares of common stock to its directors in payment of board fees.

On May 14, 2020. 11, 2023, the Company issued 2,900 shares of common stock to its directors in payment of board committee fees.

 

  

FINANCIAL INFORMATION

BIO-KEYBIO-key International, Inc. and Subsidiary
Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

  

March 31,

2020

  

December 31,

2019

 
  

(Unaudited)

     

ASSETS

        

Cash and cash equivalents

 $661,937  $79,013 

Accounts receivable, net

  120,293   126,000 

Due from factor

  130,670   110,941 

Inventory

  397,711   429,119 

Prepaid expenses and other

  166,572   108,397 

Investment – non-marketable security

  512,821   512,821 

Total current assets

  1,990,004   1,366,291 

Resalable software license rights

  68,774   73,802 

Equipment and leasehold improvements, net

  75,597   95,509 

Capitalized contract costs, net

  208,499   231,519 

Deposits and other assets

  8,712   8,712 

Operating lease right-of-use assets

  520,470   566,479 

Intangible assets, net

  147,222   154,386 

Total non-current assets

  1,029,274   1,130,407 

TOTAL ASSETS

 $3,019,278  $2,496,698 
         

LIABILITIES

        

Accounts payable

 $616,985  $844,557 

Due to related parties

  66,466   188,737 

Accrued liabilities

  515,108   572,885 

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

  2,301,956   2,255,454 

Deferred revenue

  413,345   359,212 

Operating lease liabilities, current portion

  162,886   170,560 

Total current liabilities

  4,076,746   4,391,405 

Operating lease liabilities, net of current portion

  353,553   390,466 

Total non-current liabilities

  353,553   390,466 

TOTAL LIABILITIES

  4,430,299   4,781,871 
         

Commitments and Contingencies

        
         

STOCKHOLDERS’ DEFICIT

        

Common stock — authorized, 170,000,000 shares; issued and outstanding; 18,391,122 and 14,411,432 of $.0001 par value at March 31, 2020 and December 31, 2019, respectively

  1,839   1,441 

Additional paid-in capital

  91,793,124   87,436,402 

Accumulated deficit

  (93,205,984

)

  (89,723,016

)

TOTAL STOCKHOLDERS’ DEFICIT

  (1,411,021

)

  (2,285,173

)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 $3,019,278  $2,496,698 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. 

 

F-28
  

March 31,

2023

  

December 31,

2022

 
  

(Unaudited)

     

ASSETS

        

Cash and cash equivalents

 $722,335  $2,635,522 

Accounts receivable, net

  3,362,203   1,522,784 

Due from factor

  82,500   49,500 
Inventory, net of reserve  4,427,815   4,434,369 

Prepaid expenses and other

  341,231   342,706 

Total current assets

  8,936,084   8,984,881 

Equipment and leasehold improvements, net

  94,170   107,413 

Capitalized contract costs, net

  254,279   283,069 

Deposits and other assets

  8,712   8,712 

Operating lease right-of-use assets

  131,223   197,355 

Intangible assets, net

  1,681,589   1,762,825 

Total non-current assets

  2,169,973   2,359,374 

TOTAL ASSETS

 $11,106,057  $11,344,255 
         

LIABILITIES

        

Accounts payable

 $1,210,070  $1,108,279 

Accrued liabilities

  876,287   1,009,123 

Convertible note payable

  2,454,212   2,596,203 
Government loan – BBVA Bank – current portion  134,899   120,000 

Deferred revenue – current

  653,338   462,418 

Operating lease liabilities, current portion

  96,584   159,665 

Total current liabilities

  5,425,390   5,455,688 

Deferred revenue – net of current portion

  39,969   52,134 

Deferred tax liability

  172,997   170,281 

Government loan – BBVA Bank – net of current portion

  277,580   326,767 

Operating lease liabilities, net of current portion

  33,366   37,829 

Total non-current liabilities

  523,912   587,011 

TOTAL LIABILITIES

  5,949,302   6,042,699 
         
Commitments and Contingencies      
         

STOCKHOLDERS  EQUITY

        

Common stock — authorized, 170,000,000 shares; issued and outstanding; 9,226,058 and 9,190,504 of $.0001 par value at March 31, 2023 and December 31, 2022, respectively

  922   919 

Additional paid-in capital

  122,099,984   122,028,612 

Accumulated other comprehensive income

  (170,456)  (242,602

)

Accumulated deficit  (116,773,695

)

  (116,485,373

)

TOTAL STOCKHOLDERS EQUITY

  5,156,755   5,301,556 

TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

 $11,106,057  $11,344,255 

BIO-KEY International, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

  

Three months ended
March 31,

 
  

2020

  

2019

 
         

Revenues

        

Services

 $207,523  $241,610 

License fees

  235,345   83,208 

Hardware

  79,617   226,805 
   522,485   551,623 

Costs and other expenses

        

Cost of services

  70,445   90,829 

Cost of license fees

  10,456   377,216 

Cost of hardware

  43,362   136,005 
   124,263   604,050 

Gross Profit (Loss)

  398,222   (52,427

)

         

Operating Expenses

        

Selling, general and administrative

  1,381,399   1,377,033 

Research, development and engineering

  336,889   374,118 

Total Operating Expenses

  1,718,288   1,751,151 

Operating loss

  (1,320,066

)

  (1,803,578

)

Other income (expenses)

        

Interest income

  1   70 

Interest expense

  (1,551,141

)

  - 

Loss on extinguishment of debt

  (499,076

)

  - 

Total Other Income (Expenses)

  (2,050,216

)

  70 

Net loss

  (3,370,282

)

  (1,803,508

)

Deemed dividends related to down-round features

  (112,686

)

  - 

Net loss available to common stockholders

 $(3,482,968

)

 $(1,803,508

)

         

Basic & Diluted Loss per Common Share

 $(0.23

)

 $(0.13

)

         

Weighted Average Shares Outstanding:

        

Basic & Diluted

  15,165,522   13,979,318 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

 

 

BIO-key International, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

  

Common Stock

  

Additional

Paid-in

  

Accumulated

     
  

Shares

  

Amount

  

Capital

  

Deficit

  

Total

 

Balance as of January 1, 2020

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

)

 $(2,285,173

)

Issuance of common stock pursuant to securities purchase agreements

  700,000   70   1,032,430   -  ��1,032,500 

Commitment fee adjustment

  -   -   (900,000

)

  -   (900,000

)

Beneficial conversion feature

  -   -   641,215   -   641,215 

Issuance of common stock pursuant to warrant conversion

  972,000   97   1,457,903   -   1,458,000 

Conversion of convertible note payable

  2,307,690   231   1,499,769   -   1,500,000 

Deemed dividends related to down-round features

  -   -   112,686   (112,686

)

  - 

Share-based compensation

  -   -   512,719   -   512,719 

Net loss

  -   -   -   (3,370,282

)

  (3,370,282

)

Balance as of March 31, 2020

  18,391,122  $1,839  $91,793,124  $(93,205,984

)

 $(1,411,021

)

The accompanying notes are an integral part of these statements.

BIO-key International, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

  

Common Stock

  

Additional

Paid-in

  

Accumulated

     
  

Shares

  

Amount

  

Capital

  

Deficit

  

Total

 

Balance as of January 1, 2019

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

)

 $10,466,222 

Issuance of common stock for directors’ fees

  13,820   1   16,505   -   16,506 

Share-based compensation

  -   -   509,528   -   509,528 

Net loss

  -   -   -   (1,803,508

)

  (1,803,508

)

Balance as of March 31, 2019

  13,991,688  $1,399  $86,125,173  $(76,937,824

)

 $9,188,748 

The accompanying notes are an integral part of these statements.

F-31
  

Three months ended
March 31,

 
  

2023

  

2022

 
         

Revenues

        

Services

 $532,522  $395,804 

License fees

  2,478,556   1,460,183 

Hardware

  72,689   85,184 

Total revenues

  3,083,767   1,941,171 
         

Costs and other expenses

        

Cost of services

  154,801   210,913 

Cost of license fees

  620,881   73,230 

Cost of hardware

  44,592   53,298 

Total costs and other expenses

  820,274   337,441 

Gross Profit

  2,263,493   1,603,730 
         

Operating expenses

        

Selling, general and administrative

  1,931,732   1,797,998 

Research, development and engineering

  690,159   805,266 

Total operating expenses

  2,621,891   2,603,264 

Operating loss

  (358,398)  (999,534

)

Other income (expense)

        

Interest income

  4   131 

Loss on foreign currency transaction

  (15,000)  

-

 

Change in fair value of convertible note

  141,991   - 

Interest expense

  (56,919)  - 

Total other income (expense)

  70,076   131 

Net loss

 $(288,322) $(999,403

)

         

Comprehensive loss:

        

Net loss

 $(288,322) $(999,403

)

Other comprehensive income – Foreign currency translation adjustment

  72,146   55,802 

Comprehensive loss

 $(216,176) $

(943,601

)

Basic and Diluted Loss per Common Share

 $(0.03) $(0.13

)

         

Weighted Average Shares Outstanding:

        

Basic and Diluted

  8,944,485   7,885,008 

BIO-KEY International, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

  

Three Months Ended March 31,

 
  

2020

  

2019

 
         

CASH FLOW FROM OPERATING ACTIVITIES:

        

Net loss

 $(3,370,282

)

 $(1,803,508

)

Adjustments to reconcile net loss to cash (used in) provided by operating activities:

        

Depreciation

  19,912   19,292 

Amortization of intangible assets

  7,164   3,314 

Amortization of software license rights

  -   281,074 

Amortization of capitalized contract costs

  36,679   33,510 

Amortization of debt discount

  218,061   - 

Amortization of debt issuance costs

  878,398   - 

Loss on extinguishment of debt

  499,076   - 

Amortization of beneficial conversion feature

  413,687     

Interest expense capitalized to note payable

  40,995   - 

Operating leases right-of-use assets

  46,009   34,864 

Stock based directors’ fees

  -   16,505 

Share based compensation for employees and consultants

  512,719   509,528 

Change in assets and liabilities:

        

Accounts receivable

  5,707   833,613 

Due from factor

  (19,729

)

  (19,142

)

Capitalized contract costs

  (13,659

)

  (13,709

)

Inventory

  31,408   17,921 

Resalable software license rights

  5,028   26,130 

Prepaid expenses and other

  (58,175

)

  (36,928

)

Accounts payable

  (227,572

)

  124,534 

Accrued liabilities

  (57,777

)

  29,764 

Deferred revenue

  54,133   136,631 

Operating lease liabilities

  (44,587

)

  (32,897

)

Net cash (used in) provided by operating activities

  (1,022,805

)

  160,496 

CASH FLOW FROM INVESTING ACTIVITIES:

        

Purchase of intangible assets

  -   (1,737

)

Capital expenditures

  -   (23,391

)

Net cash used in investing activities

  -   (25,128

)

CASH FLOW FROM FINANCING ACTIVITIES

        

Proceeds from issuance of convertible notes

  283,000   - 

Costs to issue convertible notes

  (13,000

)

  - 

Proceeds from warrant exercise

  1,458,000   - 
Net repayments of related party loans  (122,271)  - 

Net cash provided by financing activities

  1,605,729   - 

NET INCREASE IN CASH AND CASH EQUIVALENTS

  582,924   135,368 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

  79,013   323,943 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 $661,937  $459,311 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

 

 

BIO-KEYBIO-key International, Inc. and Subsidiary
Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(Unaudited)

  Common Stock  

Additional

Paid-in

  

Accumulated

Other

Comprehensive

  

Accumulated

     
  Shares  Amount  

Capital

  

Income

  

Deficit

  

Total

 

Balance as of January 1, 2023

  9,190,504  $919  $122,028,612  $(242,602) $(116,485,373) $5,301,556 

Issuance of common stock for directors’ fees

  15,388   1   12,001   -   -   12,002 

Issuance of common stock to employees

  40,000   4   -   -   -   4 

Restricted stock forfeited

  (19,834)  (2)  (3,103)  -   -   (3,105

)

Foreign currency translation adjustment

  -   -   -   72,146   -   72,146 

Share-based compensation

  -   -   62,474   -   -   62,474 

Net loss

  -   -   -   -   (288,322)  (288,322

)

Balance as of March 31, 2023

  9,226,058  $922  $122,089,984  $(170,456

)

 $(116,773,695

)

 $5,156,755 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

95

BIO-key International, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Continued)

(Unaudited)

  

Common Stock

  

Additional

Paid-in

  

Accumulated

Other

Comprehensive

  

Accumulated

     
  

Shares

  

Amount

  

Capital

  

Income

  

Deficit

  

Total

 

Balance as of January 1, 2022

  7,853,759  $786  $120,190,139  $-  $(104,575,470

)

 $15,615,455 

Issuance of common stock for directors’ fees

  

9,382

   

1

   

22,019

   

-

   

-

   

22,020

 

Issuance of common stock pursuant to Swivel purchase agreement

  

269,060

   

27

   

599,977

   

-

   

-

   

600,004

 

Issuance of restricted common stock to employees and directors

  

274,250

   

27

   

(27

)

  

-

   

-

   

-

 

Foreign currency translation adjustment

  -   -   -   

55,802

   

-

   

55,802

 

Share-based compensation

  

-

   

-

   

87,677

   

-

   

-

   

87,677

 

Net loss

  

-

   

-

   

-

   

-

   

(999,403

)

  

(999,403

)

Balance as of March 31, 2022

  8,406,451  $841  $120,899,785  $55,802  $(105,574,873

)

 $15,381,555 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

96

BIO-key International, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

(Unaudited)

  

Three Months Ended

March 31,

 
  

2023

  

2022

 
         

CASH FLOW FROM OPERATING ACTIVITIES:

        

Net loss

 $(288,322

)

 $(999,403

)

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

        

Depreciation

  13,242   11,220 

Amortization of intangible assets

  81,237   54,231 

Change in fair value of convertible note

  (141,991)  - 

Amortization of capitalized contract costs

  37,529   35,658 

Allowance for doubtful accounts

  50,000   - 

Operating leases right-of-use assets

  66,132   51,587 

Stock based directors’ fees

  12,002   22,020 

Share based compensation for employees and consultants

  59,373   87,677 

Bad debts

  -   25,111 

Change in assets and liabilities:

        

Accounts receivable

  (1,798,881)  (904,930

)

Due from factor

  (33,000)  (2,350

)

Capitalized contract costs

  (8,739)  (66,435

)

Inventory

  6,554   (15,812

)

Resalable software license rights

  -   2,505 

Prepaid expenses and other

  2,219   (124,616

)

Accounts payable

  88,040   175,341 

Accrued liabilities

  (135,417

)

  45,669 

Deferred revenue

  178,755   220,874 

Operating lease liabilities

  (67,544)  (52,722

)

Net cash used in operating activities

  (1,928,811

)

  (1,434,375

)

CASH FLOW FROM INVESTING ACTIVITIES:

        

Purchase of Swivel Secure, net of cash acquired of $729,905

  -   (543,578

)

Receipt of cash from note receivable

  -   3,000 

Capital expenditures

  -   (4,459

)

Net cash used in investing activities

  -   (545,037)

CASH FLOW FROM FINANCING ACTIVITIES

        
Repayment of government loan  (34,289)  - 

Net cash used in financing activities

  (34,289)  - 
         

Effect of exchange rate changes

  49,913   26,487 
         

NET DECREASE IN CASH AND CASH EQUIVALENTS

  (1,913,187

)

  (1,952,925

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

  2,635,522   7,754,046 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 $722,335  $5,801,121 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

97

BIO-key International, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

 

  

Three Months Ended March 31,

 
  

2020

  

2019

 
         

Cash paid for:

        

Interest

 $  $ 
         

Noncash Investing and financing activities

        

Right-of-use asset addition under ASC 842

 $  $602,937 

Operating lease liabilities under ASC 842

 $  $590,342 

Deemed dividends related to down-round features

 $112,686  $- 

Common Stock issued for loan commitment fees

 $132,500  $- 

Conversion of convertible note payable to common stock

 $1,500,000  - 

Beneficial conversion feature

 $641,215  $- 
  

Three Months Ended

March 31,

 
  

2023

  

2022

 
         

Cash paid for:

        

Interest

 $56,919  $- 
         
Noncash Investing and financing activities        
Accounts receivable acquired from Swivel Secure $-  $702,886 
Equipment acquired from Swivel Secure $-  $65,640 
Other assets acquired from Swivel Secure $-  $20,708 
Estimated intangible assets acquired from Swivel Secure $-  $1,379,589 
Estimated goodwill resulting from the acquisition from Swivel Secure $-  $450,643 
Accounts payable and accrued expenses acquired from Swivel Secure $-  $431,884 
Government loan acquired from Swivel Secure $-  $544,000 
Common stock issued for acquisition of Swivel Secure $-  $600,004 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

 

 

BIO-KEY International Inc., and SubsidiarySubsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 (Unaudited)

 

March 31, 2023 (Unaudited)

1.

1.         NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

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.

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements include the accounts of BIO-key International, Inc. and its wholly-owned subsidiarysubsidiaries (collectively, the “Company” or “BIO-key”) and are stated in conformity with accounting principles generally accepted in the United States of America (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. Significant intercompanyIntercompany accounts and transactions have been eliminated in consolidation.

 

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all necessary adjustments, consisting only of those of a recurring nature, and disclosures to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented. The balance sheet at December 31, 20192022 was derived from the audited financial statements, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America.GAAP. These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019,2022, filed with the SEC on May 14, 2020.June 1, 2023.

 

Foreign Currency

The Company accounts for foreign currency transactions pursuant to ASC 830, Foreign Currency Matters (“ASC 830”). The functional currency of the Company is the U.S. dollar, which is the currency of the primary economic environment in which it operates. In accordance with ASC 830, monetary balances denominated in or linked to foreign currency are stated on the basis of the exchange rates prevailing at the applicable balance sheet date. For foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used. Gains or losses arising from changes in the exchange rates used in the translation of such transactions and from the remeasurement of the monetary balance sheet items are recorded as gain (loss) on foreign currency transactions.

The functional currency of Swivel Secure Europe, SA is the Euro. Under ASC 830, all assets and liabilities are translated into U. S. dollars using the current exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated in Euros are reflected in the statement of operations as appropriate. Translation adjustments are included in accumulated other comprehensive loss.

99

Recently Issued Accounting Pronouncements

 

In August 2018,Effective January 1, 2023, 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 ASU 2018-15 prospectively or retrospectively. The Company has assessed that ASU 2018-15 currently does not have a material impact on its consolidated financial statements.

In June 2016, the FASB issuedadopted 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. The adoption of 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 assessingdid not have a material effect on the impact ASU 2016-13 will have on its condensed consolidated financial statements.statements of the Company.

 

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.

 

Reclassifications


Certain balance sheet accounts have been reclassified to conform to the 2020 presentation.

 

F-34

2.

2.         GOING CONCERN

The Company has incurred significant losses to date, and at March 31, 2020 had an accumulated deficit of approximately $93 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 March 31, 2020, the Company’s total cash and cash equivalents were approximately $662,000, as compared to approximately $79,000 at December 31, 2019.

The Company has financed operations in the past through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. The Company estimates that it currently requires approximately $525,000 per month to conduct operations, a monthly amount that it has been unable to achieve consistently through revenue generation.

If the Company is unable to generate sufficient revenue to meet its goals, it will need to obtain additional third-party financing to (i) conduct the sales, marketing 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 condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"(“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 describedCompany has suffered substantial net losses and negative cash flows from operations in the preceding paragraphsrecent years 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. Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon the Company’s ability to increase its revenue and meet its financing requirements on a continuing basis and become profitable in its future operations. The accompanying condensed 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.

 

As of the date of this report, the Company does not have enough cash for twelve months of operations. The history of significant losses, the negative cash flow from operations, the limited cash resources on hand and the dependence by the Company on its ability to obtain additional financing to fund its operations after the current cash resources are exhausted raises substantial doubt about the Company’s ability to continue as a going concern. The Company has lowered its expenses through decreasing spending in marketing and research and development. In addition, the Company has purchased inventory for projects in Nigeria, which have been delayed in deployment, and is, therefore, looking into other markets and opportunities to sell or return the product to generate additional cash.

 3.

3.         REVENUE FROM CONTRACTS WITH CUSTOMERS

 

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

Disaggregation of Revenue

 

The following table summarizes revenue from contracts with customers for the three-month period:

 

 

North

America

  

South

America

  

EMEA*

  

Asia

  

March 31,

2020

  

North

America

  

Africa

  

EMESA*

  

Asia

  

March 31,

2023

 
                     

License fees

 $165,235  $-  $-  $70,110  $235,345  $408,530  $552,630  $1,446,746  $70,650  $2,478,556 

Hardware

  56,354   -   -   23,263   79,617  24,781  -  47,008  900  72,689 

Support and Maintenance

  196,316   375   3,767   7,065   207,523 

Services

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

Total Revenues

 $417,905  $375  $3,767  $100,438  $522,485  $697,169  $576,417  $1,733,681  $76,500  $3,083,767 

 

 

North

America

  

South

America

  

EMEA*

  

Asia

  

March 31,

2019

  

North

America

  

Africa

  

EMESA*

  

Asia

  

March 31,

2022

 
                     

License fees

 $14,208  $-  $-  $69,000  $83,208  $473,070  $517,161  $390,277  $79,675  $1,460,183 

Hardware

  45,981   400   32,918   147,506   226,805  71,900  12,033  1,251  -  85,184 

Support and Maintenance

  196,076   2,116   36,418   7,000   241,610 

Services

  355,632  15,275  24,844  53  395,804 

Total Revenues

 $256,265  $2,516  $69,336  $223,506  $551,623  $900,602  $544,469  $416,372  $79,728  $1,941,171 

 

*EMEAEMESA – Europe, Middle East, AfricaSouth America

 

All of the Company's 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 licenses

Software license revenue consist of fees for perpetual and software as a service (SaaS) software licenses for one or more of the Company’s 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 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 Maintenance revenue consists of fees for unspecified upgrades, telephone assistance and bug fixes. The Company satisfies its Support and Maintenance 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 Maintenance contracts are up to one year in length and are generally invoiced either annually or quarterly in advance. Support and Maintenance revenue for SaaS license is carved out of the total license cost at 18% and recognized on a ratable basis over the license term.

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 condensed consolidated statements of operations.

 

Transaction Price Allocated to the Remaining Performance ObligationsDeferred Revenue

 

ASC 606 requiresDeferred revenue includes customer advances and amounts that have been paid by customer for which the Company disclose the aggregate amount of transaction price that is allocated to performance obligations thatcontractual maintenance terms have not yet been satisfied as at March 31, 2020.occurred. The guidance provides certain practical expedients that limit this requirement,majority of these amounts are related to maintenance contracts for which the Company’srevenue 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 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.

include provisions for unspecified when-and-if available product updates and customer telephone support services. At March 31, 20202023 and December 31, 2019,2022, amounts in deferred revenue represents the Company's remaining performance obligations related to prepaid supportwere approximately $693,000 and maintenance, all of which is expected to be recognized within one year.

$515,000, respectively. Revenue recognized during the three months ended March 31, 20202023 and 2022 from amounts included in deferred revenue at the beginning of the period was approximately $72,000.$223,000 and $234,000, respectively. The Company did not recognize any revenue from performance obligations satisfied in prior periods. Total deferred revenue (contract liability) was $413,345 and $359,212 at March 31, 2020 and December 31, 2019, respectively.

 

4.

4.         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 from a large customer, the Company has reserved $1,720,000 at March 31, 2020 and December 31, 2019, which represents 100% of the remaining balance owed under the contract. Recoveries of accounts receivable previously written off are recorded when received. Additionally, the Company sold 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 due to be paid in March 2019 for $555,555 was still outstanding and payable. As of December 31, 2019, the Company wrote off the amount directly to bad debt expense as it was determined not to be collectible.

Accounts receivable at March 31, 20202023 and December 31, 20192022 consisted of the following:

 

  

March 31,

  

December 31,

 
  

2020

  

2019

 

Accounts receivable - current

 $134,078  $139,785 

Accounts receivable - non current

  1,720,000   1,720,000 
   1,854,078   1,859,785 
         

Allowance for doubtful accounts - current

  (13,785

)

  (13,785

)

Allowance for doubtful accounts - non current

  (1,720,000

)

  (1,720,000

)

   (1,733,785

)

  (1,733,785

)

         

Accounts receivable, net of allowances for doubtful accounts

 $120,293  $126,000 
  

March 31,

  

December 31,

 
  

2023

  

2022

 

Accounts receivable

 $3,985,988  $2,096,569 
Allowance for doubtful accounts  (623,785

)

  (573,785

)

Accounts receivable, net of allowances for doubtful accounts $3,362,203  $1,522,784 

 

 

5.

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

5.         SHARE BASED COMPENSATION

 

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

 

 

Three Months Ended March 31,

  

Three Months Ended

March 31,

 
 

2020

  

2019

  

2023

  

2022

 
         
         

Selling, general and administrative

 $441,308  $453,086  $55,453  $92,426 

Research, development and engineering

  71,411   72,947   15,922   17,271 
 $512,719  $526,033  $71,375  $109,697 

 

  

6.

FACTORING

Due from factor consisted of the following as of: 

  

March 31,

  

December 31,

 
  

2020

  

2019

 
         

Original invoice value

 $243,170  $233,005 

Factored amount

  (112,500

)

  (122,064

)

Balance due from factor

 $130,670  $110,941 

The Company entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) expiring on October 31, 2020. 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:  

  

Three Months ended

March 31,

 
  

2020

  

2019

 
         

Factoring fees

 $32,000  $52,797 

7.

6.         INVENTORY

 

Inventory is stated at the lower of cost, determined on a first in, first out basis, or net realizable value. The Company periodically evaluates inventory items and establishes reserves for obsolescence accordingly. The Company also reserves for excess quantities, slow moving goods, and for other impairment of value based upon assumptions of future demand and consists primarily of fabricated assembliesmarket conditions. The $400,000 reserve on inventory is due to slow moving inventory purchased for projects in Nigeria. The Company is looking into other markets and finished goods.opportunities to sell or return the product. Inventory is comprised of the following as of:

 

 

March 31,

  

December 31,

  

March 31,

 

December 31,

 
 

2020

  

2019

  

2023

  

2022

 
         
         

Finished goods

 $256,353  $287,761  $4,758,089  $4,764,643 

Fabricated assemblies

  141,358   141,358  69,726  69,726 
Reserve on finished goods  (400,000)  (400,000

)

Total inventory

 $397,711  $429,119  $4,427,815  $4,434,369 

 

8.

RESALABLE SOFTWARE LICENSE RIGHTS

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 $12,000,000.7.         COMMITMENTS AND CONTINGENCIES

 

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-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.Distribution Agreement

 

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.

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 cashflows 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 $281,074 and $176 was charged to cost of sales during the three month period ended March 31, 2019 for amortization and the cost basis of the actual sales, respectively.

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 greatest of the two approaches being the actual unit cost per license sold. A total of $5,028 and $25,954 was charged to cost of sales during the three month periods ended March 31, 2020 and March 31, 2019, respectively. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $111,226 has been charged to cost of sales, with a carrying balance of $68,774 and $73,802 as of March 31, 2020 and December 31, 2019, respectively.

9.

INVESTMENT

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 translates to $512,821 U.S. Dollars as of March 31, 2020 and December 31, 2019. The bondSwivel Secure has a one-year maturity maturing in June 2020, and 5% interest rate. 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. The investment is recorded at amortized cost which approximates fair value, and is currently planned to be held to maturity.

10.

Related Party TRANSACTIONS

The Company has received a series of non-interest-bearing advances from Mr. Wong Kwok Fong, a director of the Company, and Mr. Michael DePasquale, the Company’s Chief Executive Officer, to pay current liabilities. The balance of the advances as at March 31, 2020 was $66,466 and $0, respectively, and as of December 31, 2019 was $74,737 and $114,000, respectively. The balances owed are due on demand.

Sales Incentive Agreementdistribution agreement with TTI

On March 25, 2020, the Company entered into a sales incentive agreement Technology Transfer InstituteSwivel Secure Limited (“TTI”SSL”). One of the Company’s board members is the Chief Executive Officer of TTI. Terms of the agreement include the following:

 

 

1.

The initial term of the agreement is one year unless notice to terminate (as defined) is given.  The agreementends on January 31, 2027 and will be automatically extended for additional one-year terms thereafter unless terminated.either party provides written notice to the other party not later than 30 days before the end of the term that it does not wish to extend the term.

 

2.

For each $5,000,000SSL appoints Swivel Secure as the exclusive distributor of SSL’s products, to market, sell and distribute in revenue (up tothe EMEA (Europe, Middle East and Africa), excluding the United Kingdom and Republic of Ireland, for a maximum of $20,000,000) TTI generates duringdefined discount on the first year that generates 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 500,000 shares of common stock.sale price.

 

3.

In the event that TTI generates revenue in excessSwivel Secure is expected to generate a certain minimum level of $20,000,000orders of SSL products each year during the firstterm of the agreement. If Swivel Secure fails to meet such minimum level of orders in any year, the Companyexclusive distribution rights will issue TTIterminate and Swivel Secure will serve as a five-year warrant to purchase 100,000 sharesnon-exclusive distributer of Common Stock at an exercise price of $1.50 per share for each $1,000,000 of revenue in excess of $20,000,000 (up to a maximum of $25,000,000).SSL Products.

 

In no event willThe Company expects the revenue targets to continue to be met based on historical performance and increasing distribution by Swivel Secure.

Litigation

From time to time, the Company may be obligatedinvolved in litigation relating to issue more than 2,000,000 sharesclaims arising out of common stock or warrants to purchase more than 500,000 sharesour operations in the normal course of common stock pursuant to this agreement. 

There have been no revenue generated or sales incentive fees paid during the three months ended March 31, 2020.

11.

CONVERTIBLE NOTES PAYABLE

Convertible notes payable asbusiness. As of March 31, 2020 and December 31, 2019 consist of the following:

  

March 31,

  

December 31,

 
  

2020

  

2019

 
         

Secured Purchase Agreement dated July 10, 2019

 $2,061,472  $2,255,454 

January 2020 Note

  143,913   - 

February 2020 Note

  96,571   - 

Convertible notes payable, net

 $2,301,956  $2,255,454 

Securities Purchase Agreement dated July 10, 2019

On July 10, 2019,2023, the Company issuedwas not 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 was secured by a lien on substantially all of the Company’s assets and properties and was convertible at the option of the Investor in shares of common stock at a fixed conversion price of $1.50 per share. The Company had the rightparty 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 2,000,000 shares of common stock at a fixed exercise price of $1.50 per share, paid a $50,000 commitment fee, and issued 266,667 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 was amortized over the life of the 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.pending lawsuits.

 

  

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. The principal amount was due and payable in full on April 13, 2020. The Amended Note is secured by a lien on substantially all of the Company’s assets and properties and is convertible at the option of the Investor into shares of common stock at a fixed conversion price of $0.65 per share. Due to the debt restructuring, the balance of the Amended Note was increased by an additional $729,000 in interest. The Company accounted for the transaction as a debt extinguishment, and therefore, the balance of the fees and unamortized discount associated with the Original Note were written off and included as loss on extingushment of debt. On the day of the conversion, the closing stock price for the day was $0.76, which resulted in a beneficial conversion of $0.11 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. At March 31, 2020, the Investor converted $1,500,000 into 2,307,690 shares of common stock.

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 per share through June 12, 2020. All other provisions of the Amended Note remain the same. As of the date of this report, the Investor has converted $3,500,000 into 5,384,610 shares of common stock and the remaining principal balance is $289,000.

Until the second anniversary of the closing, the Investor has 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.

Secured convertible note payable relating to the Amended and Original Notes, net of unamortized debt discount and debt issuance costs consisted of:

  

March 31,

  

December 31,

 
  

2020

  

2019

 

Principal amount

 $3,789,000  $3,060,000 

Less: conversion of principal into shares of common stock

  (1,500,000

)

  - 

Net Principal amount

  2,289,000   3,060,000 
         

Less: unamortized debt discount and beneficial conversion feature

  (227,528)  (574,330

)

Less: unamortized debt issuance costs

  -   (230,216

)

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

 $2,061,472  $2,255,454 

January 2020 Note

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 is convertible into common stock at a conversion price of $1.50 per share. The January 2020 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 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 January 2020 Note is repaid prior to the maturity date.  The Company paid $7,000 of legal fees for the January 2020 Note.

Convertible note payable relating to the January 2020 Note, net of unamortized debt issuance costs consisted of:

  

March 31,

  

December 31,

 
  

2020

  

2019

 

Principal amount

 $157,000  $- 

Add: prepayment premium

  23,550   - 

Add: accrued interest

  3,270   - 

Less: unamortized debt issuance costs

  (39,907

)

  - 

Notes payable, net of unamortized debt issuance costs

 $143,913  $- 

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 is convertible into common stock at a conversion price of $1.15 per share. If the Company offers a conversion discount or other more favorable conversion terms, then the investor shall be allowed to convert this February 2020 Note at the same price.  On March 12, 2020, the Original Note was amended to convert at the option of the Investor into shares of common stock at a fixed conversion price of $0.65 per share, which triggered the more favorable conversion terms and resulted in an additional deemed dividend expense of $70,998. The February 2020 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 February 2020 Note is repaid prior to the maturity date.  To date, the Company has only issued 50,000 shares at the request of the lender. The Company paid $6,000 of legal fees for the February 2020 Note.

Secured convertible note payable relating to the February 2020 Note, net of unamortized debt issuance costs consisted of:

  

March 31,

  

December 31,

 
  

2020

  

2019

 

Principal amount

 $126,000  $- 

Add: prepayment premium

  12,600   - 

Add: accrued interest

  1,575   - 

Less: unamortized debt issuance costs

  (43,604

)

  - 

Notes payable, net of unamortized debt issuance costs

 $96,571  $- 

F-40

12.

8.         LEASES

 

The Company’s leases office space in New Jersey, Hong KongMinnesota, New Hampshire, Madrid and MinnesotaHong-Kong with lease termination dates ofin 2023 2020, and 2022, respectively.2024. The leases include non-lease components with variable payments.property leased in China is paid monthly as used, without a formal agreement. The following tables present the components of lease expense and supplemental balance sheet information related to the operating leases for the three months ended and as of:were:

 

  

March 31,

 
  

2020

 
     

Lease cost

    

Operating lease cost

 $53,723 

Total lease cost

 $53,723 
     

Balance sheet information

    

Operating ROU assets

 $520,470 
     

Operating lease liabilities, current portion

 $162,886 

Operating lease liabilities, non-current portion

  353,553 

Total operating lease liabilities

 $516,439 
     

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

  3.13 

Weighted average discount rate – operating leases

  5.50

%

  

Three Months ended

March 31,

2023

  

Three Months ended

March 31,

2022

 
         

Lease cost

        

Operating lease cost

 $-  $55,219 

Total lease cost

 $-  $55,219 

Balance sheet information

 

March 31,

2023

  

December 31,

2022

 

Operating right-of-use assets

 $131,223  $197,355 
         

Operating lease liabilities, current portion

 $96,584  $159,665 
Operating lease liabilities, non-current portion  33,366   37,829 

Total operating lease liabilities

 $129,950  $197,494 
         

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

  0.66   0.96 

Weighted average discount rate – operating leases

  5.50%  5.50

%

         

Supplemental cash flow information related to leases were as follows:

        
         

Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended March 31, 2023 and 2022:

 $69,821  $65,108 
         

Maturities of operating lease liabilities were as follows as of March 31, 2023:

        
         
2023 (9 months remaining) $95,911     

2024

  38,808     
Total future lease payments $134,719     

Less: imputed interest

  (4,769)    

Total

 $129,950     

9.         CONVERTIBLE NOTE PAYABLE

 

Supplemental cash flow information relatedSecurities Purchase Agreement dated December 22, 2022

On December 22, 2022, the Company entered into and closed a securities purchase agreement (the “Purchase Agreement”) which issued a $2,200,000 principal amount senior secured promissory note (the “Note”). At closing, a total of $2,002,000 was funded, with the proceeds to leasesbe used for general working capital.

The principal amount of the Note is due six months following the date of issuance, subject to one six-month extension by the Company. Interest under the Note accrues at a rate of 10% per annum, payable monthly through month six. In the event the maturity date of the Note is extended, interest will accrue at the rate of 12% per annum in months seven through twelve, payable monthly. The Note is secured by a lien on substantially all of the Company’s assets and properties can be prepaid in whole or in part without penalty at any time.

In connection with the issuance of the Note, the Company issued to the investor 700,000 shares of Common Stock (the “Commitment Shares”) and a warrant (the “Warrant”) to purchase 200,000 shares of common stock (the “Warrant Shares”) valued at $1.00 per share at an exercise price of $3.00 per share, exercisable commencing six months after issuance with a term of five years. The Company records the warrants at their fair value which is determined using the Black-Scholes valuation model on the date of the grant. The warrant was valued at $94,316. In the event the Note is paid in full within six months after the date of issuance, the Company will exercise its right to repurchase 350,000 of the Commitment Shares for aggregate payment to the Investor of $1.00.

103

Upon issuance, the Note is not convertible into common stock or any other securities of the Company. Only after a date that is six (6) months following the issuance date of the Note and upon the occurrence of any events of default (as defined) and expiration of any applicable cure periods, all amounts due under the Note will immediately and automatically become due and payable in full, interest will accrue at the higher of 18% per annum or the maximum amount permitted by applicable law, the outstanding principal amount due under the Note will be increased by 30%, and the Investor will have the right to convert all amounts due under the Note into shares of common stock (the “Conversion Shares”) at a conversion price equal to the 10 day volume weighted average sales price of the Company’s common stock on the date of conversion, subject to the Share Cap described in the paragraph below.

The aggregate number of shares of common stock issuable in the forgoing transaction consisting of the Commitment Shares, the Warrant Shares, and the Conversion Shares are capped at 1,684,576 which is 19.9% of the Company’s issued and outstanding shares of common stock on December 22, 2022, the date the definitive transaction documents were as follows, for the three months endedexecuted (the “Share Cap”).

As of March 31, 2019:2023 and December 31, 2022, the Note with principal balance of $2,200,000, at fair value, was recorded at $2,454,212 and $2,596,203, respectively.

 

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

$

52,301

Maturities of operating lease liabilities were as follows:

2020 (remaining nine months)

 $145,424 

2021

  170,853 

2022

  160,817 

2023

  89,226 

Total future lease payments

  566,320 

Less: imputed interest

  (49,881

)

Total

 $516,439 

13.

10.         EARNINGS 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 convertible preferred stock.

The basic and diluted EPS calculations was as follows for the three month periods ended March 31, 2020 and 2019:

  

Three Months ended
March 31,

 
  

2020

  

2019

 
         

Basic and Diluted Numerator:

        
         

Net loss

 $(3,370,282

)

 $(1,803,508

)

Deemed dividends related to down-round features

  (112,686

)

  - 

Net loss available to common stockholders (basic and diluted)

 $(3,482,968

)

 $(1,803,508

)

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 due to the net losses for the three months ended March 31, 2020 and 2019:

  

Three Months ended
March 31,

 
  

2020

  

2019

 
         

Stock options

  476   - 

Warrants

  11,121   - 

Convertible Notes

  3,735,770   - 

Total

  3,747,367   - 

 

The following table sets forth options and warrants which were excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:

 

  

Three Months Ended
March 31,

 
  

2023

  

2022

 
         

Stock options

  202,996   212,461 

Warrants

  4,872,025   4,689,387 

Total

  5,075,021   4,901,848 

 

  

Three Months Ended
March 31,

 
  

2020

  

2019

 
         

Stock options

  1,640,964   1,794,737 

Warrants

  2,201,889   3,780,976 

Total

  3,842,853   5,575,713 

 

F-42

14.

11.         STOCKHOLDERS’ 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

2. Common Stock

Holders of March 31, 2020, 100,000 sharescommon 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.

104

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 been designated as Series A-1 Convertible Preferred Stock and 105,000 shares of preferred stock have been designated as Series B-1 Convertible Preferred Stock. There was no preferred stockpreemptive or similar rights. All outstanding as of March 31, 2020 or December 31, 2019.

Securities Purchase Agreement dated November 13, 2014

Pursuant to 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 664,584 shares of common stock are fully paid and warrants to purchase an additional 996,877nonassessable.

Issuances of Common Stock

During the three-month periods ended March 31, 2023, there have not been any shares of common stock for aggregate gross proceeds of $1,595,000.

The warrants expired in November 2019.

Securities Purchase Agreement dated September 23, 2015issued to anyone outside the Company, except as noted below under Issuances to Directors, Executive Officers & Consultants.

 

On September 23, 2015,March 8, 2022, the Company issued a warrant (the “2015 Warrants”) to purchase 69,445269,060 shares of common stock in connection withof which 89,687 shares were held back by the issuanceCompany to secure certain indemnification obligations under the Swivel Secure stock purchase agreement. The shares of Company common stock were issued at a promissory note. The warrants were immediately exercisabletotal cost of $600,004, priced at an initial exercise$2.23, based on the contractual 20 day volume-weighted average price of $3.60 per share and have a term of five years. the Company’s common stock immediately prior to the payment date as reported on the Nasdaq Capital Market.

 

The 2015 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 sharesIssuances of commonRestricted Stock

Restricted 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 is not triggered by certain "exempt issuances" which among other issuances, includes the issuanceconsists of shares of common stock options or other securitiesthat are subject to officers, employees, directors, consultants or service providers.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. Restricted stock is expensed ratably over the term of the restriction period.

 

On August 24, 2018During the three-month periods ended March 31, 2023 and 2022, the Company issued 40,000 and 274,250 shares of restricted common stock and warrants to certain investors at a purchase price of $1.50 per unit which triggered the anti-dilution provisions included in the 2015 Warrants. As a result, the number of shares of common stock issuable upon the full exercise of the 2015 Warrants was increased from 69,445 to 166,668 shares,employees and the exercise price was reducedboard, respectively. These shares vest in equal annual installments over a three-year period from $3.60 to $1.50 per share.the date of grant and had a fair value on the date of issuance of $31,200 and $589,638, respectively.

 

On February 14, 2020,Restricted stock compensation for the February 2020 Notethree-month period ended March 31, 2023 and 2022 was issued a conversion price of $1.15 that triggered the anti-dilution provisions included in these warrants. Also, the amendments to the Original Note reduced the conversion price of such note to $0.65 which also triggered the anti-dilution provision of the 2015 Warrants.   As a result of the forgoing transactions, the number of shares of common stock issuable upon the full exercise of the 2015 Warrants increased to 384,618, the exercise was reduced to $0.65 per share,$59,056 and the Company recorded a non-cash deemed dividend in amount of $41,688.$39,840, respectively.

 

Common StockIssuances to Directors, Executive Officers & Consultants

 

OnDuring the three-month periods ended March 2131, 2023 and 28, 2019,2022 the Company issued 13,82015,388 and 9,382 shares of common stock to its directors in lieu of payment of board and board committee fees valued at $16,506.  $12,002 and $20,020, respectively.

Employees exercise options

During the three-month periods ended March 31, 2023 and 2022, no employee stock options were exercised.

3. Warrants

There were no shares of common stockwarrants issued in payment of board and board commitment fees induring the three monthsthree-month periods ended March 31, 2020. 2023 and 2022.

 

Issuances of Stock Options12.         FAIR VALUES OF FINANCIAL INSTRUMENTS

On March 21, 2019, the Company issued options to purchase 235,334 shares of common stock to certain officers, employees, and contractors. The options have a three year vesting period, seven year term, and exercise price of $1.18.  The Company did not issue any options in the three months ended March 31, 2020. 

15.

FAIR VALUES OF FINANCIAL INSTRUMENTS      

 

Cash and cash equivalents, accounts receivable, due from factor, accounts payable and accrued liabilities are carried at, or approximate, fair value because of their short-term nature. The carrying valuesvalue of the convertible debtCompany’s notes and operating lease obligationloan payables approximated their fair values as of March 31, 2020 and December 31, 2019value as the interest rates related to the financial instruments approximated market.

 

  

16.

13.         MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLE

MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLES

 

For the three monthsmonth periods ended March 31, 20202023 and 2019, three customers accounted for 71% of revenues and2022, two customers accounted for 56%48% and one customer accounted for 27% of revenues, respectively. Two customers accounted for 37%45% of current accounts receivable as of March 31, 2020.2023. At December 31, 2019, three2022, one customers accounted for 18%, 16% and 14%35% of current accounts receivable, respectively.receivable.

 

17.

14.         SUBSEQUENT EVENTS

Refer to Note 11 for subsequent events related to the conversions of the Amended Note.

 

On April 2, 2020,May 5, 2023, the Company issued 6,8502,858 shares of common stock to its directors in payment of meetingboard committee fees. Additionally, the Company issued a stock option to a new employee for 5,000 shares with three-year vesting period. 

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 “covered period” 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.  While these are the initial guidelines, we are monitoring the announcements for the issuance of the final guidelines.

 

On May 6, 2020,5, 2023, 14,375 shares of restricted common stock were cancelled as a result of employees leaving the Company issued a $2,415,000 principal amount senior secured convertible note (the “Note”).  At closing, $2,100,000before the vesting period was funded. 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 paid 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 a placement agent.completed.

 

On May 12, 2020,11, 2023, the Company issued 7,07717,392 shares of common stock to its directors in payment of meetingboard fees.  Additionally, the Company issued a warrant to an investor for 125,000 shares for a business referral. 

 

On May 14, 2020,11, 2023, the Company issued 1,6322,900 shares of common stock to its directors in payment of board committee meeting fees.

 

Subsequent to period-end, due to the effects of the worldwide coronavirus pandemic, the Company is closely monitoring its operations, liquidity, and capital resources. The COVID-19 outbreak has caused 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 continue to monitor the situation closely 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 able to access inventory to fulfill orders and ship products as required. 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 June 8, 2020. 

 

 

The following financial statements of PistolStar, Inc. are included herein at the indicated page numbers:

Independent Auditor’s Report 2019

F-46

Balance Sheet—December 31, 2019

F-47

Statement of Income and Retained Earnings—Year ended December 31, 2019

F-48

Statement of Cash Flows—Year ended December 31, 2019

F-49

Notes to the Financial Statements—December 31, 2019

F-50

Independent Auditor’s Report 2018

F-54

Balance Sheet—Year ended December 31, 2018

F-55

Statement of Income and Retained Earnings—Year ended December 31, 2018

F-56

Statement of Cash Flows—Year ended December 31, 2018

F-57

Notes to the Financial Statements—December 31, 2018

F-58

Balance Sheet—March 31, 2020 (unaudited)

F-63

Statement of Income and Retained Earnings—Three months ended March, 31 2020 (unaudited)

F-64
Statement of Stockholder’s Equity – Three months ended March 31, 2020 (unaudited)F-65
Statement of Cash Flows— March 31, 2020 (unaudited)F-66
Notes to the Financial Statements— Three months ended March, 31 2020 (unaudited)F-67

INDEPENDENT AUDITOR'S REPORT

To the Stockholder

of PistolStar, Inc.

Bedford, New Hampshire

We have audited the accompanying financial statements of PistolStar, Inc., (a New Hampshire corporation), which comprise the balance sheet as of December 31, 2019, and the related statements of income and retained earnings and cash flows for the year then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PistolStar, Inc., as of December 31, 2019, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Penchansky & Co., PLLC

Certified Public Accountants

Manchester, New Hampshire

June 18, 2020

PistolStar, Inc.

BALANCE SHEET

  

December 31,

 
  

2019

 

ASSETS

    

Cash and cash equivalents

 $528,103 

Accounts receivable, net

  57,727 

Prepaid expenses

  11,210 

Total current assets

  597,040 

Equipment and leasehold improvements, net

  43,422 

Other assets

  194,447 

Total non-current assets

  237,869 

TOTAL ASSETS

 $834,909 
     

LIABILITIES

    

Accounts payable

 $7,931 

Contract liability

  726,492 

Accrued Corporation taxes

  70 

TOTAL LIABILITIES

  734,493 
     

Commitments and Contingencies

    
     

STOCKHOLDER’S EQUITY

    

Common stock - 1,000,000 shares authorized; issued 950,000 shares; outstanding 325,000 shares; no par value

  4,000 

Treasury stock – 625,000 shares at cost

  (2,500

)

Retained earnings

  98,916 

TOTAL STOCKHOLDER’S EQUITY

  100,416 

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY

 $834,909 

The accompanying notes are an integral part of these statements.

PistolStar, Inc.

STATEMENT OF INCOME AND RETAINED EARNINGS

  

Year ended

December 31,

 
  

2019

 
     

Revenues

    

License fees

 $1,584,487 

Costs and other expenses

    

Cost of license fees

  1,054,950 

Gross Profit

  529,537 

Operating expenses

    

Selling, general and administrative

  454,334 

Operating income

  75,203 

Other income (expense)

    

Interest income

  2,628 

Total other income (expense)

  2,628 

Net income before Provision for Taxes

  77,831 

State taxes

  6,699 

Net income

  71,132 

Retained earnings, beginning of year

  51,567 

Distribution

  (23,783

)

Retained earnings, end of year

 $98,916 

The accompanying notes are an integral part of these statements.

PistolStar Inc.

STATEMENT OF CASH FLOWS

  

Year ended

December 31,

 
  

2019

 
     

CASH FLOW FROM OPERATING ACTIVITIES:

    

Net income

 $71,132 

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation and Amortization

  16,048 

Change in assets and liabilities:

    

Accounts receivable

  5,278 

Prepaid expenses and other

  (2,429

)

Accounts payable

  (347

)

Accrued Corporate taxes

  (819

)

Contract liability

  52,944 

Net cash provided by operating activities

  141,807 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Distributions

  (23,783

)

Net cash used in financing activities

  (23,783

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

  118,024 

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

  410,079 

CASH AND CASH EQUIVALENTS, END OF YEAR

 $528,103 

The accompanying notes are an integral part of these statements.

PISTOLSTAR, INC.

Notes to the Financial Statements

For The Year Ended December 31, 2019

NOTE 1Summary of Significant Accounting Policies:

This summary of significant accounting policies of the Company is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management who is responsible for the integrity and objectivity of the financial statements. The accompanying financial statements are presented in accordance with accounting principles generally accepted in the United States of America ("GAAP") a codified by the Financial Accounting Standards Board and those principles have been consistently applied in the preparation of the financial statements.

Basis of Presentation

The Company uses the accrual basis of accounting. Revenue is recognized when it is earned and expenses are recognized when incurred, without regard to the time of receipt or payment.

Use of Estimates in Preparation of Financial Statements

Management used estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Accordingly, actual results may differ.

New Accounting Pronouncements

Topic 606

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of ASU 2014-09 is to recognize revenue when the promised goods or services due are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This standard allows for early adoption and is effective for the Company for the year beginning January I, 2018. See Note 2.

Topic 842

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases, (Topic 842). This new standard amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and a corresponding lease liability. This standard is effective for the company for the year beginning January I, 2021. Management will be evaluating the potential impact the pronouncement will have on the financial statements, if any.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all liquid deposits with maturity of three months or less to be cash and/or cash equivalents. At December 31, 2019, the Company had no cash equivalents.

PISTOLSTAR, INC.

Notes to the Financial Statements

For The Year Ended December 31, 2019

Accounts Receivable and Bad Debt

Accounts receivable are reported at net realizable value. Net realizable value is equal to the gross amount of accounts receivable less an estimated allowance for accounts unlikely to be collected. Historically, the Company has not experienced material write-offs and, therefore, has not established an allowance account.

Advertising Costs

The Company expenses marketing costs, consisting of tradeshows, promotional mailers and other media expenditures as they are incurred. Total amount expensed for the year ended December 31, 2019 was $106,961.

Revenue Recognition

Revenue is realized or realizable and earned when persuasive evidence of a performance obligation has been satisfied. The Company records revenue from contract sales, and recognizes this revenue over the term of the contract with the consumer, beginning at commencement of the contract.

Intangible Assets

The cost associated with obtaining computer domains have been capitalized and amortized over the useful life of 5 years, on a straight line basis.

Fixed Assets

Property and equipment are stated on the basis of cost. Repairs are charged to expense as they are incurred. For financial reporting purposes, depreciation is computed on the straight line basis. For tax reporting purposes, depreciation is computed by the modified accelerated cost recovery system as required by the Internal Revenue Code. The useful lives of the assets are as follows:

AssetYears
Equipment5 -7 years
Leasehold Improvements39 years

NOTE 2- Contract Liability:

During the year ending December 31, 2019, the Company has a fee agreement to provide support services and authentication services to consumers for one year contracts. In connection with this agreement, the Company has a contract liability, which is being amortized on a straight-line basis over the twelve month term of the contracts. As of December 31, 2019, the balance of the liability was $726,492.

PISTOLSTAR, INC.

Notes to the Financial Statements

For The Year Ended December 31, 2019

NOTE 3- Retirement Plan:

The Company established a qualified 401 (k) retirement plan, effective January 1, 2016, for employee's that meet the Company vesting period, that allow salary deferrals, safe harbor contributions, employer matching contributions up to 4% of employee compensation, and profit share contributions. Total contributions for the year ending December 31, 2019 was $15,703.

NOTE 4- Concentrations:

Cash

The Company maintains its bank accounts with one commercial bank. Cash in these accounts at

times exceeded the insured limit set by the Federal Deposit Insurance Corporation ("FDIC"). The Company's management believes this risk is minimal.

Accounts Receivable

Customer accounts receivable balances as a percentage of the total accounts receivable that are greater than 10% amount to a concentration ofcredit risk for the year ended December 31, 2019 was 65%.

NOTE 5- Income Tax Matters:

PistolStar, Inc. is an S-Corp and as such not a taxpaying entity for federal income tax purposes. Therefore, no provision or liability for federal income taxes has been included in the financial statements for the year ended December 31, 2019. The Company, however, is still liable for state taxes.

The Company's evaluation on December 31, 2019 revealed no uncertain tax positions that would have a material effect on the financial statements. The Company's tax returns are subject to possible examination by the taxing authorities. For federal and state purposes the tax returns essentially remain open for possible examination for a period of three years after the respective filing deadlines of those returns.

NOTE 6- Compensated Absences:

The Company allows compensated absences that will accrue evenly throughout the calendar year beginning January 1 of each year. Employees must take the time in the year it was earned and forfeit accrued unused time at the end of each year.

NOTE 7 - Operating Lease:

The Company leases its office space under a 10-year operating lease requiring monthly payments and minimum prorated share of operating expenses of $4,345. The lease expired on January 31, 2019, and was extended for an additional three years, commencing on February 1, 2019 and ending on January 31, 2022. Rent expense for the year December 31, 2019 was $53,931

PISTOLSTAR, INC.

Notes to the Financial Statements

For The Year Ended December 31, 2019

NOTE 7- Operating Lease - continued:

The following is a schedule by years of future minimum rentals under the leases at December 31, 2019:

Years Ending

December 31,

 

Facilities &

Residences

 
     
2020  52,142 
2021  52,142 
2022  4,345 
Total $108,629 

NOTE 8- Subsequent Events:

In preparing the financial statements, Management has evaluated events and transactions for potential recognition or disclosure through June 18, 2020, which is the date the financial statements were available to be issued.

During May, 2020, the Company’s stockholder agreed to sell the stock of the Company to a publicly traded company in excess of book value.

INDEPENDENT AUDITOR'S REPORT

To the Stockholder

of PistolStar, Inc.

Bedford, New Hampshire

We have audited the accompanying financial statements of PistolStar, Inc., (a New Hampshire corporation), which comprise the balance sheet as of December 31, 2018, and the related statements of income and retained earnings and cash flows for the year then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PistolStar, Inc., as of December 31, 2018, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Penchansky & Co., PLLC

Certified Public Accountants

Manchester, New Hampshire

June 5, 2020

PistolStar, Inc.

BALANCE SHEET

  

December 31,

 
  

2018

 

ASSETS

    

Cash and cash equivalents

 $410,079 

Accounts receivable, net

  63,005 

Prepaid expenses

  8,781 

Total current assets

  481,865 

Equipment and leasehold improvements, net

  58,171 

Other assets

  195,747 

Total non-current assets

  253,918 

TOTAL ASSETS

 $735,783 
     

LIABILITIES

    

Accounts payable

 $8,278 

Contract liability

  673,549 

Accrued Corporation taxes

  889 

TOTAL LIABILITIES

  682,716 
     

Commitments and Contingencies

    
     

STOCKHOLDER’S EQUITY

    

Common stock - 1,000,000 shares authorized; issued 950,000 shares; and outstanding 325,000 shares; no par value

  4,000 

Treasury stock – 625,000 shares at cost

  (2,500

)

Retained earnings

  51,567 

TOTAL STOCKHOLDER’S EQUITY

  53,067 

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY

 $735,783 

The accompanying notes are an integral part of these statements.

PistolStar, Inc.

STATEMENT OF INCOME AND RETAINED EARNINGS

  

Year ended December 31,

 
  

2018

 
     

Revenues

    

License fees

 $1,663,780 

Costs and other expenses

    

Cost of license fees

  1,118,665 

Gross Profit

  545,115 

Operating expenses

    

Selling, general and administrative

  496,425 

Operating income

  48,690 

Other income (expense)

    

Interest income

  4,511 

Interest expense

  (1,417

)

Total other income (expense)

  3,094 

Net income before Provision for Taxes

  51,784 

State taxes

  7,929 

Net income

  43,855 

Retained earnings, beginning of year

  34,910 

Distribution

  (27,198

)

Retained earnings, end of year

 $51,567 

The accompanying notes are an integral part of these statements.

PistolStar Inc.

STATEMENT OF CASH FLOWS

  

Years ended December 31,

 
  

2018

 
     

CASH FLOW FROM OPERATING ACTIVITIES:

    

Net income

 $43,855 

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation and Amortization

  17,154 

Change in assets and liabilities:

    

Accounts receivable

  218,395 

Prepaid expenses and other

  392 

Accounts payable

  (6,337

)

Accrued Corporate taxes

  (17

)

Contract liability

  (146,636

)

Net cash provided by operating activities

  126,806 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Payment on lease obligations

  (14,293

)

Distributions

  (27,198

)

Net cash used in financing activities

  (41,491

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

  85,315 

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

  324,764 

CASH AND CASH EQUIVALENTS, END OF YEAR

 $410,079 

The accompanying notes are an integral part of these statements.

PISTOLSTAR, INC.

Notes to the Financial Statements

For The Year Ended December 31, 2018

Organization and Operations

PistolStar, Inc., (the "Company"), is a New Hampshire Corporation, founded on January 11, 1999, and located in Bedford, New Hampshire. The Company is in the business of providing innovative authentication solutions while delivering high-quality, enterprise-ready authentication. The Company operates principally in the Northeast United States.

NOTE 1Summary of Significant Accounting Policies:

This summary of significant accounting policies of the Company is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management who is responsible for the integrity and objectivity of the financial statements. The accompanying financial statements are presented in accordance with accounting principles generally accepted in the United States of America ("GAAP") as codified by the Financial Accounting Standards Board and those principles have been consistently applied in the preparation of the financial statements.

Basis of Presentation

The Company uses the accrual basis of accounting. Revenue is recognized when it is earned and expenses are recognized when incurred, without regard to the time of receipt or payment.

PISTOLSTAR, INC.

Notes to the Financial Statements

For The Year Ended December 31, 2018

Use of Estimates in Preparation of Financial Statements

Management used estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Accordingly, actual results may differ.

New Accounting Pronouncements

Topic 606

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)

2014-09, Revenue.from Contracts with Customers (Topic 606). The core principle of ASU 2014-09 is to recognize revenue when the promised goods or services due are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This standard allows for early adoption and is effective for the Company for the year beginning January 1, 2018. See Note 2.

Topic 842

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases, (Topic 842). This new standard amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and a corresponding lease liability. This standard is effective for the company for the year beginning January 1, 2021. Management will be evaluating the potential impact the pronouncement will have on the financial statements, if any.

PISTOLSTAR, INC.

Notes to the Financial Statements

For The Year Ended December 31, 2018

NOTE 1- Summary of Significant Accounting Policies - continued:

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all liquid deposits with maturity of three months or less to be cash and/or cash equivalents. At December 31, 2018, the Company had no cash equivalents.

Accounts Receivable and Bad Debt

Accounts receivable are reported at net realizable value. Net realizable value is equal to the gross amount of accounts receivable less an estimated allowance for accounts unlikely to be collected. Historically, the Company has not experienced material write-offs and, therefore, has not established an allowance account.

Advertising Costs

The Company expenses marketing costs, consisting of tradeshows, promotional mailers and other media expenditures as they are incurred. Total amount expensed for the year ended December 31, 2018 was $142,057.

Revenue Recognition

Revenue is realized or realizable and earned when persuasive evidence of a performance obligation has been satisfied. The Company records revenue from contract sales, and recognizes this revenue over the term of the contract with the consumer, beginning at commencement of the contract.

Intangible Assets

The cost associated with obtaining computer domains have been capitalized and amortized over the useful life of 5 years, on a straight line basis.

Fixed Assets

Property and equipment are stated on the basis of cost. Repairs are charged to expense as they are incurred. For financial reporting purposes, depreciation is computed on the straight line basis. For tax reporting purposes, depreciation is computed by the modified accelerated cost recovery system as required by the Internal Revenue Code. The useful lives of the assets are as follows:

Asset

Years

Equipment

5 -7 years

Leasehold Improvements

39 years

NOTE 2- Contract Liability:

During the year ending December 31, 2018, the Company has a fee agreement to provide support services and authentication services to consumers for one year contracts. In connection with this agreement, the Company has a contract liability, which is being amortized on a straight-line basis over the twelve month term of the contract. As of December 31, 2018, the balance of the liability was $673,549.

PISTOLSTAR, INC.

Notes to the Financial Statements

For The Year Ended December 31, 2018

NOTE 3- Retirement Plan:

The Company established a qualified 401 (k) retirement plan, effective January 1, 2016, for employee's that meet the Company vesting period, that allow salary deferrals, safe harbor contributions, employer matching contributions up to 4% of employee compensation, and profit share contributions. Total contributions for the year ending December 31, 2018 was $29,568.

NOTE 4- Concentrations:

Cash

The Company maintains its bank accounts with one commercial bank. Cash in these accounts at times exceeded the insured limit set by the Federal Deposit Insurance Corporation ("FDIC"). The Company's management believes this risk is minimal.

Accounts Receivable

Customer accounts receivable balances as a percentage of the total accounts receivable that are greater than 10% amount to a concentration of credit risk for the year ended December 31, 2018 was 49%.

NOTE 5- Income Tax Matters:

PistolStar, Inc. is an S-Corp and as such not a taxpaying entity for federal income tax purposes. Therefore, no provision or liability for federal income taxes has been included in the financial statements for the year ended December 31, 2018. The Company, however, is still liable for state taxes.

The Company's evaluation on December 31, 2018 revealed no uncertain tax positions that would have a material effect on the financial statements. The Company's tax returns are subject to possible examination by the taxing authorities. For federal and state purposes the tax returns essentially remain open for possible examination for a period of three years after the respective filing deadlines of those returns.

NOTE 6- Compensated Absences:

The Company allows compensated absences that will accrue evenly throughout the calendar year beginning January 1 of each year. Employees must take the time in the year it was earned and forfeit accrued unused time at the end of each year.

NOTE 7 - Operating Lease:

The Company leases it office space under a 10-year operating lease requiring monthly payments of $4,345. The lease expired on January 31, 2019, and was extended for an additional three years, commencing on February 1, 2019. The Company leased additional space on an at-will, month by month lease for $500 per month. Rent expense for the year December 31, 2018 was $64,018

PISTOLSTAR, INC.

Notes to the Financial Statements

For The Year Ended December 31, 2018

NOTE 7 - Operating Lease - continued:

The following is a schedule by years of future minimum rentals under the leases at December 31, 2018:

Years Ending

December 31,

 

Facilities &

Residences

 
     

2019

  52,140 

2020

  52,140 

2021

  52,140 

2022

  4,345 

Total

 $160,765 

NOTE 8 - Related Party Transactions:

The Company entered into a lease with its sole shareholder for real estate to be used as storage, with quarterly payments of $9,000. The lease is at will and expired on March 31, 2018.

NOTE 9 - Subsequent Events:

In preparing the financial statements, Management has evaluated events and transactions for potential recognition or disclosure through June 5, 2020, which is the date the financial statements were available to be issued.

During May, 2020, the Company’s stockholder agreed to sell stock of the Company to a publicly traded company in excess of book value.

PistolStar, Inc.

BALANCE SHEET

(Unaudited)

  

March 31, 2020

 

ASSETS

    

Cash and cash equivalents

 $513,214 

Accounts receivable, net

  196,138 

Prepaid expenses and other

  10,383 

Total current assets

  719,735 

Equipment and leasehold improvements, net

  41,785 

Deposits and other assets

  194,326 

Total non-current assets

  236,111 

TOTAL ASSETS

 $955,846 
     

LIABILITIES

    

Accounts payable

 $1,452 

Accrued liabilities

  2,070 

Contract liability

  807,225 

Total current liabilities

  810,747 

TOTAL LIABILITIES

  810,747 
     

STOCKHOLDER’S EQUITY

    

Common stock - 1,000,000 shares authorized; issued 950,000 shares; and outstanding 325,000 shares; no par value

  4,000 
Treasury stock - 625,000 shares at cost  (2,500)
Additional paid in capital  27,276 

Retained earnings

  116,323 

TOTAL STOCKHOLDER’S EQUITY

  145,099 

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY

 $955,846 

PistolStar, Inc.

STATEMENT OF INCOME AND RETAINED EARNINGS
(Unaudited)

  

Three months ended

March 31,

 
  

2020

 
     

Revenues

    

License fees

 $405,919 

Costs and other expenses

    

Cost of license fees

  299,983 

Gross Profit

  105,936 
     

Operating Expenses

    

Selling, general and administrative

  87,386 

Operating income

  18,550 

Other income

    

Interest income

  590 

Total Other Income

  590 

Net income before Provision for Taxes

  19,140 

State taxes

  1,733 

Net income

  17,407 

Retained earnings, beginning of period

  98,916 

Retained earnings, end of period

 $116,323 

F-64

PISTOLSTAR, INC.

STATEMENT OF STOCKHOLDER’S EQUITY

(Unaudited)

  

Common Stock

  

Treasury Stock

  

Additional

Paid-in

  

Retained

     
  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Earnings

  

Total

 

Balance as of January 1, 2020

  325,000  $4,000   625,000  $(2,500

)

 $-  $98,916  $100,416 

Stockholder contribution

  -   -   -   -   27,276   -   27,276 

Net income

  -   -   -   -   -   17,407   17,407 

Balance as of March 31, 2020

  325,000  $4,000   625,000  $(2,500

)

 $27,276  $116,323  $145,099 

PISTOLSTAR, INC.

Statement of Cash Flows

  

Three months ended

 
  

March 31,

 
  

2020

 

CASH FLOW FROM OPERATING ACTIVITIES:

    

Net income

 $17,407 

Adjustments to reconcile net income to net cash used by operating activities:

    

Depreciation and Amortization

  1,758 

Change in assets and liabilities:

    

Accounts receivable

  (138,411)

Prepaid expenses

  4 

Prepaid taxes

  823 

Accounts Payable

  (3,515)

Credit card payable

  (2,964)

Accrued commission

  2,000 

Contract liability

  80,733 

Net cash used by operating activities

  (42,165)

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Stockholder contribution

  27,276 

Net cash provided by financing activities

  27,276 

NET DECREASE IN CASH AND CASH EQUIVALENTS

  (14,889)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

  528,103 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 $513,214 

F-66

PISTOLSTAR, INC.

Notes to the Financial Statements

For The Three Months Ended March 31, 2020

Organization and Operations

PistolStar, Inc., (the “Company”), is a New Hampshire Corporation, founded on January 11, 1999, and located in Bedford, New Hampshire.  The Company is in the business of providing innovative authentication solutions while delivering high-quality, enterprise-ready authentication. The Company operates principally in the Northeast United States. 

NOTE 1Summary of Significant Accounting Policies:

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management who is responsible for the integrity and objectivity of the financial statements. The accompanying financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as codified by the Financial Accounting Standards Board and those principles have been consistently applied in the preparation of the financial statements.

Basis of Presentation

           The Company uses the accrual basis of accounting.  Revenue is recognized when it is earned and expenses are recognized when incurred, without regard to the time of receipt or payment.

Use of Estimates in Preparation of Financial Statements

          Management used estimates and assumptions in preparing financial statements.  Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.  Accordingly, actual results may differ.

New Accounting Pronouncements

Topic 606

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606).  The core principle of ASU 2014-09 is to recognize revenue when the promised goods or services due are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services.  This standard allows for early adoption and is effective for the Company for the year beginning January 1, 2018.  See Note 2.

Topic 842

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases, (Topic 842).  This new standard amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and a corresponding lease liability.  This standard is effective for the company for the year beginning January 1, 2021.  Management will be evaluating the potential impact the pronouncement will have on the financial statements, if any.

F-67

PISTOLSTAR, INC.

Notes to the Financial Statements

For The Three Months Ended March 31, 2020

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all liquid deposits with maturity of three months or less to be cash and/or cash equivalents.  At March 31, 2020, the Company had no cash equivalents.

Accounts Receivable and Bad Debt

              Accounts receivable are reported at net realizable value.  Net realizable value is equal to the gross amount of accounts receivable less an estimated allowance for accounts unlikely to be collected.  Historically, the Company has not experienced material write-offs and, therefore, has not established an allowance account.

Advertising Costs

           The Company expenses marketing costs, consisting of tradeshows, promotional mailers and other media expenditures as they are incurred.  Total amount expensed for the three months ended March 31, 2020 was $28,812.

Revenue Recognition

Revenue is realized or realizable and earned when persuasive evidence of a performance obligation has been satisfied.  The Company records revenue from contract sales, and recognizes this revenue over the term of the contract with the consumer, beginning at commencement of the contract. 

Intangible Assets

The cost associated with obtaining computer domains have been capitalized and amortized over the useful life of 5 years, on a straight line basis.

Fixed Assets

Property and equipment are stated on the basis of cost.  Repairs are charged to expense as they are incurred.  For financial reporting purposes, depreciation is computed on the straight line basis. For tax reporting purposes, depreciation is computed by the modified accelerated cost recovery system as required by the Internal Revenue Code.  The useful lives of the assets are as follows:

Asset

Years

Equipment

5 – 7 years

Leasehold Improvements

39 years

F-68

PISTOLSTAR, INC.

Notes to the Financial Statement

For The Three Months Ended March 31, 2020

NOTE 2Contract Liability:

During the three months ending March 31, 2020, the Company has a fee agreement to provide support services and authentication services to consumers for one year contracts.  In connection with this agreement, the Company has a contract liability, which is being amortized on a straight-line basis over the twelve month term of the contract.  As of March 31, 2020, the balance of the liability was $807,225.

NOTE 3Retirement Plan:

The Company established a qualified 401 (k) retirement plan, effective January 1, 2016, for employee’s that meet the Company vesting period, that allow salary deferrals, safe harbor contributions, employer matching contributions up to 4% of employee compensation, and profit share contributions.  Total contributions for the three months ending March 31, 2020 was $2,916.

NOTE 4 - Concentrations:

           Cash

           The Company maintains its bank accounts with one commercial bank.  Cash in these accounts at times exceeded the insured limit set by the Federal Deposit Insurance Corporation (“FDIC”).  The Company’s management believes this risk is minimal.

Accounts Receivable

Customer accounts receivable balances as a percentage of the total accounts receivable that are greater than 10% amount to a concentration of credit risk for the three months ended March 31, 2020 was 32%.

NOTE 5 - Income Tax Matters:

PistolStar, Inc. is an S-Corp and as such not a taxpaying entity for federal income tax purposes. Therefore, no provision or liability for federal income taxes has been included in the financial statements for the three months ended March 31, 2020.  The Company, however, is still liable for state taxes.

The Company’s tax returns are subject to possible examination by the taxing authorities. For federal and state purposes the tax returns essentially remain open for possible examination for a period of three years after the respective filing deadlines of those returns.

NOTE 6Compensated Absences:

The Company allows compensated absences that will accrue evenly throughout the calendar year beginning January 1 of each year.  Employees must take the time in the year it was earned and forfeit accrued unused time at the end of each year.  Management has chosen not to record through March 31, 2020.      

F-69

PISTOLSTAR, INC.

Notes to the Financial Statement

For The Three Months Ended March 31, 2020

NOTE 7Operating Lease:

The Company leases its office space under a 10-year operating lease requiring minimum of $4,345.  The Company is also responsible for prorated share of operating expenses.  The lease expired on January 31, 2019, and was extended for an additional three years, commencing on February 1, 2019 and ending on January 31, 2022.  Rent expense for the three months ended March 31, 2020 was $13,126.   

The following is a schedule by years of future minimum rentals under the leases at March 31, 2020:

Years Ending

December 31,

 Facilities &
Residences
 
     
2020 (remaining months)  39,107 
2021  52,142 
2022  4,345 
Total $95,594 

NOTE 8Subsequent Events:

The Corona Virus (COVID-19) pandemic created unforeseen circumstances, including, closing interaction in trade shows and safety precautions that amounted to total business disruption.  The United States Government, in conjunction with Small Business Administration, created a loan program to supplement income to support keeping employees on payroll.  While PistolStar, Inc. accepted the loan, the amounts were paid back as of May 13, 2020.    

During May, 2020, the Company’s stockholder agreed to sell the assets and intangibles of the Company to a publicly traded company in excess of book value.  A Letter of Intent has been filed with the SEC in regards to such a purchase.

F-70

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

Unaudited Pro Forma Condensed Combined Statement of Operations Year Ended December 31, 2019

F-72

Unaudited Pro Forma Condensed Combined Statement of Operations Three Months Ended March 31, 2020

F-73

Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 2020

F-74

Notes to the unaudited pro forma condensed combined financial statements

F-75

BIO-key International, Inc. and Subsidiaries

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

Year ended December 31, 2019

  Historical Statements        
  

BIO-key

International,

Inc.

  

PistolStar,

Inc.

  

Proforma

adjustments

giving

effect to the

PistolStar,

Inc.

Acquisition

   

Proforma

adjustments after

giving effect to the

Acquisition

 
                  

Revenues

                 

Services

 $925,245  $-  $-   $925,245 

License fees

  442,649   1,584,487   -    2,027,136 

Hardware

  899,634   -   -    899,634 

Total revenues

  2,267,528   1,584,487        3,852,015 
                  

Costs and other expenses

                 

Cost of services

  272,318   -   -    272,318 

Cost of license fees

  916,112   1,054,950   314,895 

(A)

  2,285,957 

Cost of hardware

  1,272,815   -   -    1,272,815 

Total costs and other expenses

  2,461,245   1,054,950   314,895    3,831,090 

Gross Profit (Loss)

  (193,717)  529,537   (314,895)   20,925 
                  

Operating expenses

                 

Selling, general and administrative

  5,036,820   454,334   -    5,491,154 

Research, development and engineering

  1,331,667   -   -    1,331,667 

Total operating expenses before impairment

  6,368,487   454,334   -    6,822,821 

Impairment of resalable software license rights

  (6,957,516)  -   -    (6,957,516)

Operating income (loss)

  (13,519,720)  75,203   (314,895)   (13,759,412)
                  

Other income (expense)

                 

Interest income

  154   2,628   -    2,782 

Interest expense

  (1,069,134)  -   (975,222)

(B)

  (2,044,356)
State taxes  -   (6,699)  -    (6,699)

Total other income (expense)

  (1,068,980)  (4,071)  (975,222)   (2,048,273)

Net income (loss) available to common stockholders

  (14,588,700)  71,132   (1,290,117)   (15,807,685)
                  

Basic and Diluted Loss per Common Share

 $(1.03) $-  $-   $(1.11)
                  

Weighted Average Shares Outstanding:

                 

Basic and Diluted

  14,223,685   -   -    14,223,685 

(A) Represents amortization of intangible assets from PistolStar acquisition for the year

(B) Represents amortization of original issuance discount and fees associated with the convertible note and interest expense on the note payable - seller.

BIO-key International, Inc. and Subsidiaries

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

Three months ended March 31, 2020

  

Historical Statements

          
  

BIO-key

International,

Inc.

  

PistolStar,

Inc.

  

Proforma

adjustments

giving effect to

the PistolStar,

Inc. Acquisition

   

Proforma

adjustments

after giving

effect to the

Acquisition

 
                  

Revenues

                 

Services

 $207,523  $-  $-   $207,523 

License fees

  235,345   405,919   -    641,264 

Hardware

  79,617   -   -    79,617 

Total revenues

  522,485   405,919        928,404 
                  

Costs and other expenses

                 

Cost of services

  70,445   -   -    70,445 

Cost of license fees

  10,456   299,983   79,598 

(A)

  390,037 

Cost of hardware

  43,362   -   -    43,362 

Total costs and other expenses

  124,263   299,983   79,598    503,844 

Gross Profit (Loss)

  398,222   105,936   (79,598

)

   424,560 
                  

Operating expenses

                 

Selling, general and administrative

  1,381,399   87,386   -    1,468,785 

Research, development and engineering

  336,889   -   -    336,889 

Total operating expenses

  1,718,288   87,386   -    1,805,674 

Operating income (loss)

  (1,320,066

)

  18,550   (79,598

)

   (1,381,114

)

                  

Other income (expense)

                 

Interest income

  1   590   -    591 

Interest expense

  (1,551,141

)

  -   (246,458

)

(B)

  (1,797,599

)

State taxes

      (1,733

)

       (1,733

)

Loss on extinguishment of debt

  (499,076

)

  -   -    (499,076

)

Total other income (expense)

  (2,050,216

)

  (1,143

)

  (246,458

)

   (2,297,817

)

Net income (loss)

  (3,370,282

)

  17,407   (326,056

)

   (3,678,931

)

Deemed dividends related to down-round features

  (112,686

)

  -   -    (112,686

)

Net income (loss) available to common stockholders

  (3,482,968

)

  17,407   (326,056

)

   (3,791,617

)

                  

Basic and Diluted Loss per Common Share

 $(0.23

)

 $-  $-   $(0.25

)

                  

Weighted Average Shares Outstanding:

                 

Basic and Diluted

  15,165,522   -   -    15,165,522 

(A) Represents amortization of intangible assets from PistolStar acquisition for the quarter

(B) Represents amortization of original issuance discount, warrant discount, and fees associated with the convertible note.

BIO-key International, Inc. and Subsidiaries

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

March 31, 2020

  

Historical Statements

          
  

BIO-key

International Inc.

  

PistolStar, Inc.

  

Proforma

adjustments giving

effect to the

PistolStar, Inc.

Acquisition

   

Proforma

adjustments after

giving effect to the

Acquisition

 
                  
                  

ASSETS

                 

Cash and cash equivalents

 $661,937  $513,214  $(520,000

)

(A)

 $655,151 

Accounts receivable, net

  120,293   196,138��  -    316,431 

Due from factor

  130,670   -   -    130,670 

Inventory

  397,711   -   -    397,711 

Prepaid expenses and other

  166,572   10,383   -    176,955 

Investment – non-marketable security

  512,821   -   -    512,821 

Total current assets

  1,990,004   719,735   (520,000

)

   2,189,739 

Resalable software license rights

  68,774       -    68,774 

Equipment and leasehold improvements, net

  75,597   41,785   -    117,382 

Capitalized contract costs, net

  208,499   -   -    208,499 

Deposits and other assets

  8,712   194,326   (193,960)   9,078 

Operating lease right-of-use assets

  520,470   -   -    520,470 

Intangible assets, net

  147,222   -   3,148,945 

(B)

  3,296,167 

Total non-current assets

  1,029,274   236,111   2,954,985    4,220,370 

TOTAL ASSETS

 $3,019,278  $955,846  $2,434,985   $6,410,109 
                  

LIABILITIES

                 

Accounts payable

 $616,985  $1,452  $710,334 

(C)

 $1,328,721 

Due to related parties

  66,466   -   -    66,466 

Accrued liabilities

  515,108   2,070   -    517,178 

Note payable - seller

  -   -   500,000 

(D)

  500,000 

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

  2,301,956   -   856,028 

(E)

  3,157,984 

Deferred revenue

  413,345   807,225   -    1,220,570 

Operating lease liabilities, current portion

  162,886       -    162,886 

Total current liabilities

  4,076,746   810,747   2,066,362    6,953,855 

Operating lease liabilities, net of current portion

  353,553   -   -    353,553 

Total non-current liabilities

  353,553            353,553 

TOTAL LIABILITIES

  4,430,299   810,747   2,066,362    7,307,408 
                  

STOCKHOLDERS’ EQUITY (DEFICIT)

                 

Common stock

  1,839   1,500   (1,486

)

(F)

  1,853 

Additional paid-in capital

  91,793,124   -   513,708 

(G)

  92,306,832 

Retained Earnings (Accumulated deficit)

  (93,205,984)  143,599   (143,599

)

   (93,205,984)

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)

  (1,411,021

)

  145,099   368,623    (897,299

)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 $3,019,278  $955,846  $2,434,985   $6,410,109 

(A) Represents the cash portion of the purchase price for PistolStar Inc. of $2,000,000 and funds received from convertible note payable of $1,575,000 less fees paid in cash related to the convertible note  payable of $95,000.

(B) Represents the difference between the purchase price and the book value of the assets of PistolStar, Inc.

(C) Represents fees paid to a placement agent, of 7% of the convertible note payable in the amount of  $110,250, plus $600,084 of working capital adjustments.

(D) Represents the portion of the purchase price for PistolStar Inc. paid by issuance of a promissory note.

(E) Represents convertible note payable principal of $1,811,250, net of unamortized original issuance discount of $236,250, unamortized warrant discount of $511,402, and unamortized deferred debt costs of $207,570.

(F) Represents capital attributed to shares issued for the due diligence fee of $100,000 calculated per the agreement at $0.7322 per share, the closing price of the Company's common stock on June 26, 2020, as reported on Nasdaq less the common stock value of PistolStar, Inc.

(G) Represents the value of the $100,000 due diligence fee issued in common stock less the par value of the stock of $14 plus the $511,402 warrant discount, less the equity portion (32%) of the commitment fee, convertible note underwriting fee, and other expenses of $305,250.

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited pro forma condensed combined financial statements of BIO-key International, Inc. (“BIO-key”) have been prepared to give effect to the transaction where, on June 30, 2020, BIO-key acquired all of the outstanding shares of common stock of PistolStar, Inc. (“PistolStar”).

The accompanying unaudited pro forma condensed combined statements of operations for the year ended December 31, 2019 and for the three months ended March 31, 2020 combine the historical consolidated statements of operations of BIO-key and the historical statements of operations from PistolStar to give effect to the transaction as if it occurred on January 1, 2019. The unaudited pro forma condensed combined balance sheet as of March 31, 2020 combines the historical consolidated balance sheet of BIO-key and the historical balance sheet of PistolStar to give effect to the transaction as if it had occurred on March 31, 2020.

Pro forma adjustments have been limited to only those adjustments that are: directly attributable to the transaction; factually supportable; and in the case of pro forma statement of operations adjustments, expected to have a continuing impact on the combined financial results.

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The unaudited pro forma condensed combined financial statements are provided for informational purposes only and are not necessarily indicative of the results that would have occurred if the transaction had occurred on the first day of each period presented. The unaudited pro forma condensed combined financial statements should not be construed as being representative of future operating results or financial position of the combined company and should be read in conjunction with the:

1.

Accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements;

2.

BIO-key’s historical audited consolidated financial statements and notes thereto included in BIO-key’s annual report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission on May 14, 2020 and included in this prospectus;

3.

BIO-key’s unaudited condensed consolidated financial statements and notes thereto included in BIO-key’s quarterly report on Form 10-Q for the quarter ended March 31, 2020, as filed with the Securities and Exchange Commission on June 8, 2020 and included in this prospectus; and

4.

Audited consolidated financial statements and notes thereto of PistolStar, Inc. for the year ended December 31, 2019 included in this prospectus;

5.

The description of the acquisition of PistolStar included herein in the section captioned “BUSINESS”.

NOTE 2 – ACCOUNTING POLICIES

The accounting policies used in the preparation of the unaudited pro forma condensed combined financial statements are consistent with those described in the unaudited interim period consolidated financial statements of BIO-key for the three months ended March 31, 2020 and the audited consolidated financial statements of BIO-key for the year ended December 31, 2019.

NOTE 3 –PRESENTATION ADJUSTMENTS

Reclassifications were made to PistolStar’ financial statements to conform them to BIO-key’s presentation.

NOTE 4 – FAIR VALUE OF CONSIDERATION TRANSFERRED

Estimated purchase price

 
     

Cash

 $2,000,000 
     

Issuance of note payable

  500,000 
     

Total estimated purchase price

 $2,500,000 

NOTE 5 – ASSETS ACQUIRED AND LIABILITIES ASSUMED

BIO-key has performed a preliminary valuation analysis of the fair market value of PistolStar’s assets and liabilities. Preliminary purchase price allocation as of the acquisition date of June 30, 2020 is as follows:

 
     

Current assets

 $296,080 

Equipment and leasehold improvements

  10,450 

Intangible assets

  3,148,945 
     
     

Total assets acquired

  3,455,475 
     

Current liabilities

  955,475 
     

Total liabilities assumed

  955,475 
     

Net assets acquired

 $2,500,000 

NOTE 6 – PRO FORMA ADJUSTMENTS (STATEMENTS OF OPERATIONS)

See Unaudited Pro Forma Condensed Combined Statements of Operations on F-72 and F-73

NOTE 7 – PRO FORMA ADJUSTMENTS (BALANCE SHEETS)

See Unaudited Pro Forma Condensed Combined Balance Sheet on F-74

WHERE YOU CAN FIND MORE INFORMATION

 

We have filedfile annual, quarterly and special reports, proxy statements and other documents with the SEC. You may read and copy any document we file at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You should call 1-800-SEC-0330 for more information on the public reference room. The SEC maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers of securities, like us, that file electronically with the SEC. Our SEC filings are available to you on the SEC’s Internet website. We also maintain a website at www.bio-key.com, which provides additional information about the Company. The contents of our website or any other website, however, are not a part of this prospectus and is not incorporated by reference into this prospectus. Our website address is included as an inactive textual reference only.

This prospectus is part of a registration statement on Form S-1 underthat we filed with the Securities Act with respectSEC to register the shares of common stock beingsecurities to be offered by this prospectus.hereby. This prospectus does not contain all of the information included in the registration statement, including certain exhibits and its exhibits. For further information with respect to usschedules. You may obtain the registration statement and the common stock offered by this prospectus, we refer youexhibits to the registration statement and its exhibits. Statements contained in this prospectus as tofrom the contents of any contractSEC at the address listed above or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.

You can read our SEC filings, including the registration statement, over the Internet atfrom the SEC’s website at www.sec.gov. You may also request a copy of these filings, at no cost, by writing us at 3349 Highway 138, Building A, Suite E, Wall, New Jersey 07719 or telephoning us at (732) 359-1100.

We are subject to the information and periodic reporting requirements of the Exchange Act, and we file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information are available for inspection and copying at the public reference room and website of the SEC referred tolisted above. We maintain a website at http://www.bio-key.com. You may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not incorporated by reference in, and is not part of, this prospectus.

 

 

[•]900,000 Shares of Common Stock

Pre-Funded Warrants to Purchase up to [•]Shares of Common Stock

Warrants to Purchase up to [•]Shares of Common Stock

 

 

logo1.jpg

 


 

PROSPECTUS

 


 

Sole Book-Running Manager

Maxim Group LLC


July 17, 2020

, 2023

 

 

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item13.

Other Expenses of Issuance and Distribution.

 

The following table sets forth the costs andestimated expenses other than underwriting discounts, paid or payable by BIO-key International, Inc., or the Registrant,us in connection with the saleissuance and distribution of the securities being registered. All amountsregistered are estimated except the SEC registration fee and the Financial Industry Authority, Inc., or FINRA, filing fee.as follows:

 

Item

 

Amount

 

SEC registration fee

 $4,478.10 

FINRA filing fee

 $6,710.00 

Legal fees and expenses

 $125,000 

Accounting fees and expenses

 $25,000 

Transfer Agent Fees

 $5,000 

Miscellaneous fees and expenses

 $10,000 

Total

 $176,188.10 

SEC Registration Fee

 $62 

Registrant Legal Fees and Expenses*

 $10,000 

Accounting Fees and Expenses*

 $5,000 

Miscellaneous Fees and Expenses*

 $1,000 

Total

 $16,062 

 

*

Estimated solely for the purposes of this Item. Actual expenses may vary.

Item14.

Indemnification of Directors and Officers.

 

Section 145 of the DGCLDelaware General Corporation Law (“DGCL”) authorizes a corporation to indemnify its directors and officers against liabilities arising out of actions, suits and proceedings to which they are made or threatened to be made a party by reason of the fact of their prior or current service to the corporation as a director or officer, in accordance with the provisions of Section 145, which are sufficiently broad to permit indemnification under certain circumstances for liabilities arising under the Securities Act. The indemnity may cover expenses (including attorneys’ fees) judgments, fines and amounts paid in settlement actually and reasonably incurred by the director or officer in connection with any such action, suit or proceeding. Section 145 permits corporations to pay expenses (including attorneys’ fees) incurred by directors and officers in advance of the final disposition of such action, suit or proceeding. In addition, Section 145 provides that a corporation has the power to purchase and maintain insurance on behalf of its directors and officers against any liability asserted against them and incurred by them in their capacity as a director or officer, or arising out of their status as such, whether or not the corporation would have the power to indemnify the director or officer against such liability under Section 145.

 

Our certificate of incorporation, as amended (the “Certificate of Incorporation”), provides that, unless otherwise required under applicable law, (a) a director shall not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, and (b) we shall indemnify any director or officer made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact of such person’s current or prior service as a director or officer of the Company any predecessor of the Company, or any other enterprise per the Company’s or any predecessor to the Company’s request.

 

Our bylaws provide that (a) we shall indemnify and hold harmless our directors and officers to the maximum extent and in the manner permitted by the DGCL against expenses (including attorneys’ fees) reasonably incurred in connection with any proceeding, whether civil, criminal, administrative or investigative, arising by reason of the fact that such person is or was an agent of the corporation, (b) we shall advance expenses incurred by any director or officer prior to the final disposition of any proceeding to which the director or officer was or is or is threatened to be made a party promptly following a request therefore, subject to certain limited requirements, and (c) the rights conferred in our Bylaws are not exclusive.

 

We have also obtained insurance policies covering our directors and officers with respect to certain liabilities, including liabilities arising under the Securities Act.

 

The foregoing represents a summary of the general effect of the DGCL,Delaware General Corporation Law, our Certificate of Incorporation, and any other contracts or arrangements of the Company relating to indemnification, and is qualified in its entirety by reference to, the terms and provisions of the DGCL,Delaware General Corporation Law, our Certificate of Incorporation, and such other contracts or arrangements relating to indemnification.

 

109

 

Item 15.15.

Recent Sales of Unregistered Securities.

 

The following sets forth information regarding all unregistered securities sold by us in transactions that were exempt from the requirements of the Securities Act in the last three years. Except where noted, all of the securities discussed in this Item 15 were all issued in reliance on the exemption under Section 4(a)(2) of the Securities Act without engaging in any advertising or general solicitation of any kind, and unless otherwise indicated, without payment of placement agent fees or commissions.

On December 22, 2022, we entered into and closed a securities purchase agreement (the “Purchase Agreement”) with AJB Capital Investments, LLC (the “Investor”) which provides for the issuance of a $2,200,000 principal amount senior secured promissory note (the “Note”). At closing, a total of $2,002,000 was funded with the proceeds to be used for general working capital. The principal amount of the Note is due six months following the date of issuance, subject to one six-month extension. Interest under the Note accrues at a rate of 10% per annum, payable monthly through month six. In the event the maturity date of the Note is extended, interest will accrue at the rate of 12% per annum in months seven through twelve, payable monthly. The Note is secured by a lien on substantially all of the Company’s assets and properties can be prepaid in whole or in part without penalty at any time. In connection with the issuance of the Note, we issued to the investor 700,000 shares of Common Stock (the “Commitment Shares”) and a warrant (the “Warrant”) to purchase 200,000 shares of common stock (the “Warrant Shares”) at an exercise price of $3.00 per share, exercisable commencing six months after issuance with a term of five years. In the event the Note is paid in full within six months after the date of issuance, we will exercise our right to repurchase 350,000 of the Commitment Shares for aggregate payment to the Investor of $1.00. Upon issuance, the Note is not convertible into common stock or any other securities of BIO-key. Upon the occurrence of standard and customary events of default and expiration of any applicable cure periods, all amounts due under the Note will immediately and automatically become due and payable in full, interest will accrue at the higher of 18% per annum or the maximum amount permitted by applicable law, the outstanding principal amount due under the Note will be increased by 30%, and the Investor will have the right to convert all amounts due under the Note into shares of common stock (the “Conversion Shares”) at a conversion price equal to the 10 day volume weighted average sales price of our common stock on the date of conversion, subject to the Share Cap described in the paragraph below. The aggregate number of shares of common stock issuable in the forgoing transaction consisting of the Commitment Shares, the Warrant Shares, and the Conversion Shares are capped at 1,684,576 which is 19.9% of our issued and outstanding shares of common stock on December 22, 2022, the date the definitive transaction documents were executed (the “Share Cap”). The Note and the Warrant contain “blocker provisions” which prohibit conversion or exercise, as applicable, if such conversion or exercise would result in the Investor being the beneficial owner of in excess of 9.99% of our common stock. We have agreed to file a registration statement covering the public resale of the shares of common stock issuable upon conversion of the Note and exercise of the Warrant and cause such registration statement to be declared effective not later than 180 days after the closing of the transaction. The forgoing securities were issued in a private placement transaction to one accredited investor pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, without engaging in any advertising or general solicitation of any kind. Maxim Group LLC (“Maxim”) served as our placement agent in connection with the forgoing transaction. We paid a placement fee to Maxim equal to 7% of the aggregate gross proceeds raised in the transaction.

 

On June 29, 2020, we entered into and closed a securities purchase agreement with Lind (the “Investor”) which provides for the issuance of a $1,811,250 principal amount senior secured convertible note (the “Note”). At closing, a total of $1,575,000 was funded to the Company with the proceeds to be used for the acquisition of PistolStar, Inc. The principal amount due of the Note is due and payable in nine (9) equal monthly installments of $201,250 beginning four (4) months after the funding date. Repayment of the outstanding principal amount due under the Note plus an additional amount equal to 5% of the then outstanding principal amount is due in connection with the closing of a change in control transaction. Upon the occurrence of standard and customary events of default and expiration of any applicable cure periods, repayment of the outstanding principal amount due under the Note is subject to acceleration in the discretion of the Investor in which event, interest will accrue at the higher of 18% per annum or the maximum amount permitted by applicable law and the Company will become obligated to pay an amount equal to 20% of the then outstanding principal amount due under the Note. The Note is secured by a lien on substantially all of our assets and properties and is convertible at the option of Lind into shares of our common stock at a fixed conversion price of $1.16 per share. We have the right to prepay the Note in full at any time without penalty (the “Buy-Back Right”). Should we exercise our Buy-Back Right, Lind will have the option of converting 25% of the outstanding principal amount of the Note into shares of our common stock. Until the second anniversary of the closing, Lind has the right to purchase up to 20% of the securities we issue in any future private placement, subject to certain exceptions for, among other things, strategic investments. In connection with the closing, we issued a warrant (the “Warrant”) to the Investor to purchase 1,425,000 shares of common stock at a fixed exercise price of $1.16 per share and issued 136,575 shares to the Investor priced at $0.73 per share, the closing price of our common stock price to closing of the transaction, in payment of aan amount due under the Note. In connection with the closing, we issued a warrant (the “Warrant”) to the Investor to purchase 1,425,000 shares of common stock at a fixed exercise price of $1.16 per annum The Warrant has a term of five years and is immediately exercisable. We paid a placement fee to Maxim equal to 7% of the aggregate gross proceeds raised in the transaction.

 

 

On May 6, 2020, we entered into and closed a securities purchase agreement (the “Purchase Agreement”) with Lind which provides for the issuance of a $2,415,000 principal amount senior secured convertible note (the “Note”). At closing, a total of $2,100,000 was funded with the proceeds to be used for general working capital purposes. The principal amount due of the Note is due and payable in five equal monthly installments of $268,333 beginning seven (7) months after the funding date with the remaining balance due twelve (12) months after the date of funding. Repayment of the outstanding principal amount due under the Note plus an additional amount equal to 5% of the then outstanding principal amount is due in connection with the closing of a change in control transaction. Upon the occurrence of standard and customary events of default and expiration of any applicable cure periods, repayment of the outstanding principal amount due under the Note is subject to acceleration in the discretion of the Investor in which event, interest will accrue at the higher of 18% per annum or the maximum amount permitted by applicable law and the Company will become obligated to pay an amount equal to 20% of the then outstanding principal amount due under the Note. The Note is secured by a lien on substantially all of our assets and properties and is convertible at the option of the Investor into shares of our common stock at a fixed conversion price of $1.16 per share. We have the right to prepay the Note in full at any time without penalty (the “Buy-Back Right”). Should we exercise our Buy-Back Right, the Investor will have the option of converting 25% of the outstanding principal amount of the Note into shares of our common stock. In connection with the closing, we issued a warrant (the “Warrant”) to the Investor to purchase 1,900,000 shares of common stock at a fixed exercise price of $1.16 per share and issued 114,943 shares to the Investor priced at $1.16 per share in payment of a $133,000 due diligence fee. The Warrant has a term of five years and is immediately exercisable. The Note and the Warrant contain “blocker provisions” which prohibit conversion or exercise, as applicable, if such conversion or exercise would result in the Investor being the beneficial owner of in excess of 4.99% of our common stock. We paid a placement fee to Maxim equal to 7% of the aggregate gross proceeds raised in the transaction.

On March 25, 2020, we entered into a sales incentive agreement (the “Sales Agreement”) with TTI to pursue market opportunities in the continent of Africa. The initial term of the Sales Agreement is one-year (the “Initial Term”) which will automatically extend for additional one-year terms unless earlier terminated by either party upon written notice of nonrenewal given on or before ninety (90) days before the end of the then current term. The Sales 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 Initial Term through sales of the Company’s products and services in Africa to new government and private customers 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 the Initial Term, 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. These Warrants contain “blocker provisions” which prohibit exercise, if such exercise would result in TTI being the beneficial owner of in excess of 4.99% of our Common Stock or 9.99% of our Common Stock if TTI is the beneficial owner of more than 4.99% of our Common Stock.

On March 12, 2020, we and the Investor entered into an Amended and Restated Senior Secured Convertible Promissory Note, due April 13, 2020 (the “A&R Note”). The A&R Note replaced the Senior Secured Convertible Promissory Note, dated July 10, 2019 payable to Investor (the “Original Note”). The principal amount of the A&R Note, $3,789,000, is due and payable in full on April 12, 2020 (the “Maturity Date”) and is convertible at the option of the Investor into shares of our common stock at a fixed conversion price of $0.65 per share, subject to a blocker provision which prohibits conversion if such conversion would result in the Investor being the beneficial owner of in excess of 4.99% of our common stock which will be increased to 9.99% if the Investor acquires more than 4.99% of our common stock. Upon the occurrence of standard and customary events of default and expiration of any applicable cure periods, which do not apply to payment, default repayment of the outstanding principal amount due under the A&R Note is subject to acceleration in the discretion of the Investor in which event, interest will accrue at the higher of 18% per annum or the maximum amount permitted by applicable law and the Company will become obligated to pay an amount equal to 10% of the then outstanding principal amount due under the A&R Note. Maxim served as a financial advisor in connection with the forgoing transaction.

On February 13, 2020, the Company issued a $126,000 principal amount convertible note (the “February 2020 Note”) and 50,000 shares of common stock in payment of a $57,500 commitment fee. The note is due July 13, 2020 and is convertible into common stock at a conversion price of $1.15 per share.

On January 13, 2020, the Company issued a $157,000 principal amount convertible note and 50,000 shares of common stock in payment of a $75,000 commitment fee. The note is due on June 13, 2020, and is convertible into common stock at a conversion price of $1.50 per share.

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 was secured by a lien on substantially all of the Company’s assets and properties and was convertible at the option of the Investor in shares of common stock at a fixed conversion price of $1.50 per share. The Company had 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 2,000,000 shares of common stock at a fixed exercise price of $1.50 per share, paid a $50,000 commitment fee, and issued 266,667 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 was amortized over the life of the 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. The principal amount was due and payable in full on April 13, 2020. As of the date of this prospectus, the Investor has converted $3,789,000 into 5,829,225 shares of common stock and the remaining principal balance is $0.

On June 14, 2019, we issued a $157,000 note due November 14, 2019 which was convertible into shares of common stock at a conversion price of $1.50 per share in consideration of gross cash proceeds of $157,000. In connection with this financing, we issued 200,000 shares of common stock in payment of a $30,000 commitment fee, 180,000 of which were returned to us since the note was redeemed in full on July 10, 2019 prior to the maturity date.

On April 4, 2019, we issued a $550,000 principal amount secured debenture due November 15, 2019 which was convertible into shares of common stock at a conversion price of $1.50 per share in consideration of gross cash proceeds of $510,000.  In connection with this financing, we issued 80,000 shares of common stock in payment of a $120,000 commitment fee and agreed to issue 10,000 shares of common stock to the investor each month in payment of a monthly commitment fee of $15,000 until the earlier of November 1, 2019 or the repayment or conversion of the debenture.  The debenture was redeemed and repaid in full on July 10, 2019.  

On May 31, 2018, we received a conversion notice from Wong Kwok Fong to convert 23,508 shares of the Company’s Series A-1 Convertible Preferred Stock (the “Series A-1 Preferred”). Each share of Series A-1 Preferred has an original issue price of $100.00 and is convertible into shares of Company common stock (“Common Stock”) at a conversion price of $3.60 per share. The forgoing conversion resulted in the issuance of 653,000 shares of Common Stock. As a result of the forgoing conversion, there are no longer any issued and outstanding shares of Series A-1 Preferred. On May 31, 2018, we entered into a securities purchase agreement (the “Purchase Agreement”) with Wong Kwok Fong to purchase 7,073 shares of Common Stock in consideration of the conversion of an accrued dividend payable on the Series A-1 Preferred in the amount of $25,463 resulting in a per share purchase price of $3.60. The terms of the Purchase Agreement provided for us to waive the standstill provision (the “Standstill Provision”) included in the securities purchase agreements dated October 29, 2015 and November 11, 2015 by and between the Company and Wong Kwok in order to permit him to purchase the forgoing shares. The Standstill Provision remains in full force and effect and prevents Wong Kwok Fong, either alone or together with any other person, from acquiring additional shares of the Common Stock or any of the Company’s assets, soliciting proxies, or seeking further representation on the Company’s board of directors. Wong Kwok Fong, is the Company’s Managing Director of Hong Kong Operations, a director of the Company, and a principal stockholder of the Company and, therefore, has an interest in the transactions described herein.

On May 23, 2018, we received a conversion notice from Giant Leap to convert 720 shares of the Company’s Series B-1 Convertible Preferred Stock (the “Series B-1 Preferred”) and a conversion notice from Micron to convert 43,860 shares of Series B-1 Preferred. Each share of Series B-1 Preferred has an original issue price of $100.00 and is convertible into shares of Company common stock (“Common Stock”) at a conversion price of $3.60 per share. The forgoing conversions resulted in the issuance of 1,238,334 shares of Common Stock. As a result of the forgoing conversion, there are no longer any issued and outstanding shares of Series B-1 Preferred.

On May 23, 2018, we entered into a securities purchase agreement with Giant Leap to purchase 2,978 shares of Common Stock in consideration of the conversion of an accrued dividend payable on the shares of Series B-1 Preferred owned by Giant Leap in the amount of $10,721 resulting in a per share purchase price of $3.60. On May 23, 2018, we also entered into a securities purchase agreement with Micron to purchase 12,395 shares of Common Stock in consideration of the conversion of an accrued dividend payable on the shares of Series B-1 Preferred owned by Micron in the amount of $44,621 resulting in a per share purchase price of $3.60.

On April 3, 2018, we received a conversion notice from Wong Kwok Fong to convert 39,088 shares of the Company’s Series A-1. Each share of Series A-1 Preferred has an original issue price of $100.00 and is convertible into shares of Company common stock (“Common Stock”) at a conversion price of $3.60 per share. The forgoing conversion resulted in the issuance of 1,085,778 shares of Common Stock.

On April 3, 2018, we entered into a securities purchase agreement (the “Purchase Agreement”) with Wong Kwok Fong to purchase 91,820 shares of Common Stock in consideration of the conversion of an accrued dividend payable on the Series A-1 Preferred in the amount of $330,552 resulting in a per share purchase price of $3.60. The terms of the Purchase Agreement provided for us to waive the standstill provision (the “Standstill Provision”) included in the securities purchase agreements dated October 29, 2015 and November 11, 2015 by and between the Company and Wong Kwok in order to permit him to purchase the forgoing shares. The Standstill Provision remains in full force and effect and prevents Wong Kwok Fong, either alone or together with any other person, from acquiring additional shares of the Common Stock or any of the Company’s assets, soliciting proxies, or seeking further representation on the Company’s board of directors. Wong Kwok Fong, is the Company’s Managing Director of Hong Kong Operations, a director of the Company, and a principal stockholder of the Company and, therefore, has an interest in the transactions described herein.

On March 23, 2018, we received a conversion notice from Giant Leap to convert 29,280 shares of the Company’s Series B-1 and a conversion notice from Micron to convert 31,140 shares of Series B-1 Preferred. Each share of Series B-1 Preferred has an original issue price of $100.00 and is convertible into shares of Company common stock (“Common Stock”) at a conversion price of $3.60 per share. The forgoing conversions resulted in the issuance of 1,678,334 shares of Common Stock.

On March 23, 2018, we entered into a securities purchase agreement with Giant Leap to purchase 33,102 shares of Common Stock in consideration of the conversion of an accrued dividend payable on the Series B-1 Preferred in the amount of $119,167 resulting in a per share purchase price of $3.60. Yao Jianhui, a director of the Company, is chairman of the board of directors of China Goldjoy Limited, the parent company of Giant Leap, a principal stockholder of the Company, and may, therefore, be deemed to have an interest in the transactions described herein. The Series B-1 Preferred contain a blocker provision which prohibits the holder of such shares from converting such shares into Common Stock if after giving effect to such conversion, the holder would beneficially own in excess of 9.99% of our issued and outstanding shares of Common Stock. On March 23, 2018, we received notice from Micron of its desire to increase the maximum percentage from 9.99% to 19.99% effective on the 61st day following the date such notice was provided to us. In connection with this request, we entered into a securities purchase agreement with Micron to purchase 82,755 shares of Common Stock in consideration of the conversion of an accrued dividend payable on the Company’s Series B-1 Preferred in the amount of $297,917 resulting in a per share purchase price of $3.60. Effectiveness of the increase in the maximum beneficial ownership of Micron and conversion of dividends required us to waive the standstill provision (the “Standstill Provision”) included in the Securities Purchase Agreement dated November 11, 2015 by and between the Company and Micron. The Standstill Provision prevents Micron, either alone or together with any other person, from acquiring additional shares of Common Stock or any of the Company’s assets, soliciting proxies, or seeking further representation on the Company’s board of directors. We waived the Standstill for the purpose of permitting Micron to convert additional shares of Series B-1 Preferred into Common Stock so long as after giving effect to any such conversions, Micron does not beneficially own in excess of 19.99% of our Common Stock.

On September 22, 2017, the Company issued to Wong Kwok Fong, a director, executive officer and principal stockholder of the Company, 427,778 shares of common stock and warrants to purchase 138,889 shares of common stock for an aggregate purchase price of $1,540,000, or $3.60 per share. The purchase price was paid via a cash payment of $1,000,000 for 277,778 shares and conversion of an accrued dividend payable on the Company’s Series A-1 Convertible Preferred Stock of $540,000 into 150,000 shares.

Item16.

Exhibits and Financial Statement Schedules.

 

Item 16.Exhibit

Exhibits and Financial Statement Schedules.

(a) Exhibits

The following exhibits are being filed with this Registration Statement:

Exhibit

Exhibit 

No.

  
1.1Form of Underwriting Agreement (incorporated by reference to Exhibit 1.1 to Amendment No. 1 to the Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
   

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).

2.2

Stock Purchase Agreement by and among the Company, Alex Rocha and Swivel Secure Europe, SA dated February 2, 2022 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed with the SEC on February 3, 2022)

2.3

Amendment No. 1 to Stock Purchase Agreement by and among the Company, Alex Rocha and Swivel Secure Europe, SA dated March 4, 2022 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed with the SEC on March 9, 2022)

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 the Series A 7% Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible Preferred Stock, and Series D 7% Convertible Preferred Stock 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)

111

 

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 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)

4.3

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)

4.4

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)

4.5

Common Stock Purchase Warrant dated June 29, 2020 (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K, filed with the SEC on July 1, 2020)

4.6

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 16,17, 2020).

   

4.34.7

 

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 16,17, 2020).

   
4.4

4.8

 

Form of Warrant Agency Agreement*

5.1

Opinion of Fox Rothschild LLPAgreement (incorporated by reference to Exhibit 5.14.4 to Amendment No. 12 to the Registration Statement on Form S-1/A, filed with the SEC on July 16,20, 2020).

   

10.14.9

Common Stock Purchase Warrant, dated December 22, 2022 (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K filed with the SEC on December 23, 2022)

5.1*

Opinion of Fox Rothschild LLP

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)***

10.210.2***

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)

10.310.3***

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)***

112

 

10.4***

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)***

10.510.5***

Third Amendment to LeaseEmployment Agreement by and between BIO-key International, Inc. and Victor AOP, Inc.James Sullivan dated June 30, 2013April 5, 2017 (incorporated by reference to Exhibit 10.4310.42 to the annual report on Form 10-K, filed with the SEC on March 31, 2014)29, 2021)

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)

   

10.710.7***

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)

   

10.910.8**

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)**

10.1010.9***

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)***

10.1310.10

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)

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)

10.1510.11

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)

10.1610.12

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)

10.1710.13

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)

10.1810.14

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)

10.19

GLP 2nd2nd 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)

10.2010.15

Marlen 4th4th 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)***

   

10.2710.16

 

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)

   

10.2810.17

 

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)

113

10.18

 

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)

   

10.3010.19

 

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)

   

10.3110.20

 

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)

   

10.3210.21

 

$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)

   

10.3310.22

 

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)

   

10.3510.23

 

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)

   

10.3610.24

 

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)

10.3710.25

 

$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)

   

10.3810.26

 

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)

   

10.4010.27

 

$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).

10.28***

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)

10.29

BIO-key International, Inc. 2021 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the definitive proxy statement filed with the SEC on May 4, 2021)

10.30

BIO-key International, Inc. Amended and Restated 2015 Equity Incentive Plan (incorporated by reference to Appendix B to the definitive proxy statement filed with the SEC on May 4, 2021)

10.31

Management Services Agreement dated March 8, 2022 by and among Swivel Aman-FZCO, Swivel Secure Europe, SA, and Alex Rocha (incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q filed with the SEC on May 23, 2022)

10.32

Option Agreement dated March 8, 2022 by and between the Company and Alex Rocha (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q filed with the SEC on May 23, 2022)

114

10.33+

Distribution Agreement dated October 23, 2020 by and between Swivel Secure Europe, SA and Swivel Secure Limited (incorporated by reference to Exhibit 10.3 to the quarterly report on Form 10-Q filed with the SEC on May 23, 2022)

10.34+

Deed of Variation dated January 26, 2022 by and between Swivel Secure Europe, SA and Swivel Secure Limited (incorporated by reference to Exhibit 10.4 to the quarterly report on Form 10-Q filed with the SEC on May 23, 2022)

10.35

Securities Purchase Agreement dated December 22, 2022 by and between the Company and AJB Capital Investments, LLC (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on December 23, 2022)

10.36

$2,200,000 Senior Secured Promissory Note, dated December 22, 2022 (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed with the SEC on December 23, 2022)

10.37

Security Agreement dated December 22, 2022 by and between the Company and AJB Capital Investments, LLC (incorporated by reference to Exhibit 10.4 to the current report on Form 8-K filed with the SEC on December 23, 2022)

16.1

Letter to Securities and Exchange Commission from Rotenberg Meril Solomon Bertinger & Guttilla, P.C., dated July 26, 2022 (incorporated by reference to Exhibit 16.1 to the current report on Form 8-K filed with the SEC on July 26, 2022)

   

21.1

List of subsidiaries of BIO-key International, Inc. (incorporated by reference to Exhibit 21.1 to the Registration Statementannual report on Form S-1,10-K filed with the SEC on July 9, 2020).June 1, 2023)

23.123.1*

Consent of RMSBG*Marcum LLP

   
23.2

23.2*

 

Consent of PenchanskyRotenberg Meril Solomon Bertiger & Co., PLLC*Guttilla, P.C.

   

23.323.3*

 

Consent of Fox Rothschild LLP (included inas part of Exhibit 5.1) (incorporated by reference to Exhibit 23.3 to Amendment No. 1 to the Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).

   

24.124.1*

 

Power of Attorney (incorporated by reference(included on the signature page to this Registration Statement)

101.INS*

Inline XBRL Instance

101.SCH*

Inline XBRL Taxonomy Extension Schema

101.CAL*

Inline XBRL Taxonomy Extension Calculation

101.DEF*

Inline XBRL Taxonomy Extension Definition

101.LAB*

Inline XBRL Taxonomy Extension Labels

101.PRE*

Inline XBRL Taxonomy Extension Presentation

104Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 24.1 to the Registration Statement on Form S-1, filed with the SEC on July 9, 2020).101)

107*

Filing Fee Table

 

Filedfiled 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 CommissionCommission.

 

*** Management compensatory plan.

 

+ To be filedCertain portions of this exhibit (indicated by amendment.“[***]”) have been omitted as the Company has determined that such portions are (a) not material and (b) would likely cause competitive harm to the Company if publicly disclosed.

 

 

Item17.

Undertakings

 

The undersigned registrant hereby undertakes:

 

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act;Act of 1933;

 

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

 

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

 

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fide offering thereof.

 

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

(5) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SECSecurities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wall, State of New Jersey, on the 17th day of July 2020.June 15, 2023.

 

 

BIO-KEY INTERNATIONAL, INC.

 

 

By:

/s/ Michael DePasquale

 

Michael DePasquale

 

Chairman of the Board of Directors and Chief Executive Officer (principal executive officer)

 

 

By:

/s/ Cecilia Welch

 

Cecilia Welch

 

Chief Financial Officer (principal financial and accounting officer)

 

POWER OF ATTORNEY

 

We, the undersigned officers and directors of BIO-key International, Inc., hereby severally constitute and appoint Michael W. DePasquale, our true and lawful attorney with full power to sign for us and in our names in the capacities indicated below, the Registration Statement on Form S-1 filed herewith and any and all pre-effective and post-effective amendments to said Registration Statement and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same with all exhibits thereto, and the other documents in connection therewith, with the Securities and Exchange Commission, and generally to do all such things in our name and behalf in our capacities as officers and directors to enable BIO-key International, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to said Registration Statement and any and all amendments thereto.

 

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature

 

Title

Date

/s/ Michael DePasquale

 

Chairman of the Board of Directors and Chief Executive Officer

July 17, 2020June 15, 2023

Michael DePasquale

 

(Principal Executive Officer)

  

/s/ Cecilia Welch

 

Chief Financial Officer

July 17, 2020

June 15, 2023

Cecilia Welch

 

(Principal Financial Officer and Principal Accounting Officer)

  

*

 

Director

July 17, 2020

June 15, 2023

Robert J. Michel

    

*

 

Director

July 17, 2020

June 15, 2023
Thomas E. Bush III

Wong Kwok Fong

    

*

 

Director

July 17, 2020

June 15, 2023

Thomas GilleyBush III

    

*

 

Director

July 17, 2020

June 15, 2023
Peter Knook

Manny Alia

    

*

Director

July 17, 2020

Wong Kwok Fong    

*

 

Director

July 17, 2020

June 15, 2023
Manny AliaCameron E. Williams   

 

*By:   /s/ Michael DePasquale

Michael DePasquale

Attorney-in-fact

117