SECURITIES & EXCHANGE COMMISSION EDGAR FILING
BIO KEY INTERNATIONAL INC
Form: 10-K
Date Filed: 2019-04-01
Corporate Issuer CIK: 1019034
© Copyright 2019, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the terms of use.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 201 8
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ___
COMMISSION FILE NUMBER: 1-13463
BIO-KEY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
41-1741861
(IRS Employer
Identification Number)
3349 HIGHWAY 138, BUILDING A, SUITE E, WALL, NJ 07719
(Address of principal executive offices) (Zip Code)
(732) 359-1100
Registrant’s telephone number, including area code.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001 par value per share
Name of exchange on which registered
Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☐
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 29, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s
common stock held by non-affiliates was approximately $25.2 million based upon the closing price for shares of the registrant’s common stock of $2.65 as
reported by the Nasdaq Stock Market on that date.
As of March 29, 2019, the registrant had 13,991,688 shares of common stock outstanding.
Certain sections of the registrant’s Proxy Statement for its 2019 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Form
10-K. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2018.
DOCUMENTS INCORPORATED BY REFERENCE:
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
TABLE OF CONTENTS
PART I
Item 1.
Item 1A
Item 2
Item 3
Item 4
Business
Risk Factors
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5
Item 6
Item 7
Item 8
Item 9
Item 9A
Item 9B
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
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PRIVATE SECURITIES LITIGATION REFORM ACT
All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future financial
position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,”
“estimate,” “will,” “may,” “future,” “plan,” “intend” and “expect” and similar expressions generally identify forward-looking statements. Although we believe our
plans, intentions, assumptions and expectations reflected in the forward-looking statements are reasonable, we cannot be sure they will be achieved. We
caution that it is very difficult to predict the impact of known factors, it is impossible for us to anticipate all factors that could affect our actual results, and that
actual results may differ materially and adversely from the forward-looking statements contained herein due to a number of factors, including but not limited to
those factors set forth under the caption “Risk Factors” in Item 1A of this Annual Report and other filings with the Securities and Exchange Commission. These
factors are not intended to represent a complete list of the general or specific factors that may affect us. It should be recognized that other factors, including
general economic factors and business strategies, may be significant, presently or in the future. Except as required by law, we undertake no obligation to update
any forward-looking statement, whether as a result of new information, future events or otherwise.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 1. BUSINESS
PART I
BIO-key International, Inc., a Delaware corporation (the “Company,” “BIO-key,” “we,” or “us), 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.
We develop and market advanced fingerprint biometric identification and identity verification technologies, as well as related identity management and
credentialing hardware and software solutions. We were pioneers in developing automated, finger identification technology that supplements or compliments
other methods of identification and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, PKI, credit card, passports,
driver’s licenses, OTP or other form of possession or knowledge-based credentialing. Additionally, advanced BIO-key® technology has been, and is, used to
improve both the accuracy and speed of competing finger-based biometrics.
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 into commercial logical and physical privilege entitlement and access control markets. Our primary market focus includes
enterprise security, mobile payments and credentialing, healthcare records and data security, among other things. Our secondary focus includes government
markets, large scale identity projects such as voter’s registration, driver’s license, national ID programs, and SIM card registration.
In 2015, we entered into the fingerprint hardware device business through a strategic relationship with China Goldjoy Group (“CGG”), an entity that is
affiliated with one of our directors. 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 also market and sell a variety of biometric and Bluetooth
enabled padlocks, luggage locks, and bicycle locks.
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. We have built a direct sales force, and also utilize distributors, resellers,
integrators and partners with substantial experience in selling technology solutions to government and corporate customers in their respective markets.
Overview
We are 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 facilities and services, in either logical or physical domains. Our solutions positively identify individuals
before granting access to corporate resources, subscribed services, cloud services and applications.
We also develop and distribute hardware components that are used in conjunction with our software, and sell third-party hardware components with our
software in various configurations required by our customers. Our products are interoperable with all major fingerprint reader and hardware manufacturers,
enabling application developers, value added resellers (“VARs”), 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.
In November 2015, we entered into a license agreement with CGG pursuant to which we obtained a license to certain software from CGG, known as
FingerQ, which has been integrated into our core WEB-key® platform and can be used in a number of application areas, including mobile payments and
personal identity devices for the Asia Pacific markets. In 2016, the software has been integrated into our line of finger scanners that are marketed to consumers
and enterprise users worldwide.
During 2016, we continued to develop and expand our consumer footprint for hardware products such as SideSwipe, SideTouch and EcoID by launching on
Amazon, making the products available through Microsoft retail stores and developing and promoting our own eCommerce website. SideTouch was featured on
HSN in December of 2016.
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2017 represented the first year of significant sales generated by our new Asia Pacific division, including a 30,000 unit order for our finger scanners and retail
distribution of TouchLock products in 30+ retail stores.
2017 closed with us announcing a $4 million sale with a large telecommunications company. At the time, it was the largest sale in the company history.
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.
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 June 2018, our Asia Pacific (APAC) division reached an agreement with Asahi, one of Asia’s largest bicycle manufacturers, to market and sell TouchLock
Bike. In July 2018, we secured our first TouchLock OEM opportunity after signing an agreement with Aluratek.
In December 2018, we closed out the year by announcing what would become the largest sale in company history to date when we executed an agreement
to sell $12 million in software licenses, with $5 million the first year, and an option to renew for $5 million the second year and $2 million the third year. The
revenue is being recognized as payments are received and the amount recognized in 2018 was approximately $1.1M.
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.
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•
•
•
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.
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.
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, which has generated a number opportunities for both our hardware and software offerings. In 2016,
our finger scanners were tested and qualified by Microsoft, then introduced and are sold in the Microsoft stores nationwide, as well as through their on-line
channel.
At the Consumer Electronics Show 2017, we introduced a number of new products. These included TouchLock, fingerprint biometric and Bluetooth enabled
padlocks, FreePass, a wearable, mobile USB fingerprint reader, Q-180 Touch, a Micro USB compatible fingerprint reader for Android devices, and SidePass, a
compact, square, touch reader for Windows devices. We are currently distributing these products in both the Asia Pacific and domestic markets.
In 2018 we continued to invest and grow our relationship with Microsoft. The 2018 Ignite your Business event included Microsoft hosting an exclusive BIO-
key demonstration kiosk within their event showcase.
We attended CES in 2018 and in 2019 and expanded our presence to increase awareness for TouchLock and capture newly emerging OEM opportunities
with Fortune 500 customers.
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. WEB-key is currently supported by both Windows and Linux operating
systems. 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 operation:
Patents
We own patented technologies and trade secrets developed or acquired by us.
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In May 2005, the U.S. Patent & Trademark Office issued patent 6,895,104 for our Vector Segment fingerprint technology (VST), our core biometric analysis
and identification technology. With the payment of all maintenance fees, this patent will expire on March 4, 2023.
On October 3, 2006, we announced that our patent for a biometric authentication security framework had been granted by the U.S. Patent & Trademark
Office. The patent No. 7,117,356 was issued to us for a biometric authentication security framework that enhances commercial and civil biometric use. Our
authentication security framework protects privacy and security of cloud or network-based authentications while also facilitates ease of use of biometric systems.
The technology that this patent is based on is the foundation for the authentication security incorporated in our WEB-key product line. WEB-key is a mature
enterprise authentication solution that functions in a wide variety of application environments. The solution supports a variety of implementation alternatives
including card technologies for “two-factor” authentication and also supports “single-factor” authentication. Partners and customers implementing our WEB-key
software to provide convenient and secure user identity include a number of institutions including the Allscripts Healthcare Solutions, Computer Associates Site
Minder, Oracle Access Manager and many other enterprise and solutions-based systems. With the payment of all maintenance fees, this patent will expire on
May 20, 2023.
On December 26, 2006, we were issued US patent No. 7,155,040 covering our unique image processing technology, which is critical for enhancing
information used in the extraction of biometric minutiae. The issued patent protects a critical part of an innovative four-phase image enhancement process
developed by us. With the payment of all maintenance fees, this patent will expire on January 29, 2025.
On April 15, 2008, we were issued US patent No. 7,359,553 covering our image enhancement and data extraction core algorithm components. The solution
protected under this patent provides the capability to quickly and accurately transform a fingerprint image into a computer image that can be analyzed to
determine the critical data elements. With the payment of all maintenance fees, this patent will expire on January 3, 2025.
On August 19, 2008, we were issued US patent No. 7,415,605 for our “Biometric Identification Network Security” method. The solution protected under this
patent provides a defense against hackers and system attacks, while leveraging the industry standard Trusted Platform Module (TPM) specification for
encryption key management. With the payment of all maintenance fees, this patent will expire on May 20, 2023.
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 July 3, 2012, we were issued US Patent No. 8,214,652 for our “Biometric Identification Network Security”, an expanded method of network and related
network authentication security systems utilizing hardware-based support for encryption and key management for authentication purposes. With the payment of
all maintenance fees, this patent will expire on April 24, 2024.
On 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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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.
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 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. 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.
Trademarks
We have registered our trademarks “BIO-key”, “True User Identification”, “Intelligent Image Indexing”, “WEB-key”, “SideSwipe, “EcoID” and The Biometric of
Things with the U.S. Patent & Trademark Office, as well as many foreign countries, protecting our companies name and key technology offering names.
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.
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.
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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.
• Government funded initiatives, including with the state board of elections.
•
International government use case applications as prospects see we 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.
• Growth in the Asia Pacific region.
• Biometric based consumer products.
Business Model
Our business model for 2019 and beyond is focused on the following key areas:
Market
Drivers
Address Gaps in mainstream MFA Approaches
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.
We will continue to prioritize securing agreements with OEM customers. The history of success supporting NCR, McKesson 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 2018, we added our first TouchLock OEM customer by signing an agreement with Aluratek.
Government projects and healthcare, including hospitals, clinics, private practices and blood centers provide a significant opportunity for us.
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. The financial services industry in the U.S. has been slow to adopt biometric
authentication while Asia and Europe have been more receptive to incorporating biometrics. We anticipate that the U.S. market will grow
rapidly once the first major institution adopts a biometric solution.
We remain committed to a partner sales model. In the Identity and Access Management or “IAM” space, we have adjusted our targets to
include working with resellers, and are developing a security assertion markup language (SAML) solution for ease of installation purposes.
In healthcare, HealthCast and other partners, such as Allscripts, identified and sold our solutions to a number of new customers in 2019.
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OEM
Customers
Highly
Regulated
Industries
Partner
Model
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Microsoft
Partnership
Hardware
In November of 2015, we established a partnership with Microsoft initiated by our participation at the “Ignite your Business” Windows 10 –
Hello twelve city launch tour. BIO-key was featured as the exclusive biometric technology vendor during the launch and we continue to
leverage this unique status.
Almost immediately after launching SideSwipe, we witnessed an increase in inquiries inspiring us to develop a series of compact readers
with different features and form factors. Hardware has played a significant role in increasing the visibility of our company and has become a
catalyst for our software. By offering hardware to customers, we offer a more full and complete solution and eliminate the need for us to
engage a hardware vendor on certain projects, which can sometimes inhibit the process and margins. In 2017, we expanded our offerings
to include Bluetooth and biometric enabled padlocks, TSA approved luggage locks, and bicycle locks. These products have been well
received by consumers and are currently selling in both Asia Pacific and U.S. markets. We are continuing to develop new products
and grow our base of distributors and retail outlets for our products.
Research and Development
Our biometric platform is mature, stable, and widely-deployed and we concentrate our research and development efforts on enhancing the functionality,
reliability and integration of our current products as well as 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. 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. In order to maintain our position in the market, we will 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. This presents a significant opportunity for us going forward. During the years ended December 31, 2018 and 2017, we spent $1,415,401 and
$1,659,875, respectively, on research and development.
Products on Demand (PoD)
Our technology and development team has the expertise to develop customer specific solutions if they are funded. Our strategy to support POD is to utilize
internal resources, outsource support services and strategic partners to satisfy unique customer requirements. Our flexible, nimble business model and
interoperable capabilities are key differentiators.
Competition
In addition to companies that provide existing commonplace methods of restricting access to facilities and logical access points such as pass cards, PIN
numbers, passwords, locks and keys, there are numerous companies involved in the development, manufacturing and marketing of fingerprint biometrics
products to commercial, government, law enforcement and prison markets. These companies include, but are not limited to, 3M (Cogent), NEC, and
MorphoTrak.
The majority of sales for automated fingerprint identification products in the market to date have been deployed for government agencies, healthcare facilities,
and law enforcement applications. The consumer and commercial markets represent areas of significant growth potential for biometrics, led by the use of mobile
devices.
The epidemic of security and data breaches reported over the past few years is one of the driving factors for identifying new methods of protecting valuable
data. After attempting to create a more sophisticated password or more efficient token or PIN, it has become apparent that each of these methods are easily
compromised, and the downside risks are significant.
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;
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• Palm Vein scanning is expensive, technique-sensitive, and offers mobility challenges;
•
Iris scanning is viewed as accurate, but the hardware is significantly more expensive; and
• Facial recognition can have accuracy limitations and is typically highly dependent on ambient lighting conditions, angle of view, and other factors.
Government Regulations
We are not currently subject to direct regulation by any government agency, other than regulations generally applicable to businesses or related to specific
project requirements. In the event of any international sales, we would be subject to various domestic and foreign laws regulating such exports and export
activities.
Environmental Regulations
As of the date of this report, we have not incurred any material expenses relating to our compliance with federal, state, or local environmental laws and do
not expect to incur any material expenses in the foreseeable future.
Employees, Contractors, and Consultants
As of March 28, 2019, we employed fifteen individuals on a full-time basis as follows: (i) five in engineering, customer support, research and development;
(ii) three in finance and administration; and (iii) seven in sales and marketing. We also use the services of three consultants (part-time) who provide engineering
and technical services. Additionally, our Hong Kong subsidiary employs three individuals on a full-time basis as follows: (i) one in research and development, (ii)
one in finance and administration, (iii) one in sales and marketing. We also use the services of twelve factory contractors (full-time) in China.
ITEM 1A. RISK FACTORS
Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You should refer to the
explanation of the qualifications and limitations on forward-looking statements appearing just before the section captioned "Business" in Item 1. above.
BUSINESS AND FINANCIAL RISKS
Based on our lack of sufficient revenue since inception and recurring losses from operations, our independent registered public accounting firm
has included an explanatory paragraph in their opinion as to the substantial doubt about our ability to continue as a going concern.
Due to, among other factors, our history of losses and limited revenue, our independent registered public accounting firm has included an explanatory
paragraph in their opinion for the year ended December 31, 2018 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, we have historically not generated significant revenue and have sustained substantial operating losses.
As of December 31, 2018, we had an accumulated deficit of approximately $75.1 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.
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Our biometric technology has yet to gain widespread market acceptance and we do not know how large of a market will develop for our
technology.
Biometric technology has received only limited market acceptance, particularly in the private sector. Our technology represents a novel security solution and
we have not yet generated significant sales. Although recent security concerns relating to identification of individuals and appearance of biometric readers on
popular consumer products, including the Apple iPhone, have increased interest in biometrics generally, it remains an undeveloped, evolving market. Biometric
based solutions compete with more traditional security methods including keys, cards, personal identification numbers and security personnel. Acceptance of
biometrics as an alternative to such traditional methods depends upon a number of factors including:
•
•
national or international events which may affect the need for or interest in biometric solutions;
the performance and reliability of biometric solutions;
• marketing efforts and publicity regarding these solutions;
•
•
•
•
public perception regarding privacy concerns;
costs involved in adopting and integrating biometric solutions;
proposed or enacted legislation related to privacy of information; and
competition from non-biometric technologies that provide more affordable, but less robust, authentication (such as tokens and smart cards).
For these reasons, we are uncertain whether our biometric technology will gain widespread acceptance in any commercial markets or that demand will be
sufficient to create a market large enough to produce significant revenue or earnings. Our future success depends, in part, upon business customers adopting
biometrics generally, and our solution specifically.
Biometric technology is a new approach to Internet security, which must be accepted in order for our WEB-key solution to generate significant
revenue.
Our WEB-key authentication initiative represents a new approach to Internet security, which has been adopted on a limited basis by companies that
distribute goods, content or software applications over the Internet. The implementation of our WEB-key solution requires the distribution and use of a finger
scanning device and integration of database and server side software. Although we believe our solutions provide a higher level of security for information
transmitted over the Internet than existing traditional methods, unless business and consumer markets embrace the use of a scanning device and believe the
benefits of increased accuracy outweigh implementation costs, our solution will not gain market acceptance.
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:
• Original equipment manufacturers, system integrators and application developers which develop and market products and applications which can then be
sold to end users;
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•
Companies which distribute goods, services or software applications over the Internet
As a technology licensing company, our success will depend upon the ability of these manufacturers and developers to effectively integrate our technology
into products and services which they market and sell. We have no control over these licensees and cannot assure you that they have the financial, marketing or
technical resources to successfully develop and distribute products or applications acceptable to end users or generate any meaningful revenue for us. These
third parties may also offer the products of our competitors to end users. While we have commenced a significant sales and marketing effort, we have only begun
to develop a significant distribution channel and may not have the resources or ability to sustain these efforts or generate any meaningful sales.
We face intense competition and 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. Our financial performance will be subject to risks associated with changes in the value of
the U.S. dollar versus local currencies.
Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales and operating expenses worldwide.
Weakening of foreign currencies relative to the U.S. dollar will adversely affect the U.S. dollar value of our foreign currency-denominated sales and earnings, if
any, and could lead to us raising international pricing, potentially reducing the demand for our products. In addition, margins on sales of our products in foreign
countries and on sales of products that include components obtained from foreign suppliers could be materially adversely affected by foreign currency exchange
rate fluctuations.
We depend on key employees and members of our management team, including our Chairman of the Board and Chief Executive Officer and our
Chief Technology Officer, in order to achieve our goals. We cannot assure you that we will be able to retain or attract such persons.
Our employment contracts with Michael W. DePasquale, our Chairman of the Board and Chief Executive Officer, and Mira LaCous, our Chief Technology
Officer, expire annually, and renew automatically for successive one year periods unless notice of non-renewal is provided by the Company. Although the
contracts do not prevent them from resigning, they do contain confidentiality and non-compete clauses, which are intended to prevent them from working for a
competitor within one year after leaving our Company. Our success depends on our ability to attract, train and retain employees with expertise in developing,
marketing and selling software solutions. In order to successfully market our technology, we will need to retain additional engineering, technical support and
marketing personnel. The market for such persons remains highly competitive and our limited financial resources will make it more difficult for us to recruit and
retain qualified persons.
We cannot assure you that the intellectual property protection for our core technology provides a sustainable competitive advantage or barrier to
entry against our competitors.
Our success and ability to compete is dependent in part upon proprietary rights to our technology. We rely primarily on a combination of patent, copyright
and trademark laws, trade secrets and technical measures to protect our propriety rights. We have filed a patent application relating to both the optic technology
and biometrics solution components of our technology wherein several claims have been allowed. The U.S. Patent and Trademark Office has issued us a series
of patents for our Vector Segment fingerprint technology (VST), and our other core biometric analysis and identification technologies. However, we cannot
assure you that we will be able to adequately protect our technology or other intellectual property from misappropriation in the U.S. and abroad. Any patent
issued to us could be challenged, invalidated or circumvented or rights granted thereunder may not provide a competitive advantage to us. Furthermore, patent
applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite
our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and
other rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property rights on a worldwide basis in a cost-effective manner. In
jurisdictions where foreign laws provide less intellectual property protection than afforded in the U.S. and abroad, our technology or other intellectual property
may be compromised, and our business would be materially adversely affected. If any of our proprietary rights are misappropriated or we are forced to defend
our intellectual property rights, we will have to incur substantial costs. Such litigation could result in substantial costs and diversion of our resources, including
diverting the time and effort of our senior management, and could disrupt our business, as well as have a material adverse effect on our business, prospects,
financial condition and results of operations. We can provide no assurance that we will have the financial resources to oppose any actual or threatened
infringement by any third party. Furthermore, any patent or copyrights that we may be granted may be held by a court to infringe on the intellectual property
rights of others and subject us to the payment of damage awards.
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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.
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 $537,000 per month to conduct our operations, a monthly amount
that we have been unable to consistently achieve through revenue generation. During 2018, we generated approximately $4,045,000 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.
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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.
Our business could be negatively impacted by security threats, including cybersecurity threats, and other disruptions.
As a technology company, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information. Although
we utilize various procedures and controls to monitor these threats and mitigate our exposure to such threats, there can be no assurance that these procedures
and controls will be sufficient in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of sensitive
information, critical infrastructure, personnel or capabilities, essential to our operations and could have a material adverse effect on our reputation, financial
position, results of operations, or cash flows.
Cybersecurity attacks in particular are evolving and include but are not limited to, malicious software, attempts to gain unauthorized access to data, and other
electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and
corruption of data. These events could damage our reputation and lead to financial losses from remedial actions, loss of business or potential liability.
RISKS RELATED TO OUR COMMON STOCK
We have issued a substantial number of securities that are convertible into shares of our common stock which could result in substantial dilution
to the ownership interests of our existing shareholders.
As of the date of this report, approximately 5,575,515 shares of our common stock were reserved for issuance upon exercise or conversion of outstanding
stock options, and warrants. The exercise or conversion of these securities will result in a significant increase in the number of outstanding shares and
substantially dilute the ownership interests of our existing stockholders.
The availability of a substantial number of shares of our common stock for public sale may cause the price of our common stock to decline.
Our most recent registration statement, which was declared effective in October 2018, covers the public resale of 2,559,172 shares of our common stock
consisting of shares of common stock underlying warrants issued in our November 2014, September 2015, and August 2018 private offerings. The shares of
common stock being offered by the selling security holders represent approximately 18% of our outstanding shares. The availability of these shares for sale to
the public, whether or not sales have occurred or are occurring, and the sale of such shares in the public markets could have an adverse effect on the market
price of our common stock. Such an adverse effect on the market price would make it more difficult for us to raise additional financing through the sale of equity
or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
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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.
If we fail to comply with the continued minimum closing bid requirements of the Nasdaq or other requirements for continued listing, our
Common Stock may be delisted and the price of our Common Stock and our ability to access the capital markets could be negatively impacted.
Our common stock is listed for trading on Nasdaq. We must satisfy Nasdaq’s continued listing requirements, including, among other things, a minimum
closing bid price requirement of $1.00 per share for 30 consecutive business days. 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.
We may need to raise additional funds in the future through issuances of securities and such additional funding may be dilutive to stockholders
or impose operational restrictions.
We expect that we will need to raise additional capital in the future to help fund our operations through sales of shares of our common stock or securities
convertible into shares of our common stock, as well as issuances of debt. Such additional financing may be dilutive to our stockholders, and debt financing, if
available, and may involve restrictive covenants which may limit our operating flexibility. If additional capital is raised through the issuance of shares of our
common stock or securities convertible into shares of our common stock, the percentage ownership of existing stockholders will be reduced. These stockholders
may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of
the holders of our common stock.
Because we do not expect to pay dividends for the foreseeable future, investors seeking cash dividends should not purchase our shares of
common stock.
We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the
foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but
not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time.
Accordingly, investors seeking cash dividends should not purchase shares of our common stock.
Our share ownership is highly concentrated which will limit your ability to influence corporate matters.
Our directors, officers and principal stockholders, beneficially own approximately 54% 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.
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The trading price of our common stock may be volatile.
The trading price of our shares has from time to time fluctuated widely and in the future may be subject to similar fluctuations. The trading price may be
affected by a number of factors including the risk factors set forth in this prospectus as well as our operating results, financial condition, announcements of
innovations or new products by us or our competitors, general conditions in the biometrics and access control industries, and other events or factors. We cannot
assure you that any of the broker-dealers that currently make a market in our common stock will continue to serve as market makers or have the financial
capability to stabilize or support our common stock. A reduction in the number of market makers or the financial capability of any of these market makers could
also result in a decrease in the trading volume of and price of our shares. In recent years broad stock market indices, in general, and the securities of technology
companies, in particular, have experienced substantial price fluctuations. Such broad market fluctuations may adversely affect the future-trading price of our
common stock.
ITEM 2. DESCRIPTION OF PROPERTY
We do not own any real estate. We conduct operations from leased premises in Eagan, Minnesota (5,544 square feet), and Wall, New Jersey (4,517 square
feet), as well as in several home-office locations across the country. Internationally, we conduct operations from leased premises in Tsuen Wan, Hong Kong
(1,098 square feet), and Jiangmen, China (3,267 square feet).
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this
report, we are not a party to any pending lawsuit.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
Our common stock currently trades on the Nasdaq Capital Market under the symbol “BKYI”.
Holders
As of March 27, 2019, the number of stockholders of record of our common stock was 140.
Dividends
We have not paid any cash dividends on our common stock to date, and have no intention of paying any cash dividends on our common stock in the
foreseeable future. The declaration and payment of dividends on our common stock is also subject to the discretion of our Board of Directors and certain
limitations imposed under the DGCL. 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.
Common Stock
On November 8, 2018, the Company issued 4,800 shares of common stock to its directors in payment of board fees.
On November 12, 2018, the Company issued 910 shares of common stock to its directors in payment of committee fees.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion And Analysis Of Financial Condition And Results Of Operations, and other parts of this Report contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements included in this Report are based on information available to us on the date
hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including those set forth in the section captioned “RISK FACTORS” in Item 1A and elsewhere in
this Report. The following should be read in conjunction with our audited financial statements included elsewhere herein.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand the
Company. The MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes.
OVERVIEW
We develop and market advanced fingerprint biometric identification and identity verification technologies, as well as related identity management and
credentialing fingerprint biometric hardware and software solutions. We were pioneers in developing automated, finger identification technology that supplements
or compliments other methods of identification and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, PKI, credit
card, passports, driver’s licenses, OTP or other form of possession or knowledge-based credentialing. Advanced BIO-key technology has been and is used to
improve both the accuracy and speed of competing finger-based biometrics. Our solutions are used by many customers in every sector of our economy including
government, retail, healthcare and financial services.
In partnerships with OEMs, integrators, and solution providers, we provide biometric software solutions to private and public sector customers. 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 or VST, WEB-key and BSP development kits are fingerprint biometric solutions that provide
interoperability with all major reader manufacturers, enabling application developers and integrators to integrate fingerprint biometrics into their applications.
Our biometric identification technology improves both the accuracy and speed of screening individuals, for identification purposes or for personal identity
verification, by extracting unique data from a fingerprint and comparing it to existing similar fingerprint data. The technology has been built to be scalable and to
handle databases containing millions of fingerprints. We achieve the highest levels of discrimination without requiring any other identifying data (multi-factor)
such as a user ID, smart 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 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.
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 into commercial logical and physical privilege entitlement & access control markets. Our primary market focus includes,
among others, enterprise access, mobile payments & credentialing, online payments, and healthcare record and payment data security. Our secondary focus
includes government and educational markets.
Products
In 2016, we began to sell through distribution and directly to consumers and commercial users our SideSwipe, SideTouch and EcoID products. SideSwipe,
SideTouch and EcoID are stand-alone fingerprint readers that can be used on any laptop, tablet or other device with a USB port. In 2017, we expanded our
consumer product line to include biometric and blue tooth enabled pad locks, TSA approved luggage locks, and bicycle locks. In 2018, we introduced OmniPass
Consumer, a secure biometric-enabled application to manage multiple passwords for online apps, services or accounts.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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, which has generated a number opportunities for both our hardware and software offerings. In 2016,
our finger scanners were tested and qualified by Microsoft, then introduced and are sold in the Microsoft stores nationwide, as well as through their on-line
channel.
In 2018 we continued to invest and grow our relationship with Microsoft. The 2018 Ignite your Business event included Microsoft hosting an exclusive BIO-
key demonstration kiosk within their event showcase.
STRATEGIC OUTLOOK
Historically, our largest market has been access control within highly regulated industries such as healthcare. However, we believe the mass adoption of
advanced smart-phone and hand-held wireless devices have caused commercial demand for advanced user authentication to emerge as viable. The
introduction of smart-phone capabilities, like mobile payments and credentialing, could effectively require biometric user authentication on mobile devices to
reduce risks of identity theft, payment fraud and other forms of fraud in the mobile or cellular based world wide web. As more services and payment
functionalities, such as mobile wallets and near field communication (NFC), migrate to smart-phones, the value and potential risk associated with such systems
should grow and drive demand and adoption of advanced user authentication technologies, including fingerprint biometrics and BIO-key solutions.
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 (app’s) 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 over 40 commercially available fingerprint readers, across both Windows and Linux platforms, and Apple iOS and
Android mobile operating systems. This interoperability, coupled with the ability to authentic 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.
• Government funded initiatives, including with the state board of elections.
•
International government use case applications as prospects see we 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.
• Growth in the Asia Pacific region.
• Biometric based consumer products.
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, such as the healthcare industry. We believe that continued heightened security and privacy requirements in these industries will generate increased
demand for security solutions, including biometrics. In addition, we expect that the integration of our technology into Windows 10, will accelerate the demand for
our computer network log-on solutions and fingerprint readers. Finally, our entry into the Asian market and licensing arrangement with CGG has further
expanded our business by opening new markets along with the new and innovative hardware offerings. We expect our SideSwipe, EcoID and SideTouch finger
readers, and our biometric and Bluetooth enabled padlocks, luggage locks, and bicycle locks to continue to drive incremental revenue and growth.
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We intend to expand our business into the cloud and mobile computing industries. The emergence of cloud computing and mobile computing are primary
drivers of commercial and consumer adoption of advanced authentication applications, including biometric and BIO-key authentication capabilities. As the value
of assets, services and transactions increases on such networks, we expect that security and user authentication demand should rise proportionately. Our
integration partners include major web and network technology providers, who we believe will deliver our cloud-applicable solutions to interested service-
providers. These service-providers could include, but are not limited to, financial institutions, web-service providers, consumer payment service providers, credit
reporting services, consumer data service providers, healthcare providers and others. Additionally, our integration partners include major technology component
providers and OEM manufacturers, who we believe will deliver our device-applicable solutions to interested hardware manufacturers. Such manufacturers could
include cellular handset and smartphone manufacturers, tablet manufacturers, laptop and PC manufacturers, among other hardware manufacturers. Our recently
introduced SAML and Open ID solutions will create new opportunities for us in 2019.
Years ended
December 31,
2018
2017
25%
43%
32%
100%
11%
92%
103%
-3%
132%
35%
167%
-170%
0%
-170%
2018
2017
$ Chg
% Chg
2018 - 2017
1,012,576 $
1,739,897
1,292,069
4,044,542 $
1,193,190 $
3,220,371
1,889,423
6,302,984 $
(180,614)
(1,480,474)
(597,354)
(2,258,442)
443,210 $
3,720,980
4,164,190 $
439,291 $
2,802,860
3,242,151 $
3,919
918,120
922,039
$
$
$
$
18
19%
51%
30%
100%
7%
44%
51%
49%
91%
26%
117%
-68%
0%
-68%
-15%
-46%
-32%
-36%
1%
33%
28%
RESULTS OF OPERATIONS
Consolidated Results of Operations
Two Year % trend
Revenues
Services
License fees and other
Hardware
Costs and other expenses
Cost of services
Cost of license, hardware and other
Gross Profit (Loss)
Operating expenses
Selling, general and administrative
Research, development and engineering
Operating loss
Other income (deductions)
Total other income (deductions)
Net loss
Revenues and Costs of goods sold
Revenues
Service
License fees and other
Hardware
Total Revenue
Cost of goods sold
Service
License, hardware & other
Total COGS
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Revenues
Revenue decreased $2,258,442 or 36% to $4,044,542 in 2018 as compared to $6,302,984 in 2017 due to the factors stated below.
For the years ended December 31, 2018 and 2017, service revenues included approximately $895,000 and $501,000, respectively, of recurring maintenance
and support revenue, and approximately $118,000 and $692,000, respectively, of non-recurring custom services revenue. Recurring service revenue increased
78% from 2017 to 2018 due to a large three year maintenance contract, and several smaller orders from new customers. As our customer base continues to
grow, we expect the recurring revenue to increase in future periods. Non-recurring custom services decreased 83% in 2018 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, 2018 and 2017, license revenue decreased 46% to $1,739,897. The decrease was due to one large order received in
the fourth quarter of 2017 in amount of approximately $2,500,000 compared to one large international order in the fourth quarter of 2018 for which revenue is
being recognized as payments are received and amount recognized in 2018 was approximately $1,111,000. The balance of approximately $3,889,000 is
expected to be recognized in 2019 as payments are received.
Hardware sales decreased by approximately $597,000, or 32%, to $1,292,069 in 2018 as a result of fewer large customer deployments, and retail sales.
Fingerprint reader sales decreased approximately $527,000, or 34%, while the biometric locks decreased approximately $71,000, or 21% from their initial
launch in 2017.
Costs of goods sold
For the year ended December 31, 2018, cost of service increased approximately 1% to $443,210, due to reallocated research and development personnel to
support the custom services revenue and customer maintenance.
License, hardware and other costs for the year ended December 31, 2018 increased approximately 33% to $3,720,980. The increase was attributable
primarily to the amortization and actual deployments of the software rights in the approximate amount of $2,658,000 compared to $1,585,000 in 2017.
Selling, general and administrative
2018
2017
$ Chg
% Chg
2018 - 2017
$
5,333,906 $
5,676,323 $
(342,417)
-6%
Selling, general and administrative costs for year ended December 31, 2018 were $5,333,906 representing a 6% decrease from over 2017. Increases in
costs included non-cash, share-based compensation expenses, increased bad debt expense, marketing personnel and related costs. These amounts were offset
by decreases in payroll and related expenses, factoring fees, commitment fees related to the Nasdaq uplisting in 2017, commission, and contractor expenses.
Research, development and engineering
2018
2017
$ Chg
% Chg
2018 - 2017
$
1,415,401 $
1,659,875 $
(244,474)
-15%
For the year ended December 31, 2018, research, development and engineering costs were $1,415,401 representing a 15% decrease over 2017, as a result
of decreased personnel and related costs. These amounts were offset by increased costs related to our Hong Kong subsidiary, temporary outside services, non-
cash share-based compensation expenses, and recruiting costs.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities overview
Net cash used for operations during the year ended December 31, 2018 was approximately $1,613,000. Items of note included:
•
•
Negative cash flows related to changes in inventory, accounts payable, accruals, and deferred revenue of approximately $521,000, due to working
capital management, and
Net positive cash flows related to accounts receivable and the adjustments for non-cash expenses for depreciation, amortization, share-based
compensation of approximately $4,059,000, and an increase in allowance for doubtful accounts of approximately $720,000.
Investing activities overview
Approximately $82,000 was used for investing activities during the year ended December 31, 2018 relating to capital expenditures
Financing activities overview
Approximately $1,731,000 was provided by financing activities during the year ended December 31, 2018 consisting of approximately $1,875,100 (net of
$144,900 in commissions and $50,000 in reimbursable expenses) from the issuance of common stock less approximately $144,000 of stock issuance costs.
CAPITAL RESOURCES
Since our inception, our capital needs have been principally met through proceeds from the sale of equity and debt securities. We expect capital
expenditures to be less than $100,000 during the next twelve months.
The following sets forth our primary sources of capital during the previous two years:
We entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has since been extended through October 31,
2019. Pursuant to the terms of the arrangement, from time to time, we sell to the Factor a minimum of $150,000 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, to be forwarded to us once the Factor collects the full accounts receivable balance
from the customer. In addition, from time to time, we receive over advances from the Factor. Factoring fees range from 2.75% to 15% of the face value of the
invoice factored, and are determined by the number of days required for collection of the invoice. We expect to continue to use this factoring arrangement
periodically to assist with our general working capital requirements due to contractual requirements.
On April 28, 2017, we issued to Wong Kwok Fong (Kelvin), a director, executive officer and principal stockholder of the Company, 277,778 shares of
common stock at a purchase price of $3.60 per share for gross cash proceeds of $1,000,000.
On May 2, 2017, we entered into a committed equity facility pursuant to which we may issue and sell up to $5.0 million worth of shares of common stock,
subject to certain limitations and satisfaction of certain conditions, over a 36-month term following the effectiveness of a registration statement covering the
public resale of the shares of common stock issued under the facility. As of the date of this report, the registration statement has not been filed. From time to
time over the term of the facility, we may issue requests to the investor to purchase a specified dollar amount of shares up to a maximum of $100,000 over a five
trading day period based on the daily volume weighted average price of our common stock (VWAP) to the extent the VWAP equals or exceeds the greater of a
formula amount or $3.83 per share. The per share purchase price for the shares issued under the facility will be equal to 94% of the lowest VWAP that equals or
exceeds $3.83 per share. Aggregate sales under the facility are limited to 19.99% of the total outstanding shares of the Company’s common stock as of May 2,
2017, unless stockholder approval is obtained, and sales under the facility are prohibited if such a sale would result in beneficial ownership by the investor of
more than 9.99% of the Company’s common stock.
On September 22, 2017, we issued to Wong Kwok Fong (Kelvin), 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
consisted of a cash payment of $1,000,000 and the conversion of accrued dividends payable on the Company’s Series A-1 Convertible Preferred Stock of
$540,000.
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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 proceeds of $2,070,000, or $1.50 per unit.
LIQUIDITY OUTLOOK
At December 31, 2018, our total cash and cash equivalents were approximately $324,000, as compared to approximately $289,000 at December 31, 2017.
As discussed above, we have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities,
convertible preferred stock, common stock, and through factoring receivables. We currently require approximately $537,000 per month to conduct our
operations, a monthly amount that we have been unable to consistently achieve through revenue generation. During 2018, we generated approximately
$4,044,000 of revenue, which is below our average monthly requirements.
If we are unable to generate sufficient revenue to fund current operations or meet our goals, 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.
Due to several factors, including our history of losses and limited revenue, our independent auditors have included an explanatory paragraph in their opinion
related to our annual financial statements as to the substantial doubt about our ability to continue as a going concern. Our long-term viability and growth will
depend upon the successful commercialization of our technologies and our ability to obtain adequate financing. To the extent that we require such additional
financing, no assurance can be given that any form of additional financing will be available on terms acceptable to us, that adequate financing will be obtained to
meet our needs, or that such financing would not be dilutive to existing stockholders. If available financing is insufficient or unavailable or we fail to continue to
generate sufficient revenue, we may be required to further reduce operating expenses, delay the expansion of operations, be unable to pursue merger or
acquisition candidates, or in the extreme case, not continue as a going concern.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have, or are in the opinion of management reasonably likely to have, a current or future effect on
our financial condition or results of operations.
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions
on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions. With the exception of the adoption
of ASC 606 for revenue recognition, there have been no material changes to these estimates for the periods presented in this Annual Report on Form 10-K.
We believe that of our significant accounting policies, which are described in Note A of the notes to our consolidated financial statements included in this
Annual Report on Form 10-K, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we
believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
1. Revenue Recognition
We adopted ASC 606, Revenue from Contracts with Customers (ASC 606) on January 1, 2018 using the modified retrospective method for all contracts not
completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared
under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as "legacy GAAP" or the "previous guidance". The adoption of
ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's services and will
provide financial statement readers with enhanced disclosures.
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In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the
consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the
following five steps:
• Identify the contract with a customer
• Identify the performance obligations in the contract
• Determine the transaction price
• Allocate the transaction price to performance obligations in the contract
• Recognize revenue when or as the Company satisfies a performance obligation
All of our performance obligations, and associated revenue, are generally transferred to customers at a point in time, with the exception of support and
maintenance, and professional services, which are generally transferred to the customer over time.
Software licenses
Software license revenue consist of fees for perpetual software licenses for one or more of our biometric fingerprint solutions. Revenue is recognized at a point in
time once the software is available to the customer for download. Software license contracts are generally invoiced in full on execution of the arrangement.
Hardware
Hardware revenue consists of fees for associated equipment sold with or without a software license arrangement, such as servers, locks and fingerprint readers.
Customers are not obligated to buy third party hardware from us, and may procure these items from a number of suppliers. Revenue is recognized at a point in
time once the hardware is shipped to the customer. Hardware items are generally invoiced in full on execution of the arrangement.
Support and Maintenance
Support and Maintenance revenue consists of fees for unspecified upgrades, telephone assistance and bug fixes. We satisfy our Support and Maintenance
performance obligation by providing “stand-ready” assistance as required over the contract period. We record deferred revenue (contract liability) at time of
prepayment until the contracts term occurs. Revenue is recognized over time on a ratable basis over the contract term. Support and Maintenance contracts are
up to one year in length and are generally invoiced either annually or quarterly in advance.
Professional Services
Professional services revenues consist primarily of fees for deployment and optimization services, as well as training. The majority of our consulting contracts are
billed on a time and materials basis, and revenue is recognized based on the amount billable to the customer in accordance with practical expedient ASC 606-
10-55-18. For other professional services contracts, we utilize an input method and recognizes revenue based on labor hours expended to date relative to the
total labor hours expected to be required to satisfy its performance obligation.
Contracts with Multiple Performance Obligations
Some contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if
they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The standalone selling
prices are determined based on overall pricing objectives, taking into consideration market conditions and other factors, including the value of the contracts, the
cloud applications sold, customer demographics, geographic locations, and the number and types of users within the contracts.
We considered several factors in determining that control transfers to the customer upon shipment of hardware and availability of download of software.
These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and
rewards of ownership.
Accounts receivable from customers are typically due within 30 days of invoicing. We do not record a reserve for product returns or warranties as amounts
are deemed immaterial based on historical experience.
Costs to 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.
22
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2. Impairment or Disposal of Long Lived Assets, including Intangible Assets
We review our long-lived assets, including intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying
amount of such an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to the future undiscounted
cash flows the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is equal to the amount by which the
carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow
technique. In assessing recoverability, we must make assumptions regarding estimated future cash flows and discount factors. If these estimates or related
assumptions change in the future, we may be required to record impairment charges. Intangible assets with determinable lives are amortized over their
estimated useful lives, based upon the pattern in which the expected benefits will be realized, or on a straight-line basis, whichever is greater. We did not record
any impairment charges in any of the years presented.
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 provided by outside contractors, and the allocable portions of facility costs, such
as rent, utilities, insurance, repairs and maintenance, depreciation and general support services. All costs associated with research and development are
expensed as incurred.
4. Income Taxes
The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes
using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of
deferred income tax assets requires sufficient taxable income within the carryforward period available under tax law. We evaluate, on a quarterly basis whether,
based on all available evidence, it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than
not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration of
all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future
reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and
potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Because of our historical
performance and estimated future taxable income a full valuation allowance has been established.
5. Accounting for Stock-Based Compensation
We account for share based compensation in accordance with the provisions of ASC 718-10, “Compensation — Stock Compensation,” which requires
measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards
expected to vest. The majority of our share-based compensation arrangements vest over either a three or four year vesting schedule. We expense our share-
based compensation under the ratable method, which treats each vesting tranche as if it were an individual grant. The fair value of stock options is determined
using the Black-Scholes valuation model, and requires the input of highly subjective assumptions. These assumptions include estimating the length of time
employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of our common stock price over the
option’s expected term, the risk-free interest rate over the option’s expected term, and our expected annual dividend yield. Changes in these subjective
assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized as an expense in the
consolidated statements of operations. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, are
likely to change our valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-
Scholes model are recognized as expense over the service period, net of estimated forfeitures (the number of individuals that will ultimately not complete their
vesting requirements). The estimation of stock awards that will ultimately vest requires significant judgment. We consider many factors when estimating
expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ
substantially from our current estimates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements appearing at pages 26-53 of this Annual Report on Form 10-K
23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our
disclosure controls and procedures as of December 31, 2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2018, our CEO and CFO concluded that, as of such
date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override.
Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, the risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO and CFO, we have conducted an evaluation of the effectiveness of
our internal control over financial reporting as of December 31, 2018, based upon the framework in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that our internal control over
financial reporting was effective as of December 31, 2018.
As we are a smaller reporting company, this annual report does not include an attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities
and Exchange Commission that permit the company to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended December 31, 2018 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 9B. – OTHER INFORMATION
None.
ITEM 10. – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be set forth under “Proposal No. 1: Election of Directors” in the 2019 Proxy Statement and incorporated herein by
reference.
24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 11. – EXECUTIVE COMPENSATION
The information required by this item will be set forth under “Executive and Director Compensation” in the 2019 Proxy Statement and incorporated herein by
reference.
ITEM 12. – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 403 of Regulation S-K regarding security ownership of certain beneficial owners and management will be set forth under
“Stock Ownership” in the 2019 Proxy Statement and incorporated herein by reference.
The Equity Compensation Plan Information table required pursuant to Item 201(d) of Regulation S-K will be set forth in the 2019 Proxy Statement and
incorporated herein by reference.
ITEM 13. – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth under “Transactions with Related Persons” and “Director Independence” in the 2019 Proxy Statement
and incorporated herein by reference.
ITEM 14. – PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be set forth under “Ratification of Rotenberg Meril Solomon Bertiger & Guttilla, P.C. as Independent Registered
Public Accounting Firm for 2019” in the 2019 Proxy Statement and incorporated herein by reference.
ITEM 15. – EXHIBITS
(a) The following documents are filed as part of this Report. Portions of Item 15 are submitted as separate sections of this Report:
(1) Financial statements filed as part of this Report:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as at December 31, 2018 and 2017
Consolidated Statements of Operations—Years ended December 31, 2018 and 2017
Consolidated Statement of Stockholders’ Equity—Years ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows—Years ended December 31, 2018 and 2017
Notes to Consolidated Financial Statements—December 31, 2018 and 2017
(b) The exhibits listed in the Exhibits Index immediately preceding such exhibits are filed as part of this Report
ITEM 16. – FORM 10-K SUMMARY
None.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 8—FINANCIAL STATEMENTS
The following financial statements of BIO-key International, Inc. are included herein at the indicated page numbers:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as at December 31, 2018 and 2017
Consolidated Statements of Operations—Years ended December 31, 2018 and 2017
Consolidated Statements of Stockholders’ Equity—Years ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows—Years ended December 31, 2018 and 2017
Notes to the Consolidated Financial Statements—December 31, 2018 and 2017
26
27
28
29
30
31
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
BIO-key International, Inc.
Wall, NJ
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BIO-key International, Inc. and Subsidiaries (the “Company”) as of December 31, 2018 and
2017, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as
of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in the
consolidated financial statements, the Company has suffered substantial net losses in recent years, has an accumulated deficit at December 31, 2018 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.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our 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 auditor since 2010.
Saddle Brook, New Jersey
April 1, 2019
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BIO-key International, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and cash equivalents
Accounts receivable, net
Due from factor
Inventory
Resalable software license rights
Prepaid expenses and other
Total current assets
Resalable software license rights, net of current portion
Accounts receivable, net of current portion
Equipment and leasehold improvements, net
Capitalized contract costs, net
Deposits and other assets
Intangible assets, net
Total non-current assets
TOTAL ASSETS
LIABILITIES
Accounts payable
Accrued liabilities
Dividends payable on preferred stock
Deferred revenue
Total current liabilities
TOTAL LIABILITIES
Commitments and Contingencies
$
$
$
December 31,
2018
2017
323,943 $
1,574,032
56,682
998,829
1,125,000
150,811
4,229,297
6,790,610
-
148,608
319,199
8,712
195,906
7,463,035
11,692,332 $
481,269 $
548,232
-
196,609
1,226,110
1,226,110
288,721
2,875,946
109,865
946,847
2,640,000
152,654
7,014,033
7,933,808
760,000
181,165
-
8,712
181,104
9,064,789
16,078,822
499,230
688,023
630,408
507,866
2,325,527
2,325,527
STOCKHOLDERS’ EQUITY
Series A-1 convertible preferred stock: authorized, 100,000 (liquidation preference of $100 per share); issued
and outstanding 0 and 62,596 of $.0001 par value at December 31, 2018 and December 31, 2017, respectively
Series B-1 convertible preferred stock: authorized, 105,000 (liquidation preference of $100 per share); issued
and outstanding 0 and 105,000 of $.0001 par value at December 31, 2018 and December 31, 2017,
respectively
Common stock — authorized, 170,000,000 shares; issued and outstanding; 13,977,868 and 7,691,324 of $.0001
-
-
6
11
par value at December 31, 2018 and December 31, 2017, respectively
Additional paid-in capital
Accumulated deficit
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
1,398
85,599,140
(75,134,316)
10,466,222
11,692,332 $
769
80,829,001
(67,076,492)
13,753,295
16,078,822
$
The accompanying notes are an integral part of these statements.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BIO-key International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues
Services
License fees and other
Hardware
Total revenues
Costs and other expenses
Cost of services
Cost of license fees, hardware and other
Total costs and other expenses
Gross Profit (Loss)
Operating expenses
Selling, general and administrative
Research, development and engineering
Total operating expenses
Operating loss
Other income
Interest income
Total other income
Net loss
Deemed dividend from trigger of anti-dilution provision feature
Convertible preferred stock dividends
Net loss available to common stockholders
Basic and Diluted Loss per Common Share
Weighted Average Shares Outstanding:
Basic and Diluted
$
Years ended December 31,
2017
2018
1,012,576 $
1,739,897
1,292,069
4,044,542
443,210
3,720,980
4,164,190
(119,648)
5,333,906
1,415,401
6,749,307
(6,868,955)
80
80
(6,868,875)
(1,428,966)
(198,033)
(8,495,874)
1,193,190
3,220,371
1,889,423
6,302,984
439,291
2,802,860
3,242,151
3,060,833
5,676,323
1,659,875
7,336,198
(4,275,365)
27
27
(4,275,338)
-
(769,158)
(5,044,496)
$
(0.73) $
(0.76)
11,607,933
6,638,382
The accompanying notes are an integral part of these statements.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BIO-key International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Series A-1
Preferred Stock
Shares Amount
Series B-1
Preferred Stock
Shares Amount
Additional
Common Stock
Shares
Amount
Paid-in Accumulated
Capital
Deficit
Total
Balance as of December
31, 2016
90,000 $
9 105,000 $
11 6,093,843 $
609 $ 78,253,413 $ (62,801,154) $ 15,452,888
Issuance of common
stock for directors’ fees
Issuance of common
stock pursuant to
securities purchase
agreement
Dividends declared on
preferred stock
Conversion of dividends
payable on A-1
preferred stock
Conversion of A-1
preferred stock to
common stock
Issuance of stock for
consultants
Stock issuance costs
Exercise of stock options
Share-based
compensation
Net loss
Balance as of December
31, 2017
Adoption of ASC 606
Issuance of common
stock for directors’ fees
Issuance of common
stock pursuant to
securities purchase
agreement
Dividends declared on
preferred stock
Conversion of A-1
preferred stock to
common stock
Conversion of B-1
preferred stock to
common stock
Conversion of dividends
payable on A-1
preferred stock
Conversion of dividends
payable on B-1
preferred stock
Deemed dividend related
to down-round features
Stock issuance costs
Share-based
compensation
Net loss
Balance as of December
31, 2018
11,244
1
32,029
32,030
555,556
56 1,999,944
2,000,000
(769,158)
(769,158)
150,000
15
539,985
540,000
(27,404)
(3)
761,222
76
(73)
117,849
12
1,610
-
354,573
(80,366)
-
498,654
-
354,585
(80,366)
-
498,654
(4,275,338) (4,275,338)
62,596 $
6 105,000 $
11 7,691,324 $
769 $ 80,829,001 $ (67,076,492) $ 13,753,295
240,017
240,017
20,976
2
37,530
37,532
1,380,000
138 2,069,862
2,070,000
(198,033)
(198,033)
(62,596)
(6)
1,738,778
174
(168)
(105,000)
(11) 2,916,668
292
(281)
-
-
98,893
10
356,005
356,015
131,229
13
472,411
1,428,966
(338,845)
(1,428,966)
472,424
-
(338,845)
942,692
942,692
(6,868,875) (6,868,875)
- $
-
- $
- 13,977,868 $
1,398 $ 85,599,140 $ (75,134,316) $ 10,466,222
The accompanying notes are an integral part of these statements.
30
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BIO-key International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to cash used for operating activities:
Allowance for doubtful accounts
Depreciation
Amortization of intangible assets
Amortization of resaleable software license rights
Amortization of capitalized contract costs
Share and warrant-based compensation for employees and consultants
Stock based fees to directors
Change in assets and liabilities:
Accounts receivable
Due from factor
Capitalized contract costs
Inventory
Resaleable software license rights
Prepaid expenses and other
Accounts payable
Accrued liabilities
Deferred revenue
Net cash used for operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Patents
Capital expenditures
Net cash used for investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock
Costs to issue common stock
Net cash provided by financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
Years ended December 31,
2017
2018
$
(6,868,875) $
(4,275,338)
720,000
84,617
15,596
1,513,237
123,171
942,692
37,532
1,341,914
53,183
(202,353)
(51,982)
1,144,961
1,843
(17,961)
(139,793)
(311,257)
(1,613,475)
(30,398)
(52,060)
(82,458)
1,875,100
(143,945)
1,731,155
35,222
288,721
323,943 $
500,000
52,709
13,726
1,510,051
-
940,734
32,030
(1,002,700)
(56,227)
-
(481,419)
74,552
(33,472)
32,388
352,700
(125,196)
(2,465,462)
(60,698)
(166,060)
(226,758)
2,000,000
(80,366)
1,919,634
(772,586)
1,061,307
288,721
$
The accompanying notes are an integral part of these statements.
31
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest
Income taxes
Noncash investing and financing activities:
Accrual of unpaid preferred dividends
Conversion of A-1 preferred dividends payable to common stock
Conversion of A-1 preferred stock to common stock
Conversion of B-1 preferred dividends payable to common stock
Conversion of B-1 preferred stock to common stock
Deemed dividend from trigger of anti-dilution provision feature
Issuance of common stock as a commitment fee for the Equity facility
Issuance of common stock as consulting services for the Equity facility
Years ended December 31,
2017
2018
$
$
$
$
$
$
$
$
$
$
- $
- $
-
-
198,033 $
356,015 $
6,259,600 $
472,426 $
10,500,000 $
1,428,966 $
- $
- $
630,408
540,000
2,740,400
-
-
-
198,000
244,084
The accompanying notes are an integral part of these statements.
32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BIO-key International, Inc. and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2018 and 201 7
NOTE A —THE 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. 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, 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 Company has incurred significant losses to date, and at December 31, 2018, it had an accumulated deficit of approximately $75.1 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, 2018,
total cash and cash equivalents were approximately $324,000, as compared to approximately $289,000 at December 31, 2017.
As discussed below, the Company has financed itself 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 currently requires approximately $537,000 per month to conduct
operations, a monthly amount that it has been unable to consistently achieve 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 financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America
("GAAP"), which contemplate continuation of the Company as a going concern, and assumes continuity of operations, realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The matters described in the preceding paragraphs raise substantial doubt about the Company’s
ability to continue as a going concern. Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent
upon the Company’s ability to meet its financing 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.
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. Basis 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 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. 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.
33
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
3. Revenue Recognition
The Company adopted ASC 606, Revenue from Contracts with Customers (ASC 606) on January 1, 2018 using the modified retrospective method for all
contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017
were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as "legacy GAAP" or the "previous guidance".
The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's
services and will provide financial statement readers with enhanced disclosures.
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the
consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the
following five steps:
• Identify the contract with a customer
• Identify the performance obligations in the contract
• Determine the transaction price
• Allocate the transaction price to performance obligations in the contract
• Recognize revenue when or as the Company satisfies a performance obligation
All of 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 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.
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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
4. Cash Equivalents
Cash equivalents consist of liquid investments with original maturities of three months or less. At December 31, 2018 and 2017, cash equivalents consisted
of a money market account.
5. 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 and $1,000,000 at December 31, 2018 and 2017, respectively, which represents $100% and
58% of the remaining balance owed under the contract, respectively. Recoveries of accounts receivable previously written off are recorded when received.
Accounts receivable at December 31, 2018 and 2017 consisted of the following:
Accounts receivable - current
Accounts receivable - non current
Allowance for doubtful accounts - current
Allowance for doubtful accounts - non current
December 31,
2018
2017
$
1,587,817 $
1,720,000
3,307,817
(13,785)
(1,720,000)
(1,733,785)
2,889,731
1,760,000
4,649,731
(13,785)
(1,000,000)
(1,013,785)
Accounts receivable, net of allowances for doubtful accounts
$
1,574,032 $
3,635,946
The allowance for doubtful accounts for the years ended December 31, 2018 and 2017 is as follows:
Year Ended December 31, 201 8
Allowance for Doubtful Accounts
Year Ended December 31, 201 7
Allowance for Doubtful Accounts
Balance at
Beginning
of Year
Charged to
Costs
and
Expenses
Deductions
From
Reserves
Balance at
End of Year
$
$
1,013,785 $
720,000 $
- $
1,733,785
513,785 $
500,000 $
- $
1,013,785
The bad debt expense is 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.
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The cost of the software license rights has been initially allocated pro-rata to the maximum number of resalable end-user licenses in the rights contract.
Through 2018, licenses were amortized to cost of sales over the greater of the following: 1) an estimate of the economic use of such license rights over a 10 year
period with weighting towards the beginning of the term, 2) straight line method over ten years or 3) ratably at cost basis as each end user license is resold to a
customer. 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.
Amortization began in the first quarter of 2017, with the economic life assumptions that had driven the expense recognition of the license rights over the first
few years, and noted the estimates of use were front-end focused as the majority of the expected up-take of the FingerQ technology was predicted to occur
during the first 4-5 years of the 10-year life cycle of the product. Based on current sales trends, the company now believes future transactions will be more
evenly dispersed over the remaining life cycle of the product, indicating that the straight-line methodology, or greater of actual sales, will more closely align the
expense with the remaining useful life of the product. The change in amortization will be effective beginning on January 1, 2019 based on the net remaining
software license rights balance.
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. Equipment and Leasehold Improvements, Intangible Assets and Depreciation and Amortization
Equipment and leasehold improvements are stated at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to
operations over the estimated service lives, principally using straight-line methods. Leasehold improvements are amortized over the shorter of the life of the
improvement or the lease term, using the straight-line method.
The estimated useful lives used to compute depreciation and amortization for financial reporting purposes are as follows:
Equipment and leasehold improvements
Equipment (years)
Furniture and fixtures (years)
Software (years)
Leasehold improvements
Years
3 - 5
3 - 5
3
life or lease term
Intangible assets consist of patents. 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.
8. 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 did not record any impairment charges in any of the years presented.
9. Advertising Expense
The Company expenses the costs of advertising as incurred. Advertising expenses for 2018 and 2017 were approximately $309,000 and $386,000,
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 from the date the customer is delivered the products.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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”)
The Company’s EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted-average number of common shares
outstanding during the reporting period. Diluted EPS includes the effect from potential issuances of common stock, such as stock issuable pursuant to the
conversion of preferred stock, exercise of stock options and warrants, when the effect of their inclusion is dilutive. See Note R - Earnings Per Share “EPS” for
additional information.
13. Accounting for Stock-Based Compensation
The Company accounts for share based compensation in accordance with the provisions of ASC 718-10, “Compensation — Stock Compensation,” which
requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for
awards expected to vest. The majority of its share-based compensation arrangements vest over either a three or four year vesting schedule. The Company
expenses its share-based compensation under the ratable method, which treats each vesting tranche as if it were an individual grant. The fair value of stock
options is determined using the Black-Scholes valuation model, and requires the input of highly subjective assumptions. These assumptions include estimating
the length of time employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of its common
stock price over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield.
Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount
recognized as an expense in the consolidated statements of operations. As required under the accounting rules, the Company reviews its valuation assumptions
at each grant date and, as a result, the Company is likely to change its valuation assumptions used to value employee stock-based awards granted in future
periods. The values derived from using the Black-Scholes model are recognized as expense over the service period, net of estimated forfeitures (the number of
individuals that will ultimately not complete their vesting requirements). The estimation of stock awards that will ultimately vest requires significant judgment. The
Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and
future changes in estimates, may differ substantially from current estimates.
The following table presents share-based compensation expenses included in the Company’s consolidated statements of operations:
Selling, general and administrative
Research, development and engineering
Valuation Assumptions for Stock Options
Year ended
December 31,
2018
2017
$
$
855,125 $
125,099
980,224 $
864,036
108,728
972,764
For 2018 and 2017, 351,918 and 1,234,167 stock options were granted, respectively. The fair value of each option was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
Weighted average Risk free interest rate
Expected life of options (in years)
Expected dividends
Weighted average Volatility of stock price
Year ended
December 31,
2018
2017
2.70%
4.50
0%
143%
1.92%
4.51
0%
138%
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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
14. Derivative Liabilities
In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain
circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded
derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated
host instrument and accounted for separately as a derivative liability instrument. The Company early-adopted the new provisions issued July 2017, for derivative
liability instruments under FASB ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging
(Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Under ASU 2017-11,
down round features do not meet the criteria for derivative accounting and no liability is to be recorded until an actual issuance of securities triggers the down-
round feature. Prior to these provisions, the liabilities were recorded without the actual issuance of the securities triggering the down-round feature.
15. Income Taxes
The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes
using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of
deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. The Company evaluates, on a
quarterly basis whether, based on all available evidence, if it is probable that the deferred income tax assets are realizable. Valuation allowances are established
when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,”
includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses,
the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences
and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.
Because of the Company’s historical performance and estimated future taxable income, a full valuation allowance has been established.
The Company accounts for uncertain tax provisions in accordance with ASC 740-10-05, “Accounting for Uncertainty in Income Taxes.” The ASC clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
16. Recent Accounting Pronouncements
In May 2014, ASU No. 2014-09, “Revenue from Contracts with Customers” was issued. The Company adopted ASU 2014-09 and its related amendments
(collectively known as ASC 606) effective on January 1, 2018 using the modified retrospective method. Please see Note B "Revenue from Contracts with
Customers" for the required disclosures related to the impact of adopting this standard and a discussion of the Company's updated policies related to revenue
recognition and accounting for costs to obtain and fulfill a customer contract.
In February 2016, the FASB issued ASU 2016-02, “Leases”. The new standard establishes 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. Leases will be classified as either finance or operating,
with classification affecting the pattern of expense recognition in the income statement. The Company will adopt the new standard as of January 1, 2019 and will
recognize a cumulative-effect adjustment to the opening balance of accumulated deficit as of the adoption date. The Company will elect the optional transition
approach to not apply ASU 2016-02 in the comparative periods presented and the package of practical expedients. The Company will also elect the practical
expedient to not account for lease and non-lease components separately for office space, data center and equipment operating leases. The Company is
currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements, but expects that it will increase its assets
and liabilities for amounts yet to be determined, but does not expect ASU 2016-02 to have an impact on its results of operations or cash flows. The Company
does not expect the cumulative effect adjustment to the opening balance of retained earnings at January 1, 2019 to be material.
In July 2017, the FASB issued 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. Part I of
this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain
equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round
features that require fair value measurement of the entire instrument or conversion option. 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. Part II of this update addresses the
difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards
Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain
nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This
ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of ASU
2017-11, during the fiscal 2017 year did not have any impact on the consolidated financial statements, except for recording the deemed dividend in 2018 from
triggering the anti-dilution provision feature and updating our disclosures with respect to equity instruments with down round features. See Note O for updated
disclosures.
38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 is currently assessing the impact ASU 2018-15 will have on its 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—REVENUE 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:
License fees
Hardware
Support and Maintenance
Professional services
Total Revenues
License fees
Hardware
Support and Maintenance
Professional services
Total Revenues
* EMEA – Europe, Middle East, Africa
North
America
South
America
EMEA*
Asia
December 31,
2018
318,271 $
439,480
805,800
115,970
1,679,521 $
32,000 $
53,200
665
-
85,865 $
278,516 $
477,674
60,820
2,000
819,010 $
1,111,110 $
321,715
27,321
-
1,460,146 $
1,739,897
1,292,069
894,606
117,970
4,044,542
North
America
South
America
EMEA*
Asia
December 31,
2017
3,104,509 $
1,190,500
458,340
686,812
5,440,161 $
583 $
2,341
2,364
-
5,288 $
4,279 $
8,252
37,907
-
50,438 $
111,000 $
688,330
2,367
5,400
807,097 $
3,220,371
1,889,423
500,978
692,212
6,302,984
$
$
$
$
Financial Statement Impact of Adopting ASC 606
The Company adopted ASC 606 using the modified retrospective method. The cumulative effect of applying the new guidance to all contracts with customers
that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. The cost of obtaining the contract
reflects the outcome of the sales effort in educating, demonstrating and selling our solutions. Accordingly under ASC 606, commissions are a capitalized cost due
to the acquisition of a new customer.
39
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to the following select
condensed consolidated balance sheet line items as of January 1, 2018:
Capitalized contract assets
Total assets
Accumulated deficit
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
As reported -
December 31,
2017
Adjustments
January 1, 2018
As adjusted -
$
$
$
$
$
- $
16,078,822 $
(67,076,492) $
13,753,295 $
16,078,822 $
240,017 $
240,017 $
240,017 $
240,017 $
240,017 $
240,017
16,318,839
(66,836,475)
13,993,312
16,318,839
Impact of New Revenue Guidance on Financial Statement Line Items
The following table compares selected reported condensed consolidated balance sheet, statement of operations and cash flows, as of and for the year ended
December 31, 2018, to the pro-forma amounts had the previous guidance still been applied:
As of December 31, 2018
As reported
Pro-forma
Increase
(decrease)
Consolidated balance sheet data:
Capitalized contract costs, net
$
319,199 $
- $
(319,199)
Consolidated statement of operations data:
Selling, general and administrative expenses
Net loss
Net loss available to common stockholders
Basic & Diluted Loss per Common Share
Consolidated statement of cash flow data:
Net loss
Change in contract assets
Net cash used by operating activities
Year Ended
December 31, 2018
As reported
Pro-forma
Increase
(decrease)
5,333,906
(6,868,875)
(8,495,874)
(0.73)
5,413,088
(6,948,057)
(8,575,056)
(0.74)
79,182
(79,182)
(79,182)
0.00
Year Ended
December 31, 2018
As reported
Pro-forma
Increase
(decrease)
(6,868,875)
(79,182)
(1,613,475)
(6,948,057)
-
(1,613,475)
(79,182)
79,182
-
Revenue recognized during the year ended December 31, 2018 from amounts included in deferred revenue at the beginning of the period was approximately
$382,000 respectively. The Company did not recognize any revenue from performance obligations satisfied in prior periods. Total deferred revenue (contract
liability) was $196,609 and $507,866 at December 31, 2018 and December 31, 2017, respectively.
40
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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, 2018. 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, 2018 deferred revenue represents our remaining performance obligations related to prepaid support and maintenance, all of which is expected
to be recognized within one year.
NOTE C—FACTORING
Due from factor consisted of the following as of December 31:
Year Ended December 31, 201 8
Factored accounts receivable
Year Ended December 31, 201 7
Factored accounts receivable
Original Invoice
Value
Factored
Amount
Factored
Balance due
$
$
221,120 $
164,438 $
56,682
423,349 $
313,484 $
109,865
The Company entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to October
31, 2019. 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 to be forwarded to the Company once the Factor collects the
full accounts receivable balance from the customer. In addition, the Company, from time to time, receives over advances from the factor. Factoring fees range
from 2.75% to 15% of the face value of the invoice factored, and are determined by the number of days required for collection of the invoice. The cost of
factoring is included in selling, general and administrative expenses. The cost of factoring was as follows:
Years Ended December 31,
2018
2017
Factoring fees
$
186,845 $
224,142
NOTE D—FAIR 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.
NOTE E—CONCENTRATION OF RISK
Financial instruments which potentially subject the Company to risk primarily consist of cash 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. The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial
institutions. No amounts were in excess of coverage at December 31, 2018 and 2017. 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.
41
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, as follows:
Customer A
Customer B
Customer C
* Less than 10% of total revenue
Years Ended December 31,
2017
2018
27%
14%
13%
*
54%
*
The Company had certain customers whose accounts receivable balances individually represented 10% or more of the Company’s total current accounts
receivable, as follows:
Customer A
Customer B
As of December 31,
2018
2017
70%
*
*
87%
The long term accounts receivable is represented by one customer in amount of $1,720,000 which has been past due per the terms of the invoice for forty-
two months as of December 31, 2018. The Company has reserved $1,720,000 and $1,000,000 which represents 100% and 58% of the remaining balance owed
under the contract.
* Less than 10% of total accounts receivable
NOTE F—INVENTORY
Inventory is stated at the lower of cost, determined on a first in, first out basis, or realizable value, and consists primarily of fabricated assemblies and
finished goods. Inventory is comprised of the following as of December 31:
Current
Finished goods
Fabricated assemblies
Total current inventory
2018
2017
496,358
502,471
998,829 $
487,858
458,989
946,847
$
NOTE G—RESALABLE 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 cost of sub-license rights expected to be amortized in the following 12 months is $1,125,000 and is classified as current, with
remainder as non-current.
The Company has 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.
42
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Through 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. The Company believes
categorizing the amortization expense under Cost of Sales more closely reflects the nature of the license right arrangement and the use of the technology. A
total of $2,640,000 and $1,556,687 was expensed during the twelve month periods ended December 31, 2018 and 2017, respectively. The 2018 expense was
recorded based on the economic use model. Since the license purchase, a cumulative amount of $4,198,596 has been expensed, with a carrying balance of
$7,801,404 as of December 31, 2018. Based on current sales, the Company believes that the economic use was front-end focused as the majority of the
expected up-take of the FingerQ technology was predicted to occur during the first 4-5 years of the 10-year life cycle of the product. Based on current sales
trends, the company now believes future transactions will be more evenly dispersed over the remaining life cycle of the product, indicating that the straight-line
methodology, or greater of actual sales, will more closely align the expense with the remaining useful life of the product. The change in amortization will be
effective beginning on January 1, 2019 based on the net remaining software license rights balance.
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 three approaches being
the actual sales through 2018. A total of $18,198 (net of credits of $14,400) and $35,916 was expensed during the twelve month periods ended December 31,
2018 and 2017, respectively. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $65,794 net of
credits has been expensed, with a carrying balance of $114,206 as of December 31, 2018. The Company has classified the balance as non-current until a larger
deployment occurs. Software license rights is comprised of the following as of:
Current software license rights
Non-current software license rights
Total software license rights
2018
2017
$
$
1,125,000 $
6,790,610
7,915,610 $
2,640,000
7,933,808
10,573,808
During the year ended December 31, 2018, there were no events or changes in circumstances that indicated the carrying amount of the software license
rights may not be recoverable from their undiscounted cash flows. Consequently, we did not perform an impairment test. The Company did not record an
impairment loss related to the software license rights during the years ended December 31, 2018 and 2017.
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
2019
2020
2021
2022
2023
Thereafter
1,125,000*
1,114,500
1,114,500
1,114,500
1,114,500
2,332,610
* - Includes increase vs. straight line due to expected deployment of second tranche of licenses from fourth quarter 2018 order.
NOTE H—EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following as of December 31:
Equipment
Furniture and fixtures
Software
Leasehold improvements
Less accumulated depreciation and amortization
Total
$
2018
2017
619,533 $
164,079
32,045
23,403
839,060
567,473
164,079
32,045
23,403
787,000
(690,452)
(605,835)
$
148,608 $
181,165
Depreciation was $84,617 and $52,709 for 2018 and 2017, respectively. Amounts are recorded in Selling, General, and Administrative Expense and Cost of
Services.
43
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTE I—INTANGIBLE ASSETS
Intangible assets consisted of the following as of December 31:
2018
2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Patents and patents pending
Total
$
$
378,344 $
(182,438) $
195,906 $
347,946 $
(166,842) $
181,104
378,344 $
(182,438) $
195,906 $
347,946 $
(166,842) $
181,104
Aggregate amortization expense for 2018 and 2017 was $15,596 and $13,726, respectively. Amounts are recorded in Research, Development and
engineering expense. The estimated aggregate amortization expense of intangible assets for the years following December 31, 2018 is approximately $13,000
per year for 2019 through 2023, and approximately $131,000 thereafter.
NOTE J—ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of December 31:
Compensation
Compensated absences
Accrued legal and accounting fees
Sales tax payable
Factoring fees
Other
Total
NOTE K—RELATED PARTY
2018
2017
$
224,135 $
154,169
77,133
9,436
19,000
64,359
$
548,232 $
341,884
164,132
85,633
5,614
32,357
58,403
688,023
Licensing Agreement with Subsidiaries of China Goldjoy Group Limited.
On November 11, 2015, BIO-key Hong Kong Limited, a subsidiary of the Company, entered into a license purchase agreement with certain subsidiaries of
China Goldjoy Group Limited (“CGG”). The license agreement provides for the grant of a perpetual, irrevocable, exclusive, worldwide, fully-paid license to all
software and documentation regarding the software code, toolkit, electronic libraries and related technology currently known as or offered 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. 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
31.4% of the Company’s common stock, and a director and executive officer of the Company.
Securities Purchase Agreements with Wong Kwok Fong
On April 28, 2017, the Company issued to Wong Kwok Fong, a director and executive officer of the Company, 277,778 shares of common stock at a
purchase price of $3.60 per share for gross cash proceeds of $1,000,000.
44
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On September 22, 2017, the Company issued to Wong Kwok Fong, a director and executive officer of the Company, 427,778 shares of common stock and
warrants to purchase 138,889 shares of common stock for the 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 of common stock, and the conversion of an accrued dividend payable in the amount of $540,000 on the
Company’s Series A-1 Convertible Preferred Stock for 150,000 shares of common stock.
On August 7, 2017, the Company received written notice from Wong Kwok Fong, the holder of an aggregate of 90,000 shares of the Company’s Series A-1
Convertible Preferred Stock, of his desire to increase the maximum percentage of shares of common stock issuable upon conversion of the Series A-1
Convertible Preferred Stock from 9.99% to 35%. The Company waived a standstill provision to permit such increase. In accordance with the Certificate of
Designation of the Series A-1 Shares, such notice became effective on the 61st day following the date such notice was provided to the Company.
On October 17, 2017, Wong Kwok Fong converted 27,404 of the Series A-1 Shares at a conversion price of $3.60 per share resulting in the acquisition of
761,222 shares of the Company’s Common Stock.
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.
NOTE L—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, 2018 and 2017, amounts in deferred revenue were approximately $197,000 and $508,000, respectively.
NOTE M—COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company does not own any real estate but conducts operations from three leased premises. These non-cancelable operating leases expire at various
dates through 2023. In addition to base rent, the Company pays for property taxes, maintenance, insurance and other occupancy expenses according to the
terms of the individual leases.
Future minimum rental commitments of non-cancelable operating leases are approximately as follows:
Years ending December 31,
2019
2020
2021
2022
2023
192,000
156,000
127,000
131,000
89,000
695,000
$
Rental expense was approximately $234,000 and $221,000 during 2018 and 2017, respectively. Amounts are recorded in Selling, General, and
administrative expenses.
Litigation
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of December 31,
2018, the Company was not a party to any pending lawsuits.
45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTE N— EQUITY
1. Preferred Stock
Within the limits and restrictions provided in the Company’s Certificate of Incorporation, the Board of Directors has the authority, without further action by the
shareholders, to issue up to 5,000,000 shares of preferred stock, $.0001 par value per share, in one or more series, and to fix, as to any such series, any
dividend rate, redemption price, preference on liquidation or dissolution, sinking fund terms, conversion rights, voting rights, and any other preference or special
rights and qualifications. As of December 31, 2018, 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 as of December 31, 2018, 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 as of December 31, 2018.
Series A-1 Convertible Preferred Stock
On October 22 and 29, 2015, the Company issued 84,500 shares of Series A-1 Convertible Preferred Stock (“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. Shares of Series A-1 Stock were convertible at any time at the option of the holder into shares
of common stock by dividing the Series A-1 Original Issue Price by an initial conversion price of $3.60 per share, subject to adjustment for stock dividends, stock
splits, combinations, and reclassifications of the Company’s capital stock, and subject to a “blocker provision” which prohibits conversion if such conversion
would result in the holder being the beneficial owner of in excess of 9.99% of the Company’s common stock. In connection with the request of the sole holder
of the Series A-1 Stock, on August 7, 2017 the Company waived a standstill agreement to permit the holder to increase his conversion cap to 35% effective 61
days after such waiver request. The Series A-1 Stock accrued dividends at the rate of 6% per annum payable quarterly on April 1, July, 1, October 1, and
January 1 of each year. Until October 1, 2017, the dividends were payable in cash provided that if payment in cash would be prohibited under applicable
Delaware corporation law or cause the Company to breach any agreement for borrowed money, such dividends would be payable in kind through the issuance
of additional shares of common stock having a value equal to the volume weighted average trading price of the Company’s common stock for the ten (10) days
preceding the applicable dividend payment date. Commencing January 1, 2018, dividends were payable at the option of the Company in cash or kind through
the issuance of additional shares of common valued as described above.
The holders of the Series A-1 Stock were entitled to designate one person to serve on the Board of Directors of the Company. The holders of the Series A-1
Stock were entitled to vote on an as converted to common stock basis together with the holders of our common stock on all matters presented to our
stockholders. Upon any liquidation or dissolution of the Company, any merger or consolidation involving the Company or any subsidiary of the Company in
which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation do not represent immediately following such
merger or consolidation at least a majority of the voting power of the capital stock of the resulting or surviving corporation, or the sale of all or substantially all
assets in a single transaction or a series of related transactions, unless the holders of at least a majority of the outstanding Series A-1 Stock elected otherwise,
holders of Series A-1 Stock would have been entitled to receive prior to any payment to any holders of the Company’s common stock an amount per share
equal to $100.00 per share plus any declared and unpaid dividends (pari-passu with the Series B-1 holders).
Between September 22, 2017 and May 31, 2018, the holder of the Series A-1 Stock converted all shares of Series A-1 Stock into an aggregate of
2,500,000 shares of common stock and purchased an aggregate of 248,893 shares of common stock in consideration of the conversion of $896,015 of accrued
dividends payable on the Series A-1 Stock
As a result of the forgoing conversions, there are no longer any issued and outstanding shares of Series A-1 Stock as of December 31, 2018.
Overall balances and conversion of Series A-1 shares and accrued dividends into common stock has been as follows:
Balance – January 1, 2017
Accrual of dividends – Q1 2017
Accrual of dividends – Q2 2017
Accrual of dividends – Q3 2017
Conversion into common stock – September 2017
Conversion into common stock – October 2017
Accrual of dividends – Q4 2017
Balance – December 31, 2017
Accrual of dividends – Q1 2018
Conversion into common stock – April 2018
Accrual of dividends – Q2 2018 (until final conversion)
Conversion into common stock – May 2018
Balance – December 31, 2018
46
Series A-1
Accrued Dividends
90,000 $
-
(27,404)
62,596 $
(39,088)
(23,508)
- $
270,000
135,000
135,000
135,000
(540,000)
-
101,658
236,658
93,894
(330,552)
25,463
(25,463)
-
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Series A-1 Stock contained options that based on an evaluation of FASB ASC 815-15, “Embedded Derivatives” and FASB ASC 815-40-15, “Contracts in
Entity’s Own Equity - Scope and Scope Exceptions,” are considered embedded features: Preferred Stock’s conversion option: The Series A-1 Stock was
convertible at the holder’s option at any time at the fixed conversion price of $3.60 per share; Quarterly Dividend Conversion Option: From issuance until
December 31, 2017, the majority of holders could have elected to have the quarterly dividend payment made in shares of common stock, having a value equal
to the volume weighted average trading price of the common stock during the ten (10) trading day period preceding the applicable dividend payment
date. These features were analyzed by the Company and determined that they were not required to be bifurcated from the preferred stock and recorded as
derivatives as they are clearly and closely related to an equity host.
Series B-1 Convertible Preferred Stock
On November 11, 2015, the Company issued 105,000 shares of Series B-1 Convertible Preferred Stock (the “Series B-1 Stock”) at a purchase price of
$100.00 per share, for gross proceeds of $10,500,000. Shares of the Series B-1 Stock were convertible at any time at the option of the holder into shares of
common stock by dividing the Series B-1 Original Issue Price by an initial conversion price of $3.60 per share, subject to adjustment for stock dividends, stock
splits, combinations, and reclassifications of the Company’s capital stock, and subject to a “blocker provision” which prohibits conversion if such conversion
would result in the holder being the beneficial owner of in excess of 9.99% of the Company’s common stock. During a conversion detailed in the table below,
the Company waived a standstill provision to permit a holder of Series B-1 Stock to increase its conversion limitation to 19.99% of the Company's issued and
outstanding shares of common stock to be effective 61 days after such waiver. The Series B-1 Stock accrued dividends at the rate of 2.5% per annum payable
quarterly on April 1, July, 1, October 1, and January 1 of each year payable in cash provided that if payment in cash would be prohibited under applicable
Delaware corporation law or cause the Company to breach any agreement for borrowed money, or if the majority of the outstanding shares of the Series B-1
Stock elected otherwise, such dividends were payable in kind through the issuance of additional shares of common stock having a value equal to the volume
weighted average trading price of the Company’s common stock for the ten (10) days preceding the applicable dividend payment date.
The holders of the Series B-1 Stock were entitled to designate one person to serve on the Board of Directors of the Company. The holders of the Series B-1
Stock were entitled to vote on an as converted to common stock basis together with the holders of our common stock on all matters presented to our
stockholders. Upon any liquidation or dissolution of the Company, any merger or consolidation involving the Company or any subsidiary of the Company in
which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation do not represent immediately following such
merger or consolidation at least a majority of the voting power of the capital stock of the resulting or surviving corporation, or the sale of all or substantially all
assets in a single transaction or a series of related transactions, unless the holders of at least a majority of the outstanding Series B-1 Stock elected otherwise,
holders of Series B-1 Stock would have been be entitled to receive prior to any payment to any holders of the Company’s common stock an amount per share
equal to $100.00 per share plus any declared and unpaid dividends (pari-passu with the Series A-1 holders).
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, there are no longer any issued and outstanding shares of Series B-1 Stock as of December 31, 2018.
Overall balances and conversion of Series B-1 shares and accrued dividends into common stock has been as follows:
Balance – January 1, 2017
Accrual of dividends – Q1 2017
Accrual of dividends – Q2 2017
Accrual of dividends – Q3 2017
Accrual of dividends – Q4 2017
Balance – December 31, 2017
Conversion into common stock – March 2018
Accrual of dividends – Q1 2018
Accrual of dividends – Q2 2018 (until final conversion)
Conversion into common stock – May 2018
Balance – December 31, 2018
47
Series B-1
Accrued Dividends
105,000 $
105,000
(60,420)
(44,580)
- $
131,250
65,625
65,625
65,625
65,625
393,750
(417,084)
62,268
16,408
(55,342)
-
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Series B-1 Stock contained options that based on an evaluation of FASB ASC 815-15, “Embedded Derivatives” and FASB ASC 815-40-15, “Contracts in
Entity’s Own Equity - Scope and Scope Exceptions,” are considered embedded features: Preferred Stock’s conversion option: The Series B-1 Stock was
convertible at the holder’s option at any time at the fixed conversion price of $3.60 per share; Quarterly Dividend Conversion Option: The majority of holders
could have elect to have the quarterly dividend payment made in shares of common stock, having a value equal to the volume weighted average trading price of
the common stock during the ten (10) trading day period preceding the applicable dividend payment date. These features were analyzed by the Company and
determined that they were not required to be bifurcated from the preferred stock and recorded as derivatives as they are clearly and closely related to an equity
host.
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
On March 23, 2018, the holders of Series B-1 Stock converted shares and accrued dividends payable into a total of 1,794,190 shares of common stock.
On April 3, 2018, the holder of Series A-1 Stock converted shares and accrued dividends payable into a total of 1,177,598 shares of common stock.
On May 23, 2018, the holders of Series B-1 Stock converted shares and accrued dividends payable into a total of 1,253,707 shares of common stock.
On May 31, 2018, the holder of Series A-1 Stock converted shares and accrued dividends payable into a total of 660,073 shares of common stock.
On August 22, 2018, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC (the “Underwriter”) with
respect to the issuance and sale of an aggregate of 1,200,000 units (“Units”) with each unit consisting of one share of common stock and a warrant to purchase
0.75 shares of common stock at an exercise price of $1.50 per share, in an underwritten public offering pursuant to the Underwriting Agreement. Each Unit was
sold for a price of $1.50. The Warrants have a term of five years and are immediately exercisable. Pursuant to the Underwriting Agreement, the Company
granted the Underwriters a 45-day option to purchase up to an additional 180,000 shares of Common Stock and/or 135,000 Warrants to cover over-allotments, if
any (the “Over-Allotment”). On August 22, 2018, the Underwriter exercised its Over-Allotment option in full on both the Common Stock and the Warrants.
Pursuant to this agreement, 1,380,000 shares of common stock and warrants to purchase 1,035,000 shares of stock were issued on August 24, 2018 for
aggregate gross proceeds of $2,070,000. The gross proceeds were reduced by a 7% commission ($144,900) and $50,000 of underwriting expenses to net to
$1,875,100 cash received.
Costs of $143,945 were incurred during 2018 in relation to the issuance of common stock.
Issuances to Directors, Executive Officers and Consultants
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.
During the year ended December 31, 2017, the Company issued 11,244 shares of common stock to its directors in lieu of payment of board fees, valued at
$32,030.
During the year ended December 31, 2017, the Company issued 117,849 shares of common stock to consultancy firms in lieu of payment for services. The
fair value at issuance was $354,585 and was expensed over the period of the services.
48
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Employees’ exercise options
During 2018, no employee stock options were exercised. There were 4,167 employee stock options exercised resulting in the cashless issuance of 1,610
shares of common stock during 2017.
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.
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 have a term of five years and an initial exercise price of $3.60 per share, and have been fully exercisable since February 2015. The warrants
have 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 is 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.
Pursuant to the Underwriting Agreement with Maxim Group, 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. Due to this provision, 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 connection with these adjustments.
As a result of the early adoption of ASU 2017-11, the “full ratchet” anti-dilution feature is no longer a determinant for derivative liability accounting. As the “full
ratchet” anti-dilution feature was determined to have no value in the past, the adoption had no effect on the balance sheets or statements of operations.
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 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 is 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.
Pursuant to the Underwriting Agreement with Maxim Group, 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. Due to this provision, the total
number of outstanding and fully vested warrants for the investor 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 connection with these adjustments.
As a result of the early adoption of ASU 2017-11, the “full ratchet” anti-dilution feature is no longer a determinant for derivative liability accounting. As the “full
ratchet” anti-dilution feature was determined to have no value in the past, the adoption had no effect on the balance sheets or statements of operations.
49
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
3. Warrants
The Company has issued warrants to certain creditors, investors, investment bankers and consultants. A summary of warrant activity is as follows:
Weighted
average
exercise
price
Weighted
average
remaining
life
(in years)
Aggregate
intrinsic
value
Total
Warrants
Outstanding, as of December 31, 2016
1,260,080
3.84
2.78
Granted
Exercised
Forfeited
Expired
Outstanding, as of December 31, 2017
Granted
Increase due to trigger of anti-dilution provision feature
Exercised
Forfeited
Expired
Outstanding, as of December 31, 2018
Vested or expected to vest at December 31, 2018
Exercisable at December 31, 2018
NOTE O—STOCK OPTIONS
2004 Stock Option Plan
138,889
—
—
—
1,398,969
1,035,000
1,492,848
—
—
(145,841)
3,780,976
3,780,976
3,780,976
3.60
—
—
—
3.81
1.50
1.50
—
—
6.00
1.59
1.59
1.59
2.06
—
2.05
2.05
2.05
—
—
—
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 shareholders approved the 2015 Equity Incentive Plan (the 2015 Plan). Under the terms of this plan, 666,667 shares of common
stock are reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which may not be below 100-110% of fair
market value. The term of stock options granted may not exceed ten years. Options issued under the 2015 Plan vest pursuant to the terms of stock option
agreements with the recipients. In the event of a change in control, certain stock awards issued under this plan may be subject to additional acceleration of
vesting as may be provided in the participants’ written agreement. The 2015 Plan expires in December 2025.
Non-Plan Stock Options
Periodically, the Company has granted options outside of the 2004 and 2015 Plans to various employees and consultants. In the event of change in control,
as defined, certain of the non-plan options outstanding vest immediately.
50
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Stock Option Activity
Information summarizing option activity is as follows:
2004
Plan
Number of Options
Non
Plan
2015
Plan
Total
Weighted
average
exercise
price
Weighted
average
remaining
life
(in years)
Aggregate
intrinsic
value
69,380
25,003
247,280
341,663 $
3.99
—
—
—
(17,084)
64,167
—
(7,084)
—
1,170,000
(4,167)
(65,140)
(4,862)
1,234,167
(4,167)
(72,224)
(21,946)
2.69
2.16
2.62
8.86
52,296
82,086
1,343,111
1,477,493 $
2.91
5.64 $
—
—
—
(18,961)
351,918
—
(38,613)
(13,473)
—
—
(111,253)
(59,097)
351,918
—
(149,866)
(91,531)
1.97
—
2.63
3.03
33,335
381,918
1,172,761
1,588,014 $
2.72
5.00 $
1,321,981 $
2.79
4.83 $
593,573 $
3.17
3.94 $
0
0
0
0
Outstanding, as of
December 31, 2016
Granted
Exercised
Forfeited
Expired
Outstanding, as of
December 31, 2017
Granted
Exercised
Forfeited
Expired
Outstanding, as of
December 31, 2018
Vested or expected to vest at
December 31, 2018
Exercisable at December 31,
2018
The options outstanding and exercisable at December 31, 2018 were in the following exercise price ranges:
Range of exercise prices
1.83 - 2.50
2.51 - 3.50
3.51 - 4.92
1.83 - 4.92
$
$
Options Outstanding
Weighted
average
exercise
price
2.01
2.69
4.58
Number of
shares
413,843 $
1,000,415
173,756
1,588,014
Weighted
average
remaining
life (in years)
5.88
5.23
1.76
Options Exercisable
Weighted
average
exercise
price
2.15
2.69
4.58
Number
exercisable
81,230 $
338,587
173,756
593,573
The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $0.75 as of December 31,
2018, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money
options exercisable as of December 31, 2018 was 0.
The weighted average fair value of options granted during the years ended December 31, 2018 and 2017 was $1.53 and $2.32 per share, respectively. The
total intrinsic value of options exercised during the years ended December 31, 2018 and 2017 was $0 and $5,667, respectively. The total fair value of shares
vested during the years ended December 31, 2017 and 2016 was $946,435 and $197,281 respectively.
As of December 31, 2018, future forfeiture adjusted compensation cost related to nonvested stock options is $1,228,771 and will be recognized over an
estimated weighted average period of 1.50 years.
51
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTE P—INCOME TAXES
There was no provision for federal or state taxes as at December 31, 2018 and 2017.
In December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The
Tax Act significantly impacts the future ongoing U.S. corporate income tax by, among things, lowering the U.S. corporate income tax rates from 34% to 21%,
providing for unlimited net operating loss carry-forward periods, and implementing a territorial tax system. The reduction of the U.S. corporate tax rate required
the Company to revalue its U.S. deferred tax assets and liabilities and valuation allowances to the recently enacted federal rate of 21%. This transitional impact
resulted in a provisional reduction of certain of the Company’s US deferred tax assets which are offset by a full valuation allowance.
The Company has deferred taxes due to income tax credits, net operating loss carryforwards, and the effect of temporary differences between the carrying
values of certain assets and liabilities for financial reporting and income tax purposes. Significant components of deferred taxes are as follows at December 31:
Accrued compensation
Accounts receivable allowance
Stock-based compensation
Basis differences in fixed assets
Basis differences in intangible assets
Net operating loss and credit carryforwards
Valuation allowances
$
2018
2017
91,000 $
474,000
644,000
(13,000)
50,000
12,735,000
(13,981,000)
118,000
277,000
387,000
(18,000)
46,000
12,052,000
(12,862,000)
$
— $
—
The Company has a valuation allowance against the full amount of its net deferred taxes due to the uncertainty of realization of the deferred tax assets due
to operating loss history of the Company. The Company currently provides a valuation allowance against deferred taxes when it is more likely than not that some
portion, or all of its deferred tax assets will not be realized. The valuation allowance could be reduced or eliminated based on future earnings and future
estimates of taxable income. Similarly, income tax benefits related to stock options exercised have not been recognized in the financial statements.
As of December 31, 2018, the Company has federal net operating loss carryforwards of approximately $60 million subject to expiration between 2021 and
2037. These net operating loss carryforwards are subject to the limitations under Section 382 of the Internal Revenue Code due to changes in the equity
ownership of the Company.
A reconciliation of the effective income tax rate on operations reflected in the Statements of Operations to the US Federal statutory income tax rate is
presented below.
Federal statutory income tax rate
Permanent differences
Change in tax laws/tax rate
Effect of net operating loss
Effective tax rate
2018
2017
21%
—
—
(21)
—%
34%
—
(13)
(21)
—%
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 2015 through 2018 remain open to examination by the IRS and state
jurisdictions. The Company believes it is not subject to any tax audit risk beyond those periods. The Company’s policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated
with any unrecognized tax benefits, nor was any significant interest expense recognized during the years ended December 31, 2018 and 2017.
52
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTE Q—PROFIT SHARING PLAN
The Company has established a savings plan under section 401(k) of the Internal Revenue Code. All employees of the Company, after completing one day
of service, are eligible to enroll in the 401(k) plan. Participating employees may elect to defer a portion of their salary on a pre-tax basis up to the limits as
provided by the IRS Code. The Company is not required to match employee contributions but may do so at its discretion. The Company made no contributions
during the years ended December 31, 2018 and 2017.
NOTE R—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 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:
Basic Numerator:
Loss from continuing operations
Deemed dividend from trigger of anti-dilution provision feature
Convertible preferred stock dividends
Net loss available to common stockholders (basic and diluted EPS)
2018
2017
$
$
(6,868,875) $
(1,428,966)
(198,033)
(8,495,874) $
(4,275,338)
-
(769,158)
(5,044,496)
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.
Preferred stock
Stock options
Warrants
Potentially dilutive securities
Years ended December 31,
2018
2017
1,426,756
83
697,879
5,264,422
15,529
2,109
2,124,718
5,282,060
Items excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:
Stock options
Warrants
Total
NOTE S—SUBSEQUENT EVENTS
Years ended December 31,
2017
2018
1,583,014
186,806
1,390,428
1,351,052
1,769,820
2,741,480
On March 21, 2019, the Company issued 12,716 shares of common stock to its directors in payment of board and committee fees.
On March 21, 2019, the Company issued options to purchase 235,334 shares of the Company’s 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.
On March 28, 2019, the Company issued 1,104 shares of common stock to its directors in payment of committee fees.
The Company has reviewed subsequent events through the date of this filing.
53
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT INDEX
Exhibit
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)
Exhibit
No.
3.1
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
3.4
3.5
3.6
3.7
3.8
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)
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)
Certificate of Elimination of BIO-key International, Inc. filed October 6, 2015 (incorporated by reference to Exhibit 3.5 to the registration statement on
Form S-1 File No. 333-208747 filed with the SEC on December 23, 2015)
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)
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)
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)
4.1
Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the registration statement on Form SB-2, File No. 333-16451)
10.1
10.2
10.3
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)
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)
Employment Agreement, effective March 25, 2010, by and between the Company and Michael W. DePasquale (incorporated by reference to Exhibit
10.93 to the annual report on Form 10-K, filed with the SEC on March 26, 2010)
10.4
Form of Warrant (incorporated by reference to Exhibit 10.30 to the registration statement on Form S-1, filed with the SEC on July 26, 2013)
10.5
10.6
10.7
10.8
10.9
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)
Third Amendment to Lease Agreement by and between BIO-key International, Inc. and Victor AOP, Inc. dated June 30, 2013 (incorporated by
reference to Exhibit 10.43 to the annual report on Form 10-K, filed with the SEC on March 31, 2014)
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)
Form of Investor Warrant, by and between the Company and certain investors dated November 13, 2014 (incorporated by reference to Exhibit 10.2 to
the quarterly report on Form 10-Q, filed with the SEC on November 14, 2014)
Form of Convertible Preferred Stock Purchase Agreement (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the
SEC on November 2, 2015)
54
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.10
Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K, filed with the SEC on November
2, 2015)
10.11
Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q, filed with the SEC on
November 16, 2015)
10.12
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)
10.13
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)
10.14
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)**
10.15
Securities Purchase Agreement dated November 11, 2016 by and between Registrant and Wong Kwok Fong (Kelvin) (incorporated by reference to
Exhibit 10.1 to the quarterly report on Form 10-Q, filed with the SEC on November 14, 2016)
10.16
Securities Purchase Agreement dated April 28, 2017 by and between Registrant and Wong Kwok Fong (Kelvin) (incorporated by reference to Exhibit
10.1 to the quarterly report on Form 8-K, filed with the SEC on May 3, 2017)
10.17
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)
10.18
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)
10.19
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)
10.20
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
10.21
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
10.22
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
10.23
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
10.24
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
10.25
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
10.26
GLP 2nd Amendment to Lease dated July 27, 2018
10.27 Marlen 4th Amendment to Lease dated June 2, 2018
21.1
List of subsidiaries of BIO-key International, Inc. (incorporated by reference to Exhibit 21.1 to the annual report on Form 10-K, filed with the SEC on
March 30, 2016)
23.1*
31.1*
31.2*
32.1*
32.2*
Consent of RMSBG
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
55
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
101.INS*
XBRL Instance
101.SCH* XBRL Taxonomy Extension Schema
101.CAL*
XBRL Taxonomy Extension Calculation
101.DEF*
XBRL Taxonomy Extension Definition
101.LAB*
XBRL Taxonomy Extension Labels
101.PRE* XBRL Taxonomy Extension Presentation
* filed herewith
** Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted sections have been filed separately with the Securities and
Exchange Commission
56
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: April 1, 2019
BIO-KEY INTERNATIONAL, INC.
By:
/s/ MICHAEL W. DEPASQUALE
Michael W. DePasquale
CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant
and in the capacities on the dates indicated.
Signature
Title
/s/ MICHAEL W. DEPASQUALE
Michael W. DePasquale
Chairman of the Board of Directors, Chief Executive Officer and Director
(Principal Executive Officer)
Date
April 1, 2019
/s/ CECILIA WELCH
Cecilia Welch
/s/ROBERT J. MICHEL
Robert J. Michel
/s/ THOMAS E. BUSH III
Thomas E. Bush
/s/ THOMAS GILLEY
Thomas Gilley
/s/ WONG KWOK FONG
Wong Kwok Fong
/s/ YAO JIANHUI
Yao Jianhui
/s/ FABIAN SHIN
Fabian Shin
/s/ PIETER KNOOK
Pieter Knook
Chief Financial Officer (Principal Financial and Accounting Officer)
April 1, 2019
Director
Director
Director
Director
Director
Director
Director
57
April 1, 2019
April 1, 2019
April 1, 2019
April 1, 2019
April 1, 2019
April 1, 2019
April 1, 2019
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SECOND AMENDMENT TO LEASE AGREEMENT
Exhibit 10.26
THIS SECOND AMENDMENT TO LEASE AGREEMENT (hereinafter referred to as this “Amendment”) is made this _ 27_ day of ___ July___, 2018, by
and between ICON DP MD OWNER POOL 2 WEST/NORTHEAST/MIDWEST, LLC, a Delaware limited liability company (“Landlord”), and BIO-KEY
INTERNATIONAL, INC., a Delaware corporation (“Tenant”).
WITNESSETH:
WHEREAS, Landlord and Tenant are party to that certain Lease, dated as of May 4, 2009(the “Original Lease”), as amended by that certain First
Amendment to Lease Agreement, dated as of September 12, 2013 (the “First Amendment”, the “Lease”, as may be further amended or modified from time to
time), pursuant to which Landlord leases to Tenant certain premises consisting of approximately 5,544 rentable square feet with a common address of 1301
Corporate Center Drive, Suite 1160, Eagan, Minnesota 55121, as more particularly described in the Lease (the “Premises”), and located in the Project
commonly known as Eagandale Business Campus I. Capitalized terms used herein but not otherwise defined shall have the meanings ascribed thereto in the
Lease.
WHEREAS, the Term is scheduled to expire on August 31, 2018 and Landlord and Tenant desire to extend the Term for an additional twelve (12) full
calendar months from such expiration date and to amend the terms and conditions of the Lease as hereinafter provided.
AGREEMENT:
NOW, THEREFORE, in consideration of ten dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties, and the mutual covenants set forth herein, the parties hereto agree as follows:
1 . Extension of Term. The Term is hereby extended for a period of twelve (12) full calendar months, commencing as of September 1, 2018 (the
“Extended Term Commencement Date”) and expiring on August 31, 2019 (the “Extended Term”). From and after the date hereof, the “Term” shall be
deemed to include the Extended Term.
2 . Rent Schedule. Effective as of the Extended Term Commencement Date, the Annual Rent and Monthly Installment of Rent for the Premises
payable by Tenant to Landlord during the Extended Term is as follows:
Period
From
September 1, 2018
Through
August 31, 2019
Annual Rent
$40,194.00
Monthly
Installment of Rent
$3,349.50
Except as otherwise set forth in this Amendment, all other terms and conditions with respect to the payment of Monthly Installment of Rent,
Taxes, Expenses, or any other sums due and payable by Tenant under the Lease shall remain as set forth thereunder.
3 . AS-IS Condition. Tenant hereby acknowledges and agrees that it has accepted the Premises as of the date hereof, and will continue to accept
the Premises as of the Extended Term Commencement Date, in AS-IS, WHERE-IS condition without any representation or warranty of any kind made by
Landlord in favor of Tenant.
1
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4. Notice. Landlord’s Address as set forth on the Reference Pages of the Original Lease and as amended by Section 5 of the First Amendment are
hereby deleted in their entirety and replaced with the following:
Landlord:
c/o GLP US Management LLC
Two North Riverside Plaza, Suite 2350
Chicago, IL 60606
Attention: Lease Administration
With a copy to:
c/o GLP US Management LLC
50 Old Ivy, Suite 250
Atlanta, GA 30342
Attention: Regional Director
5. OFAC. Tenant hereby represents and warrants that, to the best of its knowledge, neither Tenant, nor any persons or entities holding any legal or
beneficial interest whatsoever in Tenant, are (i) the target of any sanctions program that is established by Executive Order of the President or published by the
Office of Foreign Assets Control, U.S. Department of the Treasury (“OFAC”); (ii) designated by the President or OFAC pursuant to the Trading with the Enemy
Act, 50 U.S.C. App. § 5, the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701-06, the Patriot Act, Public Law 107-56, Executive Order 13224
(September 23, 2001) or any Executive Order of the President issued pursuant to such statutes; or (iii) named on the following list that is published by OFAC:
“List of Specially Designated Nationals and Blocked Persons.” If the foregoing representation is untrue at any time during the Term, an Event of Default will be
deemed to have occurred, without the necessity of notice to the defaulting party.
6 . Tenant’s Broker. Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction and
that no broker, agent or other person brought about this transaction. Tenant agrees to indemnify and hold Landlord harmless from and against any claims by any
broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction.
7. No Offer. Submission of this Amendment by Landlord is not an offer to enter into this Amendment, but rather is a solicitation for such an offer by
Tenant. Landlord shall not be bound by this Amendment until Landlord and Tenant have fully executed and delivered this Amendment.
8 . Authority. Tenant represents and warrants to Landlord that Tenant has been and is qualified to do business in the state in which the Premises
is located, that the entity has the full right and authority to enter into this Amendment, and that all persons signing on behalf of the entity were authorized to do so
by appropriate actions.
9 . Severability. If any clause or provision of this Amendment is illegal, invalid or unenforceable under present or future laws, then and in that
event, it is the intention of the parties hereto that the remainder of this Amendment shall not be affected thereby. It is also the intention of the parties to this
Amendment that in lieu of each clause or provision of this Amendment that is illegal, invalid or unenforceable, there be added, as a part of this Amendment, a
clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable.
1 0 . Counterparts and Delivery . This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an
original, and all of such counterparts shall constitute one Amendment. Execution copies of this Amendment may be delivered by facsimile or email, and the
parties hereto agree to accept and be bound by facsimile signatures or scanned signatures transmitted via email hereto, which signatures shall be considered as
original signatures with the transmitted Amendment having the binding effect as an original signature on an original document. Notwithstanding the foregoing,
Tenant shall, upon Landlord’s request, deliver original copies of this Amendment to Landlord at the address set forth in such request. Neither party may raise the
use of a facsimile machine or scanned document or the fact that any signature was transmitted through the use of a facsimile machine or email as a defense to
the enforcement of this Amendment.
1 1 . Conflict; Ratification. Insofar as the specific terms and provisions of this Amendment purport to amend or modify or are in conflict with the
specific terms, provisions and exhibits of the Lease, the terms and provisions of this Amendment shall govern and control. Landlord and Tenant hereby agree
that (a) this Amendment is incorporated into and made a part of the Lease, (b) any and all references to the Lease hereinafter shall include this Amendment, and
(c) the Lease, and all terms, conditions and provisions of the Lease, are in full force and effect as of the date hereof, except as expressly modified and amended
hereinabove.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.]
2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly authorized, executed and delivered as of the day and year first set
forth above.
LANDLORD:
ICON DP MD OWNER POOL 2
WEST/NORTHEAST/MIDWEST, LLC,
a Delaware limited liability company
By: GLP US Management LLC,
a Delaware limited liability company,
as agent for Landlord
By:
Name:
Title:
TENANT:
BIO-KEY INTERNATIONAL, INC.,
a Delaware corporation
By
Name:Cecilia C. Welch
Title: CFO
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
FOURTH AMENDMENT TO LEASE
Exhibit 10.27
THIS FOURTH AMENDMENT TO LEASE (the “Fourth Amendment”) made this June ____, 2018, by and between MARLEN HOLDINGS, LLC with
an office at 555 Industrial Way East, Eatontown, NJ 07724 (“Landlord”), and BIO-KEY INTERNATIONAL INC. with an office at Allaire Office Park, Highway
138, Building A, Suite 102, Wall, New Jersey 07719 (hereinafter called “Tenant”).
WITNESSETH
WHEREAS, pursuant to that Lease dated June 2, 2004 as amended by the that First Amendment to Lease date August 2004, that Second Amendment
to Lease dated January 2009, and that Third Amendment to Lease dated June 2013 (the Lease and following three amendments being collectively referred to
herein as the “Lease”) Victor AOP, Inc. (successor in interest to Landlord) leased office space to Tenant comprised of 4,517 rentable square feet at Allaire Office
Park in Building A, Suite 102 pursuant to terms and conditions as more particularly described in the Lease; and
WHEREAS, Landlord and Tenant now wish to amend the Lease by this Fourth Amendment for the purposes of (i) extending the term of the Lease as
amended hereby with respect to the Premises for an additional term of five (5) years and (ii) implementing such other modifications to the Lease as are herein
agreed to;
NOW, THEREFORE, in consideration of the sum of Ten ($10.00) Dollars and other good and valuable consideration exchanged by Landlord and
Tenant, the receipt and sufficiency of which are hereby expressly acknowledged, it is AGREED as of the date hereof:
1 . Recitals; Defined Terms. The recitals set forth above shall be incorporated into the terms of this Fourth Amendment. For the purposes of this
Fourth Amendment, words and phrases used herein with initial capital case letters and not otherwise defined in this Fourth Amendment shall have the respective
meanings ascribed to them in the Lease.
2 . Demised Premises. The parties agree that Premises shall consist of 4,517 rentable square feet which is presently occupied by the Tenant. The
Landlord will provide the following improvements:
a)
b)
c)
d)
e)
f)
Paint offices where indicated on the floor plan attached hereto as Exhibit “A”,
Clean carpets where indicated on the floor plan attached hereto as Exhibit “A”;
Clean all windows and blinds;
Repair laminate on kitchen counter;
Repair kitchen sink pump;
Make good faith effort to balance climate control in the suite including the conference room.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Other than the above referenced improvements, Landlord shall not be required to make or cause any improvements to the Premises. Tenant acknowledges that
the Premises is suitable for the Permitted Use as stated in the Lease.
3 . Commencement Date/ Expiration Date. The parties hereby confirm the Lease without regard to this Fourth Amendment expires on August 31,
2018. The parties herein that the Lease shall now be extended for an additional five (5) years and the Commencement Date for the extended term shall be
September 1, 2018 and the Expiration Date thereof shall be August 31, 2023.
4. Base Rent. With respect to the Premises, Tenant shall pay Base Rent in accordance with the following”
Period
9/1/18-8/31/19
9/1/19-8/31/20
9/1/20-8/31/21
9/1/21-8/31/22
9/1/22-8/31/123
Annual
$118,932.61
Monthly
$9,911.05
$122,501.04
$10,208.42
$126,159.81
$10,513.32
$129,954.09
$133,838.71
$10,829.51
$11,153.23
Per Square Foot Rent
$26.33
$27.12
$27.93
$28.77
$29.63
5. Janitorial Services. Tenant shall be responsible for and pay directly for all janitorial service within the Premises.
6 . Brokerage. Landlord and Tenant agree that the only broker or real estate agent entitled to a commission in connection with this transaction is
Quinn & Paslawsky Commercial Realty Tenant shall indemnify and hold harmless Landlord against any claims judgments, expenses (including legal fees) and
costs against Landlord arising out of any assertion by any other broker or real estate agent other than Quinn & Paslawsky Commercial Realty. Landlord shall pay
Quinn & Paslawsky Commercial Realty a commission pursuant to a separate commission agreement.
7 . Continuation of Lease. Landlord and Tenant agree that, except as provided herein, nothing herein shall modify the terms and conditions of the
Lease with respect to the Premises and that all the other terms and conditions of the Lease shall apply to this Fourth Amendment. If any inconsistency exists or
arises between the terms of this Amendment and the terms of the Lease, the terms of this Amendment shall prevail. This Amendment shall be governed by the
laws of the State in which the Premises is located.
2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
8
. Ratification. Tenant hereby ratifies and confirms its obligations under the Lease, and represents and warrants to Landlord that it has no
defenses thereto. Additionally, Tenant further confirms and ratifies that, as of the date hereof, the Lease is and remains in good standing and in full force and
effect, and Tenant has no claims, counterclaims, set-offs or defenses against Landlord arising out of the Lease or in any way relating thereto or arising out of
any other transaction between Landlord and Tenant.
9 . Counterparts. This Amendment may be executed in multiple counterparts, each of which shall constitute an original, but all of which shall
constitute one document. A facsimile or email copy of a signature on this Amendment shall be binding as original.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Fourth Amendment the day and year first above written.
LANDLORD:
MARLEN HOLDINGS LLC
By:
Name
TENANT:
BIO-KEY INTERNATIONAL IN C.
By:
Name:
Title:
3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT “A”
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference into the registration statements of BIO-key International, Inc. on Form S-8 (file nos. 333-137414 and 333-
212066) and Form S-3 (file nos. 333-225934 and 333-227108) of our report dated April 1, 2019 relating to the financial statements which appear in this Form
10-K for the year ended December 31, 2018
Exhibit 23.1
ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
Saddle Brook, New Jersey
April 1, 2019
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31.1
CERTIFICATION
I, Michael W. DePasquale, certify that:
1. I have reviewed this annual report on Form 10-K of BIO-key International, Inc. (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most
recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the company’s internal control over financial reporting;
5. The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal
control over financial reporting.
Dated: April 1, 2019
/s/ Michael W. DePasquale
Michael W. DePasquale
Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31.2
CERTIFICATION
I, Cecilia C. Welch, certify that:
1. I have reviewed this annual report on Form 10-K of BIO-key International, Inc. (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most
recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the company’s internal control over financial reporting;
5. The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal
control over financial reporting.
Dated: April 1, 2019
/s/ CECILIA C. WELCH
Cecilia C. Welch
Chief Financial Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of BIO-key International, Inc. (the “Company”) on Form 10-K for the period ended December 31,
2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael W. DePasquale, Chief Executive Officer
of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
BIO-KEY INTERNATIONAL, INC.
By:
/s/ Michael W. DePasquale
Michael W. DePasquale
Chief Executive Officer
Dated: April 1, 2019
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of BIO-key International, Inc. (the “Company”) on Form 10-K for the period ended December 31,
2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Cecilia Welch, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, that to my
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations
of the Company.
BIO-KEY INTERNATIONAL, INC.
By:
/s/ CECILIA C. WELCH
Cecilia C. Welch
Chief Financial Officer
Dated: April 1, 2019
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.