SECURITIES & EXCHANGE COMMISSION EDGAR FILING
BIO KEY INTERNATIONAL INC
Form: 10-K
Date Filed: 2020-05-14
Corporate Issuer CIK: 1019034
© Copyright 2020, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the terms of use.
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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 9
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
Trading Symbol(s)
BKYI
Name of exchange on which registered
Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒ No ☐
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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 28, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s
common stock held by non-affiliates was approximately $8.2 million based upon the closing price for shares of the registrant’s common stock of $1.23 as
reported by the Nasdaq Stock Market on that date.
As of May 12, 2020, the registrant had 21,212,297 shares of common stock outstanding.
Certain sections of the registrant’s Proxy Statement for its 2020 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission,
are incorporated herein by reference in Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE:
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Table of Contents
PART I
Item 1.
Item 1A
Item 2
Item 3
Item 4
Business
Risk Factors
Description of Property
Legal Proceedings
Mine Safety Disclosures
PART II
TABLE OF CONTENTS
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 Accounting 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,”
“should,” “estimate,” “will,” “may,” “future,” “plan,” “intend” and “expect” and similar expressions generally identify forward-looking statements. Although we
believe our plans, intentions, assumptions and expectations reflected in the forward-looking statements are reasonable, we cannot be sure they will be achieved.
Additionally, the duration and severity of the current coronavirus COVID-19 pandemic and its effect on our business operations, sales cycles, personnel, and the
geographic markets in which we operate, and numerous other matters of national, regional and global scale, including those of a political, economic, business
and competitive nature could cause our actual results to be materially different than those expressed in our forward looking statements. We caution that it is very
difficult to predict the impact of known factors, it is impossible for us to anticipate all factors that could affect our actual results, and that actual results may differ
materially and adversely from the forward-looking statements contained herein due to a number of factors, including but not limited to those factors set forth
under the caption “Risk Factors” in Item 1A of this Annual Report and other filings with the Securities and Exchange Commission. These factors are not intended
to represent a complete list of the general or specific factors that may affect us. It should be recognized that other factors, including general economic factors and
business strategies, may be significant, presently or in the future. Except as required by law, we undertake no obligation to update any forward-looking
statement, whether as a result of new information, future events or otherwise.
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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 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.
We market and sell through distributors and directly to end users via Amazon, our SideSwipe®, EcoID® and SideTouch® finger readers which can be used
on any laptop, tablet or other device which contains a USB port.
We continue to develop advancements in our capabilities, as well as explore potential strategic relationships, including business combinations and
acquisitions, which could help us leverage our capability to deliver our solutions. To drive revenue we rely upon our inside and outside sales teams, and continue
to develop relationships with distributors, resellers, integrators, value added resellers (“VAR’s”), and technology partners. We’re building a growing network of
partners with substantial experience in selling technology solutions to government and corporate customers in their respective markets.
In 2020, we announced that we had secured two of the largest contracts in the Company’s history, with our partner Technology Transfer Institute (“TTI”).
The contracts, valued at a combined $75M, are for large-scale identification projects in Africa and Nigeria. These historic opportunities are expected to showcase
the Company’s ability to support large scale projects utilizing our core biometric authentication software engine, WEB-key®.
Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, and, in the following weeks, many U.S. states and
localities issued lockdown orders impacting our operations. Since then, the COVID-19 situation within the U.S. has rapidly escalated. The recent COVID-19
outbreak has caused us to migrate to a remote business model for our sales, marketing, administrative and executive teams. Research and development and
production are adjusting to the new landscape to maintain production as best as possible considering the conditions and regulations. We continue to monitor the
situation closely and it is possible that we will implement further measures. Since we qualify as an essential business in New Jersey because we serve the
healthcare industry, we have been able to access inventory to fulfill orders and ship products as required. The pandemic has extended sales cycles and delayed
deployments in most markets in which we operate, particularly in Africa which remains subject to shut-down and shelter at home orders. We continue to conduct
business daily and are actively closing transactions throughout the current climate, with no changes to personnel.
Overview
BIO-key is a leader in finger-based biometric identification and personal identity verification, as well as authentication-transaction security. Stand-alone, or in
partnerships with OEMs, integrators, and solution providers, we provide biometric security solutions to private and public sector customers. We help customers
reduce risk by providing the ability to control access to online assets. Our solutions positively identify individuals before granting access to corporate resources,
subscribed services, cloud services and other applications.
We also develop and distribute hardware components that are used in conjunction with our software and sell third-party hardware components with our
software in various configurations required by our customers. Our products are interoperable with all major fingerprint reader and hardware manufacturers,
enabling application developers, VAR’s, and channel partners to integrate our fingerprint biometrics into their applications, while dramatically reducing
maintenance, upgrade and life-cycle costs. Our core technology supports interoperability on over 40 different commercially available fingerprint readers and is
interoperable across Windows, Linux, and the Android mobile operating systems. This interoperability is unique in the industry, is a key differentiator for our
products in the biometric market and, in our opinion, makes our technology more viable than competing technologies and expands the size of the overall market
for our products.
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2018 saw the emergence of a few trends as customers in financial services and manufacturing began reaching out to us to add a layer of biometric sign-in to
their security infrastructure. Use cases included securing the online activity of roving users and shared workstations. Manufacturers turned to us to incorporate
workflow efficiencies such as replacing eSignature processes with biometric tracking and reducing the use of long sophisticated passwords with biometric sign-
in.
Late 2018, Lockheed Martin, a global government contractor, purchased SidePass and EcoID to secure employee access to the device and to leverage the
biometric authentication capabilities of Windows Hello – Windows Hello for Business.
Along with organizations that sought out our solutions to address compliance requirements for multifactor authentication, emerged a new area of opportunity
as state board of election organizations were funded to address key security concerns and biometric sign-in became a preferred solution.
In the second half of 2019, we modified our software licensing program to a software as a service (SaaS) model. By migrating to a SaaS billing model, we
open the door for more organizations to use our technology by lowering the cost of entry. Although we expect to sacrifice some short-term revenue, the SaaS
model is expected to generate more revenue than our former “perpetual billing method” which provided for an upfront payment for all licenses.
We approached CES 2019 as a critical proving ground for our TouchLock line of products. After expanding the product line and marketing the products on
Shopify and Amazon, we targeted CES 2019 as a crossroad to either continue to market TouchLock, or to discontinue the products to focus on the core
business. Upon returning from the event, our the executive team and our Board of Directors decided to exit the US consumer lock business.
In 2019, we entered into a sales incentive agreement with TTI to pursue market opportunities in the continent of Africa and compete for large-scale ID
products in Africa and the surrounding region. The World Bank announced that it has dedicated $443M in funds to support government ID, voter ID, SIM Card
registration programs throughout Africa and the surrounding countries. TTI has already secured $75M in contracts as of April, 2020. The COVID-19 pandemic
has delayed the timing of the rollout of the programs. We are continuing to monitor the effects of the pandemic and expect that we may experience further
delays.
In 2019, we won two significant international government law enforcement projects, one in Dubai and one in Singapore. Both organizations are using ID
Director for Windows along with BIO-key fingerprint scanners to secure internal access to files and applications.
With the upcoming election, and security being a concern, during 2019 we emerged as the preferred biometric authentication solution for certain election
offices in the Southeastern United states. Within the past twelve (12) months, we have completed projects with eight (8) county election offices to secure
internal access to the voter registration databases and additional state and county offices are evaluating our solutions. We anticipate the trend may continue to
grow both in number of offices supported and in geographic coverage.
Banking remains a primary focus as we added several banks and credit unions to our financial services footprint. During the first quarter of 2019, we
published and distributed a case study highlighting First National Bank of Long Island. Banks are finding ID Director for Windows and BIO-key scanners offer
secure cost-effective multifactor authentication, protecting internal access to customer data.
The U.S. Senate became a BIO-key customer when they ordered our fingerprint scanners to secure access to laptops, computers, and tablets. Several
offices within the White House have deployed our scanners as a way to secure the device and protect critical files and applications.
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.
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Our fingerprint identification algorithm, Vector Segment Technology (VST™), and WEB-key biometric service manager are the core intellectual property
behind our full suite of biometric products that include:
•
•
•
•
ID Director™— is a suite of solutions for integration with CA Technologies / Broadcom’s Single Sign-on solution, Oracle’s Fusion Middleware SSO, IBM
Tivoli Access Manager as well as ISAM and other solutions, utilizing the power and security of WEB-key. This solution provides a simple to implement,
custom authentication scheme for companies looking to enhance authentication. ID Director is designed to add a level of security and convenience to the
transaction level of any application. Versions of ID Director include:
•
•
•
ID Director for Windows provides enterprise customers the ability to implement and operate a biometric-centric multi-factor authentication (MFA)
solutions with their Microsoft Active Directory and Azure Cloud platforms.
ID Director for SAML allows for simplified integration with many applications and identity and access management (IAM) platforms, without coding,
including CA Technologies / Broadcom’s Single Sign-on, Oracle’s IDCS, IBM Tivoli Access Manager ESSO as well as Salesforce, SAP, and other
SAML-enabled solutions, leveraging the power and security of WEB-key into a growing set of end user authentication scenarios. This solution provides a
simple-to-implement, secure biometric authentication solution for companies looking to enhance authentication across many applications.
ID Director for EPIC adds BIO-key authentication to EPIC EHR environments, simplifying strong authentication for access, as well as meeting electronic
prescribing regulations for authentication.
Vector Segment Technology SDK (VST )—Our biometric software development kit (“SDK”) provides developers with the ability to incorporate our biometric
capabilities into their respective product offerings or infrastructure. VST is available as a low level SDK for incorporation into any application architecture to
increase security while not sacrificing convenience. VST runs on Windows and Linux as well as within WEB-key on iOS and Android systems.
Intelligent Image Indexing® —Our biometric identification solution offers both large-scale one-to-many and one-to-one user identification. This solution
enables customers to perform false alias and fast entry checks, including preventing fraudulent access to systems and privileges. Intelligent image indexing
scales identification capabilities from thousands to millions of users. The solution runs on commercially available hardware making it scalable for any size
system.
Biometric Service Provider—We provide support for the BioAPI (a standards-based solution meeting worldwide needs) for a compliant interface to
applications using biometrics for verification and identification. We enhance the traditional use of BioAPI by adding 64-bit support and other advanced
features, supporting identification calls and also providing a single user interface for multiple fingerprint readers.
We also offer a full line of easy to use finger scanners for both enterprise and consumer markets. Our SideSwipe, SideTouch and EcoID scanners are plug
and play compatible with Microsoft Windows and our Q-180 Touch reader is a Micro USB compatible fingerprint reader for Android devices. The readers are
currently sold in the Microsoft stores, as well as through their on-line channel, on Amazon, and through our website.
In 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 (PnP) compatible with the Microsoft platforms. We have been the preferred partner, in particular at the Microsoft
“Ignite your Business” Windows 10 and Office 2016 launch events.
In 2018, we continued to invest and grow our relationship with Microsoft. The 2018 Ignite your Business event included Microsoft hosting an exclusive BIO-
key demonstration kiosk within their event showcase.
In 2018, we also introduced OmniPass Consumer, a secure biometric-enabled application to manage multiple passwords for online apps, services or
accounts.
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Authentication Transaction Security
Our authentication-transaction security technology, WEB-key®, provides the ability to conduct identification and identity verification transactions in potentially
unsecure environments, including the World Wide Web or in off-site cloud environments.
WEB-key® makes cloud-based biometric user-authentication viable and eliminates technology constraints on online service providers, who are otherwise
dependent on handset provider hardware and software platform decisions. It extends all features and functionalities of the VST algorithm to customers looking to
add an enhanced level of security to their thin client and client/server applications. Both Windows and Linux operating systems currently support WEB-key®.
Clients are available on Windows and Android operating systems.
Intellectual Property Rights
We develop and own significant intellectual property and believe that our intellectual property is fundamental to our biometric operation:
Patents
We own patented technologies and trade secrets developed or acquired by us.
In May 2005, the U.S. Patent & Trademark Office issued patent 6,895,104 for our Vector Segment fingerprint technology (VST), our core biometric analysis
and identification technology. With the payment of all maintenance fees, this patent will expire on March 4, 2023.
On October 3, 2006, we announced that our patent for a biometric authentication security framework had been granted by the U.S. Patent & Trademark
Office. The patent No. 7,117,356 was issued to us for a biometric authentication security framework that enhances commercial and civil biometric use. Our
authentication security framework protects privacy and security of cloud or network-based authentications while also facilitates ease of use of biometric systems.
The technology that this patent is based on is the foundation for the authentication security incorporated in our WEB-key product line. WEB-key is a mature
enterprise authentication solution that functions in a wide variety of application environments. The solution supports a variety of implementation alternatives
including card technologies for “two-factor” authentication and also supports “single-factor” authentication. Partners and customers implementing our WEB-key
software to provide convenient and secure user identity include a number of institutions including the Allscripts Healthcare Solutions, Computer Associates Site
Minder, Oracle Access Manager and many other enterprise and solutions-based systems. With the payment of all maintenance fees, this patent will expire on
May 20, 2023.
On December 26, 2006, we were issued US patent No. 7,155,040 covering our unique image processing technology, which is critical for enhancing
information used in the extraction of biometric minutiae. The issued patent protects a critical part of an innovative four-phase image enhancement process
developed by us. With the payment of all maintenance fees, this patent will expire on January 29, 2025.
On April 15, 2008, we were issued US patent No. 7,359,553 covering our image enhancement and data extraction core algorithm components. The solution
protected under this patent provides the capability to quickly and accurately transform a fingerprint image into a computer image that can be analyzed to
determine the critical data elements. With the payment of all maintenance fees, this patent will expire on January 3, 2025.
On August 19, 2008, we were issued US patent No. 7,415,605 for our “Biometric Identification Network Security” method. The solution protected under this
patent provides a defense against hackers and system attacks, while leveraging the industry standard Trusted Platform Module (TPM) specification for
encryption key management. With the payment of all maintenance fees, this patent will expire on May 20, 2023.
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.
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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.
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 FingerQ name, together with perpetual license
under all related patents held by the licensors and any other intellectual property rights owned by the licensors related to the forgoing software. This portfolio
includes 16 patents focused on, among other things, mobile payment systems and mobile payment methods based on biometric authentication as well finger
print authentication systems and a finger print authentication method based on near field communication (“NFC”). The license agreement grants us the exclusive
right to reproduce, create derivative works and distribute copies of the FingerQ software and documentation, create new FingerQ related products, and grant
sublicenses of the licensed technology to end users. In addition, in the event the licensors make any derivatives or improvement in the FingerQ software or make
any product or service that may compete with or which includes functionality similar to the FingerQ technology, they are required to license such derivative,
improvement, product or service to us on the terms set forth in the license agreement at no additional charge. The license arrangement also allows us to create
new, innovative solutions to address the growing demand for secure mobile transactions. However, since we have not been able to generate the expected
revenue from this agreement, we have written off the balance of the FingerQ resalable software license rights.
Trademarks
We have registered our trademarks “BIO-key”, “True User Identification”, “Intelligent Image Indexing”, “WEB-key”, “SideSwipe, “EcoID” and “The Biometric of
Things” (application pending) with the U.S. Patent & Trademark Office, as well as many foreign countries, protecting our companies name and key technology
offering names.
Copyrights and trade secrets
We take measures to ensure copyright and license protection for our software releases prior to distribution. When possible, the software is licensed in an
attempt to ensure that only licensed and activated software functions to its full potential. We also take measures to protect the confidentiality of our trade secrets.
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Markets
Identity Management, User Authentication, Privilege Entitlement and Access Control
Our products simplify the authentication process for enterprise users and consumers, while raising security to the highest levels of assurance. This allows
our customers to meet new, stronger authentication requirements and security best practices across many industries, while delivering a superior end-user
experience. Customers use our products to reduce risk of theft, fraud, loss, account takeover attacks, and unauthorized account sharing by limiting access to
valuable assets, privileges, data, services, networks and places to only authorized individuals. Our products provide stronger identity binding and a superior user
experience versus traditional credentialing systems, which utilize a physical or knowledge-based electronic credential to authenticate the holder, but fail to
authenticate the actual user in addition to the token. Nearly every enterprise and public sector has seen a shift in the requirement for stronger authentication, and
both NIST and industry thought leaders such as Microsoft have encouraged entities to enhance their security posture by implementing stronger 2-factor (2FA) or
multi-factor authentication (MFA). Our products help organizations to meet their strong authentication goals, with a sign in process that end users prefer. In our
opinion, the market for advanced user authentication, including fingerprint biometrics, extends to nearly every industry segment. We believe the market
opportunity for our products is massive, global and growing.
Historically, our largest market has been access control within highly regulated industries like government and healthcare. However, we are witnessing a
change in the landscape as organizations within all industries and of all sizes are embracing biometric technology as a security and workflow solution.
Championed by the millions of users that have been successfully introduced to biometrics by companies such as Apple and Samsung, today’s users have
witnessed the security and convenience benefits of biometric technology.
Upon introducing a series of compact fingerprint readers, we saw an immediate increase in inquiries from both large commercial companies seeking an
alternative to passwords, and from consumers recognizing that they could use SideSwipe or EcoID to replace their Windows password.
In October 2015, we established BIO-key Hong Kong for purposes of establishing relationships and conducting business is the Asia Pacific Region. Through
our Hong Kong subsidiary, we support the growing demand for secure identification and authentication in the region.
We believe there is potential for significant market growth in the following key areas:
•
•
Corporate network access control, corporate campuses, computer networks, and applications.
Large scale identification projects, especially in Africa and the surrounding regions.
• Government funded initiatives, including with the state board of elections.
•
International law enforcement use case applications as prospects see us as a global leader in the biometric technology space as witnessed by our
agreement with the Israeli Defense Force, and the Singapore and Dubai Police departments.
• Consumer mobile credentialing, including mobile payments, credit and payment card programs, data and application access, and commercial loyalty
programs.
• Demand for BIO-key hardware products from Windows 10 users and Fortune 500 companies.
• Government services and highly regulated industries including, Medicare, Medicaid, Social Security, Drivers Licenses, Campus and School ID,
Passports/Visas.
• Continued growth in the Asia Pacific region.
• New remote authentication challenges – which our solutions are ideally suited to address.
•
New opportunity to market our remote security solutions, spurred on because of the COVID-19 outbreak.
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Business Model
Our business model for 2020 and beyond is focused on the following key areas:
Market
Drivers
The current climate of broad enterprise adoption of MFA to replace passwords, an ongoing upgrade cycle of Microsoft Windows 10, and
accompanying moves to Windows Hello for Business, all present broad opportunities for our products to leverage our unique differentiators
and exploit the gaps left in existing technology approach.
There are gaps in the existing IAM solution space that provide the opportunity for us to demonstrate the unique business value of our
solutions. One of those gaps is the challenge of authenticating users that “rove” among workstations. A second gap is preventing
unauthorized account sharing. These gaps represent soft entry points to gain market share by highlighting known shortcomings of the
status quo IAM approach.
We will continue to prioritize securing agreements with OEM customers. The history of success supporting NCR, Omnicell, and LexisNexis
provides an established footprint that we intend to build upon. As OEM customers embed our solutions within their products, the customer
benefits from the enhanced security and workflow. OEM customers ordering patterns are more predictable and OEM customers generally
require lower service and support resourcing. In 2019, we continued to meet with potential partners, constantly seeking that ideal synergistic
partner relationship.
Government ID projects and Healthcare organizations, including hospitals, clinics, and small private practices present a strong opportunity
for BIO-key. In healthcare, we anticipate that patient identification will emerge as a highly regulated requirement for all healthcare
organizations and we are developing our software to accommodate this need. Additionally, the financial services footprint of banking and
credit union customers has grown substantially.
In 2019, we took major steps to upgrade our partner program. We hired dedicated resources and announced the launch of a new incentive
laden Channel Alliance Partner program (CAP). The new CAP program provides VAR’s, Integrators, and Resellers with pricing and
promotional incentives. The result to date has been the addition of 20+ new partners and we are committed to growing this program
aggressively in 2020.
We remain a Microsoft Partner and our line of compact fingerprint scanners have been tested and qualified by Microsoft to support Windows
Hello and Windows Hello for Business. We continue to attend Microsoft’s premier IT event, Ignite your Business, which has become a
source for generating leads.
Hardware products generated 40% of the Company’s revenue in 2019. EcoID has emerged as our most popular scanner for enterprise
deployments. For customers that require the highest level of security, PIV-Pro is a FIPS complaint fingerprint scanner, suitable for highly
regulated industries and organizations that want a best-in-class solution.
OEM
Customers
Highly
Regulated
Industries
Partner
Model
Microsoft
Partnership
Hardware
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 need to continue to upgrade and refine our existing technologies as new standards become
relevant to our customers and markets.
We have also licensed mobile platform software from CGG which we have integrated with our core WEB-key offerings and introduced to the Asian markets
in 2016. During the years ended December 31, 2019 and 2018, we spent $1,331,667 and $1,415,401, respectively, on research and development.
Moving forward, much of our R&D focus will remain on updating and advancing our core software products including WEB-key and VST. These products are
critical to support the anticipated growth in large-scale ID projects.
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.
We have also seen “keys” disrupt the market, led by Yubico’s YubiKey a USB key that stores and protects the user’s passwords. Keys do not offer the
security benefits of biometric technology as they can be easily lost or stolen and replacement costs / managing the product becomes a growing expense.
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With respect to competing biometrics technologies, each has its strengths and weaknesses and none has emerged as a market leader:
• Fingerprint identification is generally viewed as very accurate, inexpensive and non-intrusive and is the dominant biometric in use today and will be for the
foreseeable future;
• Palm Vein scanning is expensive, technique-sensitive, and offers mobility challenges;
• Iris scanning is viewed as accurate, but the hardware is significantly more expensive; and
• Facial recognition can have accuracy 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 May 11, 2020, we employed fifteen individuals on a full-time basis as follows: (i) six in engineering, customer support, research and development; (ii)
three in finance and administration; and (iii) six 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 two individuals on a full-time basis as follows: (i) one in research and development, and (ii)
one in finance and administration. We also use the services of two factory contractors (full-time) in China.
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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, 2019 as to the substantial doubt about our ability to continue as a going concern. Our financial
statements have been prepared in accordance with accounting principles generally accepted in the United States, which contemplate that we will continue to
operate as a going concern. Our financial statements do not contain any adjustments that might result if we are unable to continue as a going concern.
Since our formation, we have historically not generated significant revenue and have sustained substantial operating losses.
As of December 31, 2019, we had an accumulated deficit of approximately $90 million. In order to increase revenue, we have developed a direct sales force
and anticipate the need to retain additional sales, marketing and technical support personnel and may need to incur substantial expenses. We cannot assure you
that we will be able to secure these necessary resources, that a significant market for our technologies will develop, or that we will be able to achieve our
targeted revenue. If we are unable to achieve revenue or raise capital sufficient to cover our ongoing operating expenses, we will be required to scale back
operations, including marketing and research initiatives, or in the extreme case, discontinue operations.
Our biometric technology has yet to gain widespread market acceptance and we do not know how large of a market will develop for our technology.
Biometric technology has received only limited market acceptance, particularly in the private sector. Our technology represents a novel security solution and
we have not yet generated significant sales. Although recent security concerns relating to identification of individuals and appearance of biometric readers on
popular consumer products, including the Apple iPhone, have increased interest in biometrics generally, it remains an undeveloped, evolving market. Biometric
based solutions compete with more traditional security methods including keys, cards, personal identification numbers and security personnel. Acceptance of
biometrics as an alternative to such traditional methods depends upon a number of factors including:
•
•
national or international events which may affect the need for or interest in biometric solutions;
the performance and reliability of biometric solutions;
• marketing efforts and publicity regarding these solutions;
•
•
•
•
public perception regarding privacy concerns;
costs involved in adopting and integrating biometric solutions;
proposed or enacted legislation related to privacy of information; and
competition from non-biometric technologies that provide more affordable, but less robust, authentication (such as tokens and smart cards).
For these reasons, we are uncertain whether our biometric technology will gain widespread acceptance in any commercial markets or that demand will be
sufficient to create a market large enough to produce significant revenue or earnings. Our future success depends, in part, upon business customers adopting
biometrics generally, and our solution specifically.
Biometric technology is a new approach to Internet security, which must be accepted in order for our WEB-key solution to generate significant
revenue.
Our WEB-key authentication initiative represents a new approach to Internet security, which has been adopted on a limited basis by companies that
distribute goods, content or software applications over the Internet. The implementation of our WEB-key solution requires the distribution and use of a finger
scanning device and integration of database and server side software. Although we believe our solutions provide a higher level of security for information
transmitted over the Internet than existing traditional methods, unless business and consumer markets embrace the use of a scanning device and believe the
benefits of increased accuracy outweigh implementation costs, our solution will not gain market acceptance.
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The market for our solutions is still developing and if the biometrics industry adopts standards or a platform different from our standards or
platform, our competitive position would be negatively affected.
The market for identity solutions is still developing. The evolution of this market may result in the development of different technologies and industry
standards that are not compatible with our current solutions, products or technologies. Several organizations set standards for biometrics to be used in
identification and documentation. Although we believe that our biometric technologies comply with existing standards, these standards may change and any
standards adopted could prove disadvantageous to or incompatible with our business model and current or future solutions, products and services.
Our software products 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 (OEMs), system integrators and application developers which develop and market products and applications which
can then be sold to end users; and
•
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 and expect material revenues from Africa beginning in 2020. Our financial performance will
be subject to risks associated with changes in the value of the U.S. dollar versus local currencies.
Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales and operating expenses worldwide.
Weakening of foreign currencies relative to the U.S. dollar will adversely affect the U.S. dollar value of our foreign currency-denominated sales and earnings, if
any, and could lead to us raising international pricing, potentially reducing the demand for our products. In addition, margins on sales of our products in foreign
countries and on sales of products that include components obtained from foreign suppliers could be materially adversely affected by foreign currency exchange
rate fluctuations.
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Although we have made significant sales of our products throughout Asia and Africa, we have not been able to consistently enforce our contract
rights and collect all receivables which has resulted in material write-offs.
In June 2015, we made a license sale in Africa for approximately $2.1 million, of which approximately $1.7 million remains unpaid. In December 2018, we
made a license sale in Asia for approximately $1.1 million, of which approximately $0.5 million remains unpaid. These amounts have been written off in full
which has negatively impacted our financial position and results of operation.
Our ability to enforce our international contracts is contingent on our relationships with foreign resellers, and their financial viability. Although we are making
efforts to better enforce our contract rights, there can be no assurance that we will be able to fully collect all receivables originating in Asia and Africa or that will
not have to write-off future receivable which may be material in amount. Any such write-offs will negatively impact our financial position and results of operation.
We depend on key employees and members of our management team, including our Chairman of the Board and Chief Executive Officer and our
Chief Technology Officer, in order to achieve our goals. We cannot assure you that we will be able to retain or attract such persons.
Our employment contracts with Michael W. DePasquale, our Chairman of the Board and Chief Executive Officer, and Mira LaCous, our Chief Technology
Officer, expire annually, and renew automatically for successive one year periods unless notice of non-renewal is provided by the Company. Although the
contracts do not prevent them from resigning, they do contain confidentiality and non-compete clauses, which are intended to prevent them from working for a
competitor within one year after leaving our Company. Our success depends on our ability to attract, train and retain employees with expertise in developing,
marketing and selling software solutions. In order to successfully market our technology, we will need to retain additional engineering, technical support and
marketing personnel. The market for such persons remains highly competitive and our limited financial resources will make it more difficult for us to recruit and
retain qualified persons.
We cannot assure you that the intellectual property protection for our core technology provides a sustainable competitive advantage or barrier to
entry against our competitors.
Our success and ability to compete is dependent in part upon proprietary rights to our technology. We rely primarily on a combination of patent, copyright
and trademark laws, trade secrets and technical measures to protect our propriety rights. We have filed a patent application relating to both the optic technology
and biometrics solution components of our technology wherein several claims have been allowed. The U.S. Patent and Trademark Office has issued us a series
of patents for our Vector Segment fingerprint technology (VST), and our other core biometric analysis and identification technologies. However, we cannot
assure you that we will be able to adequately protect our technology or other intellectual property from misappropriation in the U.S. and abroad. Any patent
issued to us could be challenged, invalidated or circumvented or rights granted thereunder may not provide a competitive advantage to us. Furthermore, patent
applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite
our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and
other rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property rights on a worldwide basis in a cost-effective manner. In
jurisdictions where foreign laws provide less intellectual property protection than afforded in the U.S. and abroad, our technology or other intellectual property
may be compromised, and our business would be materially adversely affected. If any of our proprietary rights are misappropriated or we are forced to defend
our intellectual property rights, we will have to incur substantial costs. Such litigation could result in substantial costs and diversion of our resources, including
diverting the time and effort of our senior management, and could disrupt our business, as well as have a material adverse effect on our business, prospects,
financial condition and results of operations. We can provide no assurance that we will have the financial resources to oppose any actual or threatened
infringement by any third party. Furthermore, any patent or copyrights that we may be granted may be held by a court to infringe on the intellectual property
rights of others and subject us to the payment of damage awards.
We may be subject to claims with respect to the infringement of intellectual property rights of others, which could result in substantial costs and
diversion of our financial and management resources.
Third parties may claim that we are infringing on their intellectual property rights. We may violate the rights of others without our knowledge. We may expose
ourselves to additional liability if we agree to indemnify our customers against third party infringement claims. While we know of no basis for any claims of this
type, the existence of and ownership of intellectual property can be difficult to verify and we have not made an exhaustive search of all patent filings. Additionally,
most patent applications are kept confidential for twelve to eighteen months, or longer, and we would not be aware of potentially conflicting claims that they
make. We may become subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our
business. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, and we may incur
licensing fees or be forced to develop alternative technology or obtain other licenses. In addition, we may incur substantial expenses in defending against these
third party infringement claims and be diverted from devoting time to our business and operational issues, regardless of the merits of any such claim.
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In addition, in the event that we recruit employees from other technology companies, including certain potential competitors, and these employees are
engaged in the development of portions of products which are similar to the development in which they were involved at their former employers, we may become
subject to claims that such employees have improperly used or disclosed trade secrets or other proprietary information. If any such claims were to arise in the
future, litigation or other dispute resolution procedures might be necessary to retain our ability to offer our current and future services, which could result in
substantial costs and diversion of our financial and management resources. Successful infringement or licensing claims against us may result in substantial
monetary damages, which may materially disrupt the conduct of our business and have a material adverse effect on our reputation, business, financial condition
and results of operations. Even if intellectual property claims brought against us are without merit, they could result in costly and time consuming litigation, and
may divert our management and key personnel from operating our business.
If we are unable to effectively protect our intellectual property rights on a worldwide basis, we may not be successful in the international
expansion of our business.
Access to worldwide markets depends in part on the strength of our intellectual property portfolio. There can be no assurance that, as our business expands
into new areas, we will be able to independently develop the technology, software or know-how necessary to conduct our business or that we can do so without
infringing the intellectual property rights of others. To the extent that we have to rely on licensed technology from others, there can be no assurance that we will
be able to obtain licenses at all or on terms we consider reasonable. The lack of a necessary license could expose us to claims for damages and/or injunction
from third parties, as well as claims for indemnification by our customers in instances where we have a contractual or other legal obligation to indemnify them
against damages resulting from infringement claims. With regard to our own intellectual property, we actively enforce and protect our rights. However, there can
be no assurance that our efforts will be adequate to prevent the misappropriation or improper use of our protected technology in international markets.
We face inherent product liability or other liability risks that could result in large claims against us.
We have inherent risk of exposure to product liability and other liability claims resulting from the use of our products, especially to the extent customers may
depend on our products in public safety situations that may involve physical harm or even death to individuals, as well as exposure to potential loss or damage to
property. Despite quality control systems and inspection, there remains an ever-present risk of an accident resulting from a faulty manufacture or maintenance of
products, or an act of an agent outside of our or our supplier’s control. Even if our products perform properly, we may become subject to claims and costly
litigation due to the catastrophic nature of the potential injury and loss. A product liability claim, or other legal claims based on theories including personal injury
or wrongful death, made against us could adversely affect operations and financial condition. Although we may have insurance to cover product liability claims,
the amount of coverage may not be sufficient.
We expect that we will need to obtain additional financing to execute our business plan over the long-term, which may not be available. If we are
unable to raise additional capital or generate significant revenue, we may not be able to continue operations.
We have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred
stock, common stock, and through factoring receivables. We currently require approximately $525,000 per month to conduct our operations, a monthly amount
that we have been unable to consistently achieve through revenue generation. During 2019, we generated approximately $2,268,000 of revenue, which is below
our average monthly requirements. If we are unable to generate sufficient revenue to cover operating expenses and fund our business plan, we will need to
obtain additional third-party financing to (i) conduct the sales, marketing and technical support necessary to execute our plan to substantially grow operations,
increase revenue and serve a significant customer base; and (ii) provide working capital. We may, therefore, need to obtain additional financing through the
issuance of debt or equity securities. We cannot assure you that we will be able to secure any such additional financing on terms acceptable to us or at all. If we
cannot obtain such financing, we will not be able to execute our business plan, will be required to reduce operating expenses, and in the extreme case,
discontinue operations.
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.
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If we fail to adequately manage our resources, it could have a severe negative impact on our financial results or stock price.
We could be subject to fluctuations in technology spending by existing and potential customers. Accordingly, we will have to actively manage expenses in a
rapidly changing economic environment. This could require reducing costs during economic downturns and selectively growing in periods of economic
expansion. If we do not properly manage our resources in response to these conditions, our results of operations could be negatively impacted.
The recent outbreak of COVID-19 has and may continue to have a negative impact on our business, sales, results of operations and financial
condition.
The global outbreak of COVID-19 has led to severe disruptions in general economic activities, particularly retail operations and travel, as businesses and
federal, state, and local governments take increasingly broad actions to mitigate this public health crisis. Individually and collectively, the consequences of the
COVID-19 outbreak could have a material adverse effect on our business, sales, results of operations and financial condition. Although our employees have
been accustomed to working remotely prior to the COVID-19 pandemic, the uncertainty has extended sales cycles, extended payment terms, impacted access
to inventory overseas, and delayed the start of planned deployments, particularly in the continent of Africa which remains subject to shut-down and shelter at
home orders.
Additionally, our liquidity could be negatively impacted if these conditions continue for a significant period of time and we may be required to pursue
additional sources of financing to obtain working capital, maintain appropriate inventory levels, and meet our financial obligations. Currently capital and credit
markets have been disrupted by the crisis and our ability to obtain any required financing is not guaranteed and largely dependent upon evolving market
conditions and other factors. Depending on the continued impact of the crisis, further actions may be required.
The extent to which the COVID-19 outbreak ultimately impacts our business, sales, results of operations and financial condition will depend on future
developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions
to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19
outbreak has subsided, we may continue to experience significant impacts to our business as a result of its global economic impact, including any economic
downturn or recession that has occurred or may occur in the future.
We have taken measures to minimize the health risks of COVID-19 to our employees, as their safety and well-being are a top priority. Despite these efforts,
there is a risk that one or more of our employees, including members of senior management, could contract COVID-19. Our U.S. employees are working
remotely when possible, and we may experience reduced productivity due to the remote work environment. The extent to which COVID-19 impacts our business,
sales and results of operations will depend on future developments, which are highly uncertain and cannot be predicted.
War, terrorism, other acts of violence or natural or manmade disasters such as a global pandemic may affect the markets in which the Company
operates, the Company’s customers, the Company’s delivery of products and customer service, and could have a material adverse impact on our
business, results of operations, or financial condition.
Our business may be adversely affected by instability, disruption or destruction in a geographic region in which we operate, regardless of cause, including
war, terrorism, riot, civil insurrection or social unrest, and natural or manmade disasters, including famine, food, fire, earthquake, storm or pandemic events and
spread of COVID-19, described above.
Such events may cause customers to suspend their decisions on using our products and services, make it difficult or impossible to access some of our
inventory, and give rise to sudden significant changes in regional and global economic conditions and cycles that could interfere with purchases of goods or
services. These events also pose significant risks to the our personnel and to physical facilities which could materially adversely affect our financial results.
Our business could be negatively impacted by security threats, including cybersecurity threats, ransomware, and other disruptions.
As a technology company, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information. Although
we utilize various procedures and controls to monitor these threats and mitigate our exposure to such threats, there can be no assurance that these procedures
and controls will be sufficient in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of sensitive
information, critical infrastructure, personnel or capabilities, essential to our operations and could have a material adverse effect on our reputation, financial
position, results of operations, or cash flows.
Cybersecurity attacks in particular are evolving and include but are not limited to, malicious software, attempts to gain unauthorized access to data, and other
electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and
corruption of data. Although we have implemented systems and procedures that are designed to protect customer, employee, vendor and Company information,
prevent data loss and other security breaches, and otherwise identify, assess, and analyze cybersecurity risks, these measures may not be effective.
Development and maintenance of these systems is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security
measures increase and become more sophisticated. We face an evolving threat landscape in which cybercriminals, among others, employ a complex array of
techniques designed to access personal data and other information, including, for example, the use of fraudulent or stolen access credentials, malware,
ransomware, phishing, denial of service and other types of attacks. While, to the best of our knowledge, we have not experienced any material misappropriation,
loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a security breach or cyber attack that could materially
increase financial risk to the Company or our customers, such a security breach or cyber attack could adversely affect our business and operations, including by
damaging our reputation and our relationships with our customers, employees and investors, exposing us to litigation, fines, penalties or remediation costs.
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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 9,300,000 shares of our common stock were reserved for issuance upon exercise or conversion of outstanding
stock options, warrants, and convertible notes. 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 September 2019, covered the public resale of 2,040,000 shares of our common
stock underlying a convertible note and 2,000,000 shares underlying warrants which we issued in a July 2019 private offering. In the first quarter of 2020, we
amended the convertible note to reduce the conversion price to $0.65 per share which increased the number of shares issuable upon conversion of the note. As
of the date of this report, approximately 5,000,000 shares have been converted under the note In addition, on May 6, 2020, we issued a convertible note and
warrants convertible and exercisable, respectively, into approximately 3,900,000 shares of common stock. We have agreed to register the public resale of these
shares which represent approximately 19% 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.
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.
In September 2019, we received a letter from the Nasdaq stating that our share price had not satisfied the continued listing requirement to maintain a
minimum bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2). We were not able to regain compliance during the 180-day period
following the letter, and have provided a written notice to the Nasdaq stating that it is our intention to regain compliance during the second 180-day period. On
April 20, 2020, the Company received notice from the Listing Qualifications Department of The Nasdaq Capital Market that the grace period to regain
compliance with the continued listing standard set forth in Rule 5550(a)(2) of the Nasdaq Listing Rules (the “Minimum Bid Price Requirement”) has been
extended due to the global market impact caused by COVID-19. More specifically, Nasdaq has stated that the compliance periods for any company previously
notified about non-compliance with the Minimum Bid Price Requirement will be suspended effective April 16, 2020, until June 30, 2020. On July 1, 2020,
companies will receive the balance of any pending compliance period in effect on April 16, 2020 to come back into compliance with the applicable Minimum Bid
Price Requirement. As a result of this extension, we now has until December 4, 2020, to regain compliance with the Minimum Bid Price Requirement.
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We expect 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 concentrated which will limit your ability to influence corporate matters.
Our directors, officers and principal stockholders, beneficially own approximately 36% of our common stock and will continue to have significant influence
over the outcome of all matters submitted to the stockholders for approval, including the election of our directors and approval of significant corporate
transactions. This concentration of ownership will limit your ability to influence corporate matters, and as a result, actions may be taken that you may not view as
beneficial.
Provisions of our certificate of incorporation, bylaws and Delaware law may make a contested takeover of our Company more difficult.
Certain provisions of our certificate of incorporation, bylaws and the General Corporation Law of the State of Delaware (“DGCL”) could deter a change in our
management or render more difficult an attempt to obtain control of us, even if such a proposal is favored by a majority of our stockholders. For example, we are
subject to the provisions of the DGCL that prohibit a public Delaware corporation from engaging in a broad range of business combinations with a person who,
together with affiliates and associates, owns 15% or more of the corporation’s outstanding voting shares (an “interested stockholder”) for three years after the
person became an interested stockholder, unless the business combination is approved in a prescribed manner. Our certificate of incorporation also includes
undesignated preferred stock, which may enable our board of directors to discourage an attempt to obtain control of us by means of a tender offer, proxy contest,
merger or otherwise. Finally, our bylaws include an advance notice procedure for stockholders to nominate directors or submit proposals at a stockholders
meeting. Delaware law and our charter may, therefore, inhibit a takeover.
The trading price of our common stock may be volatile.
The trading price of our shares has from time to time fluctuated widely and in the future may be subject to similar fluctuations. The trading price may be
affected by a number of factors including the risk factors set forth in this prospectus as well as our operating results, financial condition, announcements of
innovations or new products by us or our competitors, general conditions in the biometrics and access control industries, and other events or factors. We cannot
assure you that any of the broker-dealers that currently make a market in our common stock will continue to serve as market makers or have the financial
capability to stabilize or support our common stock. A reduction in the number of market makers or the financial capability of any of these market makers could
also result in a decrease in the trading volume of and price of our shares. In recent years broad stock market indices, in general, and the securities of technology
companies, in particular, have experienced substantial price fluctuations. Such broad market fluctuations may adversely affect the future-trading price of our
common stock.
ITEM 2. DESCRIPTION OF PROPERTY
We do not own any real estate. We conduct operations from leased premises in Eagan, Minnesota (5,544 square feet), 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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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock currently trades on the Nasdaq Capital Market under the symbol “BKYI”.
Holders
As of May 11, 2020, the number of stockholders of record of our common stock was 55.
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.
Securities Authorized for Issuance under Equity Compensation Plans
The information concerning our equity compensation plans is incorporated by reference from information contained under the section “Equity Compensation
Plans” in our Proxy Statement for the 2020 Annual Meeting of Stockholders.
Unregistered Sales of Equity Securities
There were no unregistered sales of the Company’s equity securities during 2019 that were not previously disclosed in a Quarterly Report on Form 10-Q or
in a Current Report on Form 8-K.
Rule 10B-18 Transactions
None.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
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 forms 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 customers in every sector of our economy including
government, financial services, education, manufacturing, retail, and call centers.
We provide the ability to positively identify and authenticate individuals before granting access to valuable corporate resources, web portals or applications in
seconds. Powered by our patented Vector Segment Technology (VST), WEB-key and BSP development kits are fingerprint biometric solutions that provide
interoperability with dozens of reader manufacturers, enabling application developers and integrators to integrate fingerprint biometrics into their applications.
Our biometric identification technology improves both the accuracy and speed of screening individuals, for identification purposes or for personal identity
verification, by extracting unique data from a fingerprint and comparing it to existing similar fingerprint data. The technology has been built to be scalable and to
handle databases containing millions of fingerprints. We achieve the highest levels of discrimination without requiring any other identifying data (multi-factor)
such as a user ID, smart cards, 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.
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Our WEB-key solution is a client server suite that can be integrated into virtually any application, whether web based or desktop application based on
Windows. The WEB-key solution is a security solution that protects the biometric data in processing, transmission and storage. WEB-key provides a turn-key
solution for biometric as well as multi-factor authentication across an enterprise, government system or any user population.
We also develop and 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 major fingerprint reader and hardware manufacturers,
supporting Windows, Linux, Mac OS X, and Android operating systems enabling application developers, value added resellers, and channel partners to integrate
our fingerprint biometrics into their applications, while dramatically reducing maintenance, upgrade and life-cycle costs. This interoperability is unique in the
industry, and a key differentiator for our products in the biometric market. In our opinion, these features makes our technology more viable than competing
technologies and expands the size of the overall market for our products.
In partnerships with OEMs, VARs, integrators, and solution providers, we market and sell biometric hardware and software solutions to SMBs, the Fortune
500 and government agencies.
We support industry standards, including PIV, FIPS, ANSI, ISO, SAML, and BioAPI among others. We have received National Institute of Standards and
Technology (NIST) independent laboratory testing and certification of our ability to support Homeland Security Presidential Directive #12 (HSPD-12) and
ANSI/INCITS-378 templates, as well as validation of our fingerprint match speed and accuracy in large database environments.
We have developed what we believe is the most discriminating and effective commercially available finger-based biometric technology. Our primary focus is
in marketing and selling this technology to customers seeking to secure access to networks, applications and data on-premises or remotely. Our primary market
focus includes, government, financial services, education, healthcare, manufacturing, retail, and call centers.
PRODUCTS
We also offer a full line of easy to use finger scanners for both enterprise and consumer markets. Our SideSwipe, SideTouch and EcoID scanners are plug
and play compatible with Microsoft Windows and our Q-180 Touch reader is a Micro USB compatible fingerprint reader for Android devices. The readers are
currently sold in the Microsoft stores, as well as through their on-line channel, on Amazon, and through our website. In 2018, we introduced OmniPass
Consumer, a secure biometric-enabled application to manage multiple passwords for online apps, services, or accounts.
In 2015, Microsoft announced native support for biometrics in the Windows 8.1 and Windows 10 Operating platforms as well as Office 2016. With Microsoft
Hello, any user can replace their PIN or password to access their device without any special software downloads by using our finger scanners, SideSwipe,
SideTouch and EcoID, which are plug and play compatible with the Microsoft platforms. We have been the preferred partner, in particular at the Microsoft “Ignite
your Business” Windows 10 and Office 2016 launch events..
Finally, our ID Director for Windows and ID Director for SAML offer biometric authentication to SAML enables apps such as Office 365, GoToMeeting,
Zoom, SalesForce, Google G-Suite, and many others.
STRATEGIC OUTLOOK
Historically, our largest market has been access control within highly regulated industries such as government, financial services, and healthcare. During
2019 we became the go-to biometric authentication provider for board of election offices as eight offices deployed our hardware and software to secure internal
access to the voter registration database. We will seek to extend this footprint in 2020 and beyond.
Working with our partner TTI, we expect to begin deploying several large-scale identity and access projects in the second quarter of 2020. We are in the
process of establishing an African subsidiary, to work closely with TTI who was awarded contracts of $45M and $30M. Under the first contract, we will provide
biometric authentication to support the infrastructure of a new e-commerce project developed with the expectation to generate more than one million jobs in
Nigeria. The second contract provides for BIO-key hardware and software to be used by a leading African telecommunications company to secure internal
access to customer data. Based on information available today, Africa and the surrounding regions are receiving government funding to expand the use of
biometric authentication solutions to help establish trustworthy government programs and reduce fraud. As described above, the COVID-19 pandemic has and
may continue to delay the rollout of these programs.
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We plan to have a more significant role in the Identity and Access Management (IAM) market which continues to expand. We plan to offer customers a suite
of authentication options that complement our biometric solutions. The more well-rounded offerings of authentication options will allow customers to customize
their approach to authentication all under one umbrella.
As devices with onboard fingerprint sensors continue to deploy to consumers, we expect that third-party application developers will demand the ability to
authenticate users of their respective applications (apps) with the onboard fingerprint biometric. We further believe that authentication will occur on the device
itself for potentially low-value, and therefore low-risk, use-transactions and that user authentication for high-value transactions will migrate to the application
provider’s authentication server, typically located within their supporting technology infrastructure, or cloud. We have developed our technology to enable, on-
device authentication as well as network or cloud-based authentication and believe we may be the only technology vendor capable of providing this flexibility and
capability. Our core technology works on major commercially available fingerprint readers, across Windows and Linux, Mac OS X and Android operating systems.
This interoperability, coupled with the ability to authenticate users via the device or cloud, is unique in the industry, provides a key differentiator for us, and in our
opinion, makes our technology more viable than competing technologies and expands the size of the overall market for our products.
We believe there is potential for significant market growth in the following key areas:
•
•
Corporate network access control, corporate campuses, computer networks, and applications.
Large scale identification projects, especially in Africa and the surrounding regions.
• Government funded initiatives, including with the state board of elections.
•
•
•
International law enforcement use case applications as prospects see us as a global leader in the biometric technology space as witnessed by our
agreement with the Israeli Defense Force, and the Singapore and Dubai Police departments.
Consumer mobile credentialing, including mobile payments, credit and payment card programs, data and application access, and commercial loyalty
programs.
Demand for BIO-key hardware products from Windows 10 users and Fortune 500 companies.
• Government services and highly regulated industries including, Medicare, Medicaid, Social Security, Drivers Licenses, Campus and School ID,
Passports/Visas.
Continued growth in the Asia Pacific region.
New remote authentication challenges – which our solutions are ideally suited to address.
New opportunity to market our remote security solutions, spurred on because of the COVID-19 outbreak.
•
•
•
In the near-term, we expect to grow our business within government services and highly-regulated industries in which we have historically had a strong
presence. 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.
Our two primary sales strategies call for expanded marketing efforts into the IAM market along with a dedicated pursuit of large-scale identification projects
across the globe.
We also plan on expanding our new Channel Alliance Program which now has more than twenty participants and started to generate modest initial
revenues.
RECENT DEVELOPMENTS
As discussed under “Item 1A. Risk Factors” above, an outbreak of a novel strain of the coronavirus, COVID-19, has been recognized as a pandemic by the
World Health Organization. This outbreak has severely restricted the level of economic activity around the world. In response to this coronavirus outbreak the
governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, including imposing restrictions on
travel and business operations and requiring individuals to limit or forego their time outside of their homes. Given the uncertainty regarding the spread of this
coronavirus, the related financial impact cannot be reasonably estimated at this time.
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The complications caused by COVID-19 has forced organizations to quickly adapt to a work from home remote business model. This increases the risk of
unauthorized users, phishing attacks, and hackers whom are eager to take advantage of the challenges of securing remote workers. We believe that biometrics
should play a key role in remote user authentication.
Years ended
December 31,
2019
2018
40%
20%
40%
100%
12%
41%
56%
109%
-9%
222%
58%
280%
307%
-596%
-47%
-643%
25%
43%
32%
100%
11%
76%
16%
103%
-3%
132%
35%
167%
-
-170%
0%
-170%
2019
2018
$ Chg
% Chg
2019 - 2018
925,245 $
442,649
899,634
2,267,528 $
1,012,576 $
1,739,897
1,292,069
4,044,542 $
(87,331)
(1,297,248)
(392,435)
(1,777,014)
272,318 $
916,112
1,272,815
2,461,245 $
443,210 $
3,072,356
648,624
4,164,190 $
(170,892)
(2,156,244)
624,191
(1,702,945)
-9%
-75%
-30%
-44%
-39%
-70%
96%
-41%
$
$
$
$
19
RESULTS OF OPERATIONS
Consolidated Results of Operations
Two Year % trend
Revenues
Services
License fees
Hardware
Costs and other expenses
Cost of services
Cost of license fees
Cost of hardware
Gross Profit (Loss)
Operating expenses
Selling, general and administrative
Research, development and engineering
Total operating expenses before impairment
Impairment of resalable software license rights
Operating loss
Other income (expense)
Total other income (expense)
Net loss
Revenues and Costs and other expenses
Revenues
Services
License fees
Hardware
Total Revenue
Costs and other expenses
Services
License fees
Hardware
Total Costs and other expenses
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Revenues
Revenue decreased $1,777,014 or 44% to $2,267,528 in 2019 as compared to $4,044,542 in 2018 due to the factors stated below.
For the years ended December 31, 2019 and 2018, service revenues included approximately $904,000 and $895,000, respectively, of recurring maintenance
and support revenue, and approximately $21,000 and $118,000, respectively, of non-recurring custom services revenue. Recurring service revenue increased
1% from 2018 to 2019 as we moved from a perpetual license to subscription based licensing. As our customer base continues to grow, we expect the recurring
revenue to increase in future periods. Non-recurring custom services decreased 82% in 2019 as a result of a completed special software requirement from an
existing customer in the first quarter of 2018.
For the years ended December 31, 2019 and 2018, license revenue decreased 75% to $442,649. The decrease was primarily due to one large international
order received in the fourth quarter of 2018 in amount of approximately $1,111,000 without a comparable transaction in the fourth quarter of 2019.
Hardware sales decreased by approximately $392,000, or 30%, to $899,634 in 2019 as a result of fewer large customer deployments, and primarily reduced
lock sales. Fingerprint reader sales decreased approximately $158,000, or 16%, while the biometric locks decreased approximately $235,000, or 84% from
2018.
Costs of goods sold
For the year ended December 31, 2019, cost of service decreased approximately 39% to $272,318, due to a completed special software requirement from
an existing customer in the first quarter of 2018.
License costs for the year ended December 31, 2019 decreased approximately 70% to $916,112. The decrease was attributable primarily to the
amortization and actual deployments of the software rights in the approximate amount of $884,000 in 2019 compared to $2,658,000 in 2018.
Hardware costs for the year ended December 31, 2019 increased approximately 96% to $1,272,815. The increase was attributable primarily to the write
down of lock inventory and parts as a result of the discontinuance of lock sales in the US, offset by a decrease in factory costs due to reduced lock sales.
Selling, general and administrative
2019
2018
$ Chg
% Chg
2019 - 2018
$
5,036,820 $
5,333,906 $
(297,086)
-6%
Selling, general and administrative costs for year ended December 31, 2019 were $5,036,820 representing a 6% decrease from over 2018. Decreases in
costs included non-cash share-based compensation expenses, decreased bad debt expense, marketing personnel and related costs, and travel. These amounts
were offset by increases in factoring fees, legal and accounting fees related to capital raising transactions, and insurance costs.
Research, development and engineering
2019
2018
$ Chg
% Chg
2019 - 2018
$
1,331,667 $
1,415,401 $
(83,734)
-6%
For the year ended December 31, 2019, research, development and engineering costs were $1,331,667 representing a 6% decrease over 2018, as a result
of decreased personnel, non-cash share-based compensation expenses, and costs related to our Hong Kong subsidiary. These amounts were offset by
increased recruiting costs.
Impairment
Impairment of resalable software license rights
2019
(6,957,516)
$
2018
$ Chg
(6,957,516)
- $
% Chg
n/a
2019 - 2018
Impairment of assets relates to the write-down of the FingerQ resalable software license rights to zero in the fourth quarter of 2019.
Other income (expense)
Interest income
Interest expense
2019
2018
$ Chg
% Chg
2019 - 2018
154
(1,069,134)
(1,068,980) $
$
80
-
80 $
74
(1,069,134)
(1,069,060)
93%
n/a
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Interest expense for the 2019 period related to the interest expense on convertible debt financings and amortization of the debt discount and debt issuance
costs incurred as a result of the convertible debt financings.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities overview
Net cash used for operations during the year ended December 31, 2019 was approximately $1,850,000. Items of note included:
•
•
•
Net positive cash flows related to accounts receivable, prepayments, inventory, accounts payables, accruals and deferred revenue of approximately
$2,222,000.
Net positive cash flows related to adjustments for non-cash expenses for impairment, depreciation, amortization, bad debt expense, and share-based
compensation of approximately $10,609,000.
Negative cash flows related to changes in contract costs and factoring of approximately $105,000, due to working capital management.
Investing activities overview
Approximately $543,000 was used for investing activities during the year ended December 31, 2019 related to the purchase of a non-marketable bond for
approximately $513,000 and capital expenditures of $30,000.
Financing activities overview
Approximately $2,149,000 was provided by financing activities during the year ended December 31, 2019 from the issuance and repayment of debt,
including convertible notes, less fees.
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,
2020. 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, 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 is determined by the number of days required for collection of the invoice. We expect to continue to use this factoring arrangement periodically to
assist with our general working capital requirements due to contractual requirements.
On August 24, 2018, we completed a public offering of units consisting of 1,380,000 shares of common stock and warrants to purchase 1,035,000 shares of
common stock for an aggregate gross proceed of $2,070,000, or $1.50 per unit.
On April 4, 2019, we issued a $550,000 secured convertible debenture to an institutional investor with a maturity date of November 15, 2019 which was
convertible into common stock at a conversion price of $1.50 per share. The debenture was redeemable at any time by payment of a premium to the principal
balance starting at 5% and increasing to 20%. The debenture was issued at a 7% original issue discount. On July 10, 2019, this debenture was redeemed and
repaid in full in connection with the financing described below.
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On June 14, 2019, we issued a $157,000 principal amount convertible note to an institutional investor with a maturity date of November 14, 2019 which was
convertible into common stock at a conversion price of $1.50 per share. The note was redeemable at any time by payment of a premium to the principal balance
starting at 10% and increasing to 30%. On July 10, 2019, this note was redeemed and repaid in full in connection with the financing described below.
On July 10, 2019, we issued a $3,060,000 principal amount senior secured convertible note (the “Original Note”) to an institutional investor. At closing,
$2,550,000 was funded. The Note is secured by a lien on substantially all of our assets and properties and was convertible into shares of our common stock at a
fixed conversion price of $1.50 per share. Pursuant to amendments in the first and second quarter of 2020, we amended the Original Note to increase the
principal amount to $3,789,000 as a result of interest and penalties, accelerated the maturity date to June 13, 2020, and reduced the conversion price to $0.65
per share (the “Amended Note”). As a result of conversions of amounts due under the Amended Note into shares of the Company’s common stock, the current
outstanding principal amount of the Amended Note is $539,000.
On January 13, 2020, we issued a $157,000 principal amount convertible note to an institutional investor with a maturity date of June 13, 2020 which was
convertible into common stock at a conversion price of $1.50 per share. The note is redeemable at any time by payment of a premium to the principal balance
starting at 10% and increasing to 30%.
On February 13, 2020, we issued a $126,000 principal amount convertible note to an institutional investor with a maturity date of July 13, 2020 which was
convertible into common stock at a conversion price of $1.15 per share. The note is redeemable at any time by payment of a premium to the principal balance
starting at 10% and increasing to 30%.
On April 20, 2020, we entered into a Paycheck Protection Program Term Note (the “SVB Note”) with Silicon Valley Bank (“SVB”) pursuant to the Paycheck
Protection Program (the “Program”) of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small
Business Administration. We received total proceeds of $340,000 which will be used in accordance with the requirements of the CARES Act. We will apply to
SVB for forgiveness of amounts due on the SVB Note to the extent they are used for eligible payroll costs, rent obligations, and covered utility payments incurred
during the eight weeks following disbursement under the SVB Note. Until the six-month anniversary of the date of the SVB Note (the “Deferral Expiration
Date”), neither principal nor interest is due and payable. On the Deferral Expiration Date, the outstanding principal of the SVB Note that is not forgiven will
convert to an amortizing term loan at an interest rate of 1% per annum requiring equal monthly payments of principal and interest through November 20, 2022.
On May 6, 2020, we issued a $2,415,000 principal amount senior secured convertible note (the “Note”). The principal amount is due and payable in five
equal monthly installments of $268,333 beginning seven months after the funding date with the remaining balance due in on the twelfth month after the date of
funding. The Note is convertible at a fixed convertible price of $1.16.
LIQUIDITY OUTLOOK
At December 31, 2019, our total cash and cash equivalents were approximately $79,000, as compared to approximately $324,000 at December 31, 2018.
As discussed above, we have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities,
convertible preferred stock, common stock, and through factoring receivables. We currently require approximately $525,000 per month to conduct our
operations, a monthly amount that we have been unable to consistently achieve through revenue generation. During 2019, we generated approximately
$2,268,000 of revenue, which is below our average monthly requirements.
If we are unable to generate sufficient revenue to 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 842 for Leases and 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.
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Table of Contents
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
The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. In
accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the
consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the
following five steps:
Identify the performance obligations in the contract
Identify the contract with a customer
•
•
• 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.
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Table of Contents
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.
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 recorded an
impairment charge for the 2019 year with respect to the FingerQ Resalable License Rights. Refer Note G – Resalable License Rights for additional information.
3. 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements appearing at pages 27-53 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our
disclosure controls and procedures as of December 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2019, 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, 2019, based upon the framework in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that our internal control over
financial reporting was effective as of December 31, 2019.
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, 2019 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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Table of Contents
ITEM 9B. – OTHER INFORMATION
None.
ITEM 10. – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this item will be set forth under “Proposal No. 1: Election of Directors” in the 2020 Proxy Statement and incorporated herein by
reference.
ITEM 11. – EXECUTIVE COMPENSATION
The information required by this item will be set forth under “Executive and Director Compensation” in the 2020 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 2020 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 2020 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 2020 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 2020” in the 2020 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, 2019 and 2018
Consolidated Statements of Operations—Years ended December 31, 2019 and 2018
Consolidated Statements of Stockholders’ Equity (Deficit)—Years ended December 31, 2019 and 2018
Consolidated Statements of Cash Flows—Years ended December 31, 2019 and 2018
Notes to Consolidated Financial Statements—December 31, 2019 and 2018
(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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Table of Contents
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, 2019 and 2018
Consolidated Statements of Operations—Years ended December 31, 2019 and 2018
Consolidated Statements of Stockholders’ Equity (Deficit) —Years ended December 31, 2019 and 2018
Consolidated Statements of Cash Flows—Years ended December 31, 2019 and 2018
Notes to the Consolidated Financial Statements—December 31, 2019 and 2018
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28
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30
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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, 2019 and
2018, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes
(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in the
consolidated financial statements, the Company has suffered substantial net losses in recent years, has negative working capital and has an accumulated deficit
at December 31, 2019 and is dependent on debt and equity financing to fund its operations, all of which raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans regarding these matters are disclosed in Note A. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Change in Accounting Principles
As discussed in Note A and Note B to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers
as of January 1, 2018 due to the adoption of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. The Company
adopted the new revenue standard using the modified retrospective approach.
As discussed in Note A and Note N to the financial statements, the Company adopted ASC 842, Leases as of January 1, 2019 using the modified retrospective
approach. ASC 842 had a significant effect on the balance sheet resulting in increased non-current right of use assets and increased current and non-current
lease liabilities, required by the new standard.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Rotenberg Meril Solomon Bertiger & Guttilla,P.C.
ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
We have served as the Company's auditor since 2010.
Saddle Brook, New Jersey
May 14, 2020
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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
Investment – non-marketable security
Total current assets
Resalable software license rights, net of current portion
Equipment and leasehold improvements, net
Capitalized contract costs, net
Deposits and other assets
Operating lease right-of-use assets
Intangible assets, net
Total non-current assets
TOTAL ASSETS
LIABILITIES
Accounts payable
Accrued liabilities
Convertible notes payable, net of debt discount and debt issuance costs
Deferred revenue
Operating lease liabilities, current portion
Total current liabilities
Operating lease liabilities, net of current portion
Total non-current liabilities
TOTAL LIABILITIES
Commitments and Contingencies
$
$
$
December 31,
2019
2018
79,013 $
126,000
110,941
429,119
-
108,397
512,821
1,366,291
73,802
95,509
231,519
8,712
566,479
154,386
1,130,407
2,496,698 $
919,294 $
686,885
2,255,454
359,212
170,560
4,391,405
390,466
390,466
4,781,871
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
Common stock — authorized, 170,000,000 shares; issued and outstanding; 14,411,432 and 13,977,868 of
$.0001 par value at December 31, 2019 and December 31, 2018, respectively
STOCKHOLDERS’ EQUITY (DEFICIT)
Additional paid-in capital
Accumulated deficit
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
1,441
87,436,402
(89,723,016)
(2,285,173)
2,496,698 $
1,398
85,599,140
(75,134,316)
10,466,222
11,692,332
$
The accompanying notes are an integral part of these statements.
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BIO-key International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Table of Contents
Revenues
Services
License fees
Hardware
Total revenues
Costs and other expenses
Cost of services
Cost of license fees
Cost of hardware
Total costs and other expenses
Gross Profit (Loss)
Operating expenses
Selling, general and administrative
Research, development and engineering
Total operating expenses before impairment
Impairment of resalable software license rights
Operating loss
Other income (expense)
Interest income
Interest expense
Total other income (expense)
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,
2019
2018
925,245 $
442,649
899,634
2,267,528
272,318
916,112
1,272,815
2,461,245
(193,717)
5,036,820
1,331,667
6,368,487
(6,957,516)
(13,519,720)
154
(1,069,134)
(1,068,980)
(14,588,700)
-
-
(14,588,700)
1,012,576
1,739,897
1,292,069
4,044,542
443,210
3,072,356
648,624
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)
$
(1.03) $
(0.73)
14,223,685
11,607,933
The accompanying notes are an integral part of these statements.
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BIO-key International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
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, 2017
62,596 $
6 105,000 $
11 7,691,324 $
ASC 606 adoption
Issuance of common
769 $ 80,829,001 $ (67,076,492) $ 13,753,295
240,017
240,017
stock for directors’ fees
-
-
-
-
20,976
2
37,530
-
37,532
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
Issuance of common
stock for directors’ fees
Issuance of common
stock for commitment
fees net of adjustments
Warrant debt discount
valuation
Legal and commitment
fees
Share-based
compensation
Net loss
Balance as of December
31, 2019
-
-
-
-
-
-
- 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
-
472,424
-
-
-
-
-
-
-
-
- 1,428,966
(338,845)
-
(1,428,966)
-
-
(338,845)
-
-
942,692
-
-
(6,868,875)
942,692
(6,868,875)
- 13,977,868 $
1,398 $ 85,599,140 $ (75,134,316) $ 10,466,222
-
36,897
3
35,010
-
35,013
-
396,667
40
594,960
-
595,000
-
-
-
-
-
-
595,662
-
595,662
-
(301,077)
-
(301,077)
-
-
912,707
-
912,707
(14,588,700) (14,588,700)
- 14,411,432 $
1,441 $ 87,436,402 $ (89,723,016) $ (2,285,173)
The accompanying notes are an integral part of these statements.
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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:
Bad debt expense
Depreciation
Amortization of intangible assets and writeoff
Amortization of resalable software license rights
Impairment of resalable software license rights
Amortization of debt discount
Amortization of capitalized contract costs
Amortization of debt issuance costs
Share based compensation for employees and consultants
Stock based fees to directors
Amortization of operating lease right-of-use assets
Change in assets and liabilities:
Accounts receivable
Due from factor
Capitalized contract costs
Inventory
Resalable software license rights
Prepaid expenses and other
Accounts payable
Accrued liabilities
Deferred revenue
Operating lease liabilities
Net cash used for operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Patents
Capital expenditures
Purchase of investment – non-marketable security
Net cash used for investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes
Repayment of convertible notes
Proceeds from issuance of common stock
Costs to issue notes and 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,
2019
2018
$
(14,588,700) $
(6,868,875)
564,361
81,852
43,256
843,287
6,957,516
571,332
138,679
424,980
912,707
35,013
36,458
883,671
(54,259)
(50,999)
569,710
41,005
29,819
438,025
138,653
162,603
(29,316)
(1,850,347)
(1,736)
(28,753)
(512,821)
(543,310)
3,217,000
(707,000)
-
(361,273)
2,148,727
(244,930)
323,943
79,013 $
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
$
The accompanying notes are an integral part of these statements.
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Table of Contents
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
Right-of-use asset addition under ASC 842
Operating lease liabilities under ASC 842
Share based loan commitment fees
Debt issuance cost allocated to equity
Debt discount issued with convertible note
Warrant debt discount valuation
Years ended December 31,
2019
2018
$
$
$
$
$
$
$
$
$
$
$
$
$
$
72,822 $
- $
- $
- $
- $
- $
- $
- $
719,812 $
707,217 $
595,000 $
152,000 $
550,000 $
595,662 $
-
-
198,033
356,015
6,259,600
472,426
10,500,000
1,428,966
-
-
-
-
-
-
The accompanying notes are an integral part of these statements.
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Table of Contents
BIO-key International, Inc. and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2019 and 201 8
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.
Going Concern and Basis of Presentation
The Company has incurred significant losses to date, and at December 31, 2019, it had an accumulated deficit of approximately $90 million. In addition,
broad commercial acceptance of the Company’s technology is critical to the Company’s success and ability to generate future revenues. At December 31, 2019,
total cash and cash equivalents were approximately $79,000, as compared to approximately $324,000 at December 31, 2018.
As discussed below, the Company 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 $525,000 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.
Reclassification
Reclassifications occurred to certain prior year amounts in order to conform to the current year presentation to segregate cost of sales for licenses and
hardware. The reclassifications have no effect on the reported net loss.
Summary of Significant Accounting Policies
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of BIO-key International, Inc. and its wholly-owned subsidiaries (collectively, the
“Company”). Intercompany accounts and transactions have been eliminated in consolidation.
2. Use of Estimates
Our consolidated financial statements are prepared in accordance with GAAP as set forth in the Financial Accounting Standards Board’s (FASB) Accounting
Standards Codification (ASC) and consider the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange
Commission (SEC). These accounting principles require us to make certain estimates, judgments and assumptions. The Company believes that the estimates,
judgments and assumptions upon which it relies are reasonable based upon information available to us at the time that these estimates, judgments and
assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the periods presented. Certain significant accounting policies that contain
subjective management estimates and assumptions include those related to revenue recognition, accounts receivable, inventory, intangible assets and long-lived
assets, and income taxes. To the extent there are material differences between these estimates, judgments or assumptions and actual results, its consolidated
financial statements will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require
management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a
materially different result.
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Table of Contents
3. Revenue Recognition
The Company adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of
adoption. In accordance with ASC Topic 606, revenue is recognized when a customer obtains control of promised 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 and SaaS software licenses for one or more of the Company’s biometric fingerprint solutions. Revenue
is recognized at a point in time once the software is available to the customer for download. Software license contracts are generally invoiced in full on execution
of the arrangement.
Hardware
Hardware revenue consists of fees for associated equipment sold with or without a software license arrangement, such as servers, locks and fingerprint
readers. Customers are not obligated to buy third party hardware from the Company, and may procure these items from a number of suppliers. Revenue is
recognized at a point in time once the hardware is shipped to the customer. Hardware items are generally invoiced in full on execution of the arrangement.
Support and Maintenance
Support and Maintenance revenue consists of fees for unspecified upgrades, telephone assistance and bug fixes. The Company satisfies its Support and
Maintenance performance obligation by providing “stand-ready” assistance as required over the contract period. The Company records deferred revenue
(contract liability) at time of prepayment until the contracts term occurs. Revenue is recognized over time on a ratable basis over the contract term. Support and
Maintenance contracts are up to one year in length and are generally invoiced either annually or quarterly in advance.
Professional Services
Professional services revenues consist primarily of fees for deployment and optimization services, as well as training. The majority of the Company’s
consulting contracts are billed on a time and materials basis, and revenue is recognized based on the amount billable to the customer in accordance with
practical expedient ASC 606-10-55-18. For other professional services contracts, the Company utilizes an input method and recognizes revenue based on labor
hours expended to date relative to the total labor hours expected to be required to satisfy its performance obligation.
Contracts with Multiple Performance Obligations
Some contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations
separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The
standalone selling prices are determined based on overall pricing objectives, taking into consideration market conditions and other factors, including the value of
the contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users within the contracts.
The Company considered several factors in determining that control transfers to the customer upon shipment of hardware and availability of download of
software. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks
and rewards of ownership.
Accounts receivable from customers are typically due within 30 days of invoicing. The Company does not record a reserve for product returns or warranties
as amounts are deemed immaterial based on historical experience.
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Costs to Obtain and Fulfill a Contract
Costs to obtain and fulfill a contract are predominantly sales commissions earned by the sales force and are considered incremental and recoverable costs of
obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit determined to be four years. These costs are
included as capitalized contract costs on the balance sheet. The period of benefit was determined by taking into consideration customer contracts, technology,
and other factors based on historical evidence. Amortization expense is included in selling, general and administrative expenses in the accompanying
consolidated statements of operations.
4. Cash Equivalents
Cash equivalents consist of liquid investments with original maturities of three months or less. At December 31, 2019 and 2018, 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 at December 31, 2019 and 2018, which represents 100% of
the remaining balance owed under the contract. Recoveries of accounts receivable previously written off are recorded when received. The Company made a
license sale to a Chinese reseller in December 2018. Revenue was recognized in accordance with ASC 606 in the amount of $1.1 million in 2018. As of
December 31, 2019, the second payment for $555,555 was still outstanding and payable. The Company wrote off directly to bad debt expense $555,555 that
was promised to be paid in March 2019, but not received.
Accounts receivable at December 31, 2019 and 2018 consisted of the following:
Accounts receivable - current
Accounts receivable - non current
Allowance for doubtful accounts - current
Allowance for doubtful accounts - non current
December 31,
2019
2018
$
139,785 $
1,720,000
1,859,785
(13,785)
(1,720,000)
(1,733,785)
1,587,817
1,720,000
3,307,817
(13,785)
(1,720,000)
(1,733,785)
Accounts receivable, net of allowances for doubtful accounts
$
126,000 $
1,574,032
The allowance for doubtful accounts for the years ended December 31, 2019 and 2018 is as follows:
Year Ended December 31, 201 9
Allowance for Doubtful Accounts
Year Ended December 31, 201 8
Allowance for Doubtful Accounts
Balance at
Beginning
of Year
Charged to
Costs
and
Expenses
Deductions
From
Reserves
Balance at
End of Year
$
$
1,733,785 $
- $
- $
1,733,785
1,013,785 $
720,000 $
- $
1,733,785
Bad debt expenses (if any) are recorded in selling, general, and administrative expense.
6. Software License Rights
Software license rights acquired for re-sale to end users are recorded as assets when purchased and are stated at the lower of cost or estimated net
realizable value.
The cost of the software license rights was initially allocated pro-rata to the maximum number of resalable end-user licenses in the rights contract. Through
December 31, 2018, the remaining license rights were amortized over the greater of the following amounts: 1) an estimate of the economic use of such license
rights, 2) the amount calculated by the straight line method over ten years or 3) the actual cost basis of sales usage of such rights. After re-evaluation of the
expected timeline of future license transaction, commencing January 1, 2019, the Company changed its amortization methodology to the greater of the straight-
line methodology or actual unit cost per license sold.
Management re-evaluates the total sub-licenses it expects to sell during the proceeding twelve months and will adjust the allocation of the current portion vs.
non-current portion of software rights.
The rights are also evaluated by management on a periodic basis to determine if estimated future net revenues, on a per sub-license basis, support the
recorded basis of each license. If the estimated net revenues are less than the current carrying value of the capitalized software license rights, the Company will
reduce the rights to their net realizable value.
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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 recorded an impairment charge for the 2019 year with respect to the FingerQ Resalable Software License Rights. Refer to Note G –
Resalable License Rights for additional information.
9. Advertising Expense
The Company expenses the costs of advertising as incurred. Advertising expenses for 2019 and 2018 were approximately $317,000 and $309,000,
respectively.
10. Deferred Revenue
Deferred revenue includes customer advances and amounts that have been paid by customer for which the contractual maintenance terms have not yet
occurred. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which
generally is 12 months.
11. Research and Development Expenditures
Research and development expenses include costs directly attributable to the conduct of research and development programs primarily related to the
development of our software products and improving the efficiency and capabilities of our existing software. Such costs include salaries, payroll taxes, employee
benefit costs, materials, supplies, depreciation on research equipment, services provided by outside contractors, and the allocable portions of facility costs, such
as rent, utilities, insurance, repairs and maintenance, depreciation and general support services. All costs associated with research and development are
expensed as incurred.
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 U - Earnings Per Share “EPS” for
additional information.
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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,
2019
2018
$
$
828,981 $
118,739
947,720 $
855,125
125,099
980,224
For 2019 and 2018, 241,334 and 351,918 stock options were granted, respectively. The fair value of each option was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
Weighted average Risk free interest rate
Expected life of options (in years)
Expected dividends
Weighted average Volatility of stock price
Year ended
December 31,
2019
2018
2.33%
4.50
0%
84%
2.70%
4.50
0%
143%
The stock volatility for each grant is determined based on the review of the experience of the weighted average of historical daily price changes of the
Company’s common stock over the expected option term. The expected term was determined using the simplified method for estimating expected option life,
which qualify as “plain-vanilla” options; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding
with the expected life of the option.
14. Derivative Liabilities
In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain
circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded
derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated
host instrument and accounted for separately as a derivative liability instrument. The Company early-adopted the new provisions issued July 2017, for derivative
liability instruments under FASB ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging
(Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Under ASU 2017-11,
down round features do not meet the criteria for derivative accounting and no liability is to be recorded until an actual issuance of securities triggers the down-
round feature. Prior to these provisions, the liabilities were recorded without the actual issuance of the securities triggering the down-round feature.
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15. Income Taxes
The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes
using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of
deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. The Company evaluates, on a
quarterly basis whether, based on all available evidence, if it is probable that the deferred income tax assets are realizable. Valuation allowances are established
when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,”
includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses,
the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences
and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.
Because of the Company’s historical performance and estimated future taxable income, a full valuation allowance has been established.
The Company accounts for uncertain tax provisions in accordance with ASC 740-10-05, “Accounting for Uncertainty in Income Taxes.” The ASC clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
16. Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases” (Topic 842), as
amended (ASC 842). 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 and classify as either operating or finance leases. We adopted this standard effective January 1,
2019 using the modified retrospective approach for all leases entered into before the effective date. Adoption of the ASC 842 had a significant effect on our
balance sheet resulting in increased non-current assets and increased current and non-current liabilities. There was no impact to retained earnings upon
adoption of the new standard. We did not have any finance leases (formerly referred to as capital leases prior to the adoption of ASC 842), therefore there was
no change in accounting treatment required. For comparability purposes, the Company will continue to comply with the previous disclosure requirements in
accordance with the existing lease guidance and prior periods are not restated.
The Company elected the package of practical expedients as permitted under the transition guidance, which allowed us: (1) to carry forward the historical
lease classification; (2) not to reassess whether expired or existing contracts are or contain leases; and, (3) not to reassess the treatment of initial direct costs for
existing leases.
In accordance with ASC 842, at the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the
unique facts and circumstances present and the classification of the lease including whether the contract involves the use of a distinct identified asset, whether
we obtain the right to substantially all the economic benefit from the use of the asset, and whether we have the right to direct the use of the asset. Leases with a
term greater than one year are recognized on the balance sheet as ROU assets, lease liabilities and, if applicable, long-term lease liabilities. The
Company has elected not to recognize on the balance sheet leases with terms of one year or less under practical expedient in paragraph ASC 842-20-25-2. For
contracts with lease and non-lease components, the Company has elected not to allocate the contract consideration and to account for the lease and non-lease
components as a single lease component.
Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The implicit
rate within our operating leases are generally not determinable and, therefore, the Company uses the incremental borrowing rate at the lease commencement
date to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The
Company determines the incremental borrowing rate for each lease using our estimated borrowing rate, adjusted for various factors including level of
collateralization, term and currency to align with the terms of the lease. The operating lease ROU asset also includes any lease prepayments, offset by lease
incentives.
An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise
that option. An option to terminate is considered unless it is reasonably certain we will not exercise the option.
For periods prior to the adoption of ASC 842, the Company recorded rent expense based on the term of the related lease. The expense recognition for
operating leases under ASC 842 is substantially consistent with prior guidance. As a result, there are no significant differences in our results of operations
presented.
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The impact of the adoption of ASC 842 on the balance sheet was:
Operating lease right-of-assets
Prepaid expenses and other
Total assets
Operating lease liabilities, current portion
Operating lease liabilities, net of current portion
Total liabilities
Total liabilities and stockholders’ equity
As reported
December 31,
2018
Adoption of ASC
842 - increase
(decrease)
Balance
January 1,
2019
$
$
$
$
$
$
$
- $
150,811 $
11,692,332 $
- $
- $
1,226,110 $
11,692,332 $
602,937 $
(12,595) $
590,342 $
135,519 $
454,823 $
590,342 $
590,342 $
602,937
138,216
12,282,674
135,519
454,823
1,816,452
12,282,674
In the third quarter of 2019, $116,875 was capitalized to operating lease right-of-use assets and operating lease liabilities in connection with signing a long-
term lease for the Company's Minnesota office space.
16. Recent Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a
Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service
contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update to the standard is effective
for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Entities can choose to adopt the ASU 2018-15 prospectively or
retrospectively. The Company has assessed that ASU 2018-15 currently does not have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), referred to herein as ASU 2016-13, which significantly
changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.
ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on
most financial assets and certain other instruments. Under ASU 2016-13 credit impairment is recognized as an allowance for credit losses, rather than as a direct
write-down of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial
assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company, the allowance for
credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance provides no threshold for recognition of impairment
allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either
current or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company
will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13. ASU 2016-13 is effective for annual periods, including
interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies. Early adoption is permitted. The Company is
currently assessing the impact ASU 2016-13 will have on its condensed consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on
the accompanying consolidated financial statements.
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,
2019
208,827 $
388,938
780,288
14,030
1,392,083 $
46,717 $
12,636
8,514
-
67,867 $
117,401 $
342,304
96,911
3,000
559,616 $
69,704 $
155,756
18,502
4,000
247,962 $
442,649
899,634
904,215
21,030
2,267,528
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
$
$
$
$
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Table of Contents
Revenue recognized during the year ended December 31, 2019 from amounts included in deferred revenue at the beginning of the period was approximately
$147,000. The Company did not recognize any revenue from performance obligations satisfied in prior periods. Total deferred revenue (contract liability) was
$359,212 and $196,609 at December 31, 2019 and December 31, 2018, respectively.
Transaction Price Allocated to the Remaining Performance Obligations
ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been
satisfied as at December 31, 2019. The guidance provides certain practical expedients that limit this requirement, which the Company’s contracts meet as
follows:
•
The performance obligation is part of a contract that has an original expected duration of one year or less, in accordance with ASC 606-10-50-14.
At December 31, 2019 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 9
Factored accounts receivable
Year Ended December 31, 2018
Factored accounts receivable
Original Invoice
Value
Factored
Amount
Factored
Balance due
$
$
233,005 $
122,064 $
110,941
221,120 $
164,438 $
56,682
The Company entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to October
31, 2020. Pursuant to the terms of the arrangement, the Company, from time to time, sells to the Factor a minimum of $150,000 per quarter of certain of its
accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 35% of the foreign and 75% of the domestic accounts
receivable balance to the Company (the “Advance Amount”), with the remaining balance, less fees, forwarded to the Company once the Factor collects the full
accounts receivable balance from the customer. In addition, the Company, from time to time, receives over advances from the Factor. Factoring fees range
from 2.75% to 15% of the face value of the invoice factored, and are determined by the number of days required for collection of the invoice. The cost of
factoring is included in selling, general and administrative expenses. The cost of factoring was as follows:
Years Ended December 31,
2019
2018
Factoring fees
$
203,950 $
186,845
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, short-term investments, and accounts receivables.
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Table of Contents
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, 2019 and 2018. The Company has not incurred any losses on these accounts.
The Company extends credit to customers on an unsecured basis in the normal course of business. The Company’s policy is to perform an analysis of the
recoverability of its receivables at the end of each reporting period and to establish allowances where appropriate. The Company analyzes historical bad debts
and contract losses, customer concentrations, and customer credit-worthiness when evaluating the adequacy of the allowances.
During the year ended December 31, 2019, two customers accounted for 22% and 14% of total revenue, respectively. During the year ended December 31,
2018, three customers accounted for 27%, 14% and 13% of total revenue, respectively.
Three customers accounted for 18%, 16% and 14% of total accounts receivable, respectively, as of December 31, 2019. One customer accounted for 70%
of total accounts receivable, as of December 31, 2018.
NOTE F—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:
Finished goods
Fabricated assemblies
Total inventory
2019
2018
287,761
141,358
429,119 $
496,358
502,471
998,829
$
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 Company initially determined the software license rights to be a finite lived intangible asset, and estimated that the software license rights shall be
economically used over a 10 year period, with a weighting towards the beginning years of that time-frame. The license rights were acquired during the fourth
quarter of 2015, but the usage of such rights in the Company’s products was not generally available until January 2017. Accordingly, amortization began in the
first quarter of 2017.
Through December 31, 2018, the license rights were amortized over the greater of the following amounts: 1) an estimate of the economic use of such
license rights, 2) the amount calculated by the straight line method over ten years or 3) the actual cost basis of sales usage of such rights. After re-evaluation of
the expected timeline of future license transactions, commencing January 1, 2019, the Company changed its amortization methodology to the greater of the
straight-line methodology or actual unit cost per license sold based on net remaining software licenses as of January 1, 2019. The Company categorized the
amortization expense under Cost of Sales as it more closely reflected the nature of the license right arrangement and the use of the technology.
During the fourth quarter of 2019, the Company re-evaluated the recoverability of the carrying amount of the balance of license rights, and concluded that
there were no significant undiscounted cashflows expected to be generated from the future sale of the license rights. Accordingly, an impairment charge of
$6,957,516 was recorded in the fourth quarter of 2019, which reduced the carrying amount of the FingerQ license rights down to zero. Throughout the year, the
Company attempted to sell the technology into the mobile market in Asia, but due to, among other things, the trade tension between the US and China,
management concluded that the future amortization would not represent an accurate cost to the ongoing business, without corresponding revenue.
A total of $843,888 (prior to the impairment charge detailed above), and $2,640,000 was expensed during the twelve month periods ended December 31,
2019 and 2018, respectively. Since the license purchase, a cumulative amount of $12,000,000 has been expensed, with a carrying balance of $0 as of
December 31, 2019.
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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 actual sales or straight-
line method approaches being the actual sales through 2019. A total of $40,404, and $18,198 was expensed during the twelve month periods ended December
31, 2019 and 2018, respectively. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $106,198
net of credits has been expensed, with a carrying balance of $73,802 as of December 31, 2019. 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
2019
2018
$
$
- $
73,802
73,802 $
1,125,000
6,790,610
7,915,610
Estimated minimum amortization expense based on straight line amortization of the software license rights for each of the next five years and thereafter
approximates the following:
Years ending December 31
2020
2021
2022
2023
2024
NOTE H—INVESTMENTS
$
$
$
$
$
18,000
18,000
18,000
18,000
1,802
During 2019, the Company purchased a 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong. The Bond
Certificate translates to $512,821 U.S. Dollars as of December, 2019. The bond has a one-year maturity and 5% interest rate. The Company can invest up to a
20,000,000 Hong Kong dollars under the terms of the certificate. The bond is recorded on the balance sheet as an investment – non-marketable security. The
investment is recorded at amortized cost which approximates fair value, and is currently planned to be held to maturity.
NOTE I—EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following as of December 31:
Equipment
Furniture and fixtures
Software
Leasehold improvements
2019
2018
$
648,286 $
164,079
32,045
23,403
867,813
619,533
164,079
32,045
23,403
839,060
Less accumulated depreciation and amortization
(772,304)
(690,452)
Total
$
95,509 $
148,608
Depreciation was $81,852 and $84,617 for 2019 and 2018, respectively. Amounts are recorded in Selling, General, and Administrative Expense and Cost of
Services.
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NOTE J—INTANGIBLE ASSETS
Intangible assets consisted of the following as of December 31:
2019
2018
Gross
Carrying
Amount
Accumulated
Amortization
Write-offs
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Patents and patents pending
$
380,080 $
(210,694) $
(15,000) $
154,386 $
378,344 $
(182,438) $
195,906
Aggregate amortization expense for 2019 and 2018 was $28,256 and $15,596, respectively. In 2019, the Company recorded $15,000 of write offs of patents
rejected. Amounts are recorded in Research, Development and engineering expense. The estimated aggregate amortization expense of intangible assets for the
years following December 31, 2019 is approximately $20,000 per year for 2020 through 2022, $17,000 for 2023, $13,000 for 2024 and approximately $65,000
thereafter.
NOTE K—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 L—RELATED PARTY
2019
2018
$
193,823 $
155,962
105,933
17,248
31,458
182,461
$
686,885 $
224,135
154,169
77,133
9,436
19,000
64,359
548,232
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 name,
together with perpetual license under all related patents held by the licensors and any other intellectual property rights owned by the licensors related to the
forgoing software. The Company made a one-time payment of $12,000,000 to the licensors. Mr. Yao Jianhu is the chairman and chief executive officer of CGG
and a director of the Company. Mr. Wong Kwok Fong served as the chief technology officer of CGG through October 2016 and is the beneficial owner of 21.6%
of the Company’s common stock, and a director and executive officer of the Company. During the fourth quarter of 2019, the Company recorded an impairment
charge of approximately $7 million, bringing the carrying value of FingerQ license rights to zero. Refer Note G - Resalable License Rights for additional
information.
Securities Purchase Agreements with Wong Kwok Fong
On April 3, 2018, Wong Kwok Fong converted 39,088 of the Series A-1 Shares at a conversion price of $3.60 per share and $330,552 of accrued dividends
payable, resulting in the acquisition of 1,177,598 shares of the Company’s Common Stock.
On May 31, 2018 Wong Kwok Fong converted 23,508 of the Series A-1 Shares at a conversion price of $3.60 per share and $25,463 of accrued dividends
payable, resulting in the acquisition of 660,073 shares of the Company’s Common Stock.
Non-Interest-Bearing Advances
During the 2019 fiscal year, the Company received a series of non-interest-bearing advances from Mr. Wong Kwok Fong, and Mr. Michael DePasquale, to pay
current liabilities. The balance of the advances as at December 31, 2019 was $74,737 and $114,000, respectively, and was recorded in Accounts Payable and
Accrued Liabilities (Other), respectively.
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NOTE M—DEFERRED REVENUE
Deferred revenue represents unearned revenue from customer prepayments prior to maintenance contractual term. Maintenance contracts include
provisions for unspecified when-and-if available product updates and customer telephone support services, and are recognized ratably over the term of the
service period. At December 31, 2019 and 2018, amounts in deferred revenue were approximately $359,000 and $197,000, respectively.
NOTE N—CONVERTIBLE NOTES PAYABLE
On April 4, 2019, the Company issued a $550,000 secured convertible debenture which had a maturity date of November 15, 2019 and was convertible into
common stock at a conversion price of $1.50 per share. The note was redeemable at any time by payment of a premium to the principal balance starting at 5%
and increasing to 25%. The note was issued at approximately 7% ($40,000) original issue discount. Subject to the mutual agreement of the Company and the
investor, the Company could issue two additional $550,000 principal amount notes on the same terms after 45 day intervals from the prior issuance, for
additional net proceeds of $1,020,000. The convertible note contained anti-dilution protections if the Company issued shares of common stock for less than the
conversion price. The convertible note was secured by substantially all the assets of the Company. At the closing, the Company issued 80,000 shares of
common stock in payment of a $120,000 commitment fee and was obligated to issue 10,000 shares of common stock monthly in payment of a monthly
commitment fee of $15,000 until the earlier of November 1, 2019 or the repayment or conversion of the note.
On June 14, 2019, the Company issued a $157,000 secured 10% convertible redeemable note which had a maturity date of November 14, 2019 and was
convertible into common stock at a conversion price of $1.50 per share. The convertible redeemable note contained anti-dilution protections if the Company
offered a conversion discount or other more favorable conversion terms while the note was outstanding. The note was redeemable within the first five months
by payment of a premium to the principal balance starting at 10% and increasing to 30% of principal plus interest. At the closing, the Company agreed to issue
200,000 shares of common stock in lieu of payment of a $30,000 commitment fee which was reduced to 20,000 shares as the note was repaid prior to the
maturity date.
Both notes were repaid in full on July 10, 2019.
For the two notes issued during the second quarter of 2019, the Company issued a total of 130,000 shares of common stock, amounting to $195,000 in
commitment fees. $195,000 was recorded as an offset to notes payable – debt issuance costs and was amortized over the life of the loan. The Company also
incurred $17,000 of legal fees withheld from proceeds which was also recorded as an offset to notes payable – debt issuance costs and was amortized over the
life of the loan. Amortization of the debt issuance costs and debt discount are included in interest expense on the statement of operations.
Securities Purchase Agreement dated July 10, 2019
On July 10, 2019, the Company issued a $3,060,000 principal amount senior secured convertible note (the “Original Note”). At closing, a total of $2,550,000
was funded. The original issue discount was $510,000. The principal amount due of the Original Note was due and payable as follows: $918,000 was due 180
days after funding, $1,071,000 was due 270 days after funding, and the remaining balance due 12 months after the date of funding.
The Original Note is secured by a lien on substantially all of the Company’s assets and properties and is convertible at the option of the Investor in shares of
common stock at a fixed conversion price of $1.50 per share. The Company has the right to prepay the Original Note in full at any time without penalty in which
event, the Investor had the option of converting 25% of the outstanding principal amount of the Note into shares of common stock.
In connection with the closing of the Original Note, the Company issued a five-year warrant to the Investor to purchase 2,000,000 shares of common stock
at a fixed exercise price of $1.50 per share, paid a $50,000 commitment fee, and issued 266,667 shares of common stock in payment of a $400,000 due
diligence fee. The Company also paid banker fees of $193,500 and legal fees of $71,330. The valuation of the warrant of $595,662 was recorded to debt
discount and is amortized over the life of the Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital
based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount are included in interest expense
on the statement of operations.
On March 12, 2020, the Company issued a $3,789,000 principal amount senior secured convertible note (the “Amended Note”), which replaced the Original
Note. The principal amount was due and payable in full on April 13, 2020. The Amended Note was secured by a lien on substantially all of the Company’s
assets and properties and was convertible at the option of the Investor into shares of common stock at a fixed conversion price of $0.65 per share.
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On April 12, 2020, and May 6, 2020 the Company entered into amendments (the “Amendments”) to the Amended Note. The Amendments extended the
maturity date to June 12, 2020 and extended the Investor’s right to convert the Amended Note into shares of the Company’s common stock at a price of $0.65
per share through June 12, 2020. All other provisions of the Amended Note remain the same. As of May 12, 2020, the Investor has converted $3,250,000 into
4,999,995 shares of common stock.
Until the second anniversary of the closing, the Investor has the right to purchase up to 20% of the securities the Company issues in any future private
placement, subject to certain exceptions for, among other things, strategic investments.
Secured convertible note payable relating to the Original Note, net of unamortized debt discount and debt issuance costs at December 31, 2019 consisted
of:
Principal amount
Less unamortized debt discount
Less unamortized debt issuance costs
Notes payable, net of unamortized debt discount and debt issuance costs
Interest expense for the year ended December 31, 2019 consists of:
April 4, 2019 debenture interest expense
April 4, 2019 debenture discount amortized
April 4, 2019 debenture deferred costs amortized
June 14, 2019 convertible note interest expense
June 14, 2019 convertible note deferred costs amortized
July 10, 2019 convertible note discount amortized
July 10, 2019 convertible note deferred costs amortized
July 10, 2019 warrant valuation (debt discount) amortization
Total
NOTE O—LEASES
$
$
3,060,000
(574,330)
(230,216)
2,255,454
$
$
55,000
40,000
175,000
17,822
37,000
245,083
212,980
286,249
1,069,134
The Company’s leases office space in New Jersey, Hong Kong and Minnesota with lease termination dates of 2023, 2020, and 2022, respectively. The
leases include non-lease components with variable payments. The following tables present the components of lease expense and supplemental balance sheet
information related to the operating leases, were:
Lease cost
Operating lease cost
Short-term lease cost
Total lease cost
Balance sheet information
Operating right-of-use assets
Operating lease liabilities, current portion
Operating lease liabilities, non-current portion
Total operating lease liabilities
Weighted average remaining lease term (in years) – operating leases
Weighted average discount rate – operating leases
46
Year ended
December 31,
2019
$
$
$
$
$
186,246
41,535
227,781
566,479
170,560
390,466
561,026
3.33
5.50%
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Table of Contents
Supplemental cash flow information related to leases were as follows, for the year ended December 31, 2019:
Cash paid for amounts included in the measurement of operating lease liabilities
$
179,105
Maturities of operating lease liabilities were as follows:
2020
2021
2022
2023
Total future lease payments
Less: imputed interest
Total
NOTE P—COMMITMENTS AND CONTINGENCIES
Litigation
$
$
$
197,724
170,853
160,817
89,226
618,620
(57,594)
561,026
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of December 31,
2019, the Company was not a party to any pending lawsuits.
NOTE Q— EQUITY
1. Preferred Stock
Within the limits and restrictions provided in the Company’s Certificate of Incorporation, the Board of Directors has the authority, without further action by the
shareholders, to issue up to 5,000,000 shares of preferred stock, $.0001 par value per share, in one or more series, and to fix, as to any such series, any
dividend rate, redemption price, preference on liquidation or dissolution, sinking fund terms, conversion rights, voting rights, and any other preference or special
rights and qualifications. As of December 31, 2019, 100,000 shares of preferred stock have been designated as Series A-1 Convertible Preferred Stock, of which
90,000 were issued in 2015 and 0 remain outstanding, and 105,000 shares of preferred stock have been designated as Series B-1 Convertible Preferred Stock,
of which 105,000 were issued in 2015 and 0 remain outstanding.
Series A-1 Convertible Preferred Stock
On October 22 and 29, 2015, the Company issued 84,500 shares of Series A-1 Stock at a purchase price of $100.00 per share, for aggregate gross
proceeds of $8,450,000. On November 11, 2015, 5,500 additional shares of Series A-1 Stock were issued at a purchase price of $100.00 per share, for gross
cash proceeds of $550,000.
In 2017, the holder of the Series A-1 Stock converted $540,000 in accrued dividends payable into 150,000 shares common stock and converted 27,404
Series A-1 Stock into 761,222 shares of common stock. Between January 1, 2018 and May 31,2018, the holder of the Series A-1 Stock converted all remaining
shares of the Series A-1 Stock into an aggregate of 1,738,778 shares of common stock and purchased an aggregate of 98,893 shares of common stock in
consideration of the conversion of $356,015 of accrued dividends payable on the Series A-1 Stock.
As a result of the forgoing conversions, at December 31, 2018 and 2019 there are no longer any issued and outstanding shares of Series A-1 Stock.
Overall balances and conversion of Series A-1 Stock and accrued dividends into common stock has been as follows:
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 and December 31, 2019
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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)
-
Table of Contents
Series B-1 Convertible Preferred Stock
On November 11, 2015, the Company issued 105,000 shares of Series B-1 Stock at a purchase price of $100.00 per share, for gross proceeds of
$10,500,000.
Between March 23, 2018 and May 23, 2018, holders of shares of Series B-1 Stock converted all shares of Series B-1 Stock into an aggregate of 2,916,668
shares of common stock and purchased an aggregate of 131,229 shares of common stock in consideration of the conversion of $472,426 of accrued dividends
payable on the Series B-1 Stock.
As a result of the forgoing conversions, at December 31, 2018 and 2019 there are no longer any issued and outstanding shares of Series B-1 Stock.
Overall balances and conversion of Series B-1 Stock and accrued dividends into common stock has been as follows:
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 and December 31, 2019
2. Common Stock
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)
-
Holders of common stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor.
Holders of common stock have one vote for each share held of record and do not have cumulative voting rights.
Holders of common stock are entitled, upon liquidation of the Company, to share ratably in the net assets available for distribution, subject to the rights, if
any, of holders of any preferred stock then outstanding. Shares of common stock are not redeemable and have no preemptive or similar rights. All outstanding
shares of common stock are fully paid and nonassessable.
Issuances of Common Stock
See Note N for common stock issued as commitment fees for notes payable during the 2019 fiscal year.
On August 22, 2018, 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.
Also see preferred stock section above for conversions of shares of preferred stock and accrued dividends into shares of common stock in 2018.
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Issuances to Directors, Executive Officers & Consultants
During the year ended December 31, 2019, the Company issued 36,897 shares of common stock to its directors in lieu of payment of board fees, valued at
$35,013.
During the year ended December 31, 2018, the Company issued 20,976 shares of common stock to its directors in lieu of payment of board fees, valued at
$37,532.
Employees’ exercise options
During 2019 and 2018, no employee stock options were exercised.
Securities Purchase Agreement dated November 13, 2014
Pursuant to a Securities Purchase Agreement, dated November 13, 2014, by and between the Company and a number of private and institutional investors,
the Company issued to certain private investors 664,584 shares of common stock and warrants to purchase an additional 996,877 shares of common stock for
aggregate gross proceeds of $1,595,000.
The warrants had a term of five years and an initial exercise price of $3.60 per share, and were fully exercisable since February 2015. The warrants had
customary anti-dilution protections including a “full ratchet” anti-dilution adjustment provision which are triggered in the event the Company sells or grants any
additional shares of common stock, options, warrants or other securities that are convertible into common stock at a price lower than $3.60 per share. The anti-
dilution adjustment provision was not triggered by certain “exempt issuances” which among other issuances, includes the issuance of shares of common stock,
options or other securities to officers, employees, directors, consultants or service providers.
On August 24, 2018 the Company issued Common Stock and Warrants to investors at a purchase price of $1.50 per unit which triggered the anti-dilution
protection provision under this Securities Purchase Agreement. As a result, the total number of outstanding and fully vested warrants was increased from
996,877 to 2,392,502, and the exercise price was reduced from $3.60 to $1.50 per share. The Company recognized a non-cash deemed dividend of $1,288,139
in 2018 in connection with these adjustments.
The warrants expired in November 2019.
Securities Purchase Agreement dated September 23, 2015
On September 23, 2015, the Company issued a warrant to purchase 69,445 shares of common stock in connection with the issuance of a promissory note.
The warrants are immediately exercisable at an initial exercise price of $3.60 per share and have a term of five years.
The warrants have customary anti-dilution protections including a "full ratchet" anti-dilution adjustment provision which are triggered in the event the
Company sells or grants any additional shares of common stock, options, warrants or other securities that are convertible into common stock at a price lower
than $3.60 per share. The anti-dilution adjustment provision was not triggered by certain "exempt issuances" which among other issuances, includes the
issuance of shares of common stock, options or other securities to officers, employees, directors, consultants or service providers.
On August 24, 2018 the Company issued Common Stock and Warrants to the investors at a purchase price of $1.50 per unit which triggered the anti-dilution
protection provision under this Securities Purchase Agreement. As a result, the total number of outstanding and fully vested warrants was increased from 69,445
to 166,668, and the exercise price was reduced from $3.60 to $1.50 per share. The Company recognized a non-cash deemed dividend of $140,827 in 2018 in
connection with these adjustments.
In February 2020, the Company entered into a convertible note at a conversion price of $1.15 that triggered the anti-dilution feature under Securities
Purchase Agreement dated September 23, 2015. Additionally, the Company entered into an amendment (as discussed in Note N) that reduced the conversion
price of the Amended Note to $0.65, thus triggering the anti-dilution feature under the Securities Purchase Agreement dated September 23, 2015. In the first
quarter of 2020, the total number of outstanding and fully vested warrants will increase, the exercise price will ultimately reduce to $0.65 per share, and the
Company will record a non-cash deemed dividend in connection with both triggering events.
49
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Table of Contents
3. Warrants
The Company has issued warrants to certain creditors, investors, investment bankers and consultants. A summary of warrant activity is as follows:
Outstanding, as of December 31, 2017
1,398,969
3.81
2.06
Weighted
average
exercise
price
Weighted
average
remaining
life
(in years)
Aggregate
intrinsic
value
Total
Warrants
Granted
Increase due to trigger of anti-dilution provision feature
Exercised
Forfeited
Expired
Outstanding, as of December 31, 2018
Granted
Exercised
Forfeited
Expired
Outstanding, as of December 31, 2019
Vested or expected to vest at December 31, 2019
Exercisable at December 31, 2019
NOTE R—STOCK OPTIONS
2004 Stock Option Plan
1,035,000
1,492,848
—
—
(145,841)
3,780,976
2,000,000
—
—
(2,392,502)
3,388,474
3,388,474
3,388,474
1.50
1.50
—
—
6.00
1.59
1.50
—
—
1.50
1.60
1.60
1.60
2.05
—
3.94
—
—
—
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.
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Table of Contents
Stock Option Activity
Information summarizing option activity is as follows:
2004
Plan
Number of Options
Non
2015
Plan
Plan
Total
Weighted
average
exercise
price
Weighted
average
remaining
life
(in years)
Aggregate
intrinsic
value
Outstanding, as of December 31, 2017
52,296
82,086 1,343,111 1,477,493 $
2.91
Granted
Exercised
Forfeited
Expired
Outstanding, as of December 31, 2018
Granted
Exercised
Forfeited
Expired
Outstanding, as of December 31, 2019
Vested or expected to vest at December
31, 2019
Exercisable at December 31, 2019
—
—
—
(18,961)
33,335
—
—
—
(2,084)
31,251
351,918
—
351,918
—
—
—
(149,866)
(111,253)
(38,613)
(91,531)
(59,097)
(13,473)
381,918 1,172,761 1,588,014 $
241,334
—
241,334
—
—
—
(44,783)
(4,168)
(40,615)
(14,717)
(32,841)
(16,040)
567,920 1,152,553 1,751,724 $
1,594,905 $
992,747 $
1.97
—
2.63
3.03
2.72
1.17
—
2.27
3.08
2.51
2.59
2.88
The options outstanding and exercisable at December 31, 2019 were in the following exercise price ranges:
5.00 $
4.30 $
4.17 $
3.63 $
0
0
0
0
Range of exercise prices
0.51 - 1.99
2.00 - 3.50
3.51 - 4.92
0.51 - 4.92
$
$
$
$
Options Outstanding
Weighted
average
exercise
price
1.52
2.56
4.58
Number of
shares
418,336 $
1,164,841
168,547
1,751,724
Weighted
average
remaining
life (in years)
5.78
4.28
0.76
Options Exercisable
Weighted
average
exercise
price
1.96
2.58
4.58
Number
exercisable
62,712 $
761,488
168,547
992,747
The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $0.50 as of December 31,
2019, 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, 2019 was 0.
The weighted average fair value of options granted during the years ended December 31, 2019 and 2018 was $1.03 and $1.53 per share, respectively. The
total intrinsic value of options exercised during the years ended December 31, 2019 and 2018 was $0. The total fair value of shares vested during the years
ended December 31, 2019 and 2018 was $891,760 and $946,435, respectively.
As of December 31, 2019, future forfeiture adjusted compensation cost related to nonvested stock options is $731,370 and will be recognized over an
estimated weighted average period of 0.91 years.
NOTE S—INCOME TAXES
There was no provision for federal or state taxes as at December 31, 2019 and 2018.
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
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51
$
2019
2018
84,000 $
474,000
894,000
(5,000)
62,000
15,002,000
(16,511,000)
91,000
474,000
644,000
(13,000)
50,000
12,735,000
(13,981,000)
$
— $
—
Table of Contents
The Company has a valuation allowance against the full amount of its net deferred taxes due to the uncertainty of realization of the deferred tax assets due
to operating loss history of the Company. The Company currently provides a valuation allowance against deferred taxes when it is more likely than not that some
portion, or all of its deferred tax assets will not be realized. The valuation allowance could be reduced or eliminated based on future earnings and future
estimates of taxable income. Similarly, income tax benefits related to stock options exercised have not been recognized in the financial statements.
As of December 31, 2019, the Company has federal net operating loss carryforwards of approximately $70 million. Approximately $55 million are subject to
expiration between 2022 and 2037, and $15 million net operating loss carryforwards have no expiration date. These net operating loss carryforwards are subject
to the limitations under Section 382 of the Internal Revenue Code due to changes in the equity ownership of the Company. The Company has 3.6 million of state
net operating loss carryforwards.
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
Effect of net operating loss
Effective tax rate
2019
2018
21%
(2)
(22)
—%
21%
—
(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 2016 through 2019 remain open to examination by the IRS and state
jurisdictions. The Company believes it is not subject to any tax audit risk beyond those periods. The Company’s policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated
with any unrecognized tax benefits, nor was any interest expense incurred during the years ended December 31, 2019 and 2018.
NOTE T—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, 2019 and 2018.
NOTE U—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:
Net Loss
Deemed dividend from trigger of anti-dilution provision feature
Convertible preferred stock dividends
Net loss available to common stockholders (basic and diluted EPS)
52
2019
2018
$
$
(14,588,700) $
-
-
(14,588,700) $
(6,868,875)
(1,428,966)
(198,033)
(8,495,874)
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Table of Contents
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.
Stock options
Warrants
Potentially dilutive securities
Years ended December 31,
2018
2019
945
-
945
83
697,879
697,962
Items excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:
Stock options
Warrants
Convertible notes
Preferred stock
Total
Years ended December 31,
2018
2019
1,749,724
3,388,474
1,458,740
-
6,596,938
1,583,014
186,806
-
1,426,756
3,196,576
NOTE V—SUBSEQUENT EVENTS
Refer to Note N for subsequent events related to convertible notes in effect as of December 31, 2019.
On January 13, 2020, the Company issued a $157,000 principal amount convertible note to an institutional investor with a maturity date of June 13, 2020
which is convertible into common stock at a conversion price of $1.50 per share. The note was redeemable at any time by payment of a premium to the principal
balance starting at 10% and increasing to 30%. At the closing, the Company agreed to issue 650,000 shares of common stock in lieu of payment of a $75,000
commitment fee which would be reduced to 50,000 shares if the note is repaid prior to the maturity date.
On February 13, 2020, the Company issued a $126,000 principal amount convertible note to an institutional investor with a maturity date of July 13, 2020
which is convertible into common stock at a conversion price of $1.15 per share. The note is redeemable at any time by payment of a premium to the principal
balance starting at 10% and increasing to 30%. At the closing, the Company agreed to issue 550,000 shares of common stock in lieu of payment of a $57,500
commitment fee which would be reduced to 50,000 shares if the note is repaid prior to the maturity date. To date, the Company has only issued 50,000 shares
at the request of the lender.
On March 25, 2020, the Company entered into a sales incentive agreement TTI. The agreement provides that for each $5,000,000 in revenue (up to a
maximum of $20,000,000) TTI generates for the Company during the first year, that generate net income (calculated under U.S. generally accepted accounting
principles) of at least 20%, the Company will pay TTI a sales incentive fee of $500,000 payable by the issuance of 500,000 shares of Common Stock. In the
event that TTI generates revenue for the Company in excess of $20,000,000 during first year, the Company will issue TTI a five-year warrant to purchase
100,000 shares of Common Stock at an exercise price of $1.50 per share (the “Warrants”) for each $1,000,000 of revenue in excess of $20,000,000 (up to a
maximum of $25,000,000). In no event shall the Company be obligated to issue more than 2,000,000 shares of Common Stock or Warrants to purchase more
than 500,000 shares of Common Stock pursuant to the Sales Agreement.
On March 30, 2020, 972,000 warrant shares were exercised at $1.50 for net proceeds to the Company of $1,458,000.
On April 2, 2020, the Company issued 6,850 shares of common stock to its directors in payment of meeting fees. Additionally, the Company issued a
warrant to a new employee for 5,000 shares with three -vesting period.
On April 20, 2020, the Company entered into a Paycheck Protection Program Term Note (the “SVB Note”) with Silicon Valley Bank (“SVB”) pursuant to the
Paycheck Protection Program (the “Program”) of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the
U.S. Small Business Administration. The Company received total proceeds of $340,000 which will be used in accordance with the requirements of the CARES
Act. The Company will apply to SVB for forgiveness of amounts due on the SVB Note to the extent they are used for eligible payroll costs, rent obligations, and
covered utility payments incurred during the eight weeks following disbursement under the SVB Note. Until the six-month anniversary of the date of the SVB
Note (the “Deferral Expiration Date”), neither principal nor interest is due and payable. On the Deferral Expiration Date, the outstanding principal of the SVB Note
that is not forgiven will convert to an amortizing term loan at an interest rate of 1% per annum requiring equal monthly payments of principal and interest through
November 20, 2022.
On May 6, 2020, the Company issued a $2,415,000 principal amount senior secured convertible note (the “Note”) which provided for the funding of
$2,100,000. The principal amount is due and payable in five equal monthly installments of $268,333 beginning seven months after the funding date with the
remaining balance due on the twelfth month after the date of funding. The Note is convertible at a fixed convertible price of $1.16 per share. In connection with
the issuance of the Note, the Company made a payment of a $133,333 due diligence fee by issuing 114,943 shares to the Investor priced at $1.16. The
Company also issued a warrant to purchase 1,900,000 shares of common stock at a fixed exercise price of $1.16 and paid a placement fee of 7% of the gross
proceeds to Maxim Group LLC.
On May 12, 2020, the Company issued 7,077 shares of common stock to its directors in payment of meeting fees.
Subsequent to year-end, due to the effects of the worldwide coronavirus pandemic, the Company is closely monitoring its operations, liquidity, and capital
resources. We are actively working to minimize the current and future impact of this unprecedented situation. As of the date of issuance of these financial
statements, the full impact to the Company’s financial position is not known.
The Company has reviewed subsequent events through the date of this filing.
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Table of Contents
Exhibit Exhibit
EXHIBIT INDEX
No.
3.1
Certificate of Incorporation of BIO-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the current report on
Form 8-K, filed with the SEC on January 5, 2005)
3.2
Bylaws (incorporated by reference to Exhibit 3.3 to the current report on Form 8-K, filed with the SEC on January 5, 2005)
3.3
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
10.4
10.5
10.6
10.7
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)***
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 Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q, filed with the SEC on
November 16, 2015)
10.8
BIO-key International, Inc. 2015 Equity Incentive Plan (incorporated by reference to Appendix B to the definitive proxy statement filed with the SEC
on December 15, 2015)
54
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Table of Contents
10.9
Software License Purchase Agreement Dated November 11, 2015 by and among BIO-key Hong Kong Limited, Shining Union Limited, WWTT
Technology China, Golden Vast Macao Commercial Offshore Limited, Giant Leap International Limited (incorporated by reference to Exhibit 10.36 to
the registration statement on Form S-1 File No. 333-208747 filed with the SEC on December 23, 2015)**
10.10
Common Stock Purchase Agreement dated May 2, 2017 by and between Registrant and Xanthe Holdings Ltd. (incorporated by reference to Exhibit
10.2 to the quarterly report on Form 8-K, filed with the SEC on May 3, 2017)
10.11
Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K, filed with the SEC on May 3,
2017)
10.12
Form Non-Plan Option Agreement between the Company and certain of its directors, officers, employees and contractors (incorporated by reference
to Exhibit 10.4 to the quarterly report on Form 10-Q filed with the SEC on May 15, 2017)***
10.13
Securities Purchase Agreement dated April 3, 2018 by and between the Registrant and Wong Kwok Fong (Kelvin) (incorporated by reference to
Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on April 4, 2018)
10.14
Securities Purchase Agreement dated May 23, 2018 by and between the Registrant and Giant Leap International Limited (incorporated by reference
to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on May 30, 2018)
10.15
Securities Purchase Agreement dated May 23, 2018 by and between the Registrant and Micron Technology Development Limited (incorporated by
reference to Exhibit 10.2 to the current report on Form 8-K, filed with the SEC on May 30, 2018)
10.16
Securities Purchase Agreement dated May 31, 2018 by and between the Registrant and Wong Kwok Fong (Kelvin) (incorporated by reference to
Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on June 4, 2018)
10.17
Underwriting Agreement dated August 22, 2018 by and between the Registrant and Maxim Group LLP (incorporated by reference to Exhibit 1.1 to
the current report on Form 8-K, filed with the SEC on August 27, 2018)
10.18
Form of Common Stock Purchase Warrant dated August 24, 2018 (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K, filed
with the SEC on August 27, 2018)
10.19
GLP 2nd Amendment to Lease dated July 27, 2018 (incorporated by reference to Exhibit 10.26 to the annual report on Form 10-K, filed with the SEC
on April 1, 2019)
10.20
Marlen 4th Amendment to Lease dated June 2, 2018 (incorporated by reference to Exhibit 10.27 to the annual report on Form 10-K, filed with the
SEC on April 1, 2019)
10.21
Securities Purchase Agreement dated July 10, 2019 by and between the Registrant and Lind Global Macro Fund, LP. (incorporated by reference to
Exhibit 10.1 to the quarterly report on Form 10-Q, filed with the SEC on August 14, 2019)
10.22
Security Agreement dated July 10, 2019 by and between the Registrant and Lind Global Macro Fund, LP. (incorporated by reference to Exhibit 10.2
to the quarterly report on Form 10-Q, filed with the SEC on August 14, 2019)
10.23
Collateral Sharing Agreement dated July 10, 2019 by and among the Registrant, Lind Global Macro Fund, LP and Versant Funding LLC
(incorporated by reference to Exhibit 10.3 to the quarterly report on Form 10-Q, filed with the SEC on August 14, 2019)
10.24
$3,060,00 Senior Secured Convertible Promissory Note dated July 10, 2019 (incorporated by reference to Exhibit 10.4 to the quarterly report on
Form 10-Q, filed with the SEC on August 14, 2019)
10.25
Common Stock Purchase Warrant dated July 10, 2019 (incorporated by reference to Exhibit 10.5 to the quarterly report on Form 10-Q, filed with the
SEC on August 14, 2019)
10.26
BIO-key International, Inc. Amended and Restated 2015 Equity Incentive Plan (incorporated by reference to Appendix A to the definitive proxy
statement filed with the SEC on April 30, 2019)***
21.1
List of subsidiaries of BIO-key International, Inc. (incorporated by reference to Exhibit 21.1 to the annual report on Form 10-K, filed with the SEC on
March 30, 2016)
23.1*
Consent of RMSBG
55
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Table of Contents
31.1*
31.2*
32.1*
32.2*
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
101.INS*
XBRL Instance
101.SCH* XBRL Taxonomy Extension Schema
101.CAL*
XBRL Taxonomy Extension Calculation
101.DEF*
XBRL Taxonomy Extension Definition
101.LAB*
XBRL Taxonomy Extension Labels
101.PRE* XBRL Taxonomy Extension Presentation
* filed herewith
** Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted sections have been filed separately with the Securities and
Exchange Commission
*** Management compensatory plan.
56
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Table of Contents
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: May 14, 2020
BIO-KEY INTERNATIONAL, INC.
/s/ MICHAEL W. DEPASQUALE
By:
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
/s/ MICHAEL W.
DEPASQUALE
Michael W. DePasquale
/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
/s/ MANNY ALIA
Manny Alia
Title
Chairman of the Board of Directors, Chief Executive Officer and Director
(Principal Executive Officer)
Date
May 14, 2020
Chief Financial Officer (Principal Financial and Accounting Officer)
May 14, 2020
Director
Director
Director
Director
Director
Director
Director
Director
57
May 14, 2020
May 14, 2020
May 14, 2020
May 14, 2020
May 14, 2020
May 14, 2020
May 14, 2020
May 14, 2020
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. 333-233713, 333-225934 and 333-227108) of our report dated May 14, 2020 relating to the financial statements which appear in this
Form 10-K for the year ended December 31, 2019.
Our report on the consolidated financial statements contains an explanatory paragraph regarding the Company's ability to continue as a going concern.
Exhibit 23.1
ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
Saddle Brook, New Jersey
May 14, 2020
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: May 14, 2020
/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: May 14,2020
/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 the Annual Report of BIO-key International, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2019, 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: May 14, 2020
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, 2019, 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: May 14, 2020
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.