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BIO-key International

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FY2020 Annual Report · BIO-key International
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SECURITIES & EXCHANGE COMMISSION EDGAR FILING

BIO KEY INTERNATIONAL INC

Form: 10-K 

Date Filed: 2021-03-29

Corporate Issuer CIK:   1019034

© Copyright 2021, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the terms of use.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER  31, 2020

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  ☐

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.  ☐

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control

over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report.  ☐

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

As of June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s
common stock held by non-affiliates was approximately $15.7 million based upon the closing price for shares of the registrant’s post-split common stock of $7.12
as reported by the Nasdaq Stock Market on that date.

As of March 26, 2021, the registrant had 7,817,475 shares of common stock outstanding.

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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

Item 5
Item 6
Item 7
Item 7A
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
Quantitative And Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information

PART III

Item 10
Item 11
Item 12
Item 13
Item 14

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

Item 15
Item 16

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 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

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

Overview

BIO-key International, Inc. (the “Company,” “BIO-key,” “we,” or “us”) is a leading identity and access management (IAM) platform provider enabling secure
work-from-anywhere  for  enterprise,  education,  and  government  customers.    Our  vision  is  to  enable  any  organization  to  secure  streamlined  and  passwordless
workforce, customer, citizen and student access to any online service, workstation, or mobile application, without a requirement to use tokens or phones.  Our
products  include  PortalGuard®  and  PortalGuard  Identity-as-a-Service  (IDaaS)  enterprise  IAM,  WEB-key®  biometric  civil  and  large-scale  ID  infrastructure,  and
high-quality, low-cost accessory hardware to provide a full and complete solution for identity-innovating customers.

BIO-key PortalGuard empowers organizations to maximize the power of cloud, mobile and web technologies by securing users’ identities and connecting

them with the applications they rely on, while keeping cyber-intruders and unauthorized delegates (proxy) out.

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

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

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

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

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

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Development of Business

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

We  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,  credit  card,  passports,  driver’s  licenses,  or  other  form  of
possession or knowledge-based credentialing. Our advanced technology has been, and is, used to improve both the accuracy and speed of competing fingerprint
biometrics in some of the largest biometric systems in the world.

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

Our Products

BIO-key PortalGuard and PortalGuard IDaaS

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

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

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

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

The forgoing allows our customers to combine and authenticate legacy and future technologies and to securely connect users to the technology that they

choose. We design transparent compatibility of the BIO-key PortalGuard IDaaS with on-premise infrastructures and public and hybrid clouds.

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

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

Our  customers  use  BIO-key  to  (i)  manage  and  secure  work-related  IT  access  of  their  employees,  contractors  and  supply  chain  partners,  which  we  call

workforce identity; and (ii) manage and secure the identities of users of their web properties, which we call customer identity.

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

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

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

We have developed what we believe is the most discriminating and effective commercially available finger-based biometric technology. This technology is
embedded in our PortalGuard product for enterprise security, providing customers with a unique capability to authenticate users without a phone or token, where
appropriate, such as manufacturing, retail, call centers, and health care workers.  Other markets for scalable biometric engines include government markets, large
scale identity projects such as voter’s registration, driver’s license, national ID programs, and SIM card registration.

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

Impact of COVID-19

The COVID-19 outbreak has led 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.    Our
transition  to  remote  work  has  been  highly  successful,  and  our  teams  operate  efficiently  using  our  own  IAM  software  to  authenticate  video  conferencing
applications and other collaboration tools.  The COVID-19 pandemic has extended sales cycles and delayed deployments in most markets in which we operate,
particularly in Africa.  We continue to conduct business daily and are actively closing transactions throughout the current climate, with no changes to personnel.

Markets

Identity Management, User Authentication, Privilege Entitlement and Access Control

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

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 and MFA 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 in their phones and welcome the same user experience to access applications without
passwords.

More  recently,  in  connection  with  the  acquisition  of  PistolStar  we  have  developed  a  large  customer  base  in  the  higher  education  vertical.  Colleges  and
universities throughout the United States use our PortalGuard single sign on platform. As colleges and universities continue to operate in remote environments,
we have seen additional demand for our solutions.

Upon  introducing  a  series  of  compact  fingerprint  readers,  we  saw  an  immediate  increase  in  inquiries  from  both  commercial  companies  seeking  an
alternative to passwords, and from consumers recognizing that they could use SidePass, SideSwipe or EcoID to replace their Windows passwords and enable
Windows Hello without replacing or upgrading laptops or tablets.

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.

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

•

•

•

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

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

Demand for BIO-key hardware products from Windows 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.

The Asia Pacific region.

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

•

•

Business Model

Our business model is focused on the following key areas:

Market
Drivers

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

OEM
Customers

We  will  continue  to  prioritize  securing  agreements  with  OEM  customers.  The  history  of  success  supporting  NCR,  McKesson,  Omnicell,  and
LexisNexis provides an established footprint that we intend to build upon. As OEM customers embed our solutions within their products, the
customer benefits from the enhanced security and workflow, and frees them from investing in R&D to manage an IAM infrastructure of their
own. OEM customers’ ordering patterns are more predictable and OEM customers generally require lower service and support resourcing.

Highly
Regulated
Industries

Partner
Model

Microsoft
Partnership

Hardware

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

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

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

Hardware products generated 16% of our revenue in 2020. 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.

We have grown our business through a combination of organic growth and the strategic acquisition of PistolStar.  We expect to continue to pursue strategic
acquisitions of select businesses and assets in the IAM space.  In furtherance of this strategy, we are active in the industry and regularly evaluate businesses
that we believe will either provide an entry into new market verticals or be synergistic with our existing operations and in either case, be accretive to earnings. 
We cannot provide any assurance as to whether we will be able to complete any acquisition and if completed, successfully integrate any business we acquire
into our operations. Please see the section captioned “RISK FACTORS” for additional information regarding acquisition risks.

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Marketing and Distribution

We sell our products directly through our field and inside sales teams, as well as indirectly through our network of channel partners. Through our CAP, we
have partnered with more than 40 resellers, system integrators and other distribution partners.  We are committed to aggressively growing this program in 2021.

We partner with leading application, managed service and infrastructure vendors, such as Ingram, D&H, Insight, NGEN, Amazon Web Services, UCROO

Campus, Software House International (SHI), Virtual Graffiti, Atlassian, and ProCirrus.

We offer our software under a SaaS term license and generate annual recurring revenue (ARR) primarily by selling multi-year subscriptions to our software.

We employ a customer success team, focused on customer satisfaction and early remediation. 

In  2020,  we  announced  that  we  had  secured  two  of  the  largest  contracts  in  our  history,  with  our  partner  Technology  Transfer  Institute.  The  contracts,
valued at a combined $75,000,000, are for large-scale identification projects in Nigeria. Under the first contract, we will provide biometric 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. Currently Africa and
the  surrounding  regions  are  receiving  government  funding  to  expand  the  use  of  biometric  authentication  solutions  to  help  establish  trustworthy  government
programs  and  reduce  fraud.    These  historic  opportunities  are  expected  to  showcase  our  ability  to  support  large  scale  projects  utilizing  our  core  biometric
authentication software engine, WEB-key and hardware to support large-scale enrollment and ID verification. We received our first purchase order under these
contracts in the fourth quarter of 2020 which we expect to ship in the first half of 2021 upon receipt of prepayment of the order. The COVID-19 pandemic has and
may continue to delay the rollout of these programs. 

Intellectual Property Rights

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

Patents

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

In May 2005, the U.S. Patent & Trademark Office issued patent 6,895,104 for our Vector Segment fingerprint technology (VST), our core biometric analysis

and identification technology. With the payment of all maintenance fees, this patent will expire on March 4, 2023.

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

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

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

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

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

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

On May 26, 2009, we were issued US patent No. 7,539,331 for our “Image Identification System” method for improving the performance and reliability of

image analysis within an image identification system. With the payment of all maintenance fees, this patent will expire on March 22, 2022.

On  November  8,  2011,  we  were  issued  US  Patent  No.  8,055,027  for  our  “Generation  of  Directional  Information  in  the  Context  of  Image  Processing”

method for image enhancement and processing. With the payment of all maintenance fees, this patent will expire on October 10, 2027.

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

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

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

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

On June 19, 2018 we were issued U.S. Patent No. 10,002,244 for our “Utilization of Biometric Data” to allow continuous, passive user authentication on a

mobile device. With the payment of all maintenance fees, this patent will expire on March 6, 2035.

On  July  27,  2018  we  were  issued  U.S.  Patent  No.  10,025,831  for  “Adaptive  Short  Lists  and  Acceleration  of  Biometric  Database  Search”,  a  method  to

quickly and iteratively search a database of biometric data. With the payment of all maintenance fees, this patent will expire on August 10, 2036.

On September 3, 2019 we were issued U.S. Patent No. 10,400,481 for “Fingerprint Lock”, a lock design method of the shackle and spring integration to

electronics. With the payment of all maintenance fees, this patent will expire on June 27, 2037.

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

We  have  also  been  granted  parallel  patents  to  the  US  Patent  portfolio  to  certain  of  our  patents  in  many  foreign  countries  offering  protection  of  our

intellectual property rights around the world.

Trademarks

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

Through our subsidiary PistolStar, we have the following additional registered trademarks: “PortalGuard®”, “PASSIVEKEY®”, and “PISTOLSTAR®”. We

also acquired the following unregistered trademarks: “PortalGuard NebulaTM”, “Password PowerTM” and “ScoochTM”.

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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.

Research and Development

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

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 and use-cases. In order to maintain our position in the market, we
will need to continue to upgrade and refine our existing technologies as new standards become relevant to our customers and markets.

During the years ended December 31, 2020 and 2019, we incurred $1,396,436 and $1,331,667, respectively, on research and development.

In future periods our R&D efforts will remain focused on updating and advancing our core software products including PortalGuard and PortalGuard IDaaS,

WEB-key and VST. These products are critical to support the anticipated growth in enterprise IAM and large-scale ID projects.

Competition

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

The  majority  of  sales  for  automated  fingerprint  identification  products  in  the  market  to  date  have  been  deployed  for  government  agencies,  healthcare
facilities, and law enforcement applications. The consumer and commercial markets represent areas of 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 FIDO-compliant keys enter the market, led by Yubico’s YubiKey, a USB key that acts as a credential for access.  Keys alone do not
meet the needs of large organizations for which key sharing and lost keys are concerns.  We are introducing a line of low-cost USB keys and they do not offer the
security benefits of biometric technology as they can be easily lost or stolen and replacement costs / managing the product becomes a growing expense.

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 privacy concerns with work-from-home use, and is typically highly dependent on ambient lighting conditions, angle
of view, and other factors.

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Government Regulations

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

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

Environmental Regulations

As of the date of this 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.

Seasonality

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

capital budgets.

Human Capital Resources

As of the date of this report, we employed thirty-four individuals on a full-time basis as follows: (i) sixteen in engineering, customer support, and research
and development; (ii) eight in finance and administration; and (iii) ten in sales and marketing. We also use two consultants who provide engineering and technical
services on a part-time basis, three full-time factory contractors, and three part-time factory contractors in China. None of our employees are represented by a
labor union and we believe that our relationship with our employees is good.

Available Information

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

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

We have historically not generated significant revenue and have sustained substantial operating losses.

BUSINESS AND FINANCIAL RISKS

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

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

technology.

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

•

•

•

•

•

•

•

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

the performance and reliability of biometric solutions;

marketing efforts and publicity regarding these solutions;

public perception regarding privacy concerns;

costs involved in adopting and integrating biometric solutions;

proposed or enacted legislation related to privacy of information; and

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

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

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

revenue.

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

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The market for our solutions is still developing and if the biometrics industry adopts standards or a platform different from our standards or

platform, our competitive position would be negatively affected.

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

Our software products 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  expect  material  revenues  from  Africa  beginning  in  2021  and  future  periods.  Our  financial  performance  will  be  subject  to  risks  associated

with changes in the value of the U.S. dollar versus local currencies.

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

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Although  we  have  made  significant  sales  of  our  products  throughout  Asia  and  Africa  in  prior  years,  we  have  not  been  able  to  consistently

enforce our contract rights and collect all receivables which has resulted in material write-offs.

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 receivables which may be material in amount.  Any such write-offs have in the past and will negatively impact our financial position and
results of operation.

We depend on key employees and members of our management team, including our Chairman of the Board and Chief Executive Officer and our

Chief Technology Officer, in order to achieve our goals. We cannot assure you that we will be able to retain or attract such persons.

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

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

to entry against our competitors.

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

We may be subject to claims with respect to the infringement of intellectual property rights of others, which could result in substantial costs

and diversion of our financial and management resources.

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

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

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

expansion of our business.

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

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

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

We may need to obtain additional financing to execute our business plan over the long-term, which may not be available. If we are unable to

raise additional capital or generate significant revenue, we may not be able to continue operations.

We have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred
stock, common stock, and through factoring receivables. We currently require approximately $735,000 per month to conduct our operations, a monthly amount
that we have been unable to consistently achieve through revenue generation. During 2020, we generated approximately $2,837,000 of revenue, which is below
our  average  monthly  requirements.  If  we  are  unable  to  generate  sufficient  revenue  to  cover  operating  expenses  and  fund  our  business  plan,  we  will  need  to
obtain additional third-party financing. We may, therefore, need to obtain additional financing through the issuance of debt or equity securities. We cannot assure
you that we will be able to secure any such additional financing on terms acceptable to us or at all. If we cannot obtain such financing, we will not be able to
execute our business plan, will be required to reduce operating expenses, and in the extreme case, discontinue operations. 

We may not achieve profitability if we are unable to maintain, improve our offerings.

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

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

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

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

condition.

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

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. 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 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  cyberattack  that  could  materially
increase financial risk to the Company or our customers, such a security breach or cyberattack could adversely affect our business and operations, including by
damaging our reputation and our relationships with our customers, employees and investors, exposing us to litigation, fines, penalties or remediation costs.

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

2020.

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

There is a scarcity of and competition for acquisition opportunities.

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

•

•

•

•

•

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

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

competition from other acquirers of operating companies;

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

unwillingness of a potential acquiree to work with our management.

Risks related to acquisition financing.

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

We  may  experience  difficulties  in  integrating  the  operations,  personnel  and  assets  of  any  business  we  acquire  which  may  disrupt  our

business, dilute stockholder value, and adversely affect our operating results.

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

•

•

difficulties in integrating operations, technologies, services and personnel;

the diversion of financial and management resources from existing operations;

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•

•

•

•

•

•

•

the risk of entering new markets;

difficulties in retaining the existing customers;

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

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

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

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

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

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

To  the  extent  we  make  any  material  acquisitions,  our  earnings   may  adversely  affected  by  non-cash  charges  relating  to  the  amortization  of

intangible assets.

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

RISKS RELATED TO OUR COMMON STOCK

We have issued a substantial number of options and warrants exercisable into shares of our common stock which could result in substantial

dilution to the ownership interests of our existing stockholders.

As of the date of this report, approximately 4,917,000 shares of our common stock were reserved for issuance upon exercise or conversion of outstanding
stock  options  and  warrants.  The  exercise  or  conversion  of  these  securities  will  result  in  a  significant  increase  in  the  number  of  outstanding  shares  and
substantially dilute the ownership interests of our existing stockholders. 

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

Our  most  recent  public  offering  in  July  2020  resulted  in  the  issuance  of  5,059,850  shares  of  our  common  stock,  including  the  exercise  of  prefunded
warrants, and warrants to purchase approximately 4,260,000 shares of common stock.  These warrants are immediately exercisable as of the date of this report
and subject to an effective registration. The availability of these shares for sale to the public, whether or not sales have occurred or are occurring, and the sale of
such shares in the public markets could have an adverse effect on the market price of our common stock. Such an adverse effect on the market price would
make  it  more  difficult  for  us  to  raise  additional  financing  through  the  sale  of  equity  or  equity-related  securities  in  the  future  at  a  time  and  price  that  we  deem
reasonable or appropriate.

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

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

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If  we  fail  to  comply  with  the  continued  minimum  closing  bid  requirements  of  the  Nasdaq  or  other  requirements  for  continued  listing,  our

Common Stock may be delisted and the price of our Common Stock and our ability to access the capital markets could be negatively impacted.

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

We may need to raise additional funds in the future through issuances of securities and such additional funding may be dilutive to stockholders

or impose operational restrictions.

We may 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. 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. 

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

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

The trading price of our common stock may be volatile.

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

ITEM 2. DESCRIPTION OF PROPERTY

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

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ITEM 3. LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this

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

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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

PART II

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

Holders

As of March 26, 2021, the number of stockholders of record of our common stock was 112.

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 Delaware General Corporation Law.  The timing, amount, and form of dividends, if any, will depend on, among other things, our
results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors.

Securities Authorized for Issuance under Equity Compensation Plans

For  information  on  securities  authorized  for  issuance  under  the  Company’s  equity  compensation  plans,  see  “Item  12  -  Security  Ownership  of  Certain

Beneficial Owners and Related Stockholder Matters.”

Unregistered Sales of Equity Securities

There were no unregistered sales of the Company’s equity securities during 2020 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help you understand our Company.
This discussion is provided as a supplement to and should be read in conjunction with our consolidated financial statements for the years ended December 31,
2020 and 2019 and the accompanying notes included elsewhere in this Report.

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

a post-split basis.

Overview

We are a leading identity access management (IAM) platform provider for the enterprise and large-scale customer and civil ID solutions.  Built to leverage
BIO-key’s world-class biometric core platform among 14 other strong authentication factors, BIO-key PortalGuard and hosted PortalGuard IDaaS are platforms
that enable our customers to securely and easily assure that only the right people can access the right systems.  PortalGuard goes beyond traditional multifactor
authentication  (MFA)  solutions  by  addressing  sizeable  gaps,  such  as  allowing  roving  users  to  biometrically  authenticate  at  any  workstation  without  using  their
phones or tokens, eliminating unauthorized account delegation, detecting duplicate users, and accommodating in-person identification. 

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

Large-scale customer and civil ID customers use our scalable biometric management platform and FBI-certified scanner hardware to manage enrollment,
de-duplication and authentication for millions of users.  One large bank has enrolled and identifies over 10 million of their customers in branches on a daily basis. 

We  sell  our  branded  biometric  and  FIDO  authentication  hardware  as  accessories  to  our  IAM  platforms,  so  that  customers  can  have  a  single  vendor
providing  all  components  of  their  IAM  solution.    We  do  not  mandate  BIO-key  hardware  and  our  NIST-certified  biometric  platform  is  unique  in  that  it  supports
interoperable mixing and matching combinations of fingerprint scanners regardless of manufacturer, so that the right scanner can be deployed for the right use
case, without mandating the user of a particular scanner.

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

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

PortalGuard is used by our customers to manage and secure IT access by their employees, contractors and partners, which we call workforce identity.
PortalGuard  is  also  used  to  manage  and  secure  the  identities  of  an  organization’s  customers  through  integration  of  APIs  we  have  developed  and  industry-
standard federation standards, which we call customer identity. We invoice customers in advance in annual and multi-year prepaid installments for subscriptions
to our platforms.

Strategic Outlook

Historically, our largest market has been access control within highly regulated industries such as government, financial services, and healthcare.  In 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 2021 and beyond.

In  2020,  we  announced  that  we  had  secured  two  of  the  largest  contracts  in  our  history,  with  our  partner  Technology  Transfer  Institute.    The  contracts,
valued at a combined $75,000,000, are for large-scale identification projects in Africa and Nigeria. Under the first contract, we will provide biometric authentication
to support the infrastructure of a new e-commerce project developed with the expectation to generate more than one million jobs in Nigeria. The second contract
provides for BIO-key hardware and software to be used by a leading African telecommunications company to secure internal access to customer data. Currently
Africa  and  the  surrounding  regions  are  receiving  government  funding  to  expand  the  use  of  biometric  authentication  solutions  to  help  establish  trustworthy
government programs and reduce fraud.  We received our first purchase order under these contracts in the fourth quarter of 2020 which we expect to ship in the
first half of 2021 upon receipt of prepayment for the order.  The COVID-19 pandemic has and may continue to delay the rollout of these programs.

We plan to have a more significant role in the 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.

We expect to grow our business within government services and highly-regulated industries in which we have historically had a strong presence including
financial services, higher education, and healthcare.  We believe that continued heightened security and privacy requirements in these industries, and as colleges
and universities continue operating in remote environments, we will generate increased demand for security solutions, including biometrics. In addition, we expect
that the compatible, yet superior portable biometric user experience offered by our technology for Windows 10 users will accelerate the demand for our computer
network log-on solutions and fingerprint readers.  Through value add-offerings via direct sales, resellers, and strategic partnerships with leading higher education
platform providers, we will continue to grow our installed base. 

Our primary sales strategies are focused on (i) increased marketing efforts into the IAM market, (ii) dedicated pursuit of large-scale identification projects
across  the  globe  and  (iii)  growing  our  channel  alliance  program  which  we  have  grown  to  more  than  forty  participants  and  is  starting  to  generate  incremental
revenues.

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A second component of our growth strategy is to pursue strategic acquisitions of select businesses and assets in the IAM space.  In furtherance of this
strategy, we are active in the industry and regularly evaluate businesses that we believe will either provide an entry into new market verticals or be synergistic
with  our  existing  operations  and  in  either  case,  be  accretive  to  earnings.    We  cannot  provide  any  assurance  as  to  whether  we  will  be  able  to  complete  any
acquisition and if completed, successfully integrate any business we acquire into our operations. 

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 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.

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 who are eager to take advantage of the challenges of securing remote workers. We believe that biometrics
should play a key role in remote user authentication.

RESULTS OF OPERATIONS

Consolidated Results of Operations

Two Year % trend

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

Years ended
December 31,

2020

2019

50%   
34%   
16%   
100%   

18%   
2%   
9%   
29%   
71%   

206%   
49%   
255%   
0%   
-184%   

-158%   
-342%   

40%
20%
40%
100%

12%
41%
56%
109%
-9%

222%
58%
280%
307%

-596%

-47%
-643%

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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

Revenues

2020

2019

$ Chg

% Chg

2020 - 2019

  $

  $

  $

  $

1,432,228    $
962,038     
442,516     
2,836,782    $

925,245    $
442,649     
899,634     
2,267,528    $

506,983     
519,389     
(457,118)    
569,254     

502,214    $
49,891     
242,721     
794,826    $

272,318    $
916,112     
1,272,815     
2,461,245    $

229,896     
(866,221)    
(1,030,094)    
(1,666,419)    

55%
117%
-51%
25%

84%
-95%
-81%
-68%

Revenue increased $569,254 or 25% to $2,836,782 in 2020 as compared to $2,267,528 in 2019 due to the factors stated below. 

For  the  years  ended  December  31,  2020  and  2019,  service  revenues  included  approximately  $1,383,000  and  $904,000,  respectively,  of  recurring
maintenance and support revenue, and approximately $49,000 and $21,000, respectively, of non-recurring custom services revenue.  Recurring service revenue
increased 53% from 2019 to 2020 which is due largely to the additional service revenue from PistolStar customers in the last six months of 2020. Non-recurring
custom  services  increased  134%  due  to  increased  new  customer  installations.  As  our  customer  base  continues  to  grow,  we  expect  the  service  revenue  to
increase in future periods.

For  the  years  ended  December  31,  2020  and  2019,  license  revenue  increased  approximately  $519,000  or  117%  to  $962,038.  We  increased  both  the

variation and number of customers, including additional revenue from the PistolStar acquisition in the last six months of 2020. 

Hardware sales decreased by approximately $457,000, or 51%, to $442,516 in 2020 as a result of fewer large customer deployments, and reduced lock

sales.  Fingerprint reader sales decreased approximately $412,000, or 48%, while the biometric locks decreased approximately $45,000, or 98% from 2019.

Costs of goods sold

For the year ended December 31, 2020, cost of service increased approximately 84% to $502,214, due to the increased revenue and the direct support for

the PortalGuard installations.

License  costs  for  the  year  ended  December  31,  2020  decreased  approximately  95%  to  $49,891.  The  decrease  was  attributable  primarily  to  the

amortization and actual deployments of the software rights of approximately $15,000 in 2020 compared to $884,000 in 2019.

Hardware costs for the year ended December 31, 2020 decreased approximately 81% to $242,721. The decrease was attributable primarily to the write

down of lock inventory and parts as a result of the discontinuance of lock sales in the US in 2019 and reduction of hardware sales.

Selling, general and administrative

2020

2019

$ Chg

% Chg

2020 - 2019

$

5,848,687    $

5,036,820    $

811,867     

16%

Selling,  general  and  administrative  costs  for  year  ended  December  31,  2020  were  $5,848,687  representing  a  16%  increase  over  2019.  The
increase included expenses associated with new marketing personnel and web-site integration of PistolStar, additional costs associated with the PistolStar office
staff  and  expenses,  one-time  integration  costs  incurred  in  connection  the  acquisition  of  PistolStar,  increased  accounting  and  legal  fees  incurred  in  connection
with financing transactions, and costs associated with establishing our African subsidiary.  These amounts were offset in part by a decrease in travel, bad debt
expense, factor fees, and non-cash compensation.

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Research, development and engineering

2020

2019

$ Chg

% Chg

2020 - 2019

$

1,396,436    $

1,331,667    $

64,769     

5%

For the year ended December 31, 2020, research, development and engineering costs were $1,396,436 representing a 5% increase over 2019, as a result
of an increase in recruiting expenses and the addition of PistolStar expenses.  These amounts were offset by a decrease in contracting services and non-cash
compensation.

Impairment

Impairment of resalable software license rights

2020

  $

-     

2019
6,957,516    $

$ Chg
(6,957,516)    

% Chg

-100%

2020 - 2019

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
Government grant
Interest expense
Loss of extinguishment of debt

2020

2019

$ Chg

% Chg

2020 - 2019

30,649     
340,819     
(4,343,212)    
(499,076)    
(4,470,820)   $

154     
-     
(1,069,134)    
-     
(1,068,980)   $

30,495     
340,819     
(3,274,078)    
(499,076)    
(3,401,840)    

  $

19,802%

n/a 
306%
n/a 
318%

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

The  2019  total  includes  the  write-off  of  unamortized  discount  and  debt  issuance  costs  related  to  the  April  2019  and  June  2019  notes  repaid  prior  to

maturity.

LIQUIDITY AND CAPITAL RESOURCES

Operating activities overview

Net cash used for operations during the year ended December 31, 2020 was approximately $4,950,000. Items of note included:

•

•

Net positive cash flows related to non-cash expenses of approximately $6,104,000.

Net negative cash flows related to changes in accounts receivable, prepayments, accounts payable, accruals, lease liabilities, and deferred revenue
of approximately $1,457,000 and our net loss for the period.

Investing activities overview

Approximately $2,230,000 was used for investing activities during the year ended December 31, 2020 and related primarily to the acquisition of PistolStar.

Financing activities overview

Approximately $24,094,000 was provided by financing activities during the year ended December 31, 2020 consisting of the issuance of common stock
and warrants in our underwritten public offering, exercise of warrants and issuance of convertible notes.  These amounts were offset by repayment of convertible
notes, repayment of notes payable and other related party debt, debt service fees, and costs associated with the issuance of our securities.

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Sources of Liquidity

Since  our  inception,  our  capital  needs  have  been  principally  met  through  proceeds  from  the  sale  of  equity  and  debt  securities.  We  expect  capital

expenditures to be less than $100,000 during the next twelve months.

The following sets forth our primary sources of capital during the previous two years:

We entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to October 31, 2021 and
may be discontinued at that time. Pursuant to the terms of the arrangement, from time to time, we sell to the Factor a minimum of $150,000 per quarter of certain
of  our  accounts  receivable  balances  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 are determined by the number of days required for collection of the invoice. We expect to continue to use this factoring
arrangement periodically to assist with our general working capital requirements due to contractual requirements.   

On April 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 $12.00 per share. On July 10, 2019, this debenture was redeemed and repaid in full in connection with
the financing described below.

On June 14, 2019, we issued a $157,000 principal amount convertible note to an institutional investor with a maturity date of November 14, 2019 which
was convertible into common stock at a conversion price of $12.00 per share. On July 10, 2019, this note was redeemed and repaid in full in connection with the
financing described below.

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

On January 13, 2020, we issued a $157,000 principal amount convertible note to an institutional investor with a maturity date of June 13, 2020 which was

convertible into common stock at a conversion price of $12.00 per share. This note was paid in full on June 12, 2020 by payment of $211,984.

On February 13, 2020, we issued a $126,000 principal amount convertible note to an institutional investor with a maturity date of July 13, 2020 which was

convertible into common stock at a conversion price of $9.20 per share. This note was paid in full on July 10, 2020 by payment of $170,442.

On April 20, 2020, we entered into a Paycheck Protection Program Term Note (the “SVB Note”) with Silicon Valley Bank (“SVB”) pursuant to the Program.
We received total proceeds of approximately $341,000 which was used in accordance with the requirements of the CARES Act. The full amount of the SVB Note
has been forgiven.

On  May  6,  2020,  we  issued  a  $2,415,000  principal  amount  senior  secured  convertible  note.  The  principal  amount  was  due  and  payable  in  five  equal
monthly  installments  of  $268,333  beginning  seven  months  after  the  funding  date  with  the  remaining  balance  due  twelve  months  after  the  date  of  funding.
Following the completion of the underwritten offering consummated in July 2020 discussed below, all outstanding amounts relating this note were paid in full.

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

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

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Liquidity Outlook

At  December  31,  2020,  our  total  cash  and  cash  equivalents  were  approximately  $17,000,000,  as  compared  to  approximately  $79,000  at  December  31,

2019.  At December 31, 2020 we had working capital of approximately $17,000,000. 

As discussed above, we have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities,
convertible preferred stock, common stock, and through factoring receivables. We currently require approximately $735,000 per month to conduct our operations,
a  monthly  amount  that  we  have  been  unable  to  consistently  achieve  through  revenue  generation.    During  2020,  we  generated  approximately  $2,837,000  of
revenue, which is below our average monthly requirements.  If we are unable to generate sufficient revenue to fund current operations and execute our business
plan, we may need to obtain additional third-party financing. As of the date of this report, we do not expect that we will need to obtain additional financing during
the next twelve months.

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.  There  have  been  no  material
changes to these estimates for the periods presented in this Annual Report on Form 10-K.

We believe that of our significant accounting policies, which are described in Note A of the notes to our consolidated financial statements included in this
Annual  Report  on  Form  10-K,  the  following  accounting  policies  involve  a  greater  degree  of  judgment  and  complexity.  Accordingly,  these  are  the  policies  we
believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations, as listed below:

1. Revenue Recognition

2. Business Combinations

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3. Goodwill and acquired intangible assets

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

5. Research and Development Expenditures

6. Income Taxes

7. Accounting for Stock-Based Compensation

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

Not Applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See financial statements appearing at pages 37-66 of this Annual Report on Form 10-K.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our  management,  with  the  participation  of  our  Chief  Executive  Officer  (“CEO”)  and  Chief  Financial  Officer  (“CFO”),  evaluated  the  effectiveness  of  our
disclosure controls and procedures as of December 31, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that
information  required  to  be  disclosed  by  a  company  in  the  reports  that  it  files  or  submits  under  the  Exchange  Act  is  recorded,  processed,  summarized  and
reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed  to  ensure  that  information  required  to  be  disclosed  by  a  company  in  the  reports  that  it  files  or  submits  under  the  Exchange  Act  is  accumulated  and
communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, 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,  2020,  based  upon  the  framework  in Internal  Control-Integrated  Framework  issued  by  the
Committee  of  Sponsoring  Organizations  of  the  Treadway  Commission.  Based  on  this  evaluation,  management  has  concluded  that  our  internal  control  over
financial reporting was effective as of December 31, 2020.

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

Changes in Internal Control Over Financial Reporting

No  change  in  our  internal  control  over  financial  reporting  occurred  during  the  quarter  ended  December  31,  2020  that  has  materially  affected,  or  is

reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

PART III

The following sets forth certain information about each director, executive officer, and key employee of the Company.

AGE

POSITIONS HELD

66  Chairman of the Board of Directors and Chief Executive Officer
68  Director
64  Director
61  Director
57  Director and Vice-Chairman of the Board of Directors
62  Director
55  Director
61  Chief Financial Officer
58  Chief Technology Officer
52  Vice President of Strategy and Compliance, Chief Legal Officer

NAME
Michael W. DePasquale
Thomas E. Bush, III (a)* (c)
Robert J. Michel (a) (b)*
Thomas Gilley (c)
Wong Kwok Fong (Kelvin)
Pieter Knook (b)
Emmanuel Alia (Manny) (b)
Cecilia Welch
Mira K. LaCous
James Sullivan

(a) Compensation Committee Member

(b) Audit Committee Member

(c) Nominating Committee Member

*

Indicates chair of committee

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

Directors

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

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

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

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

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

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

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

Non-director Executive Officers

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

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

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

Committees of the Board of Directors

Audit Committee

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

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

Compensation Committee

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

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

Code of Ethics

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

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Term of Office

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

Delinquent Section 16(a) Reports

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

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth a summary of the compensation paid to or accrued by our chief executive officer and the two most highly compensated

executive officers other than our chief executive officer, for the fiscal years ended December 31, 2020 and 2019:

SUMMARY COMPENSATION TABLE

Name

Fiscal
Year

Salary
($)

Bonus
($)

Option
Awards
($) (1)

Stock
Awards
($) (2)

All Other
Compensation
($) (3)

Total
($)

Michael W. DePasquale
Chief Executive Officer

Mira K. LaCous
Chief Technology Officer

James Sullivan
Chief Legal Officer

2020   
2019   

2020   
2019   

2020   
2019   

275,000     
275,000     

50,000     
-     

213,000     
213,075     

-     
-     

150,000     
150,000     

35,000     
-     

-     
34,510     

-     
12,941     

-     
25,883     

21,450     
-     

21,450     
-     

2,219 
1,127 

    348,669 
    310,637 

2,493 
1,401 

    236,943 
    227,417 

21,450     
-     

137,238(4)    343,688 
55,240(5)    231,123 

(1) The aggregate grant date fair value of the option awards was estimated using the Black-Scholes option pricing model, with the assumptions listed in Note A

to the Company’s financial statements. The amount shown in this column represents the grant date fair value calculated under FASB ASC 718.

(2) The aggregate grant date fair value of the restricted shares is calculated by the multiplying the quantity of shares issued by the closing trading price of the

shares on the date of issuance calculated under FASB ASC 718.

(3) Consists of life insurance premiums paid by the Company except as otherwise noted.
(4)
(5)

Consists of $135,383 of sales commissions and $1,855 of life insurance premiums paid by the Company.
Consists of $53,385 of sales commissions and $1,855 of life insurance premiums paid by the Company.

Narrative Disclosure to Summary Compensation Table

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

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

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

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

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

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

These  cash  and  equity  compensation  components  of  pay  are  supplemented  by  various  benefit  plans  that  provide  health,  life,  accident,  disability  and

severance benefits, most of which are the same as the benefits provided to all of our US based employees.

Employment Agreements

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

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

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

Stock Option Grants and Restricted Stock Awards

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

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

DECEMBER 31, 2020

The  following  table  sets  forth  for  each  named  executive  officer,  information  regarding  outstanding  equity  awards  as  at  December  31,  2020.  The  option

awards and per share amounts for all periods reflect our 1-for-8 reverse stock split, which was effective November 20, 2020.

Option Awards

Stock Awards

Number of
securities
underlying
unexercised
options
exercisable
(#)

Number of
securities
underlying
unexercised
options
unexercisable
(#)

Number of
shares or units
of stock that
have not vested

(#)

Market value of
shares of units
of
stock that have
not
vested

($)(1)

Option
exercise
price
($)

Option
expiration
date

2,605     
2,605     
31,250     
2,778     
1,389     

1,563     
1,042     
12,500     
1,042     
521     

1,563     
2,084     
12,500     
2,084     
1,042     

39.35 
17.27 
21.20 
15.68 
9.44 

39.36 
17.27 
21.20 
15.68 
9.44 

39.36 
17.27 
21.20 
15.68 
9.44 

3/13/2021   
8/13/2022   
3/16/2024   
3/23/2025   
3/21/2026   

3/13/2021   
8/13/2022   
3/16/2024   
3/23/2025   
3/21/2026   

3/13/2021   
8/13/2022   
3/16/2024   
3/23/2025   
3/21/2026   

1,389(2)   
2,778(3)   

521(2)   
1,042(3)   

1,041(2)   
2,083(3)   

4,125     

14,520 

4,125     

14,520 

4,125     

14,520 

Name

Michael W. DePasquale

Mira LaCous

James Sullivan

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

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

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

Narrative Disclosure to Outstanding Equity Awards at Fiscal Year End Table

The following are the material terms of each agreement, contract, plan or arrangement that provide for payments to one or more of our named executive

officers at, following or pursuant to their resignation, retirement or termination, or in connection with a change in control of the Company.

Termination Arrangements

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

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

We may terminate our employment agreement with Ms. LaCous at any time with or without cause. In the event of termination by us without cause, we will

continue to pay Ms. LaCous her then current base salary for nine months from the date of such termination.

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Change in Control Provisions

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

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

DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2020

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

Name (1)

Thomas E. Bush, III (3)
Thomas Gilley (3)
Yau Jianhui (4)
Pieter Knook (5)
Robert J Michel (5)
Fabian Shin (6)
Alia, Emmanuel (7)

Stock Awards
($) (2)

Total
($)

4,502     
4,002     
1,001     
6,002     
6,502     
4,001     
3,501     

4,502 
4,002 
1,001 
6,002 
6,502 
4,001 
3,501 

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

Board of Directors.

(2) The  aggregate  fair  value  of  the  common  stock  issued  was  calculated  based  on  the  closing  price  of  our  common  stock  on  the  date  of  issuance  in

accordance with FASB ASC 718.

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

(4) At December 31, 2020, Mr. Jianhui held options to purchase 188 shares of common stock. Mr. Jianhui was not nominated for re-election to the Board of

Directors at Company’s Annual Meeting in 2020.

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

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

2020.

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

Narrative Disclosure to Director Compensation Table

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

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

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

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The beneficial owners and amount of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Exchange Act and, in
accordance therewith, include all shares of our common stock that may be acquired by such beneficial owners within 60 days of March 99999, 2021 upon the
exercise  or  conversion  of  any  options,  warrants  or  other  convertible  securities.  This  table  has  been  prepared  based  on  7,817,475  shares  of  common  stock
outstanding on March 26, 2021.

Name and Address of Beneficial Owner (1)

Michael W. DePasquale
Cecilia Welch
Mira LaCous
James Sullivan
Thomas Gilley
Robert J. Michel
Thomas E. Bush, III
Pieter Knook
Emmanuel Alia
Wong Kwok Fong (Kelvin)
All officers and directors as a group (10) persons

Lind Global Micro Fund, LP

*

Less than 1%

Amount and Nature
of Beneficial
Ownership

Percentage
of
Class

60,988(2)    
28,189(3)    
21,835(4)    
37,523(5)    
6,239(6)    
5,686(7)    
5,758(8)    
5,164(9)    
998(10)   
578,659(11)   
751,039 

833,126(12)   

* 
* 
* 
* 
* 
* 
* 
* 
* 
7.4%
9.6%

9.6%

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

07719.

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

1,389 shares issuable upon exercise of options subject to vesting.

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

1,041 shares issuable upon exercise of options subject to vesting.

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

shares issuable upon exercise of options subject to vesting.

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

1,042 shares issuable upon exercise of options subject to vesting.

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

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

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

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

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

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

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

York, NY 10022

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The following table sets forth, as of December 31, 2020, information with respect to securities authorized for issuance under equity compensation plans.

The shares and per share amounts reflect BIO-key’s 1-for-8 reverse stock split, which was effective November 20, 2020.

EQUITY COMPENSATION PLAN INFORMATION

Number of
securities to be
issued
upon exercise
of outstanding
options,
warrants and
rights
(a)

Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
(b)

Number
of securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)

Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total

94,183     
133,091    $
227,274    $

10.73     
22.48     
17.61     

36,086 
— 
36,086 

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

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

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

Standstill Agreement with Principal Stockholder

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

Loans from Wong Kwok Fong (Kelvin)  

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

Loans from Michael W. DePasquale

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

Sales Incentive Agreement with Technology Transfer Institute ( “TTI”)

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

Director Independence

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

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

35

 
 
 
 
 
   
   
 
   
   
   
 
 
 
 
 
 
 
 
 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The  following  table  shows  fees  for  professional  services  and  quarterly  audit  fees  billed  to  us  by  Rotenberg  Meril  Solomon  Bertiger  &  Guttilla,  P.C.

(“RMSBG”) for the audit of our annual consolidated financial statements for the years ended December 31, 2020 and 2019:

Audit Fees
Audit-Related Fees
Tax Fees

Total Fees

2020

2019

  $

  $

124,200    $
76,925     
16,000     

217,125    $

104,743 
7,204 
18,500 

130,447 

Audit Fees consist of fees billed for professional services rendered for the audit of our financial statements and review of the interim financial statements

included in quarterly reports and services that are normally provided by our auditors in connection with statutory and regulatory filings or engagements.

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

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

Audit Committee Pre-Approval Procedures

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

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

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

ITEM 15. – EXHIBITS

PART IV

(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, 2020 and 2019

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

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

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

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

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

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ITEM 16. – FORM 10-K SUMMARY

None.

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, 2020 and 2019
Consolidated Statements of Operations—Years ended December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Equity (Deficit) —Years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows—Years ended December 31, 2020 and 2019
Notes to the Consolidated Financial Statements—December 31, 2020 and 2019

37

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40
41
42
43
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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, 2020 and
2019,  and  the  related  consolidated  statements  of  operations,  stockholders’  equity  (deficit)  and  cash  flows  for  the  years  then  ended,  and  the  related  notes
(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company  as  of  December  31,  2020  and  2019,  and  the  results  of  its  operations  and  its  cash  flows  for  the  years  then  ended  in  conformity  with  accounting
principles generally accepted in the United States of America.

Basis for Opinion

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

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

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

Critical Audit Matters

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

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

Description of the Matter

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

•

•
•

•

Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus
together, such as software licenses and related services that are sold with cloud-based services.
The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.
Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration and/or optional
purchases).
Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.

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How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures included:

• We obtained an understanding of the Company’s revenue recognition process including the various product and service offerings;
• We reviewed management’s assessment of the terms and conditions of contracts with customers which included an analysis of the distinct

performance obligations and a review of the conclusion as to whether revenue from such performance obligations should be recognized over time or at
a point in time;

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

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

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

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

Description of the Matter

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

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

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

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures included:

• We obtained an understanding of the Company's process to determine the fair value of the net assets acquired.
• We read the stock purchase agreement;
• We evaluated the reasonableness of the following:

o Valuation methodologies utilized by the outside business valuation and advisory firm in estimating fair values of assets acquired and liabilities
assumed;

o The discount rates utilized, including testing the source of information underlying the determination of the discount rates, testing the mathematical
accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rates used by management.

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

/s/ Rotenberg Meril Solomon Bertiger & Guttilla,P.C.
ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.

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

Saddle Brook, New Jersey
March 29, 2021

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BIO-key International, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS

ASSETS

December 31,

2020

2019

Cash and cash equivalents
Accounts receivable, net
Due from factor
Note receivable
Inventory
Prepaid expenses and other
Investment – debt security
Total current assets

Resalable software license rights
Equipment and leasehold improvements, net
Capitalized contract costs, net
Deposits and other assets
Operating lease right-of-use assets
Intangible assets, net
Goodwill

Total non-current assets

TOTAL ASSETS

LIABILITIES

Accounts payable
Loans payable – related parties
Accrued liabilities
Convertible notes payable, net of debt discount and debt issuance costs
Note payable – PistolStar acquisition, net of debt discount
Deferred revenue - current
Operating lease liabilities, current portion

Total current liabilities
Deferred revenue – long term
Operating lease liabilities, net of current portion

Total non-current liabilities

TOTAL LIABILITIES

Commitments

  $

  $

  $

16,993,096    $
548,049     
60,453     
295,000     
330,947     
201,507     
512,821     
18,941,873     
58,882     
81,793     
165,315     
8,712     
487,325     
1,514,146     
1,262,526     
3,578,699     
22,520,572    $

244,158    $
-     
508,487     
-     
232,000     
657,349     
234,309     
1,876,303     
44,987     
264,163     
309,150     
2,185,453     

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 

844,557 
188,737 
572,885 
2,255,454 
- 
359,212 
170,560 
4,391,405 
- 
390,466 
390,466 
4,781,871 

STOCKHOLDERS’ EQUITY (DEFICIT)
Common stock — authorized, 170,000,000 shares; issued and outstanding; 7,814,572 and 1,812,483 of $.0001

par value at December 31, 2020 and December 31, 2019, respectively

Additional paid-in capital
Accumulated deficit
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

782     
119,844,026     
(99,509,689)    
20,335,119     
22,520,572    $

182 
87,437,661 
(89,723,016)
(2,285,173)
2,496,698 

  $

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

The accompanying notes are an integral part of these statements.

40

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BIO-key International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS

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
Government grant – Paycheck Protection Program
Interest expense
Loss on extinguishment of debt
Total other income (expense)

Net loss
Deemed dividend from trigger of anti-dilution provision feature
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
2020

1,432,228    $
962,038     
442,516     
2,836,782     

502,214     
49,891     
242,721     
794,826     
2,041,956     

5,848,687     
1,396,436     
7,245,123     
-     
(5,203,167)    

30,649     
340,819     
(4,343,212)    
(499,076)    
(4,470,820)    
(9,673,987)    
(112,686)    
(9,786,673)    

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)

  $

(2.08)   $

(8.21)

4,700,787     

1,777,961 

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

The accompanying notes are an integral part of these statements.

41

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BIO-key International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY (DEFICIT)

Common Stock

Shares

Amount

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
Issuance of common stock for directors’ fees
Issuance of common stock pursuant to securities purchase

agreements

Issuance of common stock pursuant to public offering
Issuance of common stock pursuant to warrant exercises
Issuance of common stock for conversion of convertible note

payable

Issuance of restricted common stock to employees
Warrants issued with convertible notes
Warrant issued for consulting fees
Legal and commitment fees
Beneficial conversion feature
Deemed dividends related to down-round features
Share-based compensation
Net loss
Balance as of December, 2020

1,758,288    $
4,612     

49,583     
-     
-     
-     
-     
1,812,483    $
5,270     

43,939     
4,264,313     
918,538     

728,654     
41,375     
-     
-     
-     
-     
-     
-     
-     
7,814,572    $

Additional
Paid-in
Capital
85,600,362    $
35,012     

    Accumulated      
Deficit
(75,134,316)   $
-     

594,995     
595,662     
(301,077)    
912,707     
-     
87,437,661    $
28,511     

-     
-     
-     
-     
(14,588,700)    
(89,723,016)   $
-     

176    $
1     

5     
-     
-     
-     
-     
182    $
-     

Total
10,466,222 
35,013 

595,000 
595,662 
(301,077)
912,707 
(14,588,700)
(2,285,173)
28,511 

5     
426     
92     

277,828     
22,173,999     
5,602,503     

-     
-     
-     

277,833 
22,174,425 
5,602,595 

73     
4     
-     
-     
-     
-     
-     
-     
-     

3,788,927     
(4)    
1,388,339     
107,576     
(2,371,223)    
641,215     
112,686     
656,008     
-     
782    $ 119,844,026    $

-     
-     
-     
-     
-     
-     
(112,686)    
-     
(9,673,987)    
(99,509,689)   $

3,789,000 
- 
1,388,339 
107,576 
(2,371,223)
641,215 
- 
656,008 
(9,673,987)
20,335,119 

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

The accompanying notes are an integral part of these statements.

42

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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 write-off
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
Loss on extinguishment of debt
Amortization of beneficial conversion feature
Share based and warrant 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:
Issuance of note receivable
Purchase of PistolStar
Cash acquired from purchase of PistolStar
Proceeds from maturity of debt security
Purchase of debt security
Cash paid for patents
Capital expenditures
Net cash used for investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offering
Proceeds from issuance of convertible notes
Repayment of convertible notes
Proceeds from the exercise of warrants
Costs to issue notes and common stock
Repayment of note payable - PistolStar
Net repayments of loans payable to related parties
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,

2020

2019

  $

(9,673,987)   $

(14,588,700)

-     
85,751     
120,240     
-     
-     
1,425,040     
152,714     
2,166,650     
499,076     
641,215     
763,584     
28,511     
220,915     

(237,257)    
50,488     
(86,510)    
98,172     
14,920     
(83,625)    
(600,399)    
(84,415)    
(246,876)    
(204,315)    
(4,950,108)    

(295,000)    
(2,000,000)    
100,747     
512,821     
(512,821)    
-     
(35,568)    
(2,229,821)    

22,174,425     
3,958,000     
(4,509,250)    
5,602,595     
(2,693,021)    
(250,000)    
(188,737)    
24,094,012     
16,914,083     
79,013     
16,993,096    $

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)

- 
- 
- 
- 
(512,821)
(1,736)
(28,753)
(543,310)

- 
3,217,000 
(707,000)
- 
(361,273)
- 
- 
2,148,727 
(244,930)
323,943 
79,013 

  $

The accompanying notes are an integral part of these statements.

43

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SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

Cash paid for:
Interest
Income taxes

Noncash investing and financing activities:

Accounts receivable acquired from PistolStar
Prepaid expenses acquired from PistolStar
Equipment acquired from PistolStar
Intangible assets acquired from PistolStar
Goodwill related to PistolStar acquisition
Issuance of note payable for PistolStar acquisition, net of discount
Accrued expenses acquired from PistolStar
Deferred revenue acquired from PistolStar
Right-of-use asset addition under ASC 842
Operating lease liabilities under ASC 842
Issuance of common stock for conversion of note payable
Issuance of common stock pursuant to securities purchase agreements
Warrants issued with convertible notes
Beneficial conversion feature
Deemed dividends related to down-round features
Debt issuance cost allocated to equity
Debt discount issued with convertible note

Years ended December 31,
2019
2020

109,426    $
-    $

72,822 
- 

184,792    $
9,485    $
36,467    $
1,480,000    $
1,262,526    $
464,000    $
20,017    $
590,000    $
141,761    $
141,761    $
3,789,000    $
277,833    $
1,388,339    $
641,215    $
112,686    $
-    $
-    $

- 
- 
- 
- 
- 
- 
- 
- 
719,812 
707,217 
- 
595,000 
595,662 
- 
- 
152,000 
550,000 

  $
  $

  $
  $
  $
  $
  $
  $
  $
  $
  $
  $
  $
  $
  $
  $
  $
  $
  $

The accompanying notes are an integral part of these statements.

44

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
   
 
 
     
       
 
     
       
 
 
     
       
 
     
       
 
 
     
       
 
 
 
BIO-key International, Inc. and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2020 and 2019

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

Going Concern and Basis of Presentation

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 $735,000 per month to conduct our operations, a monthly amount
that we have been unable to consistently achieve through revenue generation.  During 2020, we generated approximately $2,837,000 of revenue, which is below
our average monthly requirements.  During 2020, we raised approximately $24,000,000 from financing activities and at December 31, 2020 had approximately
$17,000,000 in cash. As of the date of this report, the Company has enough cash for twelve to eighteen months of operations, and therefore, there is no longer
uncertainty in our going concern status.

Effective  November  20,  2020,  the  Company  implemented  a  reverse  stock  split  of  its  outstanding  common  stock  at  a  ratio  of  1-for-8.  All  share  figures  and

results are reflected on a post-split basis.

Summary of Significant Accounting Policies

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

1.  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.

3. Revenue Recognition

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized

reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company
applies the following five steps: 

•

•

•

Identify the contract with a customer

Identify the performance obligations in the contract

Determine the transaction price

45

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•

•

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  revenues,  are  generally  transferred  to  customers  at  a  point  in  time,  with  the  exception  of

support and maintenance, and professional services, which are generally transferred to the customer over time.

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

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

Support and Maintenance
Support  and  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 to five years in length and are generally invoiced in advance at the beginning of the term. Support and Maintenance revenue
for subscription licenses is carved out of the total license cost at 18% and recognized on a ratable basis over the license term.

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

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

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

Accounts receivable from customers are typically due within 30 days of invoicing.  The Company does not record a reserve for product returns or warranties

as amounts are deemed immaterial based on historical experience.

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

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

4. Business Combinations

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

46

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

5. Goodwill and acquired intangible assets

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

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

6. Cash Equivalents

Cash equivalents consist of liquid investments with original maturities of three months or less. At December 31, 2020 and 2019, cash equivalents consisted

of a money market account.

7. Accounts Receivable

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

As a result of the payment delays for a large customer, the Company has reserved $1,720,000 at December 31, 2020 and 2019, which represents 100% of
the  remaining  balance  owed  under  the  contract.  Recoveries  of  accounts  receivable  previously  written  off  are  recorded  when  received.  The  Company  made  a
license  sale  to  a  Chinese  reseller  in  December  2018.  Revenue  was  recognized  in  accordance  with  ASC  606  in  the  amount  of  $1.1  million  in  2018.  As  of
December 31, 2019, the second payment for $555,555 was still outstanding and payable. The Company wrote off directly to bad debt expense $555,555 that was
promised to be paid in March 2019, but not received.

Accounts receivable at December 31, 2020 and 2019 consisted of the following: 

Accounts receivable - current
Accounts receivable - non current

Allowance for doubtful accounts - current
Allowance for doubtful accounts - non current

December 31,

2020

2019

  $

561,834    $
1,720,000     
2,281,834     

(13,785)    
(1,720,000)    
(1,733,785)    

139,785 
1,720,000 
1,859,785 

(13,785)
(1,720,000)
(1,733,785)

Accounts receivable, net of allowances for doubtful accounts

  $

548,049    $

126,000 

47

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The allowance for doubtful accounts for the years ended December 31, 2020 and 2019 is as follows:

Year Ended December 31, 2020
Allowance for Doubtful Accounts
Year Ended December 31, 2019
Allowance for Doubtful Accounts

Balance at
Beginning
of Year

Charged to
Costs
and
Expenses

Deductions
From
Reserves

  $

1,733,785    $

  $

1,733,785    $

-    $

-    $

Balance at
End of Year

-    $

1,733,785 

-    $

1,733,785 

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

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

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

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

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

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

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

10. Advertising Expense

The  Company  expenses  the  costs  of  advertising  as  incurred.  Advertising  expenses  for  2020  and  2019  were  approximately  $494,000  and  $317,000,

respectively.

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.

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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.

13. Accounting for Stock-Based Compensation

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

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

Selling, general and administrative
Research, development and engineering

Valuation Assumptions for Stock Options

Year ended
December 31,

2020

2019

  $

  $

705,971    $
86,124     
792,095    $

828,981 
118,739 
947,720 

For 2020 and 2019, 28,440 and 30,167 stock options were granted, respectively. The fair value of each option was estimated on the date of grant using the

Black-Scholes option-pricing model with the following assumptions:

Weighted average Risk free interest rate
Expected life of options (in years)
Expected dividends
Weighted average Volatility of stock price

Year ended
December 31,

2020

2019

0.30%   
4.50 

0%   
115%   

2.33%
4.50 

0%
84%

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

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14. Derivative Liabilities

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

15. Income Taxes

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

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

16. Leases

In accordance with ASC 842,  Leases (ASC 842), the Company records a right-of-use (ROU) asset and a lease liability on the balance sheet for all leases

with terms longer than 12 months and classifies them as either operating or finance leases. 

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 the Company obtains the right to
substantially all the economic benefit from the use of the asset, and whether the Company has the right to direct the use of the asset. Leases with a term greater
than one year are recognized on the balance sheet as ROU assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to
recognize on the balance sheet leases with terms of one year or less under practical expedient in paragraph ASC 842-20-25-2. For contracts with lease and non-
lease components, the Company has elected not to allocate the contract consideration, and to account for the lease and non-lease components as a single lease
component.

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

An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise

that option. An option to terminate is considered unless it is reasonably certain we will not exercise the option.

17. Recent Accounting Pronouncements

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 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.

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NOTE B—REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Revenue

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

License fees
Hardware
Services
Total Revenues

License fees
Hardware
Services
Total Revenues

North
America

South
America

EMEA*

Asia

December
31,
2020

842,307    $
267,996     
1,296,696     
2,406,999    $

-    $
-     
18,300     
18,300    $

46,922    $
144,647     
94,124     
285,693    $

72,809    $
29,873     
23,108     
125,790    $

962,038 
442,516 
1,432,228 
2,836,782 

North
America

South
America

EMEA*

Asia

December
31,
2019

208,827    $
388,938     
794,318     
1,392,083    $

46,717    $
12,636     
8,514     
67,867    $

117,401    $
342,304     
99,911     
559,616    $

69,704    $
155,756     
22,502     
247,962    $

442,649 
899,634 
925,245 
2,267,528 

  $

  $

  $

  $

* EMEA – Europe, Middle East, Africa

Revenue recognized during the year ended December 31, 2020 from amounts included in deferred revenue at the beginning of the period was approximately
$290,000.  The  Company  did  not  recognize  any  revenue  from  performance  obligations  satisfied  in  prior  periods.  Total  deferred  revenue  (contract  liability)  was
$702,336 and $359,212 at December 31, 2020 and 2019, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

ASC  606  requires  that  the  Company  disclose  the  aggregate  amount  of  transaction  price  that  is  allocated  to  performance  obligations  that  have  not  yet  been
satisfied  as  at  December  31,  2020.  The  guidance  provides  certain  practical  expedients  that  limit  this  requirement,  which  the  Company’s  contracts  meet  as
follows:

•

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

At December 31, 2020, deferred revenue represents the Company’s remaining performance obligations related to prepaid support and maintenance, all of which
is expected to be recognized from one to five years.

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NOTE C—PISTOLSTAR, INC. ACQUISITION

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

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

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

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

Purchase consideration:
Total cash paid, net of acquired cash
Present value of 4% Promissory note
Total purchase price consideration

Fair value of assets acquired and liabilities assumed:
Cash and cash equivalents
Accounts receivable
Prepaid expenses and other current assets
Fixed assets
Intangible assets
Goodwill

Total assets acquired

Accrued expenses and other current liabilities
Accrued payroll
Deferred revenue

Total fair value of assets acquired and liabilities assumed

  $

  $

  $

  $

2,000,000 
464,000 
2,464,000 

100,747 
184,792 
9,485 
36,467 
1,480,000 
1,262,526 
3,074,017 

738 
19,279 
590,000 
2,464,000 

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

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

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

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

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

Trade Name
Proprietary Software
Customer relationships

Total identifiable intangible assets

52

Estimated useful
life
(in years)
15
5
 8 - 10

Amount

130,000     
420,000     
930,000   
1,480,000     

  $

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NOTE D—FACTORING

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

Year Ended December 31, 2020
Factored accounts receivable
Year Ended December 31, 2019
Factored accounts receivable

Original Invoice
Value

Factored
Amount

Factored
Balance due

  $

  $

241,715    $

181,262    $

60,453 

233,005    $

122,064    $

110,941 

The  Company  entered  into  an  accounts  receivable  factoring  arrangement  with  a  financial  institution  (the  “Factor”)  which  has  been  extended  to  October
31,  2021.  Pursuant  to  the  terms  of  the  arrangement,  the  Company,  from  time  to  time,  sells  to  the  Factor  a  minimum  of  $150,000  per  quarter  of  certain  of  its
accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 35% of the foreign and 75% of the domestic accounts
receivable balance to the Company (the “Advance Amount”), with the remaining balance, less fees, forwarded to the Company once the Factor collects the full
accounts  receivable  balance  from  the  customer.  In  addition,  the  Company,  from  time  to  time,  receives  over  advances  from  the  Factor.  Factoring  fees  range
from 2.75% to 15% of the face value of the invoice factored and are determined by the number of days required for collection of the invoice. The cost of factoring
is included in selling, general and administrative expenses. The cost of factoring was as follows:  

Years Ended December 31,
2019
2020

Factoring fees

  $

98,748    $

203,950 

NOTE E—FAIR VALUES OF FINANCIAL INSTRUMENTS

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

NOTE F—CONCENTRATION OF RISK

Financial instruments which potentially subject the Company to risk primarily consist of cash, and cash equivalents, investment in debt security, and accounts

receivables.

The  Company  maintains  its  cash  and  cash  equivalents  with  various  financial  institutions,  which,  at  times  may  exceed  insured  limits.  The  exposure  to  the
Company  is  solely  dependent  upon  daily  bank  balances  and  the  respective  strength  of  the  financial  institutions.  The  Company  was  in  excess  of  coverage  of
approximately $16,020,000 and $0 at December 31, 2020 and 2019, respectively. The Company has not incurred any losses on these accounts.

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

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

accounted for 22% and 14% of total revenue, respectively.

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

accounts receivable, respectively, as of December 31, 2019. 

NOTE G—NOTE RECEIVABLE

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

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NOTE H—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

NOTE I—RESALABLE SOFTWARE LICENSES RIGHTS

2020

2019

  $

  $

221,130    $
109,817     
330,947    $

287,761 
141,358 
429,119 

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.

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  cash  flows  expected  to  be  generated  from  the  future  sale  of  the  license  rights.  Accordingly,  an  impairment  charge  of
$6,957,516 was recorded in the fourth quarter of 2019, which reduced the carrying amount of the FingerQ license rights to zero.  A total of $843,888 (prior to the
impairment charge) was expensed during 2019.

On December 31, 2015, the Company purchased third-party software licenses in the amount of $180,000 in anticipation of a large pending deployment that
has yet to materialize. The Company is amortizing the total cost over the same methodology described above with the greater of the two approaches being the
actual unit cost per license sold. A total of $14,920 and $40,404 was charged to cost of sales during the years ended December 31, 2020 and 2019, respectively.
Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $121,118 has been charged to cost of sales,
with a carrying balance of $58,882 and $73,802 as of December 31, 2020 and 2019, respectively.

The Company has classified the balance as non-current until a larger deployment occurs.

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

2021
2022
2023
2024
Total

  $

  $

18,000 
18,000 
18,000 
4,882 
58,882 

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NOTE J—INVESTMENT IN DEBT SECURITY

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

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

NOTE K—EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

Equipment
Furniture and fixtures
Software
Leasehold improvements

2020

2019

  $

789,760    $
164,079     
32,045     
25,135     
1,011,019     

648,286 
164,079 
32,045 
23,403 
867,813 

Less accumulated depreciation and amortization

(929,226)    

(772,304)

Total

  $

81,793    $

95,509 

Depreciation was $85,751 and $81,852 for 2020 and 2019, respectively. Amounts are recorded in selling, general, and administrative expense as well as in

cost of services.

NOTE L—INTANGIBLE ASSETS

Intangible assets consisted of the following as of December 31:

2020
Accumulated
Amortization

Gross
Carrying
Amount

Net
Carrying
Amount

Gross
Carrying
Amount

2019

Accumulated
Amortization

Write-
offs

Net
Carrying
Amount

Trade name
Proprietary software
Customer relationships
Patents and patents pending

Total

  $

130,000    $
420,000     
930,000     
365,080     
  $ 1,845,080    $

125,667    $
(4,333)   $
378,000     
(42,000)    
878,333     
(51,667)    
(232,934)    
132,146     
(330,934)   $ 1,514,146    $

-    $
-     
-     
380,080     
380,080    $

-    $
-     
-     
(210,694)    
(210,694)   $

-    $
-     
-     
(15,000)    
(15,000)   $

- 
- 
- 
154,386 
154,386 

Aggregate amortization expense for 2020 and 2019 was $120,240 and $28,256, respectively. Estimated minimum amortization expense based on straight

line amortization of the software license rights for each of the next five years and thereafter approximates the following:

Years ending December 31

2021
2022
2023
2024
2025
Thereafter
Total

  $

  $

216,000 
215,000 
213,000 
209,000 
165,000 
496,146 
1,514,146 

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NOTE M—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 N—RELATED PARTY TRANSACTIONS

Licensing Agreement with Subsidiaries of GSFG.

2020

2019

  $

87,015    $
227,147     
83,738     
17,544     
5,495     
87,548     

  $

508,487    $

193,823 
155,962 
105,933 
17,248 
31,458 
68,461 

572,885 

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 served as a director of the Company until August 6, 2020. Mr. Wong Kwok Fong served as the chief technology officer of CGG through October 2016 and
is  principal  stockholder,  a  director  and  executive  officer  of  the  Company.  During  the  fourth  quarter  of  2019,  the  Company  recorded  an  impairment  charge  of
approximately $7 million, bringing the carrying value of FingerQ license rights to zero. Refer to Note I - Resalable License Rights for additional information.

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, which were both repaid in full during 2020.

NOTE O—CONVERTIBLE NOTES PAYABLE

Convertible notes payable as of December 31, 2020 and December 31, 2019 consist of the following:

Securities Purchase Agreement dated July 10, 2019
January 2020 Note
February 2020 Note
May 2020 Note
June 2020 Note

Convertible notes payable, net

56

December 31,
2020

December 31,
2019

  $

  $

-    $
-     
-     
-     
-     
-    $

2,255,454 
- 
- 
- 
- 
2,255,454 

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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  was  secured  by  a  lien  on  substantially  all  of  the  Company’s  assets  and  properties  and  was  convertible  at  the  option  of  the  Investor  in

shares of common stock at a fixed conversion price of $12.00 per share.

In connection with the closing of the Original Note, the Company issued a five-year warrant to the Investor to purchase 250,000 shares of common stock at a
fixed exercise price of $12.00 per share, paid a $50,000 commitment fee, and issued 33,334 shares of common stock in payment of a $400,000 due diligence
fee. The Company also paid banker fees of $193,500 and legal fees of $71,330. The valuation of the warrant of $595,662 was recorded to debt discount and
was amortized over the life of the Original Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital
based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount are included in interest expense
on the statement of operations.

On March 12, 2020, the Company issued a $3,789,000 principal amount senior secured convertible note (the “Amended Note”), which replaced the Original
Note  and  included  an  additional  $729,000  in  interest  due  to  the  debt  restructuring.  The  principal  amount  was  due  and  payable  in  full  on  April  13,  2020.  The
Amended Note was secured by a lien on substantially all of the Company’s assets and properties and was convertible at the option of the Investor into shares of
common stock at a fixed conversion price of $5.20 per share. The Company accounted for the transaction as a debt extinguishment and, therefore, the balance of
the  fees  and  unamortized  discount  associated  with  the  Original  Note  were  written  off  and  included  as  loss  on  extinguishment  of  debt.  On  the  day  of  the
amendment, the closing stock price for the day was $6.08, which resulted in a beneficial conversion of $0.88 per share outstanding or $641,215 to be amortized
to interest expense over the term of the Amended Note, as adjusted for any debt conversion.

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

Until  the  second  anniversary  of  the  closing,  the  investor  had  the  right  to  purchase  up  to  20%  of  the  securities  the  Company  issues  in  any  future  private

placement, subject to certain exceptions for, among other things, strategic investments.

On  June  10,  2020,  the  investor  converted  the  last  of  the  remaining  principal  into  shares  of  common  stock  for  payment  in  full,  and  the  remaining  principal

balance was $0. The Amended Note amount of $3,789,000 was converted into 728,654 shares of common stock.

Secured convertible note payable, net of unamortized debt discount and debt issuance costs was:

Principal amount
Less: conversion of principal into shares of common stock
Net Principal amount

Less: unamortized debt discount and beneficial conversion feature
Less: unamortized debt issuance costs

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

January 2020 Note

December 31,
2020

December 31,
2019

  $

  $

3,789,000    $
(3,789,000)    
-     

-     
-     
-    $

3,060,000 
- 
3,060,000 

(574,330)
(230,216)
2,255,454 

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

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

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February 2020 Note

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

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

May 2020 Note

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

Following the completion of the underwritten offering in July 2020, the principal balance of $2,415,000 was paid in full during the third quarter of 2020.  As a

result of the repayment, the Company expensed the remaining debt discounts and issuance costs of $1,218,163 in July 2020.

June 2020 Note

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

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

Following the completion of the underwritten offering in July 2020, the principal balance of $1,811,250 was paid in full during the third quarter of 2020. As a

result of the repayment, the Company expensed the remaining debt discounts and issuance costs of $957,919 in July 2020.

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NOTE P—LEASES

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

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

Supplemental cash flow information related to leases were as follows:

Year ended
December 31,
2020

Year ended
December 31,
2019

  $

  $

  $

  $

  $

239,192 
- 
239,192 

  $

  $

186,246 
41,535 
227,781 

487,325 

  $

566,479 

234,309 
264,163 
498,472 

  $

  $

2.26 
5.50%   

170,560 
390,466 
561,026 

3.33 
5.50%

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

  $

235,186    $

179,105 

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

2021
2022
2023

Total future lease payments

Less: imputed interest

Total

NOTE Q—COMMITMENTS AND CONTINGENCIES

Sales Incentive Agreement with TTI

  $

  $

  $

256,977 
187,594 
89,225 
533,796 
(35,324)
498,472 

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

following:

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

year terms unless terminated.

2. For each $5,000,000 in revenue (up to a maximum of $20,000,000) TTI generates during the first year that results in net income of at least 20% (as

defined), the Company will pay TTI a sales incentive fee of $500,000 payable by the issuance of 62,500 shares of common stock.

3.

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

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

stock pursuant to this agreement. 

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

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Litigation

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of December 31, 2020,

the Company was not a party to any pending lawsuits.

NOTE R— 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.

2. Common Stock

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

Holders of common stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor.

Holders of common stock have one vote for each share held of record and do not have cumulative voting rights.

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

Issuances of Common Stock

On  July  23,  2020,  the  Company  completed  an  underwritten  public  offering  of  shares  of  common  stock  and  warrants  resulting  in  net  proceeds  of
approximately $22.7 million, after deducting underwriting discounts and commissions and estimated offering expenses. 4,264,313 shares of common stock were
issued as a result of this offering, and a further 797,038 shares of common stock were issued upon the exercise of 512,500 prefunded warrants and 284,538
warrants exercised in conjunction with the offering.

On  March  30,  2020,  the  Company  issued  121,500  shares  of  common  stock  upon  exercise  of  warrants  at  $12.00  per  share,  resulting  in  proceeds  of

$1,458,000 to the Company.

See Note O Convertible Notes Payable for common stock issuances related to conversion of convertible notes payable and shares of common stock issued

for fees in connection with the agreements during fiscal 2020 and 2019. 

Issuances of Nonvested Stock

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

The Company issued 38,250 and 3,125 shares of restricted common stock in August and November of 2020, respectively to certain employees and directors
of the Company. These shares vest in equal annual installments over a three-year period from the date of grant, and had a fair value on the date of issuance of
$198,900, and $11,250, respectively. Nonvested stock compensation for the year ended December 31, 2020 was $23,764.

Issuances to Directors, Executive Officers & Consultants

During the year ended December 31, 2020, the Company issued 5,270 shares of common stock to its directors in lieu of payment of board fees, valued at
$28,511. During the year ended December 31, 2019, the company issued 4,612 shares of common stock to its directors in lieu of payment of board fees, valued
at $35,013.

Employees’ exercise options

During 2020 and 2019, no employee stock options were exercised.

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3. Warrants

Securities Purchase Agreement dated November 13, 2014:

As part of a Securities Purchase Agreement, dated November 13, 2014, by and between the Company and a number of private and institutional investors,

the Company issued to certain private investors warrants to purchase 124,610 shares of common stock.  The warrants expired in November 2019.

Securities Purchase Agreement dated September 23, 2015:

On September 23, 2015, the Company issued warrants (the “2015 Warrants”) to purchase 8,681 shares of common stock in connection with the issuance of
a promissory note. The warrants were immediately exercisable at an initial exercise price of $28.80 per share and had a term of five years. The 2015 Warrants
expired in September 2020.

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

Anti-dilution features were triggered as follows:

On  February  14,  2020,  the  February  2020  Note  was  issued  at  a  conversion  price  of  $9.20  that  triggered  the  anti-dilution  provisions  included  in  the  2015
Warrants.  In  addition,  the  amendments  to  the  Original  Note  reduced  the  conversion  price  of  the  Original  Note  to  $5.20  which  also  triggered  the  anti-dilution
provision  of  the  2015  Warrants.  As  a  result  of  the  forgoing  transactions,  the  number  of  shares  of  common  stock  issuable  upon  the  full  exercise  of  the  2015
Warrants increased to 48,078, the exercise was reduced to $5.20 per share, and the Company recorded a non-cash deemed dividend in amount of $41,688.

Warrants Issued for Services:

During the second quarter of 2020, the Company issued a warrant to purchase 15,625 shares of common stock to an investor in payment for a business

referral valued at $94,655.

During  the  third  quarter  of  2020,  the  Company  issued  a  warrant  to  purchase  3,125  shares  of  common  stock  to  a  former  employee  for  a  business  referral

valued at $12,921.

Warrants Issued with Convertible Notes:

In 2020, the Company issued warrants to purchase 415,625 shares in connection with the May 2020 and June 2020 Notes. In 2019, the Company issued a

warrant to purchase 250,000 shares in connection with the Securities Purchase Agreement dated July 10, 2019.

Valuation Assumptions for Warrants:

The Company records the warrants at their fair value which is determined using the Black-Scholes valuation model on the date of the grant. The fair value of

each warrant was estimated with the following assumptions:

Weighted average Risk free interest rate
Weighted average price
Weighted average exercise period
Weighted average Volatility of stock price

Year ended
December 31,

2020

2019

  $

0.33%   
9.25 
  $
5 
110%   

1.82%

12.00 
5 
83%

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

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A summary of warrant activity is as follows:

Weighted
average
exercise
price

Weighted
average
remaining
life
(in years)

Aggregate
intrinsic
value

Total
Warrants

Outstanding, as of December 31, 2018

472,622     

12.72     

2.05     

Granted
Exercised
Forfeited
Expired
Outstanding, as of December 31, 2019
Granted – public offering
Granted – prefunded warrants from the public offering
Granted – other
Increase due to trigger of anti-dilution provision feature
Exercised – public offering
Exercised – prefunded warranted from the public offering
Exercised – other
Forfeited
Expired
Outstanding, as of December 31, 2020

250,000     
—     
—     
(299,063)    
423,559     
4,264,313     
512,500     
434,375     
27,244     
(284,538)    
(512,500)    
(121,500)    
—     
(54,066)    
4,689,387     

12.00     

—       
—       

12.00     
12.80     
5.20     
0.08     
9.25     
5.20     
5.20     
0.08     
12.00     

—       

6.86     
6.04     

3.94     

— 

4.48     

— 

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NOTE S—STOCK OPTIONS

2004 Stock Option Plan

On October 12, 2004, the Board of Directors of the Company approved the 2004 Stock Option Plan (the “2004 Plan”). The 2004 Plan was not presented to
stockholders for approval and thus incentive stock options were not available under this plan. Under the terms of this plan, 20,834 shares of common stock were
reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which may not be below 85% of fair market value. The
term of stock options granted may not exceed ten years. Options issued under the 2004 Plan vest pursuant to the terms of stock option agreements with the
recipients. In the event of a change in control, as defined, all options outstanding vest immediately. The 2004 Plan expired in October 2014.

2015 Stock Option Plan

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

Non-Plan Stock Options

Periodically, the Company has granted options outside of the 2004 and 2015 Plans to various employees and consultants. In the event of change in control,

as defined, certain of the non-plan options outstanding vest immediately.

Stock Option Activity

Information summarizing option activity is as follows:

Outstanding, as of December 31, 2018
Granted
Exercised
Forfeited
Expired
Outstanding, as of December 31, 2019

Granted
Exercised
Forfeited
Expired

Outstanding, as of December 31, 2020

Vested or expected to vest at December 31, 2020

Exercisable at December 31, 2020

Number of Options

2004
Plan    

2015
Plan    

Non
Plan    

Total

Weighted
average    
exercise
price

Weighted
average
remaining    

life

(in years)    

Aggregate
intrinsic
value

4,167      47,740      146,596      198,503    $
—      30,167     
—      30,167     
—     
—     
—     
—     
(5,598)    
(521)    
(5,077)    
—     
(4,105)    
(2,005)    
(1,839)    
(261)    
3,906      70,991      144,070      218,967    $

—      28,440     
—     
—     
(4,545)    
—     
(3,906)    

—      28,440     
—     
—     
(4,545)    
—     
(703)     (10,979)     (15,588)    
—      94,183      133,091      227,274    $
       209,427    $
       167,980    $

21.76     
9.36     

—       

18.16     
24.64     
20.08     

5.04     

—       

17.34     
29.17     
17.61     
18.51     
20.77     

63

5.00    $

3.87    $
3.68    $
3.21    $

0 

0 
0 
0 

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
   
   
 
 
     
       
       
       
       
       
     
 
 
   
      
  
   
      
  
   
     
 
 
   
      
  
   
      
  
   
 
     
       
       
       
       
       
     
 
 
   
      
  
   
     
 
 
   
      
  
   
      
  
   
   
      
      
   
      
      
 
The options outstanding and exercisable at December 31, 2020 were in the following exercise price ranges:

Range of exercise prices
3.60 - 5.20
5.21 - 15.68
15.69 - 39.36
3.60 - 39.36

$
$
$
$

Options Outstanding

Options Exercisable

Number of
shares

28,065    $
49,919     
149,290     
227,274     

Weighted
average
exercise
price

Weighted
average
remaining
life (in years)

5.01     
12.16     
21.80     

6.67     
4.82     
3.06     

Weighted
average
exercise
price

4.08 
13.30 
22.01 

Number
exercisable

84    $
23,814     
144,082     
167,980     

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

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

As  of  December  31,  2020,  future  forfeiture  adjusted  compensation  cost  related  to  nonvested  stock  options  is  $232,547  and  will  be  recognized  over  an

estimated weighted average period of 1.21 years.

NOTE T—INCOME TAXES

There was no provision for federal or state taxes as at December 31, 2020 and 2019.

The Company has deferred taxes due to income tax credits, net operating loss carryforwards, and the effect of temporary differences between the carrying

values of certain assets and liabilities for financial reporting and income tax purposes. Significant components of deferred taxes are as follows at December 31:

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

  $

2020

2019

81,000    $
474,000     
1,073,000     
(14,000)    
65,000     
13,337,000     
(15,016,000)    

84,000 
474,000 
894,000 
(5,000)
62,000 
15,002,000 
(16,511,000)

  $

—    $

— 

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

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

64

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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

2020

2019

21%   
(9)    
(12)    

—%   

21%
(2)
(19)

—%

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  2017  through  2020  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, 2020 and 2019.

NOTE U—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, 2020 and 2019.

NOTE V—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 for the following fiscal years ended December 31:

Basic Numerator:
Net Loss
Deemed dividend from trigger of anti-dilution provision feature
Net loss available to common stockholders (basic and diluted EPS)

2020

2019

  $

  $

(9,673,987)   $
(112,686)    
(9,786,673)   $

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

The  following  table  summarizes  the  weighted  average  securities  that  were  excluded  from  the  diluted  per  share  calculation  because  the  effect  of  including

these potential shares was antidilutive due to net losses.

Stock options
Restricted stock
Convertible notes

Potentially dilutive securities

Years ended December 31,
2019
2020

1,002     
3,098     
-     
4,100     

118 
- 
182,343 
182,461 

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

Stock options
Warrants
Total

65

Years ended December 31,
2019
2020

223,899     
4,689,387     
4,913,286     

218,716 
423,559 
642,275 

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
     
 
     
 
   
   
   
 
     
 
     
 
   
 
 
 
 
 
 
 
 
 
 
 
   
 
 
     
       
 
     
       
 
   
 
 
 
 
 
 
 
   
 
 
     
       
 
   
   
   
   
 
 
 
 
 
 
 
   
 
 
     
       
 
   
   
   
 
NOTE W—SUBSEQUENT EVENTS

On  March  4,  2021,  the  Company  issued  1,375  shares  of  common  stock  to  its  directors  in  payment  of  board  fees.  Additionally,  the  Company  issued  an
aggregate of 1,250 shares of restricted common stock to two new employees which vest in equal annual installments over a three-year period from the date of
grant.

On March 9, 2021, the Company issued 278 shares of common stock to its directors in payment of board committee fees.  

The Company has reviewed subsequent events through the date of this filing. 

66

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
Exhibit
No.

  Exhibit 

EXHIBIT INDEX

 2.1

  Stock Purchase Agreement by and among the Company, Thomas J. Hoey, and PistolStar, Inc. dated June 6, 2020 (incorporated by reference to

Exhibit 2.1 to the Current Report on Form 8-K, filed with the SEC on July 7, 2020).

 3.1

  Certificate of Incorporation of BIO-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the current report on

Form 8-K, filed with the SEC on January 5, 2005)

 3.2

  Bylaws (incorporated by reference to Exhibit 3.3 to the current report on Form 8-K, filed with the SEC on January 5, 2005)

 3.3

  Certificate  of  Amendment  to  Certificate  of  Incorporation  (incorporated  by  reference  to  Appendix  A  to  the  definitive  proxy  statement,  filed  with  the

SEC on January 18, 2006)

 3.4

  Certificate of Amendment of Certificate of Incorporation of Bio-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit

3.4 to the annual report on Form 10-K, filed with the SEC on March 31, 2015)

 3.5

  Certificate of Elimination of BIO-key International, Inc. filed October 6, 2015 (incorporated by reference to Exhibit 3.5 to the registration statement

on Form S-1 File No. 333-208747 filed with the SEC on December 23, 2015)

 3.6

  Certificate of Designation of Preferences, Rights and Limitations of Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1

to the current report on Form 8-K, filed with the SEC on November 2, 2015)

 3.7

  Certificate of Designation of Preferences, Rights and Limitations of Series B-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1

to the quarterly report on Form 10-Q, filed with the SEC on November 16, 2015)

 3.8

  Certificate of Amendment of Certificate of Incorporation of Bio-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit

3.1 to the current report on Form 8-K, filed with the SEC on December 28, 2016)

 3.9

  Certificate of Amendment of Certificate of Incorporation of Bio-Key International, Inc., a Delaware corporation (incorporated by reference to Exhibit

3.1 to the current report on Form 8-K, filed with the SEC on November 19, 2020)

 4.1

  Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the registration statement on Form SB-2, File No. 333-16451)

 4.2

  Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registration Statement on Form S-1/A, filed with

the SEC on July 17, 2020).

 4.3

  Form of Warrant (incorporated by reference to Exhibit 4.3 to Amendment No. 1 to the Registration Statement on Form S-1/A, filed with the SEC on

July 17, 2020).

 4.4

   Form of Warrant Agency Agreement (incorporated by reference to Exhibit 4.4 to Amendment No. 2 to the Registration Statement on Form S-1/A,

filed with the SEC on July 20, 2020).

10.1

  Employment  Agreement  by  and  between  BIO-key  International,  Inc.  and  Mira  LaCous  dated  November  20,  2001  (incorporated  by  reference  to

Exhibit 10.39 to the current report on Form 8-K, filed with the SEC on January 22, 2002)***

10.2

  BIO-key International, Inc. 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.48 to amendment no. 1 the registrant’s registration

statement on Form SB-2, File No. 33-120104, filed with the SEC on December 14, 2004)***

10.3

  Employment Agreement, effective March 25, 2010, by and between the Company and Michael W. DePasquale (incorporated by reference to Exhibit

10.93 to the annual report on Form 10-K, filed with the SEC on March 26, 2010)***

10.4

  Employment Agreement by and between BIO-key International, Inc. and Cecilia Welch dated May 15, 2013 (incorporated by reference to Exhibit

10.42 to the annual report on Form 10-K, filed with the SEC on March 31, 2014)***

10.5

  Third  Amendment  to  Lease  Agreement  by  and  between  BIO-key  International,  Inc.  and  Victor  AOP,  Inc.  dated  June  30,  2013  (incorporated  by

reference to Exhibit 10.43 to the annual report on Form 10-K, filed with the SEC on March 31, 2014)

10.6

  First Amendment to Lease Agreement by and between BIO-key International, Inc. and BRE/DP MN LLC dated September 12, 2013 (incorporated

by reference to Exhibit 10.44 to the annual report on Form 10-K, filed with the SEC on March 31, 2014)

10.7

  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)***

67

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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)**

10.11

  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)***

10.27

  Sales  Incentive  Agreement  with  Technology  Transfer  Institute  dated  March  25,  2020.  (incorporated  by  reference  to  Exhibit  10.1  to  the  quarterly

report on Form 10-Q, filed with the SEC on June 8, 2020)

10.28

  Form of Technology Transfer Institute Warrant. (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q, filed with the SEC

on June 8, 2020)

68

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10.29

  Amended and Restated Senior Secured Convertible Promissory Note, due April 13, 2020 issued by the Company to Lind Global Macro Fund, LP.

(incorporated by reference to Exhibit 10.3 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020)

10.30

  Amendment to Amended and Restated Senior Secured Convertible Promissory Note, due April 13, 2020 by and between the Company and Lind
Global Macro Fund, LP dated April 12, 2020. (incorporated by reference to Exhibit 10.4 to the quarterly report on Form 10-Q, filed with the SEC on
June 8, 2020)

10.31

  Securities Purchase Agreement dated May 6, 2020 by and between the Company and Lind Global Macro Fund, LP. (incorporated by reference to

Exhibit 10.5 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020)

10.32

  $2,415,000 Senior Secured Convertible Promissory Note dated May 6, 2020. (incorporated by reference to Exhibit 10.6 to the quarterly report on

Form 10-Q, filed with the SEC on June 8, 2020)

10.33

  Common Stock Purchase Warrant dated May 6, 2020. (incorporated by reference to Exhibit 10.7 to the quarterly report on Form 10-Q, filed with the

SEC on June 8, 2020)

10.34

  Amended and Restated Security Agreement dated May 6, 2020 by and between the Company and Lind Global Macro Fund, LP. (incorporated by

reference to Exhibit 10.8 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020)

10.35

  Amendment No. 2 to Amended and Restated Senior Secured Convertible Promissory Note, due April 13, 2020 by and between the Company and
Lind  Global  Macro  Fund,  LP  dated  May  13,  2020.  (incorporated  by  reference  to  Exhibit  10.9  to  the  quarterly  report  on  Form  10-Q,  filed  with  the
SEC on June 8, 2020)

10.36

  Securities Purchase Agreement dated June 29, 2020 by and between the Company and Lind Global Macro Fund, LP (incorporated by reference to

Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on July 1, 2020)

10.37

  $1,811,250 Senior Secured Convertible Promissory Note dated June 29, 2020. (incorporated by reference to Exhibit 10.2 to the current report on

Form 8-K, filed with the SEC on July 1, 2020)

10.38

  Common Stock Purchase Warrant dated May 6, 2020. (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K, filed with the

SEC on July 1, 2020)

10.39

  Second  Amended  and  Restated  Security  Agreement  dated  June  29,  2020  by  and  between  the  Company  and  Lind  Global  Macro  Fund,  LP

(incorporated by reference to Exhibit 10.4 to the current report on Form 8-K, filed with the SEC on July 1, 2020)

10.40

   $500,000 Promissory note, dated June 30, 2020 (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed with the SEC

on July 7, 2020).

10.41

  Form of Restricted Stock Award Agreement under the BIO-key International, Inc. Amended & Restated 2015 Equity Incentive Plan (incorporated by

reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on August 28, 2020)***

10.42*

  Employment Agreement by and between BIO-key International, Inc. and James Sullivan dated April 5, 2017 ***

21.1*

  List of subsidiaries of BIO-key International, Inc.

23.1*

  Consent of RMSBG

69

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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.

70

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its

behalf by the undersigned, thereunto duly authorized.

Date: March 29, 2021

BIO-KEY INTERNATIONAL, INC.

By:

/s/  MICHAEL W. DEPASQUALE
Michael W. DePasquale
CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant

and in the capacities on the dates indicated.

Signature

/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/  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

March 29, 2021

Chief Financial Officer (Principal Financial and Accounting Officer)

March 29, 2021

Director

Director

Director

Director

Director

Director

71

March 29, 2021

March 29, 2021

March 29, 2021

March 29, 2021

March 29, 2021

March 29, 2021

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 as amended, the Registrant has duly caused this report to be

signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

Date: March 29, 2021

BIO-KEY INTERNATIONAL, INC.

By:

/s/ Michael DePasquale
Michael DePasquale
Chief Executive Officer

72

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
 
 
 
 
EMPLOYMENT AGREEMENT

Exhibit 10.42

THIS AGREEMENT (the "Agreement") dated April 5, 2017 by and between BIO-Key International, Inc., a Delaware corporation with its principal place of
business at 3349 Highway 138, Building D, Suite A, Wall NJ 07719 (the "Company") and James Sullivan, at 410 Hampton View Court, Milton, Georgia 30004 (the
"Executive").

WHEREAS, the Company desires to secure the employment of the Executive in accordance with the provisions of this Agreement; and

WHEREAS, the Executive desires and is willing to be employed by the Company in accordance herewith.

WITNESSETH:

NOW THEREFORE, in consideration of the premises and mutual covenants contained herein, and other good and valuable consideration, the receipt

and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows:

1 .        Employment Term. This Agreement shall remain in force and effect for a term commencing on the Effective Date hereof and expiring on the first
anniversary hereof (the "Initial Term"), or until the employment relationship is terminated pursuant to Section 4 hereof. Upon the expiration of the Initial Term,
this  Agreement  will  be  renewed  automatically  for  successive  one  year  periods  (each,  a  "Renewal  Term"),  unless  sooner  terminated  in  accordance  with  the
provisions of Section 4 or unless Company gives written notice of non-renewal at least two (2) months prior to the date on which the Executive's employment
would otherwise end.

2.         Duties; Exclusive Services and Best Efforts.

(a) Duties. Executive shall hold the position of Senior Vice President of Strategy and Business development, and shall have such responsibilities, duties
and authority consistent with such position as may from time to time be determined by the Company’s Chief Executive Officer (“CEO”) and Board of
Directors (“BOD”). The Executive shall report to the CEO.

( b )       Exclusive Services and Best Efforts . The Executive agrees to devote his best efforts, energies and skill to the faithful, competent and diligent
discharge  of  the  duties  and  responsibilities  attributable  to  his  position,  and  to  this  end,  will  devote  his  fulltime  attention  to  the  business  and  affairs  of  the
Company. The Executive also agrees that he shall not take personal advantage of any business opportunities that arise during his employment that may benefit
the Company. All material facts regarding such opportunities must be promptly reported to the Company's CEO for its consideration.

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
 
 
 
 
3

.        Compensation.  On  and  after  the  commencement  of  Executive's  employment,  the  Executive  shall  receive,  for  all  services  rendered  to  the

Company hereunder, the following:

(a)       Base Salary and Commissions . The Executive shall be paid a base annual salary equal to One Hundred Forty Four Thousand  ($150,000)

and  commissions  including  any  bonus  as  defined  in  the  company’s  annual  sales  incentive  compensation  plan.  The  Executive's  annual  base  salary  shall  be
payable in equal installments in accordance with the Company's general salary payment policies but no less frequently than monthly and commissions will be
paid in accordance with the company’s annual sales incentive compensation plan.

( b )       Benefits Plans. The Executive shall be eligible to participate in any and all employee welfare and health benefit plans (including, but not
limited to, life insurance, health, medical and dental plans) and other employee benefit plans, which may be established by the Company from time to time for
the  benefit  of  other  Company  employees  of  comparable  status.  The  Executive  shall  be  required  to  comply  with  the  conditions  attendant  to  coverage  by  such
preceding plans and policies and shall comply with and be eligible for benefits only in accordance with the terms and conditions of such plans as they may be
amended  from  time  to  time.  Nothing  in  this  Agreement  shall  be  construed  as  requiring  the  Company  to  establish  or  continue  any  particular  benefit  plan  in
discharge of its obligations under this Agreement.

(c)       Vacation. The Executive shall be eligible for five (5) weeks of paid vacation each year of his employment hereunder. The Executive shall
be permitted to carry over and accrue unused vacation time for a period of up to eight weeks (320 hours) of vacation. Except as required by applicable law, in no
event shall the Executive be entitled to receive any cash compensation in lieu of unused vacation time.

( d )      Expenses. Subject to and in accordance with the Company's policies and procedures, and, upon presentation of itemized accounts, the
Executive  shall  be  reimbursed  by  the  Company  for  reasonable  and  necessary  business-related  expenses,  which  expenses  are  incurred  by  the  Executive  on
behalf of the Company.

(e)         Deductions from Salary and Benefits . The Company will withhold from any salary or benefits payable to the Executive all federal, state,

local, and other taxes and other amounts as required by law, rule or regulation.

4 .              Termination. This Agreement may be terminated by either the Executive or the Company at any time, subject only to the provisions of this

Section 4.

(a)         Voluntary Termination. If Executive terminates his own employment, the Company shall be released from any and all further obligations
under  this  Agreement,  except  that  the  Company  shall  be  obligated  to  pay  Executive  his  salary  and  benefits  owing  to  Executive  through  the  effective  date  of
termination. Executive shall also be entitled to any reimbursement owed in accordance with Section 3(d). Executive's obligations under Sections 5, 7, 8 and 9
hereof and shall survive the termination of Executive's employment, and Executive shall remain bound thereby.

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
 
 
(b)         Death. This Agreement shall terminate on the date of the Executive's death, in which event salary, benefits, and reimbursable expenses

owing to the Executive through the date of the Executive's death shall be paid to his estate.

( c )       Disability. If, during the term of this Agreement, in the opinion of the Company, the Executive, because of physical or mental illness or
incapacity or disability, shall become unable to perform, with or without reasonable accommodation, substantially all of the duties and services required of him
under this Agreement for a period one hundred eighty (180) days during any twelve-month period, the Company may, upon at least ten (10) days prior written
notice given at any time after the expiration of such one hundred eighty (180) day period, notify the Executive of its intention to terminate this Agreement as of
the date set forth in the notice. In case of such termination, the Executive shall be entitled to receive salary, earned commissions in accordance to the Sales
Compensation Plan, benefits, and reimbursable expenses owing to the Executive through the date of termination. The Company shall have no further obligation
or  liability  to  the  Executive.  The  Executive's  obligations  under  Sections  5,  7  8  and  9  hereof  shall  survive  the  termination  of  Executive's  employment,  and
Executive shall remain bound thereby.

( d )         Termination  by  Employer  for  Cause .  This  Agreement  may  be  terminated  by  the  Company  for  "Cause"  at  any  time.  Upon  such
termination for “Cause”, the Company shall be released from any and all further obligations under this Agreement, except that the Company shall be obligated to
pay the Executive his salary, and earned commissions in accordance to the Sales Compensation Plan, and benefits owing to the Executive through the effective
date of such termination. The Executive shall also be entitled to any reimbursement owed in accordance with Section 3(d). The Executive's obligations under
Sections 5, 7, 8 and 9 hereof shall survive the termination of Executive's employment, and Executive shall remain bound thereby.

Cause. "Cause" for Termination shall mean the following conduct of the Executive:

written notice thereof;

       (i)         Breach of any material provision of this Employment Agreement by the Executive if not cured within two (2) weeks after receiving

       (ii)        Misconduct as an employee of the Company, including but not limited to, misappropriating funds or property of the Company; any
attempt to obtain any personal profit from any transaction in which the Executive has an interest that is adverse to the Company; any breach of the duty of loyalty
and fidelity to the Company; or any other act or omission of the Executive which substantially impairs the Company's ability to conduct its ordinary business in its
usual manner;

within two (2) weeks after receiving notice thereof;

       (iii)        Material neglect or refusal to perform the duties assigned to the Executive pursuant to this Employment Agreement if not cured

       (iv)        Conviction of a felony or plea of guilty or  nolo contendere to a felony;

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
 
 
       (v)         Acts of dishonesty or moral turpitude by the Executive that are detrimental to the Company or any other act or omission which
subjects the Company or any of its affiliates to public disrespect, scandal, or ridicule, or that causes the Company to be in violation of governmental regulations
that subjects the Company either to sanctions by governmental authority or to civil liability to its employees or third parties; and

performance of the Executive's duties.

              (vi)                  Disclosure  or  use  of  confidential  information  of  the  Company,  other  than  as  specifically  authorized  and  required  in  the

( e )       Termination by Company Without Cause . Upon termination of this Agreement without Cause, the Company shall be released from any
and all further obligations under this Agreement, except that the Executive shall continue to be paid or provided, as applicable, in the same manner as before
termination, including earned commissions, for a period of time equal to the greater of (i) six (6) months; and (ii) that number of months remaining until the end of
the Term, if, and only if, the Executive signs a valid general release of all claims against the Company, its affiliates, subsidiaries, officers, directors and agents, in
a form provided by the Company. The Company shall have no further obligation or liability to the Executive. The Executive's obligations under Sections 5, 7, 8
and 9 hereof and shall survive the termination of the Executive's employment, regardless of the circumstances of any such termination, and the Executive shall
remain bound thereby.

(f)       Termination by Mutual Agreement . This Agreement may be terminated at any time by mutual agreement of the Executive and the

Company.

5.              Non-Competition and Business Opportunities.

(a)       Non-Competition. The Executive understands that the Company (for this purpose, Company shall include all subsidiaries and affiliates of
the Company) is in the business of (i) developing and licensing finger print identification technologies, and distributing products incorporating such technologies
to original equipment manufacturers, systems integrators, application developers and end users; and (ii) developing, licensing and/or selling software, products
and  services,  including  wireless  solutions,  and  providing  technology  support  and  services  to  the  law  enforcement  and  public  safety  markets.  The  Executive
agrees that during the period of his employment hereunder and for a period of one (1) year thereafter, the Executive will not directly or indirectly: (i) market, sell
or  perform  services  such  as  are  offered  or  conducted  by  the  Company  during  the  period  of  his  employment,  to  any  customer  or  client  of  the  Company  or
"Prospective Customer" or client of the Company; or (ii) engage, directly or indirectly, whether as principal or as agent, officer, director, employee, consultant,
shareholder,  or  otherwise,  alone  or  in  association  with  any  other  person,  corporation  or  other  entity,  in  any  "Competing  Business".  For  the  purpose  of  this
Agreement,  "Prospective  Customer"  shall  mean  any  person  with  whom  the  Company  has  engaged  in  any  discussion  or  negotiation  regarding  the  use  of  the
Company's products or services. For purposes of this Section 5(a), the term "shareholder" shall exclude any interest owned by Employer in a public company to
the extent the Employer owns less than five percent (5%) of any such company's outstanding common stock. For the further purposes of this Agreement, the
term  "Competing  Business"  shall  mean  any  person,  corporation  or  other  entity  (X)  developing  and/or  licensing  finger  print  identification  technologies  or
distributing  products  incorporating  such  technologies,  (Y),  developing,  licensing  or  selling  software,  products  and  services,  including  wireless  solutions,  or
providing  technology  support  or  services  to  the  law  enforcement  and  public  safety  markets  within  the  United  States  or  (Z)  offering  or  developing  products  or
services in competition with products or services offered by, or being developed by the Company at the time of the termination of Executive’s employment with
the Company. Due to the nature of the markets served and the technology and products to be developed and marketed by the Company which are intended to
be available on a national basis, the restrictions set forth in this Section 5(a) cannot be limited to a specific geographic area within the United States.

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
( b )      Business Opportunities. The Executive agrees that during the period of his employment hereunder, the Executive will not take personal
advantage of any business opportunities that are similar or substantially similar to the business of the Company. In addition, all material facts regarding any such
business opportunities must be promptly and fully disclosed by the Executive to the CEO as soon as the Executive becomes aware of any opportunity, and in no
event later than forty-eight (48) hours after learning of such opportunity. Business opportunities covered by this Section 5(b) shall include, but are not limited to,
opportunities relating to the development and licensing of fingerprint identification technologies or the distribution of products incorporating such technologies to
original equipment manufacturers and end users.

( c )          Non-Solicitation. The Executive agrees that during the period of employment hereunder and for a period of one (1) year thereafter, the
Executive  will  not  request  or  otherwise  attempt  to  induce  or  influence,  directly  or  indirectly,  any  present  customer,  distributor  or  supplier,  or  Prospective
Customer,  distributor  or  supplier,  of  the  Company,  or  other  persons  sharing  a  business  relationship  with  the  Company  to  cancel,  to  limit  or  postpone  their
business with the Company, or otherwise take action which might be to the material disadvantage of the Company. The Executive agrees that during the period
of employment hereunder and for a period of one (1) year thereafter, Executive will not hire or solicit for employment, directly or indirectly, or induce or actively
attempt to influence, hire or solicit, any employee, agent, officer, director, contractor, consultant or other business associate of the Company to terminate his or
her employment or discontinue such person's consultant, contractor or other business association with the Company.

( d )            Scope. The parties hereto agree that, due to the nature of the Company's business, the duration and scope of the non-competition
and  non-solicitation  provisions  set  forth  above  are  reasonable.  In  the  event  that  any  court  determines  that  the  duration  or  the  geographic  scope,  or  both,  are
unreasonable and that such provisions are to that extent unenforceable, the parties hereto agree that such provisions shall remain in full force and effect for the
greatest time period and in the greatest area that would not render it unenforceable. The parties intend that the non-competition and non-solicitation provisions
herein shall be deemed to be a series of separate covenants, one for each and every county of each and every state of the United States of America and each
and every political subdivision of each and every country outside the United States of America where this provision is intended to be effective. The Executive
agrees  that  damages  are  an  inadequate  remedy  for  any  breach  of  such  provisions  and  that  the  Company,  shall,  whether  or  not  it  is  pursuing  any  potential
remedies at law, be entitled to seek in any court of competent jurisdiction, equitable relief in the form of preliminary and permanent injunctions without bond or
other security upon any actual or threatened breach of either of these competition provisions. If the Executive shall violate this Section 5, the duration of this
Section 5 automatically shall be extended as against the Executive for a period equal to the period during which the Executive shall have been in violation of this
Section 5. The covenants contained in this Section 5 are deemed to be material and the Company is entering into this Agreement relying on such covenants.

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
6 .         Representations and Warranties of the Executive. The Executive, hereby represents and warrants to the Company as follows: (i) The Executive
has the legal capacity and unrestricted right to execute and deliver this Agreement and to perform all of his obligations hereunder; (ii) the execution and delivery
of this Agreement by the Executive and the performance of his obligations hereunder will not violate or be in conflict with any fiduciary or other duty, instrument,
agreement, document, arrangement, or other understanding to which Executive is a party or by which he is or may be bound or subject; and (iii) except as set
forth  in  Exhibit  B  attached  hereto,  the  Executive  is  not  a  party  to  any  instrument,  agreement,  document,  arrangement,  including,  but  not  limited  to,  invention
assignment  agreement,  confidential  information  agreement,  non-competition  agreement,  non-solicitation  agreement,  or  other  understanding  with  any  person
(other than the Company) requiring or restricting the use or disclosure of any confidential information or the provision of any employment, consulting or other
services.

7 .         Disclosure of Innovations; Assignment of Ownership of Innovations; Protection of Confidential Information .  Executive  hereby  represents  and
warrants to the Company that Executive understands that the Company is in the business of (i) developing and licensing finger print identification technologies,
and distributing products incorporating such technologies, to original equipment manufacturers, systems integrators, application developers and end users; and
(ii) developing, licensing and/or selling software, products and services, including wireless solutions, and providing technology support and services to the law
enforcement  and  public  safety  markets,  and  that  Executive  may  have  access  to  or  acquire  information  with  respect  to  Confidential  Information  (as  defined
below), including software, processes and methods, development tools, scientific, technical and/or business innovations.

(a)    Disclosure of Innovations. Executive agrees to disclose in writing to the Company all inventions, improvements and other

innovations of any kind that Executive may make, conceive, develop or reduce to practice, alone or jointly with others, during the term of Executive's employment
with the Company, whether or not such inventions, improvements or other innovations are related to and grow out of Executive's work for the Company and
whether or not they are eligible for patent, copyright, trademark, trade secret or other legal protection ("Innovations"). Examples of Innovations shall include, but
are not limited to, discoveries, research, inventions, formulas, techniques, processes, know‑how, marketing plans, new product plans, production processes,
advertising, packaging and marketing techniques and improvements to computer hardware or software.

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
(b)    Assignment of Ownership of Innovations. Executive agrees that all Innovations will be the sole and exclusive property of the

Company and Executive hereby assigns all of Executive's rights, title or interest in the Innovations and in all related patents, copyrights, trademarks, trade
secrets, rights of priority and other proprietary rights to the Company. At the Company's request and expense, during and after the period of Executive's
employment with the Company, Executive will assist and cooperate with the Company in all respects and will execute documents, and, subject to Executive's
reasonable availability, give testimony and take further acts requested by the Company to obtain, maintain, perfect and enforce for the Company patent,
copyright, trademark, trade secret and other legal protection for the Innovations. Executive hereby appoints an authorized officer of the Company as Executive's
attorney‑in‑fact to execute documents on his behalf for this purpose. Executive has attached hereto as Exhibit C a list of Innovations as of the date hereof which
belong to Executive and which are not assigned to the Company hereunder (the "Prior Innovations"), or, if no such list is attached, Executive represents that
there are no Prior Innovations.

(c)    Protection of Confidential Information of the Company . Executive understands that Executive's work as an employee of the

Company creates a relationship of trust and confidence between Executive and the Company. During and after the period of Executive's employment with the
Company, Executive will not use or disclose or allow anyone else to use or disclose any "Confidential Information" (as defined below) relating to the Company,
its products, services, suppliers or customers except as may be necessary in the performance of Executive's work for the Company or as may be specifically
authorized in advance by appropriate officers of the Company. "Confidential Information" shall include, but not be limited to, information consisting of research
and development, patents, trademarks and copyrights and applications thereto, technical information, computer programs, software, methodologies, innovations,
software tools, know-how, knowledge, designs, drawings, specifications, concepts, data, reports, processes, techniques, documentation, pricing, marketing
plans, customer and prospect lists, trade secrets, financial information, salaries, business affairs, suppliers, profits, markets, sales strategies, forecasts,
Executive information and any other information not available to the general public, whether written or oral, which Executive knows or has reason to know the
Company would like to treat as confidential for any purpose, such as maintaining a competitive advantage or avoiding undesirable publicity. Executive will keep
Confidential Information secret and will not allow any unauthorized use of the same, whether or not any document containing it is marked as confidential. These
restrictions, however, will not apply to Confidential Information that has become known to the public generally through no fault or breach of Executive's or that
the Company regularly gives to third parties without restriction on use or disclosure.

8.         Work Made For Hire; Disclosure of Works and Inventions/Assignment of Patents.

(a)         Work Made For Hire. Executive further recognizes and understands that Executive's duties at the Company may include the preparation
of materials, including without limitation written or graphic materials, and that any such materials conceived or written by Executive shall be done as "work made
for hire" as defined and used in the Copyright Act of 1976, 17 U.S.C. §§ 1 et seq. In the event of publication of such materials, Executive understands that since
the work is a "work made for hire", the Company will solely retain and own all rights in said materials, including right of copyright. In the event that any of such
works  shall  be  deemed  by  a  court  of  competent  jurisdiction  not  to  be  a  "work  made  for  hire,"  this  Agreement  shall  operate  as  an  irrevocable  assignment  by
Executive to the Company of all right, title and interest in and to such works, including, without limitation, all worldwide copyright interests therein, in perpetuity.
The  fact  that  such  copyrightable  works  are  created  by  Executive  outside  of  the  Company's  facilities  or  other  than  during  Executive's  working  hours  with  the
Company shall not diminish the Company's right with respect to such works which otherwise fall within this paragraph. Executive agrees to execute and deliver to
the Company such further instruments or documents as may be requested by the Company in order to effectuate the purposes of this paragraph.

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
( b )         Disclosure  of  Works  and  Inventions/Assignment  of  Patents .  In  consideration  of  the  promises  set  forth  herein,  Executive  agrees  to
disclose promptly to the Company, or to such person whom the Company may expressly designate for this specific purpose (its "Designee"), any and all works,
inventions, discoveries and improvements authored, conceived or made by Executive during the period of employment and related to the business or activities of
the  Company,  and  Executive  hereby  assigns  and  agrees  to  assign  all  of  Executive's  interest  in  the  foregoing  to  the  Company  or  to  its  Designee.  Executive
agrees that, whenever he is requested to do so by the Company, Executive shall execute any and all applications, assignments or other instruments which the
Company  shall  deem  necessary  to  apply  for  and  obtain  Letters  Patent  or  Copyrights  of  the  United  States  or  any  foreign  country  or  to  otherwise  protect  the
Company's  interest  therein.  Such  obligations  shall  continue  beyond  the  termination  or  nonrenewal  of  Executive's  employment  or  service  with  respect  to  any
works,  inventions,  discoveries  and/or  improvements  that  are  authored,  conceived  of,  or  made  by  Executive  during  the  period  of  Executive's  employment  or
service, and shall be binding upon Executive's successors, assigns, executors, heirs, administrators or other legal representatives.

9 .           Company Property. All records, files, lists, including computer generated lists, drawings, documents, software, documents, equipment, models,
binaries,  object  modules,  libraries,  source  code  and  similar  items  relating  to  the  Company's  business  that  the  Executive  shall  prepare  or  receive  from  the
Company  and  all  Confidential  Information  shall  remain  the  Company's  sole  and  exclusive  property  ("Company  Business  Property").  Upon  termination  of  this
Agreement,  the  Executive  shall  promptly  return  to  the  Company  all  property  of  the  Company  in  his  possession,  including  Company  Business  Property.  The
Executive  further  represents  that  he  will  not  copy  or  cause  to  be  copied,  print  out,  or  cause  to  be  printed  out  any  Company  Business  Property  other  than  as
specifically authorized and required in the performance of the Executive's duties. The Executive additionally represents that, upon termination of his employment
with the Company, he will not retain in his possession any such Company Business Property.

1 0 .         Cooperation. The Executive and Company agree that during the term of Executive’s employment they shall, at the request of the other Party,
render all assistance and perform all lawful acts that each Party considers necessary or advisable in connection with any litigation involving either Party or any
director, officer, employee, shareholder, agent, representative, consultant, client, or vendor of the Company.

11.         Employment Dispute Settlement Procedure/Waiver of Rights.

(a)         The Executive and the Company each agree that, in the event either party (or its representatives, successors or assigns) brings an action in a
court  of  competent  jurisdiction  relating  to  the  Executive's  recruitment,  employment  with,  or  termination  of  employment  from  the  Company,  each  party  in  such
action agrees to waive his, her or its right to a trial by jury, and further agrees that no demand, request or motion will be made for trial by jury.

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
(b)                  The  parties  hereto  further  agree  that,  in  the  event  that  either  seeks  relief  in  a  court  of  competent  jurisdiction  for  a  dispute  covered  by  this
Agreement, any other Agreement between the Executive and the Company or which relates to the Executive’s recruitment, employment with, or termination of
employment  from  the  Company,  the  defendant  or  third-party  defendant  in  such  action  may,  at  any  time  within  sixty  (60)  days  of  the  service  of  the  complaint,
third-party complaint or cross-claim upon such party, at his, her or its option, require all or part of the dispute to be arbitrated by one arbitrator in accordance with
the rules of the American Arbitration Association. The parties agree that the option to arbitrate any dispute is governed by the Federal Arbitration Act. The parties
understand  and  agree  that,  if  the  other  party  exercises  his,  her  or  its  option,  any  dispute  arbitrated  will  be  heard  solely  by  the  arbitrator,  and  not  by  a  court.
Judgment upon the award rendered, however, may be entered in any court of competent jurisdiction. The cost of such arbitration shall be borne equally by the
parties.

(c)         This dispute resolution agreement will cover all matters directly or indirectly related to the Executive's recruitment, employment or termination of
employment by the Company; including, but not limited to, claims involving laws against discrimination whether brought under federal and/or state law and/or
local law, and/or claims involving co-employees but excluding Worker's Compensation Claims. Nothing contained in this Section 11 shall limit the right of the
Company to enforce by court injunction or other equitable relief the Executive's obligations under Sections 5, 7, 8 and 9 hereof.

The right to a trial, and to a trial by jury, is of value.

THE  EXECUTIVE  MAY  WISH  TO  CONSULT  AN  ATTORNEY  PRIOR  TO  SIGNING  THIS  AGREEMENT.  IF  SO,  THE
EXECUTIVE  SHOULD  TAKE  A  COPY  OF  THIS  AGREEMENT  WITH  HIM.  HOWEVER,  THE  EXECUTIVE  WILL  NOT  BE
OFFERED EMPLOYMENT UNTIL THIS AGREEMENT IS SIGNED AND RETURNED TO EMPLOYER.

1 2 .         Choice of Law and Jurisdiction. This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the
laws of the State of Massachusetts. Each of the parties hereto hereby irrevocably consents and submits to the exclusive jurisdiction of the state courts of the
State of New Jersey, and of the United States District Court for the District of New Jersey in connection with any suit, action, or other proceeding concerning this
Agreement or enforcement of Sections 5, 7, 8 and 9 hereof. The Executive waives and agrees not to assert any defense that the court lacks jurisdiction, venue is
improper,  inconvenient  forum  or  otherwise.  The  Executive  waives  the  right  to  a  jury  trial  and  agrees  to  accept  service  of  process  by  certified  mail  at  the
Executive's last known address.

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
1 3 .         Successors and Assigns . Neither this Agreement, nor any of the Executive's rights, powers, duties or obligations hereunder, may be assigned
by the Executive. This Agreement shall be binding upon and inure to the benefit of the Executive and his heirs and legal representatives and the Company and
its  successors.  Successors  of  the  Company  shall  include,  without  limitation,  any  company  or  companies,  individuals,  groups,  associations,  partnerships,  firm,
venture or other entity or party acquiring, directly or indirectly, all or substantially all of the assets of the Company, whether by merger, consolidation, purchase,
lease  or  otherwise.  Any  such  successor  referred  to  in  this  paragraph  shall  thereafter  be  deemed  "the  Company"  for  the  purpose  hereof.  All  covenants  and
restrictions upon the Executive hereunder, including, but not limited to Sections 5, 7, 8 and 9 hereof, are specifically assignable by the Company.

1 4 .         Waiver.  Any  waiver  or  consent  from  the  Company  with  respect  to  any  term  or  provision  of  this  Agreement  or  any  other  aspect  of  the
Executive's  conduct  or  employment  shall  be  effective  only  in  the  specific  instance  and  for  the  specific  purpose  for  which  given  and  shall  not  be  deemed,
regardless of frequency given, to be a further or continuing waiver or consent. The failure or delay of the Company at any time or times to require performance
of, or to exercise any of its powers, rights or remedies with respect to any term or provision of this Agreement or any other aspect of the Executive's conduct or
employment in no manner (except as otherwise expressly provided herein) shall affect the Company's right at a later time to enforce any such term or provision.

15.         Notices. All notices, requests, demands, and other communications hereunder must be in writing and shall be deemed to have been duly given
if delivered by hand or mailed within the continental United States by first class, registered mail, return receipt requested, postage and registry fees prepaid, to
the applicable party and addressed as follows:

(a)

If to the Company:

Bio-key International, Inc.
3349 Highway 138, Building D, Suite A
Wall, NJ 07719
Attn: CEO

(b)

If to the Executive:
James Sullivan
410 Hampton View Ct.
Milton, Georgia 30004

           16.         Construction of Agreement.

( a )         Severability. In the event that any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable,

the validity, legality or enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

( b )           Headings. The descriptive headings of the several paragraphs of this Agreement are inserted for convenience of reference only and

shall not constitute a part of this Agreement.

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 7 .   Entire  Agreement  and  Amendments .  This  Agreement,  including  all  Exhibits  which  shall  form  parts  hereof,  contains  the  entire  agreement  of  the
parties  concerning  the  Executive's  employment  and  all  promises,  representations,  understandings,  arrangements  and  prior  agreements  on  such  subject  are
merged herein and superseded hereby. The provisions of this Agreement may not be amended, modified, repealed, waived, extended or discharged except by
an agreement in writing signed by the party against whom enforcement of any amendment, modification, repeal, waiver, extension or discharge is sought. No
person acting other than the CEO shall have authority on behalf of the Company to agree to amend, modify, repeal, waive, extend or discharge any provision of
this Agreement or anything in reference thereto or to exercise any of the Company's rights to terminate or to fail to extend this Agreement.

1 8 .    Survival.  The  Executive's  obligations  under  Paragraphs  5,  7,  8  and  9  shall  survive  and  continue  pursuant  to  the  terms  and  conditions  of  this

Agreement following specific termination.

19.    Understanding. The Executive represents and agrees that he fully understands his rights to discuss all aspects of this Agreement with his private
attorney, that to the extent he desires, he availed himself of this right, that he has carefully read and fully understands all of the provisions of this Agreement, that
he is competent to execute this Agreement, that his decision to execute this Agreement has not been obtained by any duress and that he freely and voluntarily
enters into this Agreement, and that he has read this document in its entirety and fully understands the meaning, intent, and consequences of this Agreement.

2 0 .     Counterparts.  This  Agreement  may  be  executed  in  any  number  of  counterparts,  each  of  which  shall  be  deemed  an  original,  and  all  of  which

together shall constitute one and the same instrument.

2 1 .     Injunctive Relief. The Executive hereby agrees and acknowledges that in the event of a breach or threatened breach of this Agreement by the
Executive, the Company may suffer irreparable harm and monetary damages alone would not adequately compensate the Company. Accordingly, the Company
will therefore be entitled to injunctive relief to enforce this Agreement.

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and attested by its duly authorized officers, and the Executive has

set his hand, all as of the day and year first above written.

BIO-KEY INTERNATIONAL, INC.

By:

/s/Michael W. DePasquale
Name: Michael W. DePasquale
Title: Chief Executive Officer

EXECUTIVE

/s/James Sullivan
James Sullivan 

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Name

BIO-key Hong Kong Limited

Public Safety Group, Inc. 

PistolStar, Inc.

BIOKEY AFRICA LIMITED

Subsidiaries

State/Country of Incorporation

Hong Kong

Delaware

New Hampshire

Nigeria

Exhibit 21.1

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
 
Consent of Independent Registered Public Accounting Firm

Exhibit 23.1

We consent to the incorporation by reference into the registration statements of BIO-key International, Inc. on Form S-8 (file nos. 333- 233737, 333-212066) and
Form S-3 (file nos. 333-233713 and 333-225934) of our report dated March 29, 2021 relating to the financial statements which appear in this Form 10-K for the
year ended December 31, 2020.

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

ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
Saddle Brook, New Jersey
March 29, 2021

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
 
 
Exhibit 31.1

I, Michael W. DePasquale, certify that: 

1. I have reviewed this annual report on Form 10-K of BIO-key International, Inc. (the “Company”);

CERTIFICATION

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: March 29, 2021

/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

I, Cecilia C. Welch, certify that: 

1. I have reviewed this annual report on Form 10-K of BIO-key International, Inc. (the “Company”);

CERTIFICATION

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: March 29, 2021

/s/ CECILIA C. WELCH
Cecilia C. Welch
Chief Financial Officer

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Exhibit 32.1

In connection with the Quarterly Report of BIO-key International, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2020, 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: March 29, 2021

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 Quarterly Report of BIO-key International, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2020, 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: March 29, 2021

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.