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.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
TABLE OF CONTENTS
PART I
Item 1.
Item 1A
Item 2
Item 3
Item 4
Business
Risk Factors
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.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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:
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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:
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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:
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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:
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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.
32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
33
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
36
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
38
40
41
42
43
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
BIO-key International, Inc.
Wall, NJ
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BIO-key International, Inc. and Subsidiaries (the “Company”) as of December 31, 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.
38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
39
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BIO-key International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues
Services
License fees
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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BIO-key International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to cash used for operating activities:
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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest
Income taxes
Noncash investing and financing activities:
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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
•
•
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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
48
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
49
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
14. Derivative Liabilities
In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain
circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded
derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated
host instrument and accounted for separately as a derivative liability instrument. The Company early-adopted the new provisions issued July 2017, for derivative
liability instruments under FASB ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging
(Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Under ASU 2017-11,
down round features do not meet the criteria for derivative accounting and no liability is to be recorded until an actual issuance of securities triggers the down-
round feature. Prior to these provisions, the liabilities were recorded without the actual issuance of the securities triggering the down-round feature.
15. Income Taxes
The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes
using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of
deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. The Company evaluates, on a
quarterly basis whether, based on all available evidence, if it is probable that the deferred income tax assets are realizable. Valuation allowances are established
when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,”
includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses,
the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences
and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.
Because of the Company’s historical performance and estimated future taxable income, a full valuation allowance has been established.
The Company accounts for uncertain tax provisions in accordance with ASC 740-10-05, “Accounting for Uncertainty in Income Taxes.” The ASC clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
16. 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.
50
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
51
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
$
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
53
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
54
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
55
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
57
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
February 2020 Note
On February 13, 2020, the Company issued a $126,000 principal amount secured 10% convertible redeemable note (the “February 2020 Note”) to an
institutional investor with a maturity date of July 13, 2020 which was convertible into common stock at a conversion price of $9.20 per share. On March 12, 2020,
the Original Note was amended to reduce the conversion price to $5.20 per share, which reduced the conversion price of the February Note to $5.20 and resulted
in a deemed dividend of $70,998. The February 2020 Note was redeemable at any time by payment of a premium to the principal balance starting at 10% and
increasing to 30%. The Company issued 6,250 shares of common stock to the investor in lieu of payment of a $57,500 commitment fee. The Company paid
$6,000 of legal fees in connection with the issuance of February 2020 Note.
The February 2020 Note was paid in full on July 10, 2020 by payment of $170,442.
May 2020 Note
On May 6, 2020, the Company issued a $2,415,000 principal amount senior secured convertible note (the “May 2020 Note”). At closing, $2,100,000 was
funded. The principal amount was due and payable in five equal monthly installments of $268,333 beginning seven months after the funding date with the
remaining balance due on the twelfth month after the date of funding. The May 2020 Note was convertible at a fixed convertible price of $9.28 per share. In
connection with the issuance of the May 2020 Note, the Company paid a $133,333 due diligence fee by issuing 14,368 shares of common stock to the Investor
priced at $9.28 per share. The Company also paid a placement fee of 7% of the gross proceeds to a placement agent. In connection with the closing of the May
2020 Note, the Company issued a five-year warrant to the investor to purchase 237,500 shares of common stock at a fixed exercise price of $9.28 and was
immediately exercisable. The valuation of the warrant of $876,937 was recorded to debt discount and was amortized over the life of the May 2020 Note. The fees
associated with the agreement were allocated to debt issuance costs and additional paid-in-capital based on the respective ratio of the valuation of the note and
warrant. Amortization of the debt issuance costs and debt discount were included in the interest expense on the statement of operations.
Following the completion of the underwritten offering in July 2020, the principal balance of $2,415,000 was paid in full during the third quarter of 2020. As a
result of the repayment, the Company expensed the remaining debt discounts and issuance costs of $1,218,163 in July 2020.
June 2020 Note
On June 29, 2020, the Company issued a $1,811,250 principal amount senior secured convertible note (the “June 2020 Note”). At closing, $1,575,000 was
funded. The principal amount was due and payable in nine equal monthly installments of $201,250 beginning four months after the funding date with the
remaining balance due on the twelfth month after the date of funding. The June 2020 Note was convertible at a fixed convertible price of $9.28 per share. In
connection with the issuance of the June 2020 Note, the Company paid a $100,000 due diligence fee by issuing 17,071 shares to the Investor priced at $5.86 per
share. The Company also paid a placement fee of 7% of the gross proceeds to a placement agent.
In connection with the closing of the June 2020 Note, the Company issued a five-year warrant to the Investor to purchase 178,125 shares of common stock at
a fixed exercise price of $9.28 per share, and was immediately exercisable. The valuation of the warrant of $511,402 was recorded to debt discount and was
amortized over the life of the June 2020 Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital based
on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount are included in interest expense on the
statement of operations.
Following the completion of the underwritten offering in July 2020, the principal balance of $1,811,250 was paid in full during the third quarter of 2020. As a
result of the repayment, the Company expensed the remaining debt discounts and issuance costs of $957,919 in July 2020.
58
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
59
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
—
62
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.