Table of Contents
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, 2023
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
41-1741861
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification Number)
101 CRAWFORDS CORNER ROAD, SUITE 4116, HOLMDEL, NJ 07753
(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
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
BKYI
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 ☐
Table of Contents
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 ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2023 (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 $6,303,798 based upon the closing price for shares of the registrant’s post-split common stock of
$13.50 as reported by the Nasdaq Stock Market on that date.
As of June 4, 2024 the registrant had 1,814,228 shares of common stock outstanding.
Table of Contents
TABLE OF CONTENTS
PART I
1
Item 1.
Business
1
Item 1A
Risk Factors
9
Item 1B
Unresolved Staff Comments
18
Item 1C
Cybersecurity
18
Item 2
Properties
18
Item 3
Legal Proceedings
18
Item 4
Mine Safety Disclosures
18
PART II
19
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
19
Item 6
Reserved
19
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
Item 7A
Quantitative And Qualitative Disclosures About Market Risk
25
Item 8
Financial Statements and Supplementary Data
25
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
25
Item 9A
Controls and Procedures
26
Item 9B
Other Information
26
Item 9C
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
26
PART III
27
Item 10
Directors, Executive Officers and Corporate Governance
27
Item 11
Executive Compensation
30
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
34
Item 13
Certain Relationships and Related Transactions, and Director Independence
36
Item 14
Principal Accountant Fees and Services
36
PART IV
37
Item 15
Exhibits and Financial Statement Schedules
37
Item 16
Form 10-K Summary
38
Signatures
73
Table of Contents
EXPLANATORY NOTE
BIO-key International, Inc., and its consolidated subsidiaries (the “Company”, “we” or “us”) is filing this comprehensive annual report on Form 10-K for
the fiscal year ended December 31, 2023 (the “Comprehensive Form 10-K”). This Comprehensive Form 10-K contains our audited financial statements
for the fiscal year ended December 31, 2023 and 2022 as well as restatement of the following previously filed periods: (i) our unaudited consolidated
financial statements covering the quarterly reporting periods during fiscal year 2023, consisting of the quarters ended March 31, 2023, June 30, 2023, and
September 30, 2023.
Restatement Background
As previously disclosed, on April 16, 2024, the Audit Committee (the “Audit Committee”) of the Board of Directors of the Company determined, after
consultation with the Company’s management and its independent auditors, that the Company made certain errors in the manner in which it recognized
revenue generated by its European subsidiary, Swivel Secure Europe, SA, in the first quarter of 2023. In addition, certain allowances for accounts
receivable and certain reserves for inventory were understated. As a result, the Company concluded that its previously issued consolidated financial
statements for the three months ended March 31, 2023, the three and six months ended June 30, 2023, and the three and nine months ended September
30, 2023 included in the Company’s previously filed Quarterly Reports on Form 10-Q for such periods (collectively, the “Restatement Periods”) should
be restated to correct historical errors related principally to the of recognition of the Company’s revenues, allowances for accounts receivable, and certain
reserves for inventory.
The need for the restatement arose out of the results of certain financial analysis the Company performed in the course of preparing its fiscal year-end
2023 consolidated financial statements. In the course of the audit of the Company’s consolidated financial statements for the fiscal year ended December
31, 2023, the Company determined that certain errors were made which require the restatement of the Company’s previously issued financial statements
for the Restatement Periods. These errors resulted in the overstatement of accounts receivable and revenue, understatements in certain allowances for
accounts receivable and certain reserves for inventory, and an understatement of net loss and an overstatement of total stockholders’ equity which errors
may also impact other amounts included in the financial statements for the Restatement Periods. The Company principally attributes the errors to a
material weakness in internal controls over the recording and processing of revenues, allowances for accounts receivable, and certain reserves for
inventory, which the Company is working to remediate in fiscal year 2024.
Items Restated in this Form 10-K
This Form 10-K for the fiscal year ended December 31, 2023 includes the restatement of consolidated financial statements for the quarterly and year-to-
date periods in fiscal year which are disclosed in Note U to the consolidated financial statements. Other sections impacted are: Part I, Item 1A. Risk
Factors; and Part II, Item 9A. Controls and Procedures.
The Company has not filed, and does not intend to file, amendments to the previously filed Quarterly Reports on Form 10-Q for any of the quarters for
the year ended December 31, 2023. Accordingly, investors should rely only on the financial information and other disclosures regarding the Restatement
Periods in this Form 10-K or in future filings with the SEC (as applicable), and not on any previously issued or filed reports, earnings releases, or similar
communications relating to these periods.
See Note U to the consolidated financial statements, included in Part II, Item 8 of this Form 10-K, for additional information on the restatement and the
related consolidated financial statement effects.
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. These statements are not guarantees of future performance or events and are subject to risks and uncertainties that may cause actual results to
differ materially from those included within or implied by such forward-looking statements. These risks and uncertainties include, without limitation, our
history of losses and limited revenue; our ability to raise additional capital; our ability to protect our intellectual property; changes in business conditions;
changes in our sales strategy and product development plans; changes in the marketplace; continued services of our executive management team; security
breaches; competition in the biometric technology and identity access management industries; market acceptance of biometric products generally and our
products under development; our ability to convert sales opportunities to customer contracts; our ability to expand into Asia, Africa and other foreign
markets; our ability to integrate the operations and personnel of Swivel Secure into our business; fluctuations in foreign currency exchange rates; the
duration and extent of continued hostilities in Ukraine and its impact on our European customers; delays in the development of products, the commercial,
reputational and regulatory risks to our business that may arise as a consequence of our need to restate our financial statements, including any consequences
of non-compliance with Securities and Exchange Commission (“SEC”) and Nasdaq periodic reporting requirements; our temporary loss of the use of a
Registration Statement on Form S-3 to register securities in the future; any disruption to our business that may occur on a longer-term basis should we be
unable to remediate during fiscal year 2024 certain material weaknesses in our internal controls over financial reporting, the nature and amount of
adjustments that may be required from our preliminary estimates of our results of operations for the first quarter of 2024, as the results may vary from the
narrative included in prior reports filed with the SEC, and such variance may be material, statements of assumption underlying any of the foregoing, and
numerous other matters of national, regional and global scale, including those set forth under the caption “Risk Factors” in Item 1A of this Annual Report
and other filings with the Securities and Exchange Commission (“SEC”). These factors are not intended to represent a complete list of the general or
specific factors that may affect us. It should be recognized that other factors, including general economic factors and business strategies, may be significant,
presently or in the future. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise.
Table of Contents
PART I
ITEM 1. BUSINESS
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 using secure multi-factor authentication (MFA). Our vision is
to enable any organization to secure streamlined and passwordless workforce, customer, citizen and student access to any online service, workstation, or
mobile application, without a requirement to use tokens or phones for roving users and shared workstations. Our products include PortalGuard® and
PortalGuard Identity-as-a-Service (IDaaS) enterprise IAM, WEB-key® biometric civil and large-scale ID infrastructure, MobileAuth® mobile phone
authentication application for iOS and Android, and high-quality, low-cost accessory fingerprint scanner and FIDO-compliant hardware to provide a full
and complete solution for identity-innovating customers.
BIO-key PortalGuard 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 users) out. Competing MFA solutions
require a phone or token for every user authentication use case, but this is expensive and ineffective for workforce users who cannot use a phone in their
workplace, who rove among workstations or share kiosks for access to information systems. BIO-key’s exclusive Identity-Bound Biometrics (IBB)
authentication methods address this by making biometric identification based available at any end point device, making the user, not their phone or a token,
their own credential.
Our customers 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 needed 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. PortalGuard can operate
standalone as a comprehensive MFA, Single Sign On, and Self-Service Password Reset solution, directly authenticating for Windows sign in and
application access, or as an upgraded MFA user experience within an enterprise IAM framework such as Microsoft, Okta, Ping or ForgeRock.
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 them to 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.
1
Table of Contents
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 Identity-
Bound Biometrics to support roving users without requiring them to carry their phone or a token. As of December 31, 2023, more than 600 customers
across multiple industries use BIO-key to secure and manage access for users around the world.
Development of Business
BIO-key was founded in 1993 to develop and market advanced fingerprint biometric technology and related security software solutions. First
incorporated as BBG Engineering, the company was renamed SAC Technologies in 1994 and renamed BIO-key International, Inc. in 2002. Our principal
executive office is located at 101 Crawfords Corner Road, Suite 4116, Holmdel, NJ, 07733.
BIO-key was a pioneer in developing automated finger identification technology that supplements or compliments other methods of identification
and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, credit card, passports, driver’s licenses, or other form
of possession or knowledge-based credentialing. Our advanced technology and is used to improve both the accuracy and speed of fingerprint biometrics in
some of the largest biometric systems in the world.
On June 30, 2020, we enhanced our product offering by acquiring PistolStar, Inc. (“PistolStar”). PistolStar provides enterprise-ready identity access
management solutions to commercial, government and education customers throughout the United States and internationally. PistolStar develops and
markets our PortalGuard line of software and services.
On March 8, 2022, we expanded our sales and support operation into Europe, Africa and the Middle East (“EMEA”) by acquiring Swivel Secure
Europe, SA. Swivel Secure Europe is a Madrid, Spain based provider of IAM solutions serving over 300 customers through a network of dozens of channel
partners throughout EMEA. Swivel Secure Europe is the exclusive distributer of AuthControl® Sentry, AuthControl Enterprise and AuthControl MSP
product line in Europe, Middle East, and Africa, excluding the United Kingdom. Swivel Secure maintains a direct sales force with offices in Madrid, Spain
and Lisbon, Portugal.
Our Products
BIO-key PortalGuard and PortalGuard IDaaS
BIO-key PortalGuard is an independent, customer-controlled and neutral-by-design cloud-based identity platform that allows our customers to
integrate with any cloud or on-premise SaaS application, service or cloud host, as well as Windows device authentication through a single secure, reliable
and scalable IAM platform. It provides identical capabilities in both a SaaS (PortalGuard IDaaS) or on-premise (PortalGuard) delivery model. PortalGuard
integrates BIO-key’s Identity Bound Biometric (IBB) authentication as what-you-are authentication options that are not tied to a device or “what you have”
authentication, allowing our customers to positively identify who is accessing their systems, not the device they might have handed off to another user.
Our three-way IAM neutrality consists of:
●
seventeen MFA authentication factor choices, including our server-secured IBB via fingerprint scanners, or using a palm scan, facial
selfie, or voice biometric via our MobileAuth app on a mobile phone;
●
open user directory choices including on premise, hybrid or full-Azure Active Directory, LDAP, IBM Domino, or custom SQL user
directory; and
●
multiple single sign on, or SSO, federation options, including SAML, Open ID Connect (OIDC), OAUTH, CAS and WS-Fed.
These capabilities allow our customers to combine and authenticate legacy and future technologies and to securely connect users to the technology
that they choose. We design transparent compatibility of the BIO-key PortalGuard IDaaS with on-premise infrastructures and public and hybrid clouds.
Our customers use the BIO-key PortalGuard IDaaS to secure their workforces and student populations and make their partner networks more
collaborative. PortalGuard IDaaS provides more and secure experiences for their customers and end users, which enables our customers to future-proof
their environments. PortalGuard IDaaS can be used as the central system for an organization’s connectivity, access, authentication and identity lifecycle
management needs across all of its users, technology and applications. We enable our customers to easily deploy, manage and secure applications and
devices, and offer provisioning services using open source tools.
Developers can leverage an extensive suite of API and modular SDK tools to build custom cloud, mobile and web application enrollment and
authentication experiences that leverage BIO-key PortalGuard and WEB-key as the underlying identity management platform. Once deployed, PortalGuard
allows administrators to enforce contextual access management decisions based on conditions such as user identity, device, geolocation, application
destination identity, IP range, and time of day.
2
Table of Contents
Our customers use BIO-key to (i) manage and secure work-related IT access of their employees, contractors and supply chain partners, which we
call workforce identity; and (ii) manage and secure the identities of users of their web properties, which we call customer identity.
BIO-key PortalGuard and PortalGuard IDaaS for Workforce Identity. PortalGuard streamlines the way an organization’s employees, contractors and
supply chain partners connect to its applications and data from any device, while increasing user efficiency, preventing unauthorized delegation, credential
sharing, and keeping digital environments secure through our MFA capabilities. We enable organizations to provide their workforces with immediate and
secure access to every application from any device they use, without maintaining multiple credentials. Our multi-directory support interfaces with the
directories in place at an organization, while allowing SQL-based custom directories where none presently exist. BIO-key PortalGuard Desktop allows
customers to extend the BIO-key PortalGuard IDaaS to their existing on-premises and remote workstation Windows sign in.
BIO-key PortalGuard and PortalGuard IDaaS for Customer Identity. BIO-key PortalGuard allows organizations to secure access to their online
properties, while upgrading their customers’ user experience by delivering self-enrollment and management for customer-facing cloud, mobile or web
applications. We enable an organization’s product team to layer BIO-key’s MFA, SSO and self-service password reset, or SSPR, functionality into their
cloud, web and mobile applications through federation standards or using our APIs. Our customers are able to centrally manage policies, audit and log
access across their properties, leading to more seamless customer experiences.
BIO-key VST and WEB-key; Products; Civil and Large-Scale ID Infrastructure
We have developed what we believe is the most discriminating and effective commercially available finger-based biometric technology. 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 PIV Pro, SidePass®, EcoID II® and
SideSwipes® finger readers can be used on any laptop, tablet or other device which contains a USB A or C port. We market and sell these fingerprint
scanners through distributors and directly to end users via Amazon.
AuthControl Sentry; AuthControl Enterprise; AuthControl MSP
Swivel Secure is the exclusive distributer of AuthControl Sentry, AuthControl Enterprise, and AuthControl MSP product line in Europe, Africa and
the Middle East, or EMEA, excluding the United Kingdom and Ireland. These solutions include a patented one-time-code extraction technology, helping
enterprises manage the increasing data security risks posed by cloud services and bring your own device policies.
Fingerprint Readers
Our series of compact fingerprint readers, we find commercial companies use SidePass®, SideSwipe® or EcoID II® to replace their Windows
passwords and enable Windows Hello for Business without replacing or upgrading laptops or tablets.
Identity and Access Management, User Multi-Factor Authentication, Single Sign On, Privilege Entitlement and Access Control
Our products simplify the authentication process for enterprise users and consumers, while raising security levels. This allows our 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.
Our Markets
Historically, our largest market has been identity and access management for highly regulated industries like government and healthcare. However,
we are witnessing a change in the landscape as organizations within all industries and of all sizes are embracing biometric technology and MFA as a
security and workflow solution. Millions of users have been successfully using biometrics in phones from Apple and Samsung and they welcome the same
user experience to access applications without passwords or tokens.
Our acquisition of PistolStar added a large customer base in the state and local government and higher education (SLED) vertical. Colleges and
universities throughout the United States use our PortalGuard MFA and SSO platform. As governments, colleges and universities continue to operate in
remote environments, we have seen additional demand for our solutions.
3
Table of Contents
We believe there is potential for significant market growth in the following key areas:
●
Enterprise MFA for access to computer networks, and applications.
●
Large scale identification projects, especially in Africa and the surrounding regions.
●
Government funded initiatives, including the state board of elections.
●
International law enforcement applications where we are viewed as a global leader in the biometric technology and serve customers such as the
Israeli Defense Force and the Singapore Police departments.
●
Consumer mobile credentialing, including mobile payments, credit and payment card programs, data and application access, and commercial
loyalty programs.
●
Demand for BIO-key hardware products from Windows Hello for Business users and Fortune 2000 companies.
●
Government services and highly regulated industries including, Medicare, Medicaid, Social Security, drivers' licenses, campus and school ID,
passports/visas.
●
Remote authentication challenges, including those created by the remote work shift resulting from the pandemic.
Business Model
Our business model is focused on the following key areas:
Market
Drivers
Enterprise needs are not being met by mainstream MFA’s phone app or token approach. Supply chain breaches, ransomware attacks, and
administrative access compromises highlight the shortcomings of mainstream MFA and security approaches, which leave far too much
responsibility on end-users to comply with cyber-hygiene policies. BIO-key’s biometric authentication process prevents human error and
human nature from undermining secure authentication, while making the end user’s access easier than ever. The current climate of broad
enterprise adoption of MFA to replace passwords presents opportunities for us to leverage our unique differentiators and exploit the gaps in
existing IAM technology approaches. One of those gaps is the challenge of authenticating users that “rove” among workstations. A second
gap is preventing unauthorized account sharing and delegation.
OEM
Customers
We continue to prioritize securing agreements with OEM customers. The history of success supporting NCR, McKesson, Omnicell, and
LexisNexis provides an established footprint that we intend to build upon. As OEM customers embed our solutions within their products,
the customer benefits from the enhanced security and workflow, and frees them from investing in R&D to manage an IAM infrastructure of
their own. OEM customers’ ordering patterns are more predictable and OEM customers generally require lower service and support
resourcing.
Highly
Regulated
Industries
Government ID projects and healthcare organizations, including hospitals, clinics, and small private practices present a strong opportunity
for us. Additionally, the financial services industry, including banks and credit unions has grown substantially.
Partner
Model
In 2023, we continued to grow our Channel Alliance Partner program (CAP) focused on partnering with select value added resellers,
integrators, and distributors.
Microsoft
Partnership
We are a Microsoft Partner and our line of compact fingerprint scanners has been tested and qualified by Microsoft to support Windows
Hello and Windows Hello for Business.
4
Table of Contents
Hardware
Hardware products generated 15% and 9% of our revenue in 2023 and 2022, respectively. EcoID II® has emerged as our most popular
scanner for enterprise deployments. For customers that require the highest level of security, PIV-Pro is a FIPS compliant fingerprint
scanner, suitable for highly regulated industries and organizations that want a best-in-class solution.
We have grown our business through a combination of organic growth and the strategic acquisitions of PistolStar and Swivel Secure Europe. We
expect to continue to pursue strategic acquisitions of select businesses and assets in the IAM space. In furtherance of this strategy, we are active in the
industry and regularly evaluate businesses that we believe will either provide an entry into new market verticals or be synergistic with our existing
operations and in either case, be accretive to earnings. We cannot provide any assurance as to whether we will be able to complete any acquisition and if
completed, successfully integrate any business we acquire into our operations. Please see the section captioned “RISK FACTORS” for additional
information regarding acquisition risks.
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
Channel Alliance Program, we have partnered with more than 85 resellers, system integrators and other distribution partners. We are committed to
continue to aggressively grow this program in 2024.
We partner with leading application, managed service and infrastructure vendors, such as Intelisys, Insight, NGEN, Amazon Web Services, Pathify
(formerly UCROO Campus), Software House International (SHI), BlueAlly, 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.
Intellectual Property Rights
We develop and own significant intellectual property and believe that our intellectual property is fundamental to our biometric and IAM product
operation: We own patented technologies and trade secrets developed or acquired by us.
Patents
On December 26, 2006, we were issued US patent No. 7,155,040 covering our unique image processing technology, which is critical for enhancing
information used in the extraction of biometric minutiae. The issued patent protects a critical part of an innovative four-phase image enhancement process
developed by us. With the payment of all maintenance fees, this patent will expire on January 29, 2025.
On April 15, 2008, we were issued US patent No. 7,359,553 covering our image enhancement and data extraction core algorithm components. The
solution protected under this patent provides the capability to quickly and accurately transform a fingerprint image into a computer image that can be
analyzed to determine the critical data elements. With the payment of all maintenance fees, this patent will expire on January 3, 2025.
5
Table of Contents
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 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 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.
On April 20, 2021, we were issued U.S. Patent No. 10,984,085 for “Biometric Recognition for Uncontrolled Acquisition Environments”, expected to
be deployed in mobile devices, the patent provides a method of continuous capture of the users biometric data before the need of the authentication or
enrollment, as well as during an active session with a user, to assure the user has not changed. With the payment of all maintenance fees, this patent will
expire on March 13, 2039.
We have also been granted parallel patents to the US Patent portfolio to certain of our patents in many foreign countries offering protection of our
intellectual property rights around the world.
Trademarks
We have registered our trademarks “BIO-key”, “True User Identification”, “Intelligent Image Indexing”, “WEB-key”, “SideSwipe”, “SidePass”,
“EcoID”, “PistolStar®”, “PortalGuard”, “MobileAuth”, “PASSIVEKEY®” and “PISTOLSTAR®” with the U.S. Patent & Trademark Office, as well as
many foreign countries, protecting the names of our companies and our key technology offerings.
6
Table of Contents
We also own the following unregistered trademarks: “PortalGuard Nebula™”, “Password Power™” and “Scooch™”.
Copyrights and trade secrets
We take measures to ensure copyright and license protection for our software releases prior to distribution. When possible, the software is licensed in
an attempt to ensure that only licensed and activated software functions to its full potential. We also take measures to protect the confidentiality of our trade
secrets.
Research and Development
Our PortalGuard IAM product line is mature, with hundreds of active customers, and we are adding additional factors and capabilities to the product,
as well as enhancing the self-management for the functionally equivalent PortalGuard IDaaS offering. A significant new authentication factor set will come
via our MobileAuth application for users to experience multiple biometric secure authentication via their mobile phone devices. Our VST and WEB-key
biometric platforms are mature, stable, and widely-deployed. We concentrate our research and development efforts on enhancing the functionality,
reliability and integration of our current products as well as acquiring and developing new and innovative products and solutions for providing broader
access to the BIO-key user experience.
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, 2023 and 2022, we incurred expenses of $2,394,926 and $3,252,236, respectively, for 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, MobileAuth, WEB-key and VST. These products are critical to support the anticipated growth in enterprise IAM.
Competition
The IAM, MFA and SSO market is characterized by multiple solution 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
seventeen authentication factors. There are numerous companies involved in the development, manufacturing and marketing of fingerprint biometrics
products to commercial, government, law enforcement and prison markets. These companies include, but are not limited to, IDEMIA, Thales, NEC,
Neurotechnology, and Innovatrics.
The majority of sales for automated fingerprint identification products in the market to date have been deployed for government agencies, healthcare
facilities, and law enforcement applications. The consumer and commercial markets represent areas of 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 hardware token device that acts as a credential for access.
FIDO officially recommends enterprises purchase two or more keys for every user, to prevent lockout in the event of a lost or misplaced FIDO token.
These hardware tokens alone do not meet the needs of large organizations for which key sharing and lost keys are concerns, establishing the opportunity for
our Identity Bound Biometric differentiation. Where FIDO is needed, we offer a line of equivalent function and quality, but lower-cost FIDO 2.0 keys.
With respect to competing biometrics technologies, each has its strengths and weaknesses and none has emerged as a market leader:
●
Fingerprint identification is generally viewed as very accurate, inexpensive and non-intrusive and is the dominant biometric in use today
and will be for the foreseeable future;
●
Palm Vein scanning is expensive, technique-sensitive, and offers mobility challenges;
7
Table of Contents
●
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.
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 have forty-two employees consisting of forty-three individuals on a full-time basis and one part-time employee as
follows: (i) nineteen in engineering, customer support, and research and development; (ii) ten in finance and administration; and (iii) thirteen in sales and
marketing. We also have two 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.
8
Table of Contents
ITEM 1A. RISK FACTORS
Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You should refer to the
explanation of the qualifications and limitations on forward-looking statements appearing just before the section captioned “BUSINESS” in Item 1 above.
BUSINESS AND FINANCIAL RISKS
The restatement of our previously issued financial statements has been time-consuming and expensive and could expose us to additional
risks that could materially adversely affect our financial position, results of operations and cash flows.
As discussed in the Explanatory Note to this Annual Report and in Note U, Quarterly Financial Data (Unaudited and Restated), to the consolidated
financial statements included in this Annual Report, we are restating our previously issued financial statements for our unaudited consolidated financial
statements covering the quarterly reporting periods during fiscal year 2023, consisting of the quarters ended March 31, 2023, June 30, 2023 and
September 30, 2023 (the "Restatement Periods"). These restatements, and the remediation efforts we have undertaken and are continuing to undertake,
have been time-consuming and expensive and could expose us to a number of additional risks that could materially adversely affect our financial
position, results of operations and cash flows. To the extent these steps are not successful, we could be forced to incur additional time and expense. Our
management’s attention has also been diverted from the operation of our business in connection with the restatements and ongoing remediation of
material weaknesses in our internal controls.
We identified a material weakness in our internal control over financial reporting related to the recording and processing of revenue
transactions. Such material weaknesses could materially and adversely affect our operations, financial condition, reputation and stock price.
As discussed in Note U of our consolidated financial statements, Management has concluded that the Company’s previously issued consolidated
financial statements should be restated due to inadvertently including certain revenue from our European subsidiary, Swivel Secure Europe, Ltd., in the
first quarter of 2023. In addition, certain allowances for accounts receivable and certain reserves for inventory were understated. Therefore, the
Company misstated gross revenues, accounts receivable, and inventory during the Restatement Periods. The restatement related to the Company’s
material weakness in internal control over financial reporting over the recording of revenue, accounts receivable, and inventory transactions. A material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We completed the
restatement and are now evaluating and working towards the appropriate corrective actions to remediate the material weakness to strengthen our
internal controls over the recording of revenue transactions.
It is possible that we may discover significant deficiencies or material weaknesses in our internal control over financial reporting in the future. For
example, internal control over financial reporting may not achieve their intended objectives. Control processes that involve human diligence and
compliance, such as our disclosure controls and procedures and internal control over financial reporting, are subject to lapses in judgment and
breakdowns resulting from human failures. Controls can also be circumvented by collusion or improper management-override of such controls.
Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected, and that information
may not be reported on a timely basis.
Based on our limited cash resources, history of significant losses, and negative cash flow, our independent registered public accounting firm
has included an explanatory paragraph in their opinion as to the substantial doubt about our ability to continue as a going concern.
Due to, among other factors, our history of significant losses, limited cash resources, and negative cash flow, our independent registered public
accounting firm has included an explanatory paragraph in their opinion for the year ended December 31, 2023 as to the substantial doubt about our ability
to continue as a going concern. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United
States, which contemplate that we will continue to operate as a going concern. Our financial statements do not contain any adjustments that might result if
we are unable to continue as a going concern.
We have historically not generated significant revenue and have sustained substantial operating losses.
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.
9
Table of Contents
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 $732,000 per month to conduct our operations, a
monthly amount that we have been unable to consistently achieve through revenue generation. During 2023, we generated approximately $9.0 million of
revenue, which is below our average monthly requirements. If we are unable to generate sufficient revenue to cover operating expenses and fund our
business plan, we will need to obtain additional third-party financing. We may, therefore, need to obtain additional financing through the issuance of debt or
equity securities. We cannot assure you that we will be able to secure any such additional financing on terms acceptable to us or at all. If we cannot obtain
such financing, we will not be able to execute our business plan, will be required to reduce operating expenses, and in the extreme case, discontinue
operations.
The delayed filing of this annual report has made us currently ineligible to use a registration statement on Form S-3 to register the offer and
sale of securities, which could adversely affect our ability to raise future capital.
As a result of the delayed filing of this annual report with the SEC, we will not be eligible to register the offer and sale of our securities using a
registration statement on Form S-3 until one year from the date we regain and maintain status as a current filer. Should we wish to register the offer and
sale of our securities to the public prior to the time we are eligible to use Form S-3, both our transaction costs and the amount of time required to complete
the transaction could increase, making it more difficult to execute any such transaction successfully and potentially harming our financial condition.
Our biometric technology has yet to gain widespread market acceptance and we do not know how large of a market will develop for our
technology.
Biometric technology has received only limited market acceptance, particularly in the private sector. Our technology represents a novel security
solution and we have not yet generated significant sales. Although recent security concerns relating to identification of individuals and appearance of
biometric readers on popular consumer products, including the Apple iPhone, have increased interest in biometrics generally, it remains an undeveloped,
evolving market. Biometric based solutions compete with more traditional security methods including keys, cards, personal identification numbers and
security personnel. Acceptance of biometrics as an alternative to such traditional methods depends upon a number of factors including:
●
national or international events which may affect the need for or interest in biometric solutions;
●
the performance and reliability of biometric solutions;
●
marketing efforts and publicity regarding these solutions;
●
public perception regarding privacy concerns;
●
costs involved in adopting and integrating biometric solutions;
●
proposed or enacted legislation related to privacy of information; and
●
competition from non-biometric technologies that provide more affordable, but less robust, authentication (such as tokens and smart cards).
For these reasons, we are uncertain whether our biometric technology will gain widespread acceptance in any commercial markets or that demand
will be sufficient to create a market large enough to produce significant revenue or earnings. Our future success depends, in part, upon business customers
adopting biometrics generally, and our solution specifically.
Biometric technology is a relatively 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 relatively 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.
10
Table of Contents
The market for our solutions is still developing and if the biometrics industry adopts standards or a platform different from our standards
or platform, our competitive position would be negatively affected.
The market for identity solutions is still developing. The evolution of this market may result in the development of different technologies and
industry standards that are not compatible with our current solutions, products or technologies. Several organizations set standards for biometrics to be used
in identification and documentation. Although we believe that our biometric technologies comply with existing standards, these standards may change and
any standards adopted could prove disadvantageous to or incompatible with our business model and current or future solutions, products and services.
Our software products may contain defects which will make it more difficult for us to establish and maintain customers.
Although we have completed the development of our core biometric technology, it has only been used by a limited number of business customers.
Despite extensive testing during development, our software may contain undetected design faults and software errors, or “bugs” that are discovered only
after it has been installed and used by a greater number of customers. Any such defect or error in new or existing software or applications could cause
delays in delivering our technology or require design modifications. These could adversely affect our competitive position and cause us to lose potential
customers or opportunities. Since our technologies are intended to be utilized to secure physical and electronic access, the effect of any such bugs or delays
will likely have a detrimental impact on us. In addition, given that biometric technology generally, and our biometric technology specifically, has yet to
gain widespread acceptance in the market, any delays would likely have a more detrimental impact on our business than if we were a more established
company.
In order to generate revenue from our biometric products, we are dependent upon independent original equipment manufacturers, system
integrators and application developers, which we do not control. As a result, it may be more difficult to generate sales.
We market our technology through licensing arrangements with:
●
original equipment manufacturers (OEMs), system integrators and application developers which develop and market products and
applications which can then be sold to end users; and
●
companies which distribute goods, services or software applications over the Internet.
As a technology licensing company, our success will depend upon the ability of these manufacturers and developers to effectively integrate our
technology into products and services which they market and sell. We have no control over these licensees and cannot assure you that they have the
financial, marketing or technical resources to successfully develop and distribute products or applications acceptable to end users or generate any
meaningful revenue for us. These third parties may also offer the products of our competitors to end users. While we have commenced a significant sales
and marketing effort, we have only begun to develop a significant distribution channel and may not have the resources or ability to sustain these efforts or
generate any meaningful sales.
We face intense competition and may not have the financial and human resources necessary to keep up with rapid technological changes,
which may result in our technology becoming obsolete.
The Internet, facility access control, and information security markets are subject to rapid technological change and intense competition. We
compete with both established biometric companies and a significant number of startup enterprises as well as providers of more traditional methods of
access control. Most of our competitors have substantially greater financial and marketing resources than we do and may independently develop superior
technologies, which may result in our technology becoming less competitive or obsolete. We may not be able to keep pace with this change. If we are
unable to develop new applications or enhance our existing technology in a timely manner in response to technological changes, we will be unable to
compete in our chosen markets. In addition, if one or more other biometric technologies such as voice, face, iris, hand geometry or blood vessel recognition
are widely adopted, it would significantly reduce the potential market for our fingerprint identification technology.
We recognized revenues from Africa and the European Union in 2022 and 2023 and expect continued revenues from these regions in future
periods. Our financial performance will be subject to risks associated with changes in the value of the U.S. dollar versus local currencies.
Owing to the international scope of our operations, including our recent acquisition of Swivel Secure Europe, SA, we are exposed to foreign
exchange risk. Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales and operating expenses
worldwide. Weakening of foreign currencies relative to the U.S. dollar will adversely affect the U.S. dollar value of our foreign currency-denominated sales
and earnings, if any, and could lead to us raising international pricing, potentially reducing the demand for our products. In addition, margins on sales of
our products in foreign countries and on sales of products that include components obtained from foreign suppliers could be materially adversely affected
by foreign currency exchange rate fluctuations. As a result, our business and the price of our common stock may be affected by fluctuations in foreign
exchange rates, which may have a significant impact on our results of operations and cash flows from period to period. Currently, we do not have any
exchange rate hedging arrangements in place.
11
Table of Contents
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 negatively impacted our financial
position and results of operation.
We depend on key employees and members of our management team, including our Chairman of the Board and Chief Executive Officer,
Chief Financial Officer, and our Chief Legal 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, Cecilia C. Welch, our Chief
Financial Officer, and James D. Sullivan, our Chief Legal 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.
12
Table of Contents
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 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. 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.
We are subject to risks and uncertainties associated with the continued growth of our international operations, which may harm our
business.
We have international operations and continue to expand our international operations when we acquired Swivel Secure Europe SA. Accordingly, our
business is subject to risks and uncertainties associated with doing business outside of the United States and could be adversely affected by a variety of
factors, including:
●
multiple, conflicting and changing laws and regulations such as privacy, security, and data use regulations, tax laws, export and import
restrictions, economic and trade sanctions and embargoes, employment laws, anticorruption laws, regulatory requirements,
reimbursement or payer regimes and other governmental approvals, permits and licenses;
●
failure by us, our collaborators or our distributors to obtain regulatory clearance, authorization or approval for the use of our product
candidates in various countries;
●
additional potentially relevant third-party patent rights;
●
complexities and difficulties in obtaining intellectual property protection and enforcing our intellectual property;
●
difficulties in staffing and managing foreign operations;
●
financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises
on demand and payment for our product candidates and exposure to foreign currency exchange rate fluctuations;
●
natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts,
curtailment of trade and other business restrictions;
●
regulatory and compliance risks that relate to maintaining accurate information and control over sales and distributors’ activities that may
fall within the purview of the U.S. Foreign Corrupt Practices Act (FCPA), its books and records provisions, or its anti-bribery provisions,
or laws similar to the FCPA in other jurisdictions in which we may now or in the future operate; and
●
anti-bribery requirements of several Member States in the European Union and other countries that may change and require disclosure of
information to which U.S. legal privilege may not extend.
Any of these factors could significantly harm our business, operating results, financial condition or prospects.
13
Table of Contents
Our business could be negatively impacted by security threats, including cybersecurity threats, ransomware, and other disruptions.
Our customers use our solutions to access their business systems and store data related to their employees, contractors, partners and customers. Our
systems’ integrity is essential to their use of our platform, which stores, transmits and processes customers’ proprietary information and users’ personal
data. If the confidentiality, integrity or availability of our customers’ data or systems is disrupted, we could incur significant liability to our customers and
to individuals or businesses whose information was being stored by our customers, and our platform may be perceived as less desirable, which could
negatively affect our business and damage our reputation. We, our third-party service providers, and our customers may be unable to anticipate these
techniques or to implement adequate preventive measures. Further, because we do not control our third-party service providers, or the processing of data by
our third-party service providers, we cannot ensure the integrity or security of measures they take to protect customer information and prevent data loss
beyond evaluating and relying on their representations as to their security methods and posture. Although we utilize various procedures and controls to
monitor these threats and mitigate our exposure to such threats, there can be no assurance that these procedures and controls will be sufficient in preventing
security threats from materializing. If any of these events were to materialize, they could lead to losses of sensitive information, critical infrastructure,
personnel or capabilities, essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations, or
cash flows. As a technology company, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information.
on an ongoing basis.
In addition to threats from traditional computer “hackers,” malicious code (such as malware, viruses, worms and ransomware), employee or
contractor theft or misuse, password spraying, phishing and denial-of-service attacks, we and our third-party service providers now also face threats from
sophisticated nation-state and nation-state-supported actors who engage in attacks (including advanced persistent threat intrusions) that add to the risks to
our systems (including those hosted on AWS’ systems), internal networks, our customers’ systems and the information that they store and process.
Cybersecurity attacks in particular are evolving, we expect that they will continue, and we expect the scope and sophistication of these efforts may increase
in future periods. As a result, we and our third-party service providers may be unable to anticipate these techniques or implement adequate preventative
measures quickly enough to prevent either an electronic intrusion into our systems or services or a compromise of customer data, employee data or other
protected information.
Although we have implemented systems and procedures that are designed to protect customer, employee, vendor and Company information, prevent
data loss and other security breaches, and otherwise identify, assess, and analyze cybersecurity risks, these measures may not function as expected or may
not be sufficient to protect our internal networks and platform against certain attacks. Development and maintenance of these systems is costly and requires
ongoing monitoring and updating as technologies change and efforts to overcome security measures increase and become more sophisticated. We face an
evolving threat landscape in which cybercriminals, among others, employ a complex array of techniques designed to access personal data and other
information, including, for example, the use of fraudulent or stolen access credentials, malware, ransomware, phishing, denial of service and other types of
attacks. While, to the best of our knowledge, we have not experienced any material misappropriation, loss or other unauthorized disclosure of confidential
or personally identifiable information as a result of a security breach or 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.
We maintain cybersecurity insurance, but our insurance may be insufficient to cover all liabilities incurred in any such incident, and any incident
may result in loss of, or increased costs of, that cybersecurity insurance. Any breach, or any perceived breach, of our systems, our customers’ systems, or
other systems or networks secured by our products, without regard to whether any breach is due to a vulnerability in our platform, may also undermine
confidence in our platform or the identity as a service industry and could result in damage to our reputation and brand, negative publicity, loss of partners,
customers and sales, increased costs to correct any problem, costly litigation and other liabilities. In addition, a breach of the security measures of one of
our partners could result in the disclosure of confidential information or other data that may provide additional avenues of attack, and if a high profile
security breach occurs with respect to a comparable cloud technology provider, our customers and potential customers may lose trust in the security of the
cloud business model generally, which could adversely impact our ability to retain existing customers or attract new ones. Any of these negative outcomes
could adversely impact market acceptance of our products and could harm our business, results of operations, and financial condition.
Our failure to comply with applicable privacy, data protection and information security laws or related contractual obligations could
subject us to significant liability and negatively impact our financial position and results of operation.
There are numerous laws and regulations in various jurisdictions regarding privacy, data protection, information security, and the storing, sharing,
use, processing, transfer, disclosure and protection of personal data. In light of the increasing pace of new technology development, including with respect
to biometric data, the scope of these data protection and privacy-related laws and regulations are expanding, subject to differing interpretations, and may be
inconsistent among jurisdictions, or conflict with other rules that we are subject to. These evolving laws and regulations may result in increasing regulatory
and public scrutiny and escalating levels of enforcement and sanctions. We are also subject to the terms of our privacy policies and contractual obligations
to third parties related to privacy, data protection and information security.
Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or other third parties, or
applicable laws or regulations relating to privacy, data protection, or information security may result in governmental investigations or enforcement actions,
litigation, claims or public statements against us by consumer advocacy groups or others, and could result in significant liability or cause our customers to
lose trust in us, which could cause them to cease or reduce use of our products and services and otherwise have an adverse effect on our reputation and
business. Any similar failure or perceived failure by users of our products or services may also have an adverse effect on our reputation and business. In
addition, legal, regulatory, contractual and other obligations as well as public concerns relating to privacy, data protection or information security could
restrict our ability to store and process data as part of our solutions or otherwise impact our ability to provide our solutions in certain jurisdictions and may
result in the loss of business opportunities from customers operating in, or seeking to expand into, those jurisdictions. Additionally, in 2023, the SEC
adopted new rules related to cybersecurity risk management, which may further increase our regulatory burden and the cost of compliance in such events.
14
Table of Contents
Our failure to maintain appropriate environmental, social, and governance ("ESG") practices and disclosures could result in reputational
harm, a loss of customer and investor confidence, and adverse business and financial results.
There is an increasing focus from certain investors, employees, customers and other stakeholders concerning corporate responsibility, specifically
related to environmental, social and governance matters (“ESG”). Some investors may use these non-financial performance factors to guide their
investment strategies and, in some cases, may choose not to invest in us if they believe our policies and actions relating to corporate responsibility are
inadequate. The growing investor demand for measurement of non-financial performance is addressed by third-party providers of sustainability assessment
and ratings on companies. The criteria by which our corporate responsibility practices are assessed may change due to the constant evolution of the
sustainability landscape, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. If we elect
not to or are unable to satisfy such new criteria, investors may conclude that our policies and/or actions with respect to corporate social responsibility are
inadequate. We may face reputational damage in the event that we do not meet the ESG standards set by various constituencies.
Furthermore, if our competitors’ corporate social responsibility performance is perceived to be better than ours, potential or current investors may
elect to invest with our competitors instead. In addition, in the event that we communicate certain initiatives and goals regarding environmental, social and
governance matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such
initiatives or goals. If we fail to satisfy the expectations of investors, employees and other stakeholders or our initiatives are not executed as planned, our
reputation and business, operating results and financial condition could be adversely impacted.
New climate disclosure rules adopted by the SEC, may increase our costs and litigation risks, which could materially and adversely affect
our future results of operations and financial condition.
In March 2024, the SEC adopted new climate disclosure rules, which require new disclosure in certain SEC filings about material climate-related
risks, activities to mitigate or adapt to such risks, board oversight of climate-related risks and management’s role in managing material climate-related
risks, and climate-related targets and goals. The new climate disclosure rules have been the subject of multiple legal challenges, so the extent to which the
new rules will go into effect remains uncertain. We are currently assessing the impact of the new rules, but at this time, we cannot predict the costs of
implementation or any potential adverse impacts resulting from the new rules. However, we may incur increased costs relating to the assessment and
disclosure of climate-related risks and increased litigation risks related to disclosures made pursuant to the new rules, either of which could materially
and adversely affect our future results of operations and financial condition.
The war in Ukraine and the international community’s response have created substantial political and economic disruption, uncertainty,
and risk.
Russia’s military intervention in Ukraine in late February 2022, Ukraine’s widespread resistance, and the NATO led and United States coordinated
economic, financial, communications, and other sanctions imposed by other countries have created significant political and economic world uncertainty.
There is significant risk of expanded military confrontation between Russia and other countries. It is not possible to predict the broader consequences of
the conflict, including related geopolitical tensions, and the measures and retaliatory actions taken by the U.S. and other countries in respect thereof, as well
as any counter measures or retaliatory actions by Russia in response. At a minimum, the continuing conflict is likely to cause regional instability,
geopolitical shifts and could materially adversely affect global trade, currency exchange rates, regional economies and the global economy, which could
materially adversely affect our financial condition or results of operations. Current and likely additional international sanctions against Russia may
contribute to higher costs, particularly for petroleum-based products. These and related actions, responses, and consequences that cannot now be predicted
or controlled may contribute to world-wide economic reversals.
There is a scarcity of and competition for acquisition opportunities.
There are a limited number of operating companies available for acquisition that we deem to be desirable targets. In addition, there is a very high
level of competition among companies seeking to acquire these operating companies. Many established and well-financed entities are active in acquiring
interests in companies that we may find to be desirable acquisition candidates. Many of these entities have significantly greater financial resources,
technical expertise and managerial capabilities than us. Consequently, we will be at a competitive disadvantage in negotiating and executing possible
acquisitions of these businesses. Even if we are able to successfully compete with these entities, this competition may affect the terms of completed
transactions and, as a result, we may pay more or receive less favorable terms than we expected for potential acquisitions. We may not be able to identify
operating companies that complement our strategy, and even if we identify a company that complements our strategy, we may be unable to complete an
acquisition of such a company for many reasons, including:
●
failure to agree on the terms necessary for a transaction, such as the purchase price;
●
incompatibility between our operational strategies or management philosophies with those of the potential acquiree;
●
competition from other acquirers of operating companies;
●
lack of sufficient capital to acquire a profitable company; and
●
unwillingness of a potential acquiree to work with our management.
15
Table of Contents
Risks related to acquisition financing.
We have limited financial resources and our ability to make additional acquisitions without securing additional financing from outside sources is also
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 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;
●
the risk of entering new markets;
●
difficulties in retaining the existing customers;
●
the potential loss of existing or acquired strategic operating partners following an acquisition;
●
the potential loss of key employees following an acquisition and the associated risk of competitive efforts from departures;
●
assumed or unforeseen liabilities that arise in connection with the acquired business;
●
possible legal disputes with the acquired company following an acquisition; and
●
the inability to generate sufficient revenue to offset acquisition or investment costs.
As a result, if we fail to properly evaluate and execute any acquisitions or investments, our business and prospects may be seriously harmed.
To the extent we make any material acquisitions, our earnings may be 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 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 1,814,000 shares of our common stock (as adjusted to reflect our 1-for-18 reverse stock split, which was
effective December 21, 2023) 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.
16
Table of Contents
An active trading market for our common stock may not be sustained.
Although our common stock is listed on the Nasdaq Capital Market, an active trading market for our shares may not be developed and if developed,
sustained. If an active market for our common stock is not developed or sustained, it may be difficult for you to sell your shares without depressing the
market price for the shares or sell your shares at all. Any inactive trading market for our common stock may also impair our ability to raise capital to
continue to fund our operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as
consideration.
If we fail to comply with the requirement to timely file all required periodic financial reports with the Securities and Exchange Commission,
or other continued listing requirements of The Nasdaq Stock Market, 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, to timely
file all required periodic financial reports with the Securities and Exchange Commission. On April 17, 2024, we received notice from Nasdaq indicating
that were not in compliance with Nasdaq continued listing rule which requires us to timely file all required periodic financial reports with the Securities and
Exchange Commission due to our failure to timely file this Annual Report on Form 10-K for the fiscal year ended December 31, 2023. On May 22, 2024,
we received a second notice from Nasdaq indicating that we were not in compliance with Nasdaq’s continued listing rules due to our failure to timely file
our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024. We have 60 calendar days from the initial notification letter, or until June
17, 2024 to submit a plan to regain compliance with Nasdaq’s continued listing requirements. If the plan is accepted, we may be eligible for up to 180
calendar days from the original due date to file this Annual Report on Form 10-K, or until October 14, 2024, to regain compliance. The 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. Delisting could also 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 Annual Report on Form 10-K 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.
17
Table of Contents
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 1C. CYBERSECURITY
We take a defense-in-depth approach, leveraging multiple, layered security measures, to protect our data, our customers’ data, our infrastructure,
and our employees. We embed data protection throughout our operations and information technology programs, relying on multiple and various controls
to prevent and detect threats, with the goal of safeguarding our assets, data and personnel.
We evaluate cybersecurity risks as part of our overall enterprise risk management. A steering committee of senior executives meets quarterly to
evaluate any changes to the Company’s exposure to cybersecurity risks, discuss potential mitigation plans and provide updates on mitigation efforts
already underway. Our cybersecurity team keeps up to date on the latest threats and risks through multiple channels and is also involved in evaluating
risks associated with any new proposed service providers. We employ a Cybersecurity Engineer, reporting directly to our Chief Technology Officer, who
manages our cybersecurity team that is comprised entirely of security professionals with industry recognized certifications. The cybersecurity team
within BIO-key is responsible for assessing and managing risks and informing/gaining feedback from the cybersecurity steering committee.
Additionally, our team of dedicated cybersecurity experts/professionals maintain a comprehensive set of cybersecurity policies and standards,
including a security incident response framework. The framework is a set of coordinated procedures and tasks that our incident response team executes to
ensure timely and accurate reporting and resolution of computer security incidents. The framework details who, how and when appropriate persons or
committees, including the Board of Directors and Audit Committee are kept informed on the status of potential cybersecurity incidents. A summary of
recent incidents is also presented by the Chief Law Officer (“CLO”) at each regular Audit Committee meeting. Our policies and standards were
developed in collaboration with a wide range of disciplines, including information technology, cybersecurity, legal, compliance and business.
Our cybersecurity strategy and policies are continually reassessed to ensure they attempt to identify and proactively address the constant changes in the
global threats. Decision makers such as the CLO, executive team, and Audit Committee are regularly kept up to date on cybersecurity trends. Ongoing
collaboration with stakeholders throughout the business also helps to build continued awareness and visibility of future needs.
We engage external vendors to assess the cybersecurity program as needed. An independent third party will perform annual multi-stage penetration
testing of our IT environment.
Our cybersecurity program is governed by the Audit Committee of our Board. The Audit Committee of the Board and the full Board will each
receive quarterly updates on cybersecurity risks identified through the enterprise risk management processes described above.
Notwithstanding our processes to oversee and identify risk from cybersecurity threats, we may not be successful in preventing or mitigating
a cybersecurity incident that could have a material adverse effect on us. We identify nation state-sponsored threat actors and the rise in sophistication and
proliferation of ransomware campaigns as top reasonable material risks to the business. The theft, unauthorized use or publication of our intellectual
property and/or confidential business or personal information (whether through a breach of our own systems or the breach of a system of a third party that
provides services to us) could harm our competitive or negotiating positions, reduce the value of our investment in research and development and other
strategic initiatives, compromise our patent enforcement strategies or outlook, damage our reputation or otherwise adversely affect our business. To date
there have not been any risks that have materially affected our operations.
See Item 1A. “RISK FACTORS” for a discussion of cybersecurity risks.
ITEM 2. 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 Holmdel, New Jersey (150 square feet). Internationally, we conduct operations from leased premises in Tsuen Wan, Hong Kong
(1,098 square feet), Jiangmen, China (3,267 square feet), and Madrid, Spain (1,504 square feet). Our Eagan, Minnesota and Bedford, New Hampshire
offices provide research and development, and customer support, for BIO-key software and PistolStar software, respectively. Our Holmdel, New Jersey
location serves as our corporate headquarters. Our Hong Kong location is a small warehouse for finished goods as well as administrative and sales
support. Our Jiangmen, China facility provides our hardware research and development, contract manufacturing and warehousing of raw materials, work-
in-process, and finished goods. Our Madrid, Spain office serves as our sales organization for Europe, the Middle East, and parts Africa.
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.
18
Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock currently trades on the Nasdaq Capital Market under the symbol “BKYI”.
Holders
As of June 4, 2024 the number of stockholders of record of our common stock was 159.
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 2023 that were not previously disclosed in a Quarterly Report on Form
10-Q or in a Current Report on Form 8-K.
Issuer Purchases of Equity Securities
None.
ITEM 6. RESERVED
Not Applicable.
19
Table of Contents
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, 2023 and 2022 and the accompanying notes included elsewhere in this Report.
All share totals reported herein have been adjusted to reflect our 1-for-18 reverse stock split, which was effective December 21, 2023.
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 seventeen 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 functional gaps, such as allowing roving users to biometrically authenticate at
any workstation without using their phones or tokens, eliminating unauthorized account delegation, detecting duplicate users, and accommodating in-
person identification.
Our customers use BIO-key every day to securely access a variety of cloud, mobile and web applications, on-premise and cloud-based servers from
all of their devices. Employees, contractors, students and faculty sign in through PortalGuard to seamlessly and securely access the applications they need
to do their important work, without relying on personal phone use or per-user tokens. Organizations use our platform to securely collaborate with their
supply chain and partners, and to provide their customers with flexible, resilient user experiences online or in-person.
Large-scale customer and civil ID customers use our scalable biometric management platform and FBI-certified scanner hardware to manage
enrollment, de-duplication and authentication for millions of users. One large bank has enrolled and identifies over 21.7 million of their customers using
BIO-key fingerprint biometrics in branches on a daily basis.
PortalGuard and IBB deliver unique value to enterprises who find that mainstream MFA solutions do not adequately address their workforce use
cases. PortalGuard operates as a single MFA user experience, providing a rich set of authentication choices to meet every use case. We sell our branded
biometric and FIDO authentication hardware as accessories to our IAM platforms, so that customers can have a single vendor providing all components of
their IAM solution. We do not mandate the use of BIO-key hardware with our software and services. Our NIST-certified fingerprint biometric platform is
unique in that it supports interoperable mixing and matching combinations of different manufactures’ fingerprint scanners in a deployment, so that the right
scanner can be selected for the right use case, without mandating the user of a particular scanner.
Security-conscious software developers leverage our platform APIs and federation interfaces to securely and efficiently embed biometric and MFA
identity capabilities into their software. Our approach to IDaaS allows our customers to efficiently scale their security and identity infrastructures to
protect both internal cloud workforce- and external customer-facing applications.
In 2022, we expanded our product offerings and customer base when we acquired Swivel Secure, a Madrid, Spain based provider of IAM solutions.
Swivel Secure is the exclusive distributer of AuthControl Sentry, AuthControl Enterprise, and AuthControl MSP product line in Europe, Africa and the
Middle East, or EMEA, excluding the United Kingdom and Ireland. These solutions include a patented one-time-code extraction technology, helping
enterprises manage the increasing data security risks posed by cloud services and bring your own device policies.
We operate a SaaS business model with customers subscribing to term use of our software for annual recurring revenue. We sell our products
directly through our field and inside sales teams, as well as indirectly through our network of channel partners including resellers, system integrators,
master agents and other distribution partners. Our subscription fees include a term license of hosted or on-premise product and technical support and
maintenance of our platform. We base subscription fees primarily on the products used and the number of users enrolled in our platform. We generate
subscription fees pursuant to noncancelable contracts with a weighted average duration of approximately one year.
20
Table of Contents
Strategic Outlook
We plan to have a more significant role in the IAM market which continues to expand. We plan to continue 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 eighty-five participants and continues to
generate incremental revenues.
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”, given the uncertainty the current economic and political environment and their effects 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, the related financial impact cannot be reasonably estimated at this time.
The current trend of continued remote work environments increases the risk of unauthorized users, phishing attacks, and hackers who are eager to
take advantage of the challenges of securing remote workers. A growing trend of security incidents that highlight potential cybersecurity vulnerabilities,
additional regulatory requirements, and increasingly stringent Cyber Insurance underwriting standards that mandate enhanced security solutions has
resulted in many businesses requiring MFA for their employees, partners and customers to access their business systems and data. We believe that
biometrics should continue to play a key role in remote user authentication.
RESULTS OF OPERATIONS
Consolidated Results of Operations
Two Year % trend
Years ended
December 31,
2023
2022
Revenues
Services
29%
26%
License fees
56%
65%
Hardware
15%
9%
100%
100%
Costs and other expenses
Cost of services
11%
10%
Cost of license fees
15%
13%
Cost of hardware
9%
6%
Cost of hardware reserve
47%
6%
82%
35%
Gross Profit
18%
65%
Operating expenses
Selling, general and administrative
101%
133%
Research, development and engineering
31%
46%
Reversal of earnout payable-Swivel acquisition
0%
-7%
Impairment of goodwill
0%
34%
Total operating expenses
132%
206%
Operating loss
-114%
-141%
Other income (expense)
Total other income (expense)
2%
-29%
Loss before provision for income tax benefit
-112%
-170%
Provision for income tax benefit
2%
0%
Net loss
-110%
-170%
21
Table of Contents
Revenues and Costs and other expenses
2023-2022
2023
2022
$ Chg
% Chg
Revenues
Services
$
2,218,885 $
1,789,720 $
429,165
24%
License fees
4,342,010
4,584,052
(242,042)
-5%
Hardware
1,194,010
646,486
547,524
85%
Total Revenue
$
7,754,905 $
7,020,258 $
734,647
10%
Costs and other expenses
Services
$
861,936 $
722,152 $
139,784
19%
License fees
1,174,919
906,417
268,502
30%
Hardware
700,231
411,001
289,230
70%
Hardware reserves
3,586,500
400,000
3,186,500
797%
Total Costs and other expenses
$
6,323,586 $
2,439,570 $
3,884,016
159%
Revenues
Revenue increased $734,647 or 10% to $8,654,905 in 2023 as compared to $7,020,258 in 2022 due to the factors stated below.
For the years ended December 31, 2023, and 2022, service revenues included approximately $1,193,000 and $1,243,000, respectively, of recurring
maintenance and support revenue, and approximately $1,026,000 and $546,000, respectively, of non-recurring custom services revenue. Recurring service
revenue decreased 4% in 2023 due to delayed renewals in the fourth quarter. Non-recurring custom services increased 88% in 2023 due to increased new
customer installations, Swivel Secure service fees, and conversion to the cloud platform. Although inflation has negatively impacted many industries, we
have continued to see our pipeline increase for the cybersecurity protection software and services that we offer.
For the year ended December 31, 2023 and 2022 license revenue decreased $242,042 or 5% to $4,342,010, due primarily to lower new customer
orders. We expect do not expect this trend to continue into 2024.
Hardware sales increased by $547,524, or 85%, to $1,194,010 in 2023 from $646,486 in 2022. The increase was attributable largely to fourth
quarter 2023 sales to an international defense agency.
Costs of goods sold
For the year ended December 31, 2023, cost of services increased approximately 19% to $861,936, due to the increased costs to support Swivel
Secure deployments.
License fees for the year ended December 31, 2023 increased $268,502, or approximately 30%, to $1,174,919 due primarily to increased license
revenue and related license fees payable for third-party software distributed by Swivel Secure.
Hardware costs for the year ended December 31, 2023 increased $289,230, or approximately 70%, to $700,231 from $411,001 in 2022. The increase
was associated with the increased hardware sales and hardware mix described above. Hardware reserve costs for the year ended December 31,
2023 increased $3,186,500 due to a complete reserve of slow moving inventory purchased for projects in Nigeria, and for other older inventory. We are
continuing to explore other markets and opportunities to sell this inventory.
22
Table of Contents
Selling, general and administrative
2023-2022
2023
2022
$ Chg
% Chg
$
7,862,710 $
9,364,887 $
(1,502,177)
-16%
Selling, general and administrative costs for year ended December 31, 2023 were $7,862,710 representing a 16% decrease from 2022. The decrease
included lower sales and marketing expenses related to show participation and personnel costs, offset by an increase in allowance for doubtful accounts ofr
$750,000 compared to $360,000 in 2022.
Research, development and engineering
2023-2022
2023
2022
$ Chg
% Chg
$
2,394,926 $
3,252,236 $
(857,310)
-26%
For the year ended December 31, 2023, research, development and engineering costs were $2,394,926 representing a 26% decrease from 2022.
Included in the decrease were lower personnel costs associated with wages and benefits for engineering employees.
Reversal of earnout payable – Swivel Secure acquisition
2023-2022
2023
2022
$ Chg
% Chg
$
- $
(500,000) $
500,000
-100%
For the year ended December 31, 2022, we recognized income on the elimination of the earnout payable on the acquisition of Swivel Secure as the
requirements for the payout were not achieved.
Impairment of goodwill
2023-2022
2023
2022
$ Chg
% Chg
$
- $
2,387,193 $
(2,387,193)
-100%
For the year ended December 31, 2022, we recognized an impairment of our goodwill balances due to the decrease in market value of our common
stock compared to the carrying value of our net assets.
Other income (expense)
2023-2022
2023
2022
$ Chg
% Chg
Interest income
$
11,533 $
233 $
11,300
4850%
Gain from sale of asset
20,000
-
20,000
100%
Foreign currency loss
(39,000)
-
(39,000)
100%
Investment-debt security reserve
-
(452,821)
452,821
-100%
Loan transaction costs
-
(1,147,456)
1,147,456
-100%
Change in fair value of convertible note
396,203
(396,203)
792,406
-200%
Interest expense
(218,270)
(10,462)
(207,808)
1986%
$
170,466 $
(2,006,709) $
2,177,175
-108%
The amounts for other income (expense) for the year ended December 31, 2023 consisted of interest income of $11,533, a gain from the sale of a
PistolStar domain asset, change in loan transactions costs for payment of the convertible note payable as we elected to value the convertible note under the
fair value option, and interest expense of $218,270 on the convertible note payable and the government loan through the BBVA bank. The amounts for the
year ended December 31, 2022, consisted of interest income of $233, a write-off of the investment-debt security as we received the proceeds and the bond
issuer defaulted on repayment, loan transactions costs expensed for the convertible note payable as we elected to value the convertible note payable under
the fair value option, the change in the fair value of the convertible note, and interest expense of $10,462 on the convertible note and the government loan
through the BBVA bank.
23
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
Operating activities overview
Net cash used for operations during the year ended December 31, 2023 was $3,793,456. Items of note included:
●
Net positive cash flows related to non-cash expenses of approximately $4,933,000.
●
Net negative cash flows related to changes in accounts receivable, prepayments, lease liabilities, and deferred revenue in the aggregate amount of
approximately $244,000 and our net loss for the period.
Investing activities overview
Net cash used in investing activities during the year December 21, 2023 was $1,000 for capital expenditures.
Financing activities overview
Approximately $4,297,000 was provided by financing activities during the year ended December 31, 2023 consisting of the issuance of common
stock and warrants in public and private securities offerings, and exercise of warrants. These amounts were offset by repayment of convertible note
payable, costs associated with the issuance of our securities, and proceeds of $17,478 from sales of common stock under the employee stock purchase
plan.
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:
On November 20, 2023, we completed a private placement of shares of common stock and warrants resulting in net proceeds of approximately
$435,000, after deducting placement agent fees and estimated offering expenses.
On October 30, 2023, we completed a public offering of shares of common stock and warrants resulting in net proceeds of approximately $3.3
million, after deducting placement agent fees and estimated offering expenses. We used approximately $2.2 million of the net proceeds to repay the
outstanding amount due under outstanding convertible note payable.
In December 2022, we entered into and closed a securities purchase agreement (the “Purchase Agreement”) with AJB Capital Investments, LLC
under which we issued a $2,200,000 principal amount senior secured promissory note (the “Note”). The principal amount of the Note was due six months
following the date of issuance, subject to one six-month extension. Interest under the Note accrued at a rate of 10% per annum, payable monthly through
month six and at 12% per annum in months seven through twelve, payable monthly. The Note was secured by a lien on substantially all of our assets and
properties. The Note was repaid in December 2022.
In March 2022, in connection with the acquisition of Swivel Secure, we assumed a €500,000 government loan that was issued through BBVA Bank
during the COVID-19 pandemic. The loan bears interest at the rate of 1.75% per annum and is payable in monthly installments of approximately $11,900
inclusive of interest from May 2022 through maturity in April 2026. Upon closing of the acquisition, Swivel Secure had cash equal to the outstanding
balance.
We entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to October
31, 2024 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.
Liquidity Outlook
At December 31, 2023, our total cash and cash equivalents were approximately $511,000, as compared to $2,600,000 at December 31, 2022. At
December 31, 2023, we had working capital of approximately $(777,000) as a result of the allowance for doubtful accounts and reserve on inventory.
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 $732,000 per month to
conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation. During 2023, we generated
approximately $7,755,000 of revenue, which did not generate enough cash to fully fund our average monthly cash requirements. We expect that Swivel
Secure Europe will continue to generate positive cash flow in 2024. We also have approximately $3.6 million of inventory (currently reserved) purchased
for projects in Nigeria. We continue to explore other markets and opportunities to sell or return the product to generate additional cash.
If we are unable to generate sufficient revenue and positive cash flow from operations or liquidation of existing inventory to fund current operations
and execute our business plan, we will need to obtain additional third-party 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, if at all, 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.
24
Table of Contents
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these
financial statements 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.
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. Impairment or Disposal of Long Lived Assets, including Intangible Assets
3. Allowances for Accounts Receivable
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements appearing at pages 37-64 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
25
Table of Contents
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, 2023. 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, 2023, our CEO
and CFO concluded that, as of such date, our disclosure controls and procedures were ineffective.
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) and 15d-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 can also 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. 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, 2023, 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 not effective as of December 31, 2023 as a result of certain material weaknesses discovered during the
course of their review.
In particular, in connection with the audit of our financial statements as of and for the year ended December 31, 2023, our management identified a
lack of control over properly assessing revenue, allowances for accounts receivable and certain reserves for inventory. This resulted in certain errors in the
manner in which we recognized revenue generated by our European subsidiary, Swivel Secure Europe, SA, in the first quarter of 2023. In addition, certain
allowances for accounts receivable and certain reserves for inventory were understated.
We are currently working to implement appropriate corrective actions to remediate the material weakness to strengthen our internal controls over the
recording of revenues.
Each of the material weaknesses noted will only be deemed to have been remediated after the new controls and procedures have been in place for a
sufficient period and management has concluded through appropriate testing that the controls are operating effectively. However, we cannot assure you that
these or other measures will fully remediate the material weaknesses in a timely manner.
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 SEC 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
Going forward, we will change our internal control over financial reporting for the year ended December 31, 2023 to thoroughly access all accounts
for potential adjustments required for proper presentation of the value of the accounts.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
26
Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following sets forth certain information about each director and executive officer of the Company.
NAME
AGE
POSITIONS HELD
Michael W. DePasquale
69
Chairman of the Board of Directors and Chief Executive Officer
Cameron Williams (a)* (b) (c)
77
Director
Robert J. Michel (a) (b)*(c)
67
Director
Wong Kwok Fong (Kelvin)
60
Director and Vice-Chairman of the Board of Directors
Emmanuel Alia (b) (c)*
59
Director
Cecilia C. Welch
64
Chief Financial Officer
Mira K. LaCous
62
Chief Technology Officer
James D. Sullivan
56
Vice President of Strategy and Compliance, Chief Legal Officer
(a) Compensation Committee Member
(b) Audit Committee Member
(c) Nominating Committee Member
*
Indicates chair of committee
Set forth below is a brief description of the background and business experience of our directors and executive officers for the past five years.
Directors
Michael W. DePasquale 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. Mr. DePasquale has held executive management positions with McGraw-Hill,
Digital Equipment Corporation, and other companies in the software and professional services industries. Mr. DePasquale earned a Bachelor of Science
degree from the New Jersey Institute of Technology. He serves as the Vice Chairman on the Board of Directors 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.
Cameron E. Williams was appointed Director of the Company on June 2, 2023. Mr. Williams has over 40 years of financial and executive
management experience. Since 2014, he has served as the principal of CEW Advisory Services, a consulting firm he founded which provides strategic
planning and related services to the consumer lending industry. He previously founded CEW Solutions which provided fraud investigation services to
insurance companies, law firms, and third-party administrators. From 2007 to 2009, Mr. Williams served as COO of Asta Funding, Inc., a publicly traded
diversified financial services company where he was responsible for the sourcing and financial analysis of distressed consumer assets. From 1998 to 2007,
Mr. Williams served as President of Popular Financial Holdings, an affiliate of Popular, Inc., a $36 billion banking organization. Mr. Williams began his
career in the banking industry holding financial management positions with Security Pacific Financial Services, BankAmerica Financial, Inc., and Security
Pacific Financial Services System, Inc. Mr. Williams earned a Bachelor’s in Accounting and completed graduate coursework at San Diego State University.
We believe Mr. Williams’ extensive financial and executive management experience in a variety of industries strengthens the Board’s collective
qualifications, skills, and experience.
27
Table of Contents
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 (Nasdaq: 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. Mr. Michel spent 15 years at Asta Funding, Inc. (Nasdaq: ASFI), a
diversified financial services company, including serving as its Chief Financial Officer from 2009 until 2017 where he was responsible for all financial
matters and SEC reporting. Mr. Michel is a certified public accountant, earned an MBA in Taxation from St. John’s University, and a BS in Business
Administration from Villanova University. 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.
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 25 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.
Emmanuel Alia 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.
Executive Officers
Cecilia C. 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, Ms. Welch has held senior financial management positions in various industries, including software
and manufacturing. Ms. Welch has a bachelor’s degree in accounting from Franklin Pierce University.
Mira K. LaCous has served as Chief Technology Officer of the Company since March 13, 2014, as Senior Vice President of Technology &
Development since 2012, and as our Vice President of Technology and Development since 2000. Ms. LaCous has over 35 years of product/project
management, solution architecture, software development, team leadership and customer relations experience, with a background that includes successfully
bringing numerous innovative products and technologies to market, including automated voice response systems, automated building control systems,
software piracy protection, internet training materials and testing, WYSIWYG page layout and design software, image scanning / recognition software and
systems, biometric security systems and algorithms, automated national ID systems using biometrics, and mobile applications with secure frameworks. Ms.
LaCous has been a speaker at multiple events/conferences and has worked with teams around the globe bringing biometric technology deployments to life.
Ms. LaCous is the author of eight (8) US patented technologies, multiple international patents and lead the engineering team in developing other patents
and inventive technologies. Ms. LaCous earned a bachelor’s degree in Computer Science, with mathematics and physics from North Dakota State
University.
28
Table of Contents
James D. 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 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 privacy, cybersecurity, and biometric authentication
for workforce and consumer applications. During his twenty years with the Company, Mr. Sullivan has directly worked with dozens of the Company’s
customers, including AT&T, Israel Defense Forces, LexisNexis, NCR and Omnicell, as well as large-scale biometric-centered identity management projects
that interface daily with millions of corporate and consumer users. Mr. Sullivan earned a Juris Doctor with Honors 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 26 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), Cameron Williams, and Emmanuel Alia each of whom meets 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 Cameron Williams (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, 101 Crawfords Corner Road, Suite 4116, Holmdel, NJ 07733.
29
Table of Contents
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, 2023, all Section 16(a) filing requirements applicable to our officers, directors and ten percent (10%)
stockholders were satisfied in a timely fashion,
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, 2023 and 2022:
SUMMARY COMPENSATION TABLE
Stock
All Other
Name and Principal
Salary
Awards
Compensation
Total
Position
Year
($)
($) (1)
($) (2)
($)
Michael W. DePasquale
2023
271,250
19,250
1,027
291,527
Chief Executive Officer
2022
295,833
75,250
997
372,080
Cecilia C. Welch
2023
189,875
16,500
1,320
207,695
Chief Financial Officer
2022
204,167
64,500
1,119
269,786
James D. Sullivan
2023
212,479
16,500
6,433 (3)
235,412
Chief Legal Officer
2022
233,333
64,500
134,157 (4)
431,990
(1) The aggregate grant date fair value of the restricted shares is calculated by the multiplying the quantity of shares issued by the closing trading price of
the shares on the date of issuance calculated under FASB ASC 718.
(2) Consists of life insurance premiums paid by the Company except as otherwise noted.
(3) Consists of $5,102 of sales commissions and $1,331 of life insurance premiums paid by the Company.
(4) Consists of $132,826 of sales commissions and $1,331 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. Effective January 16, 2023, we decreased the base compensation of Mr. DePasquale, Mr. Sullivan
and Ms. Welch as part of the revised budget for the year. Effective March 1, 2022, we increased the base compensation of Mr. DePasquale, Mr. Sullivan
and Ms. Welch.
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.
30
Table of Contents
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 2022 and 2023, we issued restricted stock awards to each of our named executive
officers in recognition of the revenue growth of the Company in 2021 and successful integration of Portal Guard, and revenue growth of the Company in
2022 and successful integration of Swivel Secure, respectively.
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. Since 2021, Mr.
Sullivan’s annual base salary has been $225,000, subject to adjustment by the compensation committee. The agreement contains standard and customary
confidentiality, technical invention provisions as well as non-competition and non-solicitation covenants which prohibit Mr. Sullivan from doing business
with any current or prospective customer of the Company or engaging in any business competitive with that of the Company during the term or his
employment and for the one-year period thereafter. The agreement also contains a number of termination provisions as described under the caption
“Termination Agreements” below.
On May 15, 2013, we entered into an employment agreement with Cecilia Welch to serve as the Chief Financial Officer of the Company until May
2014. 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. The employment agreement contains standard and customary confidentiality, technical
invention provisions, as well as a covenant not to compete, which prohibits Ms. Welch 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 her employment and for the one-year period thereafter.
This agreement also contains a number of termination provisions as described in “Termination and Change in Control Arrangements” in this Item.
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.
31
Table of Contents
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table sets forth for each named executive officer, information regarding outstanding equity awards as at December 31, 2023.
Option Awards
Stock Awards
Market value
Number of
Number of
of
securities
shares or
shares of
underlying
units
units of
unexercised
Option
of stock that
stock that
options
exercise
Option
have not
have not
exercisable
price
expiration
vested
vested
Name
(#)
($)
date
(#)
($)(1)
Michael W. DePasquale
1,737
381.60
3/16/2024
3,242
9,726
232
282.24
3/23/2025
-
-
232
169.92
3/21/2026
-
-
Cecilia C. Welch
903
381.60
3/16/2024
2,779
8,337
174
282.24
3/23/2025
-
-
174
169.92
3/21/2026
-
-
James D. Sullivan
695
381.60
3/16/2024
2,779
8,337
174
282.24
3/23/2025
-
-
174
169.92
3/21/2026
-
-
(1) Calculated based on the closing market price of the Company’s common stock on December 31, 2023 of $3.00 per share.
Narrative Disclosure to Outstanding Equity Awards at Fiscal Year End Table
The following are the material terms of each agreement, contract, plan or arrangement that provide for payments to one or more of our named
executive officers at, following or pursuant to their resignation, retirement or termination, or in connection with a change in control of the Company.
Termination Arrangements
We may terminate our employment agreement with Mr. DePasquale at any time with or without cause. In the event of termination by us without
cause, we will continue to pay Mr. DePasquale his then current base salary for the greater of nine months from the date of such termination or the number
of months remaining until the end of the term of the agreement.
We may terminate our employment agreement with Mr. Sullivan at any time with or without cause. In the event of termination by us without cause,
we will continue to pay Mr. Sullivan his then current base salary, plus earned commissions, for the greater of six months from the date of such termination
or the number of months remaining until the end of the term of the agreement.
We may terminate our employment agreement with Ms. Welch at any time with or without cause. In the event of termination by us without cause, we
will continue to pay Ms. Welch her then current base salary 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.
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.
32
Table of Contents
DIRECTOR COMPENSATION
The following table sets forth for each director, information regarding their compensation for the year ended December 31, 2023:
Stock Awards
Total
Name (1)
($) (2)
($)
Thomas E. Bush, III (3)
7,001
7,001
Pieter Knook (4)
7,001
7,001
Robert J. Michel (5)
11,002
11,002
Emmanuel Alia (6)
10,002
10,002
Cameron Williams (7)
4,001
4,001
(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) Mr. Bush resigned from the Board of Directors effective November 8, 2023.
(4) Mr. Knook resigned from the Board of Directors effective May 13, 2023
(5) At December 31, 2023, Mr. Michel held options to purchase 117 shares of common stock and held 278 shares of restricted common stock.
(6) At December 31, 2023, Mr. Alia held options to purchase 18 shares of common stock and held 278 shares of restricted common stock.
(7) Mr. Williams joined the Board of Directors on June 2, 2023. At December 31, 2023 Mr. Williams held 278 shares of restricted common stock.
Narrative Disclosure to Director Compensation Table
During 2023, we had a policy to pay each non-employee director $3,000 per board meeting, $1,000 per telephonic board meeting, and $1,000 per
board committee meeting attended. Fees for attendance at regular quarterly board meetings held during the first three quarters of each fiscal year are paid
through the issuance of common stock and payments for the last meeting of the year are paid in cash or, at the option of the director, in shares of common
stock. All of our directors elected to receive payment in common stock for the last board meeting in 2023. 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.
33
Table of Contents
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The following table sets forth, as of May 31, 2024 information with respect to the securities holdings of all persons that we, pursuant to filings with
the SEC and our stock transfer records, have reason to believe may be deemed the beneficial owner of more than 5% of our common stock. The following
table also sets forth, as of such date, the beneficial ownership of our common stock by all of our current executive officers and directors, both individually
and as a group.
The beneficial owners and number of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as awarded, and, in accordance therewith, include all shares of our common stock that may be acquired by such beneficial owners
within 60 days of June 4, 2024 upon the exercise or conversion of any options, warrants or other convertible securities. This table has been prepared based
on 1,814,228
Amount and Nature
Percentage
of Beneficial
of
Name and Address of Beneficial Owner (1)
Ownership
Class
Directors and Executive Officers
Michael W. DePasquale
24,872(2)
1.4%
Cecilia C. Welch
2,244(3)
*
Mira K. LaCous
1,515(4)
*
James D. Sullivan
34,949(5)
1.9%
Robert J. Michel
2,290(6)
*
Emmanuel Alia
1,957(7)
*
Cameron E. Williams
624(8)
*
Wong Kwok Fong (Kelvin)
31,462(9)
1.7%
All officers and directors as a group (eight (8) persons)
99,913
5.5%
Beneficial Owner
Armistice Capital, LLC
121,494(10)
6.7%
*
Less than 1%
(1)
Unless otherwise indicated, the address of each person listed below is c/o BIO-key International, Inc., 101 Crawfords Corner Rd, Suite 4116,
Holmdel, NJ 07733
(2)
Includes 464 shares issuable on exercise of options, 9,167 shares issuable upon exercise of warrants, and 4,121 shares of restricted stock of
which 3,242 remain subject to vesting.
(3)
Includes 348 of shares issuable upon exercise of options and 3,565 shares of restricted stock of which 2,779 remain subject to vesting.
(4)
Includes 174 of shares issuable upon exercise of options and 1,203 shares of restricted stock of which 834 remain subject to vesting.
(5)
Includes 348 of shares issuable on exercise of options, 12,667 shares issuable upon exercise of warrants, and 3,565 shares of restricted stock of
which 2,779 remain subject to vesting.
(6)
Includes 470 of shares issuable on exercise of options and 278 shares of restricted stock of which 186 remain subject to vesting.
(7)
Includes 278 shares of restricted stock of which 278 remain subject to vesting.
(8)
Includes 278 of shares of restricted stock of which 278 remain subject to vesting.
(9)
Includes 464 of shares issuable on exercise of options and 787 shares of restricted stock of which 464 remain subject to vesting. The address of
Kelvin is Flat C, 27/F, Block 5, Grand Pacific Views, Siu Lam, Hong Kong N7.
(10)
Armistice Capital, LLC (“Armistice Capital”) is the investment manager of Armistice Capital Master Fund Ltd. (the “Master Fund”), the direct
holder of the 121,494 shares of common stock, and pursuant to an Investment Management Agreement, Armistice Capital exercises voting and
investment power over the securities held by the Master Fund and thus may be deemed to beneficially own the securities held by the Master
Fund. Steven Boyd, as the managing member of Armistice Capital, may be deemed to beneficially own the securities held by the Master Fund.
The Master Fund specifically disclaims beneficial ownership of the securities directly held by it by virtue of its inability to vote or dispose of
such securities as a result of its Investment Management Agreement with Armistice Capital. The address of Armistice Capital, LLC is 510
Madison Avenue, 7th Floor, New York, NY 10022.
34
Table of Contents
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth, as of December 31, 2023, information with respect to securities authorized for issuance under equity compensation
plans.
On January 27, 2016, the stockholders approved the 2015 Equity Incentive Plan, which was amended on June 13, 2019 by vote of stockholders, and
amended and restated by vote of stockholders on June 18, 2021 (as amended and restated, the “2015 Plan”). The 2015 Plan reserves 43,834 shares of
common stock for issuance of options, restricted stock, and other equity based awards to employees, officers, directors, and consultants of the Company.
Options are issued at exercise prices which may not be below 100-110% of fair market value and have terms not to exceed ten years. Options issued under
the 2015 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, certain stock awards issued
under this plan may be subject to additional acceleration of vesting as may be provided in the participants’ written agreement. The 2015 Plan expires in
December 2025.
In addition to options issued under the 2015 Plan, we have issued options to purchase common stock to employees, officers, directors and
consultants outside of the plan. The terms of these outstanding options are substantially similar to the provisions of the 2015 Plan and options issued
thereunder. In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately.
On June 18, 2021, the stockholders approved the 2021 Employee Stock Purchase Plan (“ESPP”). Under the terms of this plan, 43,834 shares of
common stock are reserved for issuance and sale to employees and officers of the Company at a purchase price equal to 85% of the lower of the closing
price of our common stock as reported on the Nasdaq Capital Market on the first day or the last day of the offering period. Eligible employees are granted
an option to purchase shares of common stock funded by payroll deductions. The Board may suspend or terminate the plan at any time, otherwise the plan
expires June 17, 2031.
On December 14, 2023, the stockholders approved the 2023 Stock Incentive Plan. The 2023 Plan reserves 333,334 shares of common stock for
issuance of options, restricted stock, and other equity based awards to employees, officers, directors, consultants advisors and independent contractors of
the Company. Options are issued at exercise prices which may not be below 100% of fair market value (or 110% of the fair market value if, at the time the
option is granted, the participant owns, directly or indirectly, more than 10% of the total combined voting power of all classes of our stock) and have terms
not to exceed ten years. Options issued under the 2023 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a
change in control, certain awards issued under this plan may be subject to additional acceleration of vesting as may be provided in the participants’ written
agreement. The 2023 Plan expires on December 13, 2033, unless terminated earlier. No awards have yet been granted under the 2023 Plan.
Number
of securities
remaining
available for
Number of
future issuance
securities to be
Weighted-
under equity
issued
average
compensation
upon exercise
exercise price
plans
of outstanding
of outstanding
(excluding
options,
options,
securities
warrants and
warrants and
reflected in
rights
rights
column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by security holders
3,373
(1)
(2) $
186.55
374,401 (3)
Equity compensation plans not approved by security holders
5,893
$
381.89
—
Total
9,266
(1)
(2) $
311.16
374,401 (3)
(1)
Consists of shares of common stock issuable upon the exercise of options outstanding as of December 31, 2023 under the 2015 Plan.
(2)
Excludes employee stock purchase rights accruing under the ESPP.
(3)
Amount includes 4,627 shares of common stock and 333,334 shares of common stock available as of December 31, 2023 for future issuance under
the 2015 Plan and the 2023 Plan, respectively, and 36,440 shares of common stock available as of December 31, 2023 for future issuance under the
ESPP.
35
Table of Contents
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Standstill Agreement with Principal Stockholders
Pursuant to separate securities purchase agreements dated October 29, 2015 and November 11, 2015 with Wong Kwok Fong (Kelvin), we issued and
sold shares of series A-1 stock to Kelvin which were subsequently converted into shares of our common stock. The forgoing agreements contain a standstill
provision (the “Standstill”) which prohibits Kelvin either alone or together with any other person, from acquiring additional shares of our common stock or
any of our assets, soliciting proxies, or seeking representation on our board of directors. Kelvin is the Co-Chairman of the board of directors and an
executive officer.
2023 Public Securities Offering
On October 31, 2023, we completed a public offering of shares of common stock and warrants resulting in net proceeds of approximately $3.3
million, after deducting placement agent fees and estimated offering expenses. Units comprised of shares of common stock and warrants to purchase
common stock were purchased at a per unit price of $3.15, and warrants have an exercise price of $3.15. Michael W. DePasquale, our Chairman of the
Board of Directors and Chief Executive Officer, James D. Sullivan, our Vice President of Strategy and Compliance, Chief Legal Officer, and Mr. Sullivan’s
spouse each participated in the public offering. Mr. DePasquale purchased 9,167 shares of common stock and a warrant to purchase 9,167 shares of
common stock for a total purchase price of $28,875. Mr. Sullivan purchased 12,667 shares of common stock and a warrant to purchase 12,667 shares of
common stock for a total purchase price of $39,000, and his spouse purchased 3,173 shares of common stock and a warrant to purchase 3,173 shares of
common stock for a total purchase price of $9,993.
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, Emmanuel Alia, and Cameron Williams, are “independent” under NASDAQ standards.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows fees for professional services and audit fees billed to us by Bush and Associates CPA for the audit of our annual
consolidated financial statements for the year ended December 31, 2023. The following table also shows fees for professional services and audit fees billed
to us by Marcum LLC for review of our financial statements for the first, second and third quarters of 2023 and the second and third quarters of 2022, and
audit of our financial statements for the year ended December 31, 2022. The table also includes the review of our financial statements for the
first quarter 2022 by Rotenberg Meril Solomon Bertiger & Guttilla, P.C. (“RMSBG”), prior to RMSBG’s merger with Marcum:
2023
2022
Audit Fees
$
280,000 $
133,000
Audit-Related Fees
73,151
27,913
Tax Fees
17,000
17,000
Other Fees
-
-
Total Fees
$
370,151 $
177,913
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.
36
Table of Contents
Audit Committee Pre-Approval Procedures
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 2023 and 2022 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.
PART IV
ITEM 15. – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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:
Report of Independent Registered Public Accounting Firm (Bush and Associates CPA., PCAOB ID:6797)
Report of Independent Registered Public Accounting Firm (Marcum LLP, PCAOB ID:688)
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Operations—Years ended December 31, 2023 and 2022
Consolidated Statements of Stockholders’ Equity—Years ended December 31, 2023 and 2022
Consolidated Statements of Cash Flows—Years ended December 31, 2023 and 2022
Notes to Consolidated Financial Statements—December 31, 2023 and 2022
(b) The exhibits listed in the Exhibits Index immediately preceding such exhibits are filed as part of this Report
37
Table of Contents
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 (Bush and Associates CPA., PCAOB ID:6797)
39
Report of Independent Registered Public Accounting Firm (Marcum LLC., PCAOB ID:688)
40
Consolidated Balance Sheets as of December 31, 2023 and 2022
41
Consolidated Statements of Operations and Comprehensive Loss—Years ended December 31, 2023 and 2022
42
Consolidated Statements of Stockholders’ Equity —Years ended December 31, 2023 and 2022
43
Consolidated Statements of Cash Flows—Years ended December 31, 2023 and 2022
44
Supplementary Disclosures of Cash Flow Information—Years ended December 31, 2023 and 2022
45
Notes to the Consolidated Financial Statements—December 31, 2023 and 2022
46
38
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholder and the Board of Directors of
BIO-key International, Inc. Holmdel, NJ
Opinion on the Financial Statements
We have audited the retrospective adjustments related to the reverse stock split discussed in Note A, the accompanying consolidated balance sheet of
BIO-key International, Inc. (the “Company”) as of December 31, 2022. Additionally, we have audited the accompanying consolidated balance sheet of
BIO-key International, Inc. and Subsidiaries (the “Company”) as of December 31, 2023, and the related consolidated statements of operations and
comprehensive loss, stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements and the retrospective adjustments related to the reverse stock split present fairly, in all material
respects, the financial position of the Company as of December 31, 2023, and results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company's ability to continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in Note A of the
financial statements, the Company has suffered substantial net losses and negative cash flows from operations in recent years and is dependent on debt
and equity financing to fund its operations, all of which raise substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans regarding these matters are disclosed in Note A. The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgements. We determined that there are no critical audit matters.
/s/Bush & Associates CPA LLC
We have served as the Company’s auditor since 2024.
Henderson, Nevada
June 5, 2024
39
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
BIO-key International, Inc. Holmdel, NJ
Opinion on the Financial Statements
We have audited, before the effects of the retrospective adjustments related to the reverse stock split discussed in Note A, the accompanying consolidated
balance sheet of BIO-key International, Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of operations, changes in
stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion,
before the effects of the retrospective adjustments related to the reverse stock split discussed in Note A, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to audit, review, or apply any procedures to the effects of the retrospective adjustments related to the reverse stock split discussed in
Note A and, accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and
have been properly applied. Those retrospective adjustments were audited by other auditors.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in Note A of the
financial statements, the Company has suffered substantial net losses and negative cash flows from operations in recent years and is dependent on debt and
equity financing to fund its operations, all of which raise substantial doubt about the Company’s ability to continue as a going concern. Management’s
plans regarding these matters are disclosed in Note A. The financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We served as the Company’s auditor from 2010 to 2024
Saddle Brook, New Jersey
June 5, 2024
40
Table of Contents
BIO-key International, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
2023
2022
ASSETS
Cash and cash equivalents
$
511,400 $
2,635,522
Accounts receivable, net
1,201,526
1,522,784
Due from factor
99,320
49,500
Inventory, net of reserve
445,740
4,434,369
Prepaid expenses and other
364,171
342,706
Total current assets
2,622,157
8,984,881
Equipment and leasehold improvements, net
220,177
107,413
Capitalized contract costs, net
229,806
283,069
Deposits and other assets
-
8,712
Operating lease right-of-use assets
36,905
197,355
Intangible assets, net
1,407,990
1,762,825
Total non-current assets
1,894,878
2,359,374
TOTAL ASSETS
$
4,517,035 $
11,344,255
LIABILITIES
Accounts payable
$
1,316,014 $
1,108,279
Accrued liabilities
1,305,848
1,009,123
Convertible note payable
-
2,596,203
Government loan – BBVA Bank, current portion
138,730
120,000
Deferred revenue - current
414,968
462,418
Operating lease liabilities, current portion
37,829
159,665
Total current liabilities
3,213,389
5,455,688
Deferred revenue, net of current portion
28,296
52,134
Deferred tax liability
22,998
170,281
Government loan – BBVA Bank, net of current portion
188,787
326,767
Operating lease liabilities, net of current portion
-
37,829
Total non-current liabilities
240,081
587,011
TOTAL LIABILITIES
3,453,470
6,042,699
Commitments (Note O)
STOCKHOLDERS’ EQUITY
Common stock — authorized, 170,000,000 shares; issued and outstanding; 1,032,777 and 552,739 of $.0001
par value at December 31, 2023 and December 31, 2022, respectively
103
55
Additional paid-in capital
126,047,851
122,029,476
Accumulated other comprehensive loss
22,821
(242,602)
Accumulated deficit
(125,007,210)
(116,485,373)
TOTAL STOCKHOLDERS’ EQUITY
1,063,565
5,301,556
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
4,517,035 $
11,344,255
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.
The accompanying notes are an integral part of these statements.
41
Table of Contents
BIO-key International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years ended December 31,
2023
2022
Revenues
Services
$
2,218,885 $
1,789,720
License fees
4,342,010
4,584,052
Hardware
1,194,010
646,486
Total revenues
7,754,905
7,020,258
Costs and other expenses
Cost of services
861,936
722,152
Cost of license fees
1,174,919
906,417
Cost of hardware
700,231
411,001
Cost of hardware reserve
3,586,500
400,000
Total costs and other expenses
6,323,586
2,439,570
Gross Profit
1,431,319
4,580,688
Operating expenses
Selling, general and administrative
7,862,710
9,364,887
Research, development and engineering
2,394,926
3,252,236
Reversal of earnout payable – Swivel acquisition
-
(500,000)
Impairment of goodwill
-
2,387,193
Total operating expenses
10,257,636
14,504,316
Operating loss
(8,826,317)
(9,923,628)
Other income (expense)
Interest income
11,533
233
Gain from sale of asset
20,000
-
Loss on foreign currency transactions
(39,000)
-
Investment-debt security reserve
-
(452,821)
Loan transaction costs
-
(1,147,456)
Change in fair value of convertible note
396,203
(396,203)
Interest expense
(218,270)
(10,462)
Total other income (expense)
170,466
(2,006,709)
Loss before provision for income tax benefit
(8,655,851)
(11,930,337)
Provision for income tax benefit
134,014
20,434
Net loss
$
(8,521,837) $
(11,909,903)
Comprehensive loss:
Net loss
$
(8,521,837) $
(11,909,903)
Other comprehensive loss- Foreign translation adjustment
265,423
(242,602)
Comprehensive loss
$
(8,256,414) $
(12,152,505)
Basic and Diluted Loss per Common Share
$
(15.21) $
(27.26)
Weighted Average Shares Outstanding:
Basic and Diluted
560,278
436,821
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.
The accompanying notes are an integral part of these statements.
42
Table of Contents
BIO-key International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated
Additional
Other
Common Stock
Paid-in
Comprehensive Accumulated
Shares (1)
Amount
Capital
Income (Loss)
Deficit
Total
Balance as of December 31, 2021
478,475 $
48 $120,190,877 $
- $ (104,575,470) $ 15,615,455
Issuance of common stock for directors’ fees
2,202
-
76,043
-
-
76,043
Issuance of restricted common stock to employees
15,444
1
(1)
-
-
-
Forfeiture of restricted stock
(583)
-
-
-
-
-
Issuance of common stock pursuant to Swivel
purchase agreement
14,948
2
600,001
-
-
600,003
Issuance of common stock for note issuance fees
38,889
4
699,996
-
-
700,000
Issuance of warrant in conjunction with note payable
-
-
94,316
-
94,316
Issuance of common stock for employee stock
purchase plan
3,364
-
56,380
-
-
56,380
Share based compensation for employee stock
purchase plan
-
-
18,787
-
-
18,787
Foreign currency translation adjustment
-
-
(242,602)
-
(242,602)
Share-based compensation
-
-
293,077
-
-
293,077
Net loss
-
-
-
-
(11,909,903) (11,909,903)
Balance as of December 31, 2022
552,739 $
55 $122,029,476 $
(242,602) $ (116,485,373) $
5,301,556
Issuance of common stock for directors’ fees
3,078
-
39,007
-
-
39,007
Issuance of restricted common stock to employees
16,404
1
(1)
-
-
-
Forfeiture of restricted stock
(3,752)
-
(3,105)
-
-
(3,105)
Exercise of warrants
177,889
18
302
-
-
320
Issuance of warrants
-
-
3,403,322
-
-
3,403,322
Issuance of stock for securities purchase agreements
283,472
29
892,909
-
-
892,938
Issuance of common stock for employee stock
purchase plan
2,947
-
17,478
-
-
17,478
Share based compensation for employee stock
purchase plan
-
-
4,343
-
-
4,343
Foreign currency translation adjustment
-
-
-
265,423
-
265,423
Share-based compensation
-
-
225,487
-
-
225,487
Issuance costs
-
-
(561,367)
-
-
(561,367)
Net loss
-
-
-
-
(8,521,837)
(8,521,837)
Balance as of December 31, 2023
1,032,777 $
103 $126,047,851 $
22,821 $ (125,007,210) $
1,063,565
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.
The accompanying notes are an integral part of these statements.
43
Table of Contents
BIO-key International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2023
2022
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss
$
(8,521,837) $
(11,909,903)
Adjustments to reconcile net loss to cash used for operating activities:
Depreciation
75,136
43,794
Impairment of goodwill
-
2,387,193
Reversal of earnout payable – Swivel acquisition
-
(500,000)
Amortization of intangible assets and write-off
354,558
298,113
Amortization of resalable software license rights
-
48,752
Loan transaction costs
-
1,147,456
Loss on foreign currency
39,000
-
Reserve for investment security
-
452,821
Reserve for inventory
3,586,500
400,000
Reserve for note receivable
-
186,000
Allowance for doubtful account
750,000
360,000
Amortization of debt discount
-
-
Amortization of capitalized contract costs
171,291
106,624
Share based and warrant compensation for employees and consultants
226,725
311,864
Stock based fees to directors
39,007
76,043
Bad debt expense
100,000
130,111
Change in fair value of convertible note
(396,203)
396,203
Deferred income tax benefit
(134,014)
(20,434)
Amortization of operating lease right-of-use assets
160,449
155,353
Change in operating assets and liabilities:
Accounts receivable
(428,742)
(339,383)
Due from factor
(49,820)
-
Capitalized contract costs
(118,028)
(140,681)
Inventory
402,129
106,291
Prepaid expenses and other
(21,465)
(46,655)
Accounts payable
57,725
239,144
Income tax payable
(121,764)
Accrued liabilities
275,561
167,614
Deferred revenue
(71,288)
(120,078)
Operating lease liabilities
(168,376)
(165,276)
Net cash used for operating activities
(3,793,456)
(6,229,034)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Swivel Secure, net of cash acquired of $729,905
-
(623,578)
Receipt of cash from note receivable
-
9,000
Capital expenditures
(1,000)
(82,040)
Net cash used for investing activities
(1,000)
(696,618)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offerings
4,296,260
-
Repayment of convertible notes
(2,200,000)
-
Proceeds from the exercise of warrants
320
-
Costs incurred for issuance of common stock
(561,367)
-
Proceeds from issuance of convertible notes
-
2,002,000
Costs incurred for issuance of convertible note
-
(155,140)
Repayment of government loan
(119,251)
-
Proceeds from Employee Stock Purchase Plan
17,478
56,380
Net cash (used in) provided by financing activities
1,433,440
1,903,240
Effect of exchange rate changes
236,894
(96,112)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(2,124,122)
(5,118,524)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
2,635,522
7,754,046
CASH AND CASH EQUIVALENTS, END OF YEAR
$
511,400 $
2,635,522
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.
The accompanying notes are an integral part of these statements.
44
Table of Contents
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Years ended December 31,
2023
2022
Cash paid during the year for:
Taxes
$
- $
25,682
Interest
$
218,270 $
10,462
Noncash investing and financing activities:
Accounts receivable acquired from Swivel Secure
$
- $
702,886
Equipment acquired from Swivel Secure
$
- $
65,640
Other assets acquired from Swivel Secure
$
- $
20,708
Intangible assets acquired from Swivel Secure
$
- $
762,860
Goodwill resulting from the acquisition from Swivel Secure
$
- $
1,258,087
Accounts payable and accrued expenses acquired from Swivel Secure
$
- $
431,884
Government loan acquired from Swivel Secure
$
- $
544,000
Deferred tax liability from the acquisition of Swivel Secure
$
- $
190,715
Common stock issued for acquisition of Swivel Secure
$
- $
600,004
Common stock issued for acquisition of note payable
$
- $
700,000
Issuance of warrant for acquisition of note payable
$
- $
94,316
Operating lease right-of-use asset and liability for new lease
$
- $
105,893
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.
The accompanying notes are an integral part of these statements.
45
Table of Contents
BIO-key International, Inc. and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2023 and 2022
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 (public key infrastructure), 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
The Company has historically financed operations through access to the capital markets by issuing convertible debt securities, convertible preferred
stock, common stock, and through factoring receivables. As of the date of this report, the Company does not have enough cash for twelve months of
operations. The history of significant losses, the negative cash flow from operations, the limited cash resources on hand and the dependence by the
Company on its ability, to obtain additional financing to fund its operations after the current cash resources are exhausted raises substantial doubt about the
Company's ability to continue as a going concern. The Company has lowered expenses through decreasing spending in marketing, and research and
development. In addition, the Company has purchased inventory for projects in Nigeria, which have been delayed in deployment, and is, therefore looking
into other markets and opportunities to sell or return the product to generate additional cash.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of
America ("GAAP"), which contemplate continuation of the Company as a going concern, and assumes continuity of operations, realization of assets and
the satisfaction of liabilities and commitments in the normal course of business. The Company has suffered substantial net losses and negative cash flows
from operations in recent years and is dependent on debt and equity financing to fund its operations all of which raise substantial doubt about the
Company’s ability to continue as a going concern. Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon the Company’s ability to increase its revenue and meet its financing requirements on a continuing basis and become profitable in
its future operations. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of
recorded assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
Reverse Stock Split
All references to issued and outstanding shares for all periods reflect the 1-for-18 reverse stock split, which was effective December 21, 2023. As a
result, all share numbers for all periods, including the number of shares underlying warrants, options, and other convertible securities, and all exercise
prices applicable to such warrants, options and convertible securities have been adjusted retrospectively to reflect the 1-for-18 reverse stock split.
Foreign Currency
The Company accounts for foreign currency transactions pursuant to ASC 830, Foreign Currency Matters ("ASC 830”). The functional currency of the
Company is the U.S. dollar, which is the currency of the primary economic environment in which it operates. In accordance with ASC 830, monetary
balances denominated in or linked to foreign currency are stated on the basis of the exchange rates prevailing at the applicable balance sheet date. For
foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used. Gains or
losses arising from changes in the exchange rates used in the translation of such transactions and from the remeasurement of the monetary balance sheet
items are recorded as gain (loss) on foreign currency transactions.
The functional currency of Swivel Secure Europe, SA is the Euro. Under ASC 830, all assets and liabilities are translated into U. S. dollars using the
current exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing throughout the
respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated in Euros are reflected in the
statement of operations as appropriate. Translation adjustments are included in accumulated other comprehensive loss.
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.
46
Table of Contents
2. Use of Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America
(GAAP) as set forth in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) and consider the various staff
accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission (SEC). These accounting principles require us
to make certain estimates, judgments and assumptions. The Company believes that the estimates, judgments and assumptions upon which it relies are
reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and
assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues
and expenses during the periods presented. Certain significant accounting policies that contain subjective management estimates and assumptions include
those related to accounts receivable, inventory, intangible assets and goodwill, fair value of convertible note payable, and income taxes.
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
●
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 consists 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 term of the contract begins. Revenue is recognized over time on a ratable basis over the contract term.
Support and maintenance contracts are 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.
47
Table of Contents
The Company considered several factors in determining that control transfers to the customer upon shipment of hardware and availability of download
of software. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the
risks and rewards of ownership.
Accounts receivable from customers are typically due within 30 days of invoicing. The Company does not record a reserve for product returns or
warranties as amounts are deemed immaterial based on historical experience.
Costs to Obtain and Fulfill a Contract
Costs to obtain and fulfill a contract are predominantly sales commissions earned by the sales force and are considered incremental and recoverable
costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit determined to be four years. These costs
are included as capitalized contract costs on the balance sheet. The period of benefit was determined by taking into consideration customer contracts,
technology, and other factors based on historical evidence. Amortization expense is included in selling, general and administrative expenses in the
accompanying consolidated statements of operations.
Deferred Revenue
Deferred revenue includes customer advances and amounts that have been paid by customers for which the contractual maintenance terms have not yet
occurred. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which
generally is 12-60 months. Contracts greater than 12 months are segregated as long term deferred revenue. Maintenance contracts include provisions for
unspecified when-and-if available product updates and customer telephone support services. At December 31, 2023 and 2022, amounts in deferred revenue
were approximately $443,000 and $515,000, 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.
The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair value. Goodwill as of the acquisition date is
measured as the excess of consideration transferred over the net acquisition date fair value of the assets acquired and the liabilities assumed and represents
the expected future economic benefits arising from other assets acquired that are not individually identified and separately recognized. While the Company
uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the
acquisition date, its estimates are inherently uncertain and subject to refinement. Assumptions may be incomplete or inaccurate, and unanticipated events or
circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results. As a result, during the measurement
period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the
corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the
measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are
recorded to the consolidated statements of operations.
5. Goodwill and acquired intangible assets
Goodwill is not amortized, but is evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. The Company has determined that there is a single reporting unit for the purpose of conducting this goodwill impairment
assessment. For purposes of assessing potential impairment, the Company estimates the fair value of the reporting unit, based on the Company’s market
capitalization, and compares this amount to the carrying value of the reporting unit. If the Company determines that the carrying value of the reporting unit
exceeds its fair value, an impairment charge would be required. The annual goodwill impairment test will be performed as of December 31st of each year.
Refer Note K for more information regarding the impairment of goodwill in 2022.
Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. The Company amortizes
acquired definite-lived intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern
cannot be readily determined, on a straight-line basis.
6. Cash Equivalents
Cash equivalents consist of liquid investments with original maturities of three months or less. At December 31, 2023 and 2022, cash equivalents
consisted of a money market account.
48
Table of Contents
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.
Accounts receivable at December 31, 2023 and 2022 consisted of the following:
December 31,
2023
2022
Accounts receivable
$
2,207,311 $
2,096,569
Allowance for doubtful accounts
(1,005,785)
(573,785)
Accounts receivable, net of allowances for doubtful accounts
$
1,201,526 $
1,522,784
Bad debt expenses (if any) are recorded in selling, general, and administrative expense.
The allowance for doubtful accounts for the years ended December 31, 2023 and 2022 is as follows:
Balance at
Beginning of
Year
Charged to
Costs and
Expenses
Deductions
from Reserves
Balance at
End of Year
Year ended December 31, 2023 Allowance for Doubtful Accounts
$
573,785 $
750,000 $
(318,000) $
1,005,785
Year ended December 31, 2022 Allowance for Doubtful Accounts
$
213,785 $
360,000 $
- $
573,785
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:
Years
Equipment and leasehold improvements
Equipment
3 - 5
Furniture and fixtures
3 - 5
Software
3
Leasehold improvements
life or lease term
Intangible assets other than goodwill consist of patents, 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. There were no impairments in 2023 and 2022.
10. Advertising Expense
The Company expenses the costs of advertising as incurred. Advertising expenses for 2023 and 2022 were approximately $340,000 and $842,000,
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.
49
Table of Contents
12. Earnings Per Share of Common Stock (“EPS”)
The Company’s EPS is calculated by dividing net 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
exercise of stock options and warrants, when the effect of their inclusion is dilutive. All BIO-key shares issued and outstanding for all periods reflect BIO-
key’s 1-for-18 reverse stock split, which was effective December 21, 2023.
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 a three 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 certain assumptions. These assumptions include estimating the
length of time employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of its common
stock price over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield.
Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount
recognized as an expense in the consolidated statements of operations. As required under the accounting rules, the Company reviews its valuation
assumptions at each grant date and, as a result, the Company is likely to change its valuation assumptions used to value employee stock-based awards
granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the service period, net of estimated
forfeitures (the number of individuals that will ultimately not complete their vesting requirements). The estimation of stock awards that will ultimately vest
requires significant judgment. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and
historical experience. Actual results, and future changes in estimates, may differ substantially from current estimates. Options and warrants to outsiders are
accounted for under ASC 718.
The following table presents share-based compensation expenses included in the Company’s consolidated statements of operations:
Year ended
December 31,
2023
2022
Selling, general and administrative
$
209,134 $
310,017
Research, development and engineering
56,598
77,890
$
265,732 $
387,907
50
Table of Contents
14. Income Taxes
The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax
purposes using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future
realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. The
Company evaluates, on a quarterly basis whether, based on all available evidence, if it is probable that the deferred income tax assets are realizable.
Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as
prescribed by ASC 740-10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating
results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future
taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an
operating loss or tax credit carryforward from expiring unused. Because of the Company’s historical performance and estimated future taxable income, a
full valuation allowance has been established.
The Company accounts for uncertain tax provisions in accordance with ASC 740. 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.
15. 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.
16. The Fair Value Measurement Option
The Company has elected the fair value measurement option for convertible debt with embedded derivatives that require bifurcation, and record the
entire hybrid financing instrument at fair value under the guidance of ASC 825, Financial Instruments. As a result, the convertible promissory note was
recorded at fair value upon issuance and will subsequently be remeasured at each reporting date until settled or converted. The Company recognized the
note initially at fair value, which exceeded the proceeds received resulting in a day one loss that has been recognized in net loss. The Company reports
interest expense, including accrued interest, related to the convertible debt under the fair value option, separately from within the change in fair value of the
convertible debt in the accompanying consolidated statement of operations.
17. Fair Value Measurements
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market
participants at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest
priority to unobservable inputs (Level 3 measurements). These tiers include:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active or inputs which are observable either directly or indirectly for substantially the full term of the
asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by
little or no market activity).
The Company issued a convertible note which included an original issue discount, conversion features and a detachable warrant, as further discussed in
Note M. The detachable warrant represents a freestanding, separable equity-linked financial instrument recorded at fair value. The fair value of the
detachable warrant was calculated using a Black-Scholes valuation model. The Company elected the fair value option for the convertible debt which was
determined based on significant unobservable inputs including the likelihood of default, the estimated date at which the default could take place, and the
present value discount rate, which causes it to be classified as a Level 3 measurement within the fair value hierarchy. The fair value option requires
recognition at fair value upon issuance and on each balance sheet date thereafter. Changes in the estimated fair value are recognized as change in fair value
of convertible note in the consolidated statements of operations. As a result of applying the fair value option, direct costs and fees related to the issuance of
the convertible note were expensed and not deferred.
51
Table of Contents
The Company estimated the fair value of the convertible note using a probability-weighted discounted cash flow model with the following assumptions
and significant terms of the convertible note at December 22, 2022:
1. Face amount - $2,200,000
2. Nominal interest rate – 10% - 12%
3. Default interest rate – 18%
4. Increase in principal upon a default – 30%
5. Present value discount rate – 15.18%
6. Likelihood of default – estimated to be 50% at the extended maturity date
The following table shows the changes in fair value measurements for the convertible note using significant unobservable inputs (Level 3) during the
year ended December 31, 2023:
Beginning balance
$
2,596,203
Purchases and issuances
(2,200,000)
Day one change in value of hybrid instrument
(396,203)
Ending balance
$
-
18. 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 writedown of the amortized cost basis of a financial asset. The impairment allowance is a valuation account
deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new
pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The
new guidance provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that
have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an allowance reserve under currently generally
accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables
under ASU 2016-13. ASU 2016-13 is effective for the Company for annual periods, including interim periods within those annual periods, beginning on
January 1, 2023. The Company has adopted the accounting standard.
NOTE B—REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the years ended December 31, 2023 and 2022:
North
December 31,
America
Africa
EMESA*
Asia
2023
License fees
$
1,971,348 $
552,630 $
1,801,381 $
16,651 $
4,342,010
Hardware
147,815
0
1,013,295
32,900
1,194,010
Services
1,116,935
101,816
981,848
18,286
2,218,885
Total revenues
$
3,236,098 $
654,446 $
3,796,524 $
67,837 $
7,754,905
52
Table of Contents
North
December 31,
America
Africa
EMESA*
Asia
2022
License fees
$
1,856,814 $
517,161 $
2,124,088 $
85,989 $
4,584,052
Hardware
422,275
25,833
19,914
178,464
646,486
Services
1,270,067
83,306
436,293
54
1,789,720
Total revenues
$
3,549,156 $
626,300 $
2,580,295 $
264,507 $
7,020,258
* EMESA – Europe, Middle East, South America
Revenue recognized during the year ended December 31, 2023 from amounts included in deferred revenue at the beginning of the year was
approximately $467,000. Revenue recognized during the year ended December 31, 2022 from amounts included in deferred revenue at the beginning of the
year was approximately $489,000. Total deferred revenue (contract liability) was approximately $443,000 and $515,000 at December 31, 2023 and 2022,
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. 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.
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.
NOTE C—SWIVEL SECURE EUROPE, SA ACQUISITION
On March 8, 2022, the Company completed the acquisition of 100% of the issued and outstanding capital stock of Swivel Secure based in Madrid,
Spain, pursuant to the terms of a stock purchase agreement. The aggregate purchase price consisted of a base purchase price of $1.75 million, subject to
closing adjustments based on the closing date working capital, indebtedness and unpaid transaction expenses, and an earn-out of $500,000. The earn-out
was payable based on Swivel Secure generating $3,000,000 of revenue and $1,000,000 of operating profit during an earn-out period commencing on the
closing date and ending on January 31, 2023, which was not attained. At the closing, the Company made a cash payment of $1.27 million and issued
14,948 shares of common stock of which 4,983 shares were held back by the Company to secure certain indemnification obligations under the stock
purchase agreement. The shares of Company common stock were priced at $2.23, the contractual 20 day volume-weighted average price of the Company’s
common stock immediately prior to the payment date as reported on the Nasdaq Capital Market.
The business combination has been accounted for as an acquisition and, in accordance with ASC 805. The Company recorded the assets acquired
and liabilities assumed at their respective fair values as of the acquisition date. The following table summarizes the purchase price allocation, with no
earnout payment:
Purchase consideration:
Total cash paid, including working capital adjustment
$
1,273,483
Earnout payable
500,000
Common stock issued
600,004
Total purchase price consideration
$
2,373,487
Fair value of assets acquired and liabilities assumed:
Cash and cash equivalents
$
729,905
Accounts receivable
702,886
Equipment acquired
65,640
Other assets
20,708
Intangible assets
762,860
Goodwill
1,258,087
Total estimated assets acquired
3,540,086
Accounts payable and accrued expenses
431,884
Government loan
544,000
Deferred tax liability
190,715
Total liabilities assumed
1,166,599
Total estimated fair value of assets acquired and liabilities assumed
$
2,373,487
53
Table of Contents
The fair value of the assets acquired and liabilities assumed was less than the purchase price, resulting in the recognition of goodwill. The goodwill
reflected the value of the synergies the Company expected to realize and the assembled workforce. Refer to Note K for more information regarding the
impairment of goodwill.
The significant intangible asset identified in the purchase price allocation discussed above was Customer Relationships. To value the Customer
Relationships, the Company utilized the Excess Earnings Method, which isolates the value of the specific intangible asset by discounting its income stream
to present value.
The government loan was issued through BBVA Bank during the COVID-19 pandemic. The loan bears interest at the rate of 1.75% per annum and
is payable in monthly installments of approximately $11,900 inclusive of interest from May 2022 through April 2026. The installment payments have been
paid monthly as per the schedule, as of the date of this report.
The following table presents the final fair values and useful lives of the identifiable intangible assets acquired:
Estimated useful
life
Amount
(in years)
Customer relationships
$
762,860
7
Total identifiable intangible assets
$
762,860
As discussed above, the earnout payable was not achieved. As such, the Company reversed the earnout payable of $500,000 and recognized the
income on the reversal of the earnout payable.
NOTE D—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.
54
Table of Contents
NOTE E—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 not in excess of
coverage at December 31, 2023. The Company was in excess of coverage of approximately $2,000,000 December 31, 2022. 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.
For the year ended December 31, 2023 three customers accounted for 34% of total revenue. For the year ended December 2022, no customer
accounted for greater than 10% of total revenue.
At December 31, 2023, three customers accounted for 66% of the total accounts receivable. At December 31, 2022, one customer accounted for 35%
of total accounts receivable.
NOTE F—NOTE RECEIVABLE
During the third quarter of 2020, the Company loaned $295,000 as an advance to Technology Transfer Institute (“TTI”) to aid in fulfilling the African
contracts. The note did not bear any interest if paid within the nine (9) monthly installments beginning December 31, 2020. The note bore a default rate of
5%. Due to the ongoing delays in payment, the Company reserved $186,000 of the note as an allowance. On February 17, 2022, the Company amended the
note to modify the payment terms to provide for lower monthly payments, with an updated maturity date on or before December 6, 2023. On May 5, 2022,
the Company amended the note to modify the payment terms to eight biweekly installments of $1,000 beginning February 25, 2022, nineteen consecutive
monthly installments of $15,000 beginning on July 6, 2022, and $2,000 on or before February 6, 2024. The payments are behind schedule. Due to the delay
in payments, the Company has increased the allowance for the remainder of the balance owed under the note in 2022. The Company is continuing to pursue
payment with an outside collection agency. A member of the Company's board of directors served as Chief Executive Officer of TTI until August 12, 2020.
December 31,
December 31,
2023
2022
Note receivable
$
- $
195,000
Repayment of note
-
(9,000)
Allowance for doubtful account
-
(186,000)
Note receivable, net of allowance
-
-
Current portion, net of allowance
$
- $
-
Noncurrent portion, net of allowance
$
- $
-
NOTE G—INVENTORY
Inventory is stated at the lower of cost, determined on a first in, first out basis, or realizable value. The Company periodically evaluates inventory items
and establishes reserves for obsolescence accordingly. The Company also reserves for excess quantities, slow moving goods, and for other impairment of
value based upon assumptions of future demand and market conditions. The reserve on inventory in 2022 and 2023 is due to slow moving inventory
purchased for projects in Nigeria. The Company is looking into other markets and opportunities to sell or return the product.
Inventory is comprised of the following as of December 31:
2023
2022
Finished goods
$
4,373,056 $
4,764,643
Fabricated assemblies
59,184
69,726
Reserve on finished goods
(3,986,500)
(400,000)
Total inventory
$
445,740 $
4,434,369
55
Table of Contents
NOTE H—RESALABLE SOFTWARE LICENSES RIGHTS
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 was amortizing the total cost at the greater of the actual unit cost per license sold or straight-line amortization
over 10 years. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $141,190 has been
charged to cost of sales. Since the Company did not receive any sales for the license in 2021 or 2022, it accelerated the amortization for the balance of the
license in 2022, leaving a carrying balance of $0 as of both December 31, 2023 and 2022. A total of $48,752 was charged to cost of sales during the
year ended December 31, 2022.
NOTE I—INVESTMENT IN DEBT SECURITY
The Company purchased a 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong in September
2020 bearing interest at 5% per annum. The Bond Certificate translated to $512,821 U.S. Dollars, based on the exchange rate at the purchase date. The
investment was originally recorded at amortized cost and was scheduled to mature in June 2021. The Company never received the proceeds and accrued
interest from the investment and as such, wrote off the investment during 2022 as the bond issuer defaulted on repayment, and the Company had no
recourse.
NOTE J—EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following as of December 31:
2023
2022
Equipment
$
1,012,958 $
825,058
Furniture and fixtures
225,978
225,978
Software
49,143
49,143
Leasehold improvements
34,903
34,903
1,322,982
1,135,082
Less accumulated depreciation and amortization
(1,102,805)
(1,027,669)
Total
$
220,177 $
107,413
Depreciation was $75,136 and $43,794 for 2023 and 2022, respectively. Amounts are recorded in selling, general, and administrative expense as well
as in cost of services.
NOTE K—INTANGIBLE ASSETS AND GOODWILL
Intangible assets consisted of the following as of December 31:
2023
2022
Trade name
$
130,000 $
130,000
Proprietary software
420,000
420,000
Customer relationships
1,692,860
1,692,860
Patents and patents pending
365,080
365,080
2,607,940
2,607,940
Less accumulated amortization
(1,199,950)
(845,115)
Total
$
1,407,990 $
1,762,825
56
Table of Contents
Aggregate amortization expense for 2023 and 2022 was approximately $355,000 and $298,000, respectively. Estimated minimum amortization
expense based on straight line amortization of the software license rights for each of the next five years and thereafter approximates the following:
Years ending December 31
2024
$
311,000
2025
$
267,000
2026
$
224,000
2027
$
223,000
2028
$
141,000
Thereafter
$
241,990
Total
$
1,407,990
Goodwill
The Company concluded the amounts in goodwill had been fully impaired and accordingly wrote-off the entire balance in full as at December 31,
2022.
NOTE L—ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of December 31:
2023
2022
Compensation
$
326,007 $
377,958
Compensated absences
327,252
378,874
Accrued legal and accounting fees
264,976
110,008
Taxes
152,986
7,000
Employee expenses reimbursement
124,209
114,209
Sales tax payable
19,282
17,594
Other
91,136
3,480
Total
$
1,305,848 $
1,009,123
NOTE M—CONVERTIBLE NOTE PAYABLE
Securities Purchase Agreement dated December 22, 2022
On December 22, 2022, the Company entered into and closed a securities purchase agreement (the “Purchase Agreement”) which issued a $2,200,000
principal amount senior secured promissory note (the “Note”). At closing, a total of $2,002,000 was funded, with the proceeds to be used for general
working capital.
57
Table of Contents
The principal amount of the Note was due six months following the date of issuance, subject to one six-month extension by the Company. Interest
under the Note accrues at a rate of 10% per annum, payable monthly through month six and at the rate of 12% per annum in months seven through twelve,
payable monthly. The Note is secured by a lien on substantially all of the Company’s assets and properties can be prepaid in whole or in part without
penalty at any time.
In connection with the issuance of the Note, the Company issued to the investor 38,889 shares of Common Stock (the “Commitment Shares”) valued
at $18.00 per share and a warrant (the “Warrant”) to purchase 11,112 shares of common stock (the “Warrant Shares”) at an exercise price of $54.00 per
share, exercisable commencing on the date of issuance with a term of five years. The warrant was valued at $94,316 (see Note P. #3).
On October 31, 2023 the Company repaid $1,400,000 of principal due under the Note, and on December 21, 2023 the Company repaid the remaining
principal balance of $800,000 due under the Note.
As of December 31, 2023, the Note was paid in full.
58
Table of Contents
NOTE N—LEASES
The Company’s leases office space in New Jersey, Minnesota, New Hampshire, Madrid and Hong Kong with lease termination dates in 2023 and
2024. The property leased in China is paid monthly as used, without a formal agreement. The following tables present the components of lease expense and
supplemental balance sheet information related to the operating leases were:
Year ended
Year ended
December 31,
December 31,
2023
2022
Lease cost
Operating lease cost
$
166,161 $
254,649
Total lease cost
$
166,161 $
254,649
Balance sheet information
Operating right-of-use assets
$
36,905 $
197,355
Operating lease liabilities, current portion
$
37,829 $
159,665
Operating lease liabilities, non-current portion
-
37,829
Total operating lease liabilities
$
37,829 $
197,494
Weighted average remaining lease term (in years) – operating leases
0.67
0.96
Weighted average discount rate – operating leases
5.50%
5.50%
Supplemental cash flow information related to leases were as follows:
Cash paid for amounts included in the measurement of operating lease liabilities
$
213,783 $
259,558
Maturities of operating lease liabilities were as follows as of December 31, 2023:
2024
$
38,808
2025
-
Total future lease payments
$
38,808
Less: imputed interest
(979)
Total
$
37,829
59
Table of Contents
NOTE O—COMMITMENTS AND CONTINGENCIES
Distribution Agreement
Swivel Secure has a distribution agreement with Swivel Secure Limited (“SSL”). Terms of the agreement include the following:
1.
The initial term of the agreement ends on January 31, 2027 and will be automatically extended for additional one-year terms thereafter unless either
party provides written notice to the other party not later than 30 days before the end of the term that it does not wish to extend the term.
2.
SSL appoints Swivel Secure as the exclusive distributor of SSL’s products, to market, sell and distribute in the EMEA (Europe, Middle East and
Africa), excluding the United Kingdom and Republic of Ireland, for a defined discount on the sale price.
3.
Swivel Secure is expected to generate a certain minimum level of orders of SSL products each year during the term of the agreement. If Swivel
Secure fails to meet such minimum level of orders in any year, the exclusive distribution rights will terminate and Swivel Secure will serve as a non-
exclusive distributer of SSL Products.
The Company expects the revenue targets to continue to be met based on historical performance and increasing distribution by Swivel Secure.
Litigation
From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. As of
December 31, 2023, the Company was not a party to any pending lawsuits.
NOTE P— 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
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 December 22, 2022, the Company issued the Commitment Shares. See Note M - Convertible Note Payable for more information.
On March 8, 2022, the Company issued 14,948 shares of common stock of which 4,983 shares were held back by the Company to secure certain
indemnification obligations under the Swivel Secure stock purchase agreement. The shares of Company common stock were issued at a total cost of
$600,004, priced at $40.14, based on the contractual 20-day volume-weighted average price of the Company’s common stock immediately prior to the
payment date as reported on the Nasdaq Capital Market.
On June 18, 2021, the stockholders approved the 2021 Employee Stock Purchase Plan. Under the terms of this plan, 43,834 shares of common stock
are reserved for issuance to employees and officers of the Company at 85% of the lower of the closing price of the common stock as reported on the
Nasdaq Capital Market at the first day or the last day of the offering period. Eligible employees are granted an option to purchase shares under the plan
funded by payroll deductions. The Board may suspend or terminate the plan at any time, otherwise the plan expires June 17, 2031. During 2023 and 2022,
2,947, and 3,364 shares respectively were issued under the ESPP to employees, which resulted in a $4,343, and $18,787 non-cash compensation expense
respectively for the Company.
60
Table of Contents
Issuances of Restricted Stock
Restricted stock consists of shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified
conditions. The fair value of nonvested shares is determined based on the market price of the Company's common stock on the grant date. Restricted stock
is expensed ratably over the term of the restriction period.
The Company issued 16,404 shares of restricted common stock to certain employees of the Company and 3,752 of shares of restricted common
stock were forfeited during fiscal year 2023. The Company issued 15,444 shares of restricted common stock to certain employees of the Company and 583
of shares of restricted common stock were forfeited during fiscal year 2022. These shares vest in equal annual installments over a three-year period from
the date of grant.
Restricted stock compensation for the years ended December 31, 2023 and 2022 was $205,517 and $218,552, respectively.
Issuances to Directors, Executive Officers & Consultants
During the 2023 and 2022 years, the Company issued 3,078 and 2,202 shares of common stock respectively to its directors in lieu of payment of
board fees, valued at $39,007 and $76,043 respectively.
Warrants
Warrants Issued with Convertible Note:
See Note M - Convertible Note Payable for the warrant issued with a convertible note in 2022.
Valuation Assumptions for Warrants:
The Company 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 the warrants issued in 2023 and 2022 were estimated with the following assumptions:
Years ended
December 31,
2023
2022
Weighted average risk-free interest rate
4.63%
3.70%
Weighted average exercise price
$
3.15 $
3.00
Weighted average exercise period
5
5
Weighted average Volatility of stock price
817%
108.60%
The volatility for each issuance is determined based on the review of the experience of the weighted average of historical daily price changes of the
Company’s common stock over the expected exercise period. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for
periods corresponding with the years to maturity.
A summary of warrant activity is as follows:
Weighted
Weighted
average
average
remaining
Aggregate
Total
exercise
life
intrinsic
Warrants
price
(in years)
value
Outstanding, as of December 31, 2021
260,525
106.42
3.48
—
Granted
11,112
54.00
Exercised
—
—
Forfeited
—
—
Expired
(965)
518.40
Outstanding, as of December 31, 2022
270,672 $
104.95
2.59
—
Granted
2,534,148
3.15
Exercised
(177,890)
0.0018
Forfeited
—
—
Expired
(438)
—
Outstanding, as of December 31, 2023
2,626,492 $
19.09
4.37
—
61
Table of Contents
The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $3.00, $10.62, and
$39.78 as of December 31, 2023, 2022 and 2021, respectively, which would have been received by the warrant holders had all warrant holders exercised
their options as of that date. There were no in-the-money warrants exercisable as of December 31, 2023, 2022 and 2021.
NOTE Q—STOCK OPTIONS
2023 Stock Incentive Plan
On December 14, 2024, the stockholders approved the 2023 Stock Incentive Plan. The 2023 Plan reserves 333,334 shares of common stock for
issuance of options, restricted stock, and other equity based awards to employees, officers, directors, consultants advisors and independent contractors of
the Company. Options are issued at exercise prices which may not be below 100% of fair market value (or 110% of the fair market value if, at the time the
option is granted, the participant owns, directly or indirectly, more than 10% of the total combined voting power of all classes of our stock) and have terms
not to exceed ten years. Options issued under the 2023 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a
change in control, certain awards issued under this plan may be subject to additional acceleration of vesting as may be provided in the participants’ written
agreement. The 2023 Plan expires on December 13, 2033, unless terminated earlier. No awards have yet been granted under the 2023 Plan.
2015 Stock Option Plan
On January 27, 2016, the stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan initially reserved 10,417 shares of
common stock for issuance of options, restricted stock, and other equity based awards to employees, officers, directors, and consultants of the Company. In
2021, the stockholders approved an amendment to the 2015 to increase the shares of common stock authorized for issuance under the 2015 Plan from
10,417 shares to 43,834 shares together with other technical changes. The term of stock options granted under the 2015 Plan, may not exceed ten years,
exercise prices may not be below 100-110% of fair market value, and vesting occurs over time periods set forth in written agreements with the recipients.
In the event of a change in control, certain stock awards issued under the 2015 Plan may be subject to additional acceleration of vesting as may be provided
in the participants’ written agreement. The 2015 Plan expires in December 2025.
Non-Plan Stock Options
Periodically, the Company has granted options outside of the 2015 Plan 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:
Weighted
Weighted
average
Number of Options
average
remaining
Aggregate
2015
Non
Total
exercise
life
intrinsic
Plan
Plan
price
(in years)
value
Outstanding, as of December 31, 2021
5,072
6,771
11,843 $
299.61
3.03 $
0
Granted
—
—
—
—
Exercised
—
—
—
—
Forfeited
—
—
—
—
Expired
—
(530)
(530)
311.11
Outstanding, as of December 31, 2022
5,072
6,241
11,313 $
299.07
2.07 $
0
Granted
—
—
—
—
Exercised
—
—
—
—
Forfeited
(151)
—
(151)
94.44
Expired
(1,548)
(348)
(1,896)
256.30
Outstanding, as of December 31, 2023
3.373
5,893
9,266 $
311.16
0.96 $
0
Vested or expected to vest at December 31, 2023
9,266 $
311.16
0.96 $
0
Exercisable at December 31, 2023
9,266 $
311.16
0.96 $
0
62
Table of Contents
The options outstanding and exercisable at December 31, 2023 were in the following exercise price ranges:
Options Outstanding
Options Exercisable
Weighted
Weighted
Weighted
average
average
average
Number of
exercise
remaining
Number
exercise
Range of exercise prices
shares
price
life (in years)
exercisable
price
$93.60 - 169.92
2,205 $
136.65
2.85
2,205 $
136.65
$169.93 - 504.00
7,061
365.66
0.38
7,061
365.66
$93.60 - 504.00
9,266
9,266
The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $3.00, $10.62, and
$39.78 as of December 31, 2023, 2022 and 2021, respectively, which would have been received by the option holders had all option holders exercised their
options as of that date. There were no in-the-money options exercisable as of December 31, 2023, 2022 and 2021.
The weighted average fair value of options granted during the years ended December 31, 2023 and 2022 was $0 as no options were granted in either
year. The total intrinsic value of options exercised during the years ended December 31, 2023 and 2022 was $0 as no options were exercised in either year.
The total fair value of shares vested during the years ended December 31, 2023 and 2022 was $18,310 and $100,668, respectively.
As of December 31, 2023, there was no future forfeiture adjusted compensation costs related to nonvested stock options.
NOTE R—INCOME TAXES
The components of net loss consist of the following:
Year ended
Year ended
December 31,
December 31,
2023
2022
United States
$
(7,279,970) $
(10,416,593)
Hong Kong
(627,146)
(458,839)
Nigeria
(203,700)
(143,499)
Spain
(411,021)
(890,972)
Total
$
(8,521,837) $
(11,909,903)
63
Table of Contents
There was no provision for current federal, foreign or state taxes for both of the years ended December 31, 2023 and 2022 as a result of taxable
losses incurred in these jurisdictions. The provision for income tax benefits consist of the following (in thousands):
Year ended
Year ended
December 31,
December 31,
2023
2022
Current – federal,
$
- $
-
state
foreign
40,986
Deferred- Federal
1,175,000
States
122,000
Foreign
(175,000)
(20,434)
Total
(134,014)
1,276,566
Change in valuation allowance
(1,297,000)
Provision for income tax expense (benefit)
$
(134,014) $
(20,434)
Significant components of deferred tax assets and liabilities are as follows at December 31, 2023 and 2022 (in thousands):
December 31,
December 31,
2023
2022
Accrued compensation
$
112,201 $
113,000
Allowance for doubtful accounts
90,405
169,000
Research and development expenses
1,017,551
633,000
Capital loss carry forward
114,251
114,000
Stock-based compensation
32,408
456,000
Equipment and leasehold improvements
(12,353)
(19,000)
Intangible assets - US
-
341,000
Intangible assets - Foreign
(145,000)
(170,000)
Reserve - Foreign
150,000
-
Inventory reserve
828,668
89,000
Interest expense
-
44,000
Operating lease liabilities
-
44,000
Other
1,000
-
Tax credits
1,748,235
-
Operating lease right-of-use assets
206
(44,000)
Net operating loss and research and credit carryforwards
13,277,118
15,248,000
Valuation allowance
(17,214,690)
(17,188,000)
Net deferred tax liability
$
- $
(170,000)
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. With a full valuation allowance, any change in the deferred tax asset or liability is fully offset by a corresponding
change in the valuation allowance. At December 31, 2023 and 2022, the Company provided a valuation allowance on its net deferred tax assets of
$17,239,173 and $17,188,000, respectively.
64
Table of Contents
As of December 31, 2023, the Company has U.S. federal net operating loss carryforwards of approximately $60.3 million. Approximately $39.7
million are subject to expiration between 2024 and 2037, and $18.6 million net operating loss carryforwards have no expiration date. These net operating
loss carryforwards could be subject to the limitations under Section 382 of the Internal Revenue Code due to changes in the equity ownership of the
Company. In addition, the Company has net operating loss carry forwards from various states of approximately $5.3 million which expire from 2026
through 2042.
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.
Year ended
Year ended
December 31,
December 31,
2023
2022
Federal statutory income tax rate
21%
21%
State taxes, net of federal benefit
(1.41)
0.9
Permanent differences
1.97
(4.7)
Expiration of net operating loss and research credit carryforwards
(7.84)
(5.7)
Expiration and forfeiture of stock options
-
(0.3)
foreign rate differential
(5.84)
rate change
(1.05)
Other
(9.08)
(0.5)
Valuation allowance
(0.24)
(10.9)
Effective tax rate
(2.5)%
(0.2)%
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 2019 through 2022 remain open to examination by the IRS and
state jurisdictions.
The Company's subsidiary in Nigeria has not filed its required returns since inception. Management believes that when the returns are filed, no taxes
will be owed due to the losses incurred during those periods. The Company is not subject to minimum tax during the first four years of operations. As a
result, management could not calculate the amount of net operating loss carryforwards that are available to offset future taxable income.
The Company's subsidiary in Hong Kong has not filed its required returns in several years. Management believes that when the returns are filed, no
taxes will be owed due to losses incurred during those periods. As a result, management could not calculate the amount of net operating loss carryforwards
are available to offset future taxable income.
The Company believes it is not subject to any tax audit risk beyond those periods. The Company’s policy is to recognize interest and penalties accrued
on any unrecognized tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated with any
unrecognized tax benefits, nor was any interest expense incurred during the years ended December 31, 2023 and 2022.
NOTE S
The Company has established a savings plan under section 401(k) of the Internal Revenue Code. All employees of the Company, after completing one
day of service, are eligible to enroll in the 401(k) plan. Participating employees may elect to defer a portion of their salary on a pre-tax basis up to the limits
as provided by the IRS Code. The Company is not required to match employee contributions but may do so at its discretion. The Company made no
matching contributions during the years ended December 31, 2023 and 2022.
65
Table of Contents
NOTE T—EARNINGS PER SHARE (EPS)
The following table summarizes the weighted average securities that were excluded from the diluted per share calculation because the effect of
including these potential shares was antidilutive.
Years ended December 31,
2023
2022
Stock options
-
-
Warrants
1,913,566
-
Total
1,913,566
-
Items excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:
Years ended December 31,
2023
2022
Stock options
9,266
11,313
Warrants
270,234
270,672
Total
279,500
281,985
NOTE U—QUARTERLY FINANCIAL DATA (UNAUDITED AND RESTATED)
The Company is providing restated quarterly unaudited consolidated financial information for interim periods occurring within the year ended
December 31, 2023.
The need for the restatement arose out of the results of certain financial analysis the Company performed in the course of preparing its fiscal year-end
2023 consolidated financial statements. In the course of the audit of the Company’s consolidated financial statements for the fiscal year ended December
31, 2023, the Company determined that certain errors were made which require the restatement of the Company’s previously issued financial statements for
the interim periods occurring within the year ended December 31, 2023. These errors resulted in the overstatement of accounts receivable and revenue,
understatements in certain allowances for accounts receivable and certain reserves for inventory, and an understatement of net loss and total stockholders’
equity which errors may also impact other amounts included in the financial statements. The Company attributes the errors principally to a material
weakness in internal controls over the recording and processing of revenues, allowances for accounts receivable and certain reserves for inventory, which
the Company is working to remediate in fiscal year 2024.
The restated consolidated balance sheet line items for the first, second and third fiscal quarters of 2023 are as follows:
Originally
Reported
Adjustment
Restated
Three Months
Ended
Six Months
Ended
Nine Months
Ended
Three
Months
Ended
Six Months
Ended
Nine Months
Ended
Three Months
Ended
Six Months
Ended
Nine Months
Ended
March 31,
2023
June 30, 2023
September
30, 2023
March 31,
2023
June 30,
2023
September
30, 2023
March 31,
2023
June 30, 2023
September
30, 2023
Accounts receivable,
net
$
3,362,203 $
3,178,785 $
2,799,218 $
(900,000) $ (1,100,000) $ (1,300,000) $
2,462,203 $
2,078,785 $
1,499,218
Inventory
4,427,815
4,384,098
4,289,213
(500,000)
(1,500,000) (2,500,000)
3,927,815
2,884,098
1,789,213
Total current assets
8,936,084
8,531,330
7,820,339 (1,400,000)
(2,600,000) (3,800,000)
7,536,084
5,931,330
4,020,339
Accumulated deficit
(116,773,695) (118,196,573) (118,834,397) (1,400,000)
(2,600,000) (3,800,000) (118,173,695) (120,796,573) (122,634,397)
Total Stockholders'
Equity
5,156,755
3,845,091
3,314,451 (1,400,000)
(2,600,000) (3,800,000)
3,756,755
1,245,091
(485,549)
Total Liabilities and
Stockholders' Equity
11,106,057
10,583,245
9,749,380 (1,400,000)
(2,600,000) (3,800,000)
9,706,057
7,983,245
5,949,380
66
Table of Contents
The restated line items of the consolidated statements of comprehensive income for the three-month periods ended March 31, 2023, June 30, 2023,
and September 30, 2023 are as follow:
Originally
Reported
Adjustment
Restated
Q1
Q2
Q3
Q1
Q2
Q3
Q1
Q2
Q3
License fees
$ 2,478,556 $ 1,235,771 $
950,015 $
(900,000)
-
- $ 1,578,556 $ 1,235,771 $
950,015
Total revenues
3,083,767 1,928,929 1,817,108
(900,000)
-
- 2,183,767 1,928,929 1,817,108
Cost of hardware -
Reserve
-
-
-
500,000 1,000,000 1,000,000
500,000 1,000,000 1,000,000
Total costs and other
expenses
820,274
606,111
476,604
500,000 1,000,000 1,000,000 1,320,274 1,606,111 1,476,604
Gross profit
2,263,493 1,322,818 1,340,504 (1,400,000) (1,000,000) (1,000,000)
863,493
322,818
340,504
Selling, general and
administrative
1,931,732 1,943,164 1,547,376
-
200,000
200,000 1,931,732 2,143,164 1,747,376
Total Operating
Expenses
2,621,891 2,501,345 2,106,062
-
200,000
200,000 2,621,891 2,701,345 2,306,062
Operating loss
(358,398) (1,178,527)
(765,558) (1,400,000) (1,200,000) (1,200,000) (1,758,398) (2,378,527) (1,965,558)
Loss before provision
for income tax
(288,322) (1,279,878)
(638,013) (1,400,000) (1,200,000) (1,200,000) (1,688,322) (2,479,878) (1,838,013)
Net loss
(288,322) (1,422,878)
(637,824) (1,400,000) (1,200,000) (1,200,000) (1,688,322) (2,479,878) (1,838,013)
Comprehensive Net
loss
(288,322) (1,422,878)
(637,824) (1,400,000) (1,200,000) (1,200,000) (1,688,322) (2,479,878) (1,838,013)
Comprehensive loss
(216,176) (1,402,994)
(602,460) (1,400,000) (1,200,000) (1,200,000) (1,616,176) (2,459,994) (1,802,649)
Basic and Diluted
Loss per Common
Share
(0.52)
(2.56)
(1.12)
(2.52)
(2.16)
(2.11)
(3.04)
(4.45)
(3.22)
The restated line items of the consolidated statements of comprehensive income for the six-month period ended June 30, 2023 and nine-month
period ended September 30, 2023 are as follows:
Originally Reported
Adjustment
Restated
Six Months
Ended
Nine Months
Ended
Six Months
Ended
Nine Months
Ended
Six Months
Ended
Nine Months
Ended
June 30, 2023
September 30,
2023
June 30, 2023
September 30,
2023
June 30, 2023
September 30,
2023
License fees
$
3,714,327 $
4,664,341 $
(900,000) $
(900,000) $
2,814,327 $
3,764,341
Total revenues
5,012,696
6,829,804
(900,000)
(900,000)
4,112,696
5,929,804
Cost of hardware - reserve
-
-
1,500,000
2,500,000
1,500,000
2,500,000
Total costs and other expenses
1,426,385
1,902,989
1,500,000
2,500,000
2,926,385
4,402,989
Gross profit
3,586,311
4,926,815
(2,400,000)
(3,400,000)
1,186,311
1,526,815
Selling, general and
administrative
3,874,896
5,422,272
200,000
400,000
4,074,896
5,822,272
Total Operating Expenses
5,123,237
7,229,298
200,000
400,000
5,323,237
7,629,298
Operating loss
(1,536,926)
(2,302,483)
(2,600,000)
(3,800,000)
(4,136,926)
(6,102,483)
Loss before provision for income
tax
(1,568,200)
(2,206,212)
(2,600,000)
(3,800,000)
(4,168,200)
(6,006,212)
Net loss
(1,711,200)
(2,349,023)
(2,600,000)
(3,800,000)
(4,311,200)
(6,149,023)
Comprehensive net loss
(1,711,200)
(2,349,023)
(2,600,000)
(3,800,000)
(4,311,200)
(6,149,023)
Comprehensive loss
(1,619,170)
(2,221,629)
(2,600,000)
(3,800,000)
(4,219,170)
(6,021,629)
Basic and Diluted Loss per
Common Share
(3.07)
(4.12)
(4.67)
(6.67)
(7.74)
(10.79)
NOTE V—SUBSEQUENT EVENTS
On January 4, 2024, the Company issued 347,000 shares of common stock upon the exercise of prefunded warrants.
On January 5, 2024, the Company issued 142,000 shares of common stock upon the exercise of prefunded warrants.
On January 12, 2024, the Company issued 158,000 shares of common stock upon the exercise of prefunded warrants.
On February 15, 2024, 243 shares of restricted common stock were forfeited by employees who left the Company before the lapse of the
restriction period applicable to such shares.
On March 21, 2024, 73 shares of restricted common stock were forfeited by employees who left the Company before the lapse of the restriction
period applicable to such shares.
On March 27, 2024, the Company issued 4,287 shares of common stock to its directors in payment of board fees.
On May 6, 2024, 186 shares of restricted common stock were forfeited by an employee who left the Company before the lapse of the restriction
period applicable to such shares.
67
Table of Contents
EXHIBIT INDEX
Exhibit
Exhibit
No.
2.1
Stock Purchase Agreement by and among the Company, Thomas J. Hoey, and PistolStar, Inc. dated June 6, 2020 (incorporated by
reference to Exhibit 2.1 to the Current Report on Form 8-K, filed with the SEC on July 7, 2020)
2.2
Stock Purchase Agreement by and among the Company, Alex Rocha and Swivel Secure Europe, SA dated February 2, 2022 (incorporated
by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed with the SEC on February 3, 2022)
2.3
Amendment No. 1 to Stock Purchase Agreement by and among the Company, Alex Rocha and Swivel Secure Europe, SA dated March 4,
2022 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed with the SEC on March 9, 2022)
3.1
Certificate of Incorporation of BIO-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the current
report on Form 8-K, filed with the SEC on January 5, 2005)
3.2
Bylaws (incorporated by reference to Exhibit 3.3 to the current report on Form 8-K, filed with the SEC on January 5, 2005)
3.3
Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Appendix A to the definitive proxy statement, filed
with the SEC on January 18, 2006)
3.4
Certificate of Amendment of Certificate of Incorporation of Bio-key International, Inc., a Delaware corporation (incorporated by reference
to Exhibit 3.4 to the annual report on Form 10-K, filed with the SEC on March 31, 2015)
3.5
Certificate of Elimination of 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)
3.10
Certificate of Amendment to 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 19, 2023)
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
Common Stock Purchase Warrant dated May 6, 2020 (incorporated by reference to Exhibit 10.7 to the quarterly report on Form 10-Q filed
with the SEC on June 8, 2020)
4.3
Common Stock Purchase Warrant dated June 29, 2020 (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K filed
with the SEC on July 1, 2020)
4.4
Form of Pre-Funded 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)
68
Table of Contents
4.5
Form of 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)
4.6
Form of Common Warrant (incorporated by reference to Exhibit 4.9 to Amendment No. 1 to Registration Statement on Form S-1 filed
with the SEC on October 26, 2023)
4.7
Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.10 to Amendment No. 1 to the Registration Statement on Form S-1,
filed with the SEC on October 26, 2023)
4.8
Form of Warrant Agency Agreement (incorporated by reference to Exhibit 4.11 to Amendment No. 1 to the Registration Statement on
Form S-1, filed with the SEC on October 26, 2023)
4.9
Form of Common Warrant (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed with the SEC on December
21, 2023)
4.10
Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.2 to the current report on Form 8-K filed with the SEC on December
21, 2023)
4.11
BIO-key International, Inc. Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
(incorporated by reference to Exhibit 4.5 to the annual report on From 10-K filed with the SEC on April 1, 2022
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)
69
Table of Contents
10.2
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)
10.3
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)
10.4
Employment Agreement by and between BIO-key International, Inc. and James Sullivan dated April 5, 2017 (incorporated by reference to
Exhibit 10.42 to the annual report on Form 10-K, filed with the SEC on March 29, 2021)
10.5
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)
10.6
BIO-key International, Inc. 2015 Equity Incentive Plan (incorporated by reference to Appendix B to the definitive proxy statement filed
with the SEC on December 15, 2015)
10.7
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)
10.8
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)
10.9
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)
10.10
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)
10.11
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)
10.12
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)
10.13
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)
70
Table of Contents
10.14
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)
10.15
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)
10.16
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)
10.17
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)
10.18
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)
71
Table of Contents
10.19
BIO-key International, Inc. 2021 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the definitive proxy
statement filed with the SEC on May 4, 2021)
10.20
BIO-key International, Inc. Amended and Restated 2015 Equity Incentive Plan (incorporated by reference to Appendix B to the definitive
proxy statement filed with the SEC on May 4, 2021)
10.21
Management Services Agreement dated March 8, 2022 by and among Swivel Aman-FZCO, Swivel Secure Europe, SA, and Alex Rocha
(incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q filed with the SEC on May 23, 2022)
10.22
Option Agreement dated March 8, 2022 by and between the Company and Alex Rocha (incorporated by reference to Exhibit 10.2 to the
quarterly report on Form 10-Q filed with the SEC on May 23, 2022)
10.23
Distribution Agreement dated October 23, 2020 by and between Swivel Secure Europe, SA and Swivel Secure Limited (incorporated by
reference to Exhibit 10.3 to the quarterly report on Form 10-Q filed with the SEC on May 23, 2022) +
10.24
Deed of Variation dated January 26, 2022 by and between Swivel Secure Europe, SA and Swivel Secure Limited (incorporated by
reference to Exhibit 10.4 to the quarterly report on Form 10-Q filed with the SEC on May 23, 2022) +
10.25
Securities Purchase Agreement dated December 22, 2022 by and between the Company and AJB Capital Investments, LLC (incorporated
by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on December 23, 2022)
10.26
Common Stock Purchase Warrant, dated December 22, 2022 (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K
filed with the SEC on December 23, 2022)
10.27
$2,200,000 Senior Secured Promissory Note, dated December 22, 2022 (incorporated by reference to Exhibit 10.2 to the current report on
Form 8-K filed with the SEC on December 23, 2022)
10.28
Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.39 to Amendment No. 1 to Registration Statement on
Form S-1 filed with the SEC on October 26, 2023)
10.29***
BIO-key International, Inc. 2023 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed
with the SEC on December 19, 2023)
10.30
Securities Purchase Agreement, dated as of December 20, 2023, by and between BIO-key International, Inc. and Dillon Hill Investment
Company LLC (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on December 21, 2023)
21.1*
List of subsidiaries of BIO-key International, Inc.
23.1*
Consent of Bush and Associates CPA
23.2*
Consent of Marcum LLP
31.1*
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
Inline XBRL Instance
101.SCH*
Inline XBRL Taxonomy Extension Schema
101.CAL*
Inline XBRL Taxonomy Extension Calculation
101.DEF*
Inline XBRL Taxonomy Extension Definition
101.LAB*
Inline XBRL Taxonomy Extension Labels
101.PRE*
Inline XBRL Taxonomy Extension Presentation
104
Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)
* 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.
+ Certain portions of this exhibit (indicated by “[***]”) have been omitted as the Company has determined that such portions are (a) not material and
(b) would likely cause competitive harm to the Company if publicly disclosed.
72
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BIO-KEY INTERNATIONAL, INC.
Date: June 5, 2024
By:
/s/ MICHAEL W. DEPASQUALE
Michael W. DePasquale
CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the dates indicated.
Signature
Title
Date
/s/ MICHAEL W.
DEPASQUALE
Chairman of the Board of Directors, Chief Executive Officer and Director
(Principal Executive Officer)
June 5, 2024
Michael W. DePasquale
/s/ CECILIA WELCH
Chief Financial Officer (Principal Financial and Accounting Officer)
June 5, 2024
Cecilia Welch
/s/ROBERT J. MICHEL
Director
June 5, 2024
Robert J. Michel
/s/ WONG KWOK FONG
Director
June 5, 2024
Wong Kwok Fong
/s/ CAMERON WILLIAMS
Director
June 5, 2024
Cameron Williams
/s/ MANNY ALIA
Director
June 5, 2024
Manny Alia
73
Exhibit 21.1
Subsidiaries
Name
State/Country of Incorporation
BIO-key Hong Kong Limited
Hong Kong
Public Safety Group, Inc.
Delaware
PistolStar, Inc.
New Hampshire
BIOKEY AFRICA LIMITED
Nigeria
Swivel Secure Europe, SA
Spain
Swivel Secure, Unipessoal LDA.
Portugal
BIO-key Europe SL
Spain
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Whom It May Concern:
We hereby 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, 333-257520 and 333-257754), Form S-1 (file nos. 333-275003 and 276773), and Form S-3 (file no. 333-257875) of our Report of
Independent Registered Public Accounting Firm, dated June 5, 2024 on the balance sheet of BIO-key International Inc. as of December 31, 2023 and the
related statements of operations, changes in stockholder’s equity and cash flows for the year then ended.
We also consent to the references to us under the headings “Experts” in such Registration Statement.
Very truly yours,
/s/ Bush & Associates CPA LLC
Bush & Associates CPA LLC (PCAOB 6797)
Henderson, Nevada
June 5, 2024
179 N. Gibson Rd., Henderson, NV 89014 l 702.703.5979 l www.bushandassociatescpas.com
Exhibit 23.2
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
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, 333-257520 and 333-257754), Form S-1 (File Nos. 333-275003 and 333-276773), and Form S-3 (File No. 333-257875) of our report dated June
1, 2023, with respect to our audit of the consolidated financial statements of BIO-key International, Inc. as of December 31, 2022 and for the year then
ended, which report is included in this Annual Report on Form 10-K of BIO-key International, Inc. for the year ended December 31, 2023.
We were dismissed as auditors on April 23, 2024 and, accordingly, we have not performed any audit or review procedures with respect to any financial
statements incorporated by reference for the periods after the date of our dismissal.
/s/ Marcum LLP
Marcum LLP
Saddle Brook, New Jersey
June 5, 2024
Exhibit 31.1
CERTIFICATION
I, Michael W. DePasquale, certify that:
1. I have reviewed this annual report on Form 10-K of BIO-key International, Inc. (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most
recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The Company’s other certifying officer 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: June 5, 2024
/s/ Michael W. DePasquale
Michael W. DePasquale
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Cecilia C. Welch, certify that:
1. I have reviewed this annual report on Form 10-K of BIO-key International, Inc. (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most
recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The Company’s other certifying officer 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: June 5, 2024
/s/ CECILIA C. WELCH
Cecilia C. Welch
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of BIO-key International, Inc. (the “Company”) on Form 10-K for the period ended December 31,
2023, 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: June 5, 2024
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of BIO-key International, Inc. (the “Company”) on Form 10-K for the period ended December 31,
2023, 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: June 5, 2024