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Item 9A. Controls and Procedures

2022-04-01 compared with 2021-03-29 · 729 added, 563 removed, 922 unchanged (58% of the section changed)

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Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020.

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Management ’ s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).

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.

Based on the evaluation of our disclosure controls and procedures as of December 31, 2021, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Management ’

s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our CEO and CFO, we have conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020, based upon the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2020.

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, 2021, based upon the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2021.

As we are a smaller reporting company, this annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.

Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.

Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

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

No change in our internal control over financial reporting occurred during the quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

OTHER INFORMATION

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not Applicable.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

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

POSITIONS HELD

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Pieter Knook (b)

Emmanuel Alia (Manny) (b)

Cecilia Welch

Emmanual Alia (Manny) (b)

Chief Financial Officer

Chief Technology Officer

James Sullivan

Vice President of Strategy and Compliance, Chief Legal Officer

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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.

DePasquale has served as our Chief Executive Officer and a Director since January 3, 2003, and Chairman of the Board since January 29, 2014.

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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.

Bush, III has served as a Director of the Company since January 29, 2014.

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Bush served with the Federal Bureau of Investigation for over 33 years.

Bush joined the FBI in September 1975, ultimately becoming the Director of the CJIS division, with over 2,500 employees and a budget of approximately one billion dollars.

Bush joined the FBI in September 1975, ultimately becoming the Director of the CJIS division, with over 2,500 employees and a budget of approximately one billion dollars. Mr.

Bush is known for providing critical services in support of the criminal justice community, including two significant IT projects, Next Generation Identification and N-Dex, which were awarded by CJIS during his tenure at the FBI.

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We believe Mr.

Bush’s qualifications to sit on the board of directors include his extensive experience in law enforcement, security matters, and the use of biometric technologies in the government sector, which provide the board with a unique perspective on security and public sector matters.

Michel has served as a Director of the Company since April 10, 2017.

Bush’s qualifications to sit on the board of directors include his extensive experience in law enforcement, security matters, and the use of biometric technologies in the government sector, which provide the board with a unique perspective on security and public sector matters. 

Michel  has served as a Director of the Company since April 10, 2017.

He has over 30 years of accounting and financial management experience.

Since September, 2018, he has served as the Chief Financial Officer of Daxor Corporation (NYSE MKT:

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.

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Michel is a certified public accountant, earned a MBA in Taxation from St.

John’s University, and a BS in Business Administration from Villanova University.

Michel gained his public accounting experience at PricewaterhouseCoopers in New York.

John’s University, and a BS in Business Administration from Villanova University.

Michel gained his public accounting experience at PricewaterhouseCoopers in New York. 

We believe Mr.

Michel’s qualifications to sit on the board of directors include his substantial experience in accounting and financial management for public companies which provide the board with a deep knowledge of financial and SEC reporting and strengthen the board’s collective qualifications, skills, and experience.

Thomas Gilley has served as a Director of the Company since January 29, 2014.

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Gilley founded several successful companies including PicoStar, a Silicon Valley incubator-technology investment company, and an on-demand web media company he sold to Vignette.

Gilley acted as CTO throughout the transaction until the company’s ultimate acquisition by OpenText.

We believe Mr.

Gilley’s qualifications to sit on the board of directors include his substantial experience in starting, operating and financing technology companies which provides the board with a deep knowledge of the sales and development cycles applicable to growth businesses in the technology industry.

Wong Kwok Fong (Kelvin) has served as a Director of the Company since December 4, 2015, as Managing Director of our Hong Kong Subsidiary since August 2016, and as Vice-Chairman of the Board of Directors since March 2019.

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.

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Kelvin brings over 20 years of senior management experience in manufacturing, supply chain, and marketing functions in the electronics and technology industries, including establishing manufacturing plants in Hong Kong and China, and building an extensive network in the electronics and technology industries.

We believe Kelvin’s qualifications to sit on the board of directors include his substantial experience in the technology industry, including biometrics and payment systems, and serving the Asian markets, which broaden and strengthen the board’s collective qualifications, skills, and experience.

Pieter Knook , has served as a Director of the Company since May 2, 2016.

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Since 2010, Mr.

Knook has served on the boards of a number of private equity backed and publicly traded early stage technology companies, including Altitude Angel in Reading, the London Internet Exchange, Pulsant in the UK, BroadHorizon in the Netherlands and Telenor in Norway.

Knook has served on the boards of a number of private equity backed and publicly traded early stage technology companies, including Altitude Angel in Reading, the London Internet Exchange, BroadHorizon in the Netherlands and Telenor in Norway.

Knook served as the Director of Internet Services at Vodafone Group in London from March 2008 through October 2010.

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As President of Microsoft Asia from 1997 to 2001, Mr.

Knook led the company’s efforts in opening and expanding Asian markets.

He subsequently served as Senior Vice President of Microsoft’s mobile communication business from 2001 through 2008.

Knook led the company’s efforts in opening and expanding Asian markets.

He subsequently served as Senior Vice President of Microsoft’s mobile communication business from 2001 through 2008.

We believe Mr.

Knook’s qualifications to sit on the board of directors include his extensive technology industry experience, which further broaden and strengthen the board’s collective qualifications, skills, and experience.

Emmanual Alia (Manny) , was appointed Director of the Company on April 3, 2020.

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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.

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.

Alia received a Bachelor of Arts in Accounting from SouthEastern University and a Master’s of Business Administration (MBA) from Cornell University.

We believe Mr.

Alia’s qualifications to sit on the board of directors include his extensive industry experience and connection and networking abilities in the African communities and markets which further broaden and strengthen the board’s collective qualifications, skills, and experience.

Non-director Executive Officers

Cecilia Welch has served as the Chief Financial Officer of the Company since December 21, 2009.

Welch  has served as the Chief Financial Officer of the Company since December 21, 2009.

Welch joined the Company in 2007 as Corporate Controller.

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From December 1988 to July 2004, she was the Controller for ATN Microwave (acquired by Agilent Technologies), a manufacturer of automated test equipment.

Welch has a Bachelor’s degree in Accounting from Franklin Pierce University.

Lacous has served as Chief Technology Officer of the Company since March 13, 2014.

Welch has a Bachelor’s degree in Accounting from Franklin Pierce University.

LaCous  has served as Chief Technology Officer of the Company since March 13, 2014.

Prior to her appointment as Chief Technology Officer, she served as Senior Vice President of Technology & Development since 2012, and as our Vice President of Technology and Development since 2000.

LaCous has over 30 years of product/project management, solution architecture, software development, team leadership and customer relations experience, with a background that includes successfully bringing numerous technologies to market, including automated voice response systems, automated building control systems, software piracy protection, intranet training materials and testing, page layout and design software, image scanning software and systems, biometric security, and biometric algorithms.

LaCous is also the author of six US patented technologies, multiple international patents, and other patent pending solutions.

LaCous has a Bachelor’s in Computer Science from North Dakota State University.

James Sullivan has served as BIO-key’s Senior Vice President of Strategy and Compliance and BIO-key’s Chief Legal Officer since February, 2020, as Senior Vice President of Strategy and Business Development the Company from April 2012 through December 2018, and the dual role as Senior Vice President of Global Sales from August 2015 through December of 2016.

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, page layout and design software, image scanning software and systems, biometric security systems, automated national ID systems using biometrics, and biometric algorithms.

LaCous has been a speaker at multiple events/conferences and has worked with teams around the globe bringing biometric technology deployments to life. 

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.

LaCous has a Bachelor’s in Computer Science, with mathematics and physics from North Dakota State University.

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.

Sullivan is a recognized expert in biometric authentication, cyberlaw and privacy for consumer and mobile applications.

During over 17 years with the Company, Mr.

Sullivan has directly worked with dozens of the Company’s customers, including AT&T, Israel Defense Forces, LexisNexis, NCR and Omnicell, as well as large-scale biometric-centered identity management projects that interface daily with millions of corporate and consumer users.

During over 18 years with the Company, Mr.

Sullivan earned a Juris Doctor cum laude from Georgia State University College of Law, is a member of the Georgia Bar, and enrolled to practice before the IRS.

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Our audit committee is comprised of Robert J.

Michel (Chair), Pieter Knook, and Emmanuel Alia, all of whom meet the independence standards for purposes of serving on an audit committee established by NASDAQ and under the Exchange Act.

Michel (Chair), Pieter Knook, and Emmanual Alia, all of whom meet the independence standards for purposes of serving on an audit committee established by NASDAQ and under the Exchange Act.

Our audit committee (i) assists the board of directors in its oversight of the integrity of our financial statements, compliance with legal and regulatory requirements, and corporate policies and controls, (ii) has the sole authority to retain and terminate our independent registered public accounting firm, approve all auditing services and related fees and the terms thereof, and pre-approve any non-audit services to be rendered by our independent registered public accounting firm, and (iii) is responsible for confirming the independence and objectivity of our independent registered public accounting firm.

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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.

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 .

The charter is available on our website at 

www.bio-key.com .

Compensation Committee

Our compensation committee is comprised of Thomas Bush, III (Chair) and Robert Michel, both of whom meet the independence standards established by NASDAQ and under the Exchange Act.

The compensation committee’s duties include overseeing our overall compensation philosophy, policies and programs.

This includes reviewing and analyzing the design and function of our various compensation components, establishing salaries, incentives and other forms of compensation for officers and non-employee directors, and administering our equity incentive plan.

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Our compensation committee operates under a written charter that is reviewed annually.

The charter is available on our website at www.bio-key.com .

The charter is available on our website at 

www.bio-key.com .

Code of Ethics

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Our Code of Ethics is designed to deter wrongdoing and promote:

(i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

(ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in our other public communications;

(iii) compliance with applicable governmental laws, rules, and regulations;

(iv) the prompt internal reporting of violations of the code to an appropriate person or persons identified in the code;

and (v) accountability for adherence to the code.

We intend to disclose amendments or waivers of the Code of Ethics on our website within four business days.

Any person may obtain a copy of our Code of Ethics free of charge by sending a written request for such to the attention of the Chief Financial Officer of the Company, 3349 Highway 138, Building A Suite E, Wall, NJ 07719.

(i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

(ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in our other public communications;

(iii) compliance with applicable governmental laws, rules, and regulations;

(iv) the prompt internal reporting of violations of the code to an appropriate person or persons identified in the code;

and (v) accountability for adherence to the code.  We intend to disclose amendments or waivers of the Code of Ethics on our website within four business days.  Any person may obtain a copy of our Code of Ethics free of charge by sending a written request for such to the attention of the Chief Financial Officer of the Company, 3349 Highway 138, Building A Suite E, Wall, NJ 07719.  

Term of Office

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Delinquent Section 16(a) Reports

Reports of all transactions in our common stock by officers, directors and ten percent (10%) stockholders are required to be filed with the SEC pursuant to Section 16(a) of the Exchange Act.

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

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, 2021, all Section 16(a) filing requirements applicable to our officers, directors and ten percent (10%) stockholders were satisfied in a timely fashion, except for one late Form 4 filing by Mr.

Sullivan reporting an open market purchase.

EXECUTIVE COMPENSATION

The following table sets forth a summary of the compensation paid to or accrued by our chief executive officer and the two most highly compensated executive officers other than our chief executive officer, for the fiscal years ended December 31, 2020 and 2019:

SUMMARY COMPENSATION TABLE

Name and Principal

Chief Executive Officer

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Chief Legal Officer

The aggregate grant date fair value of the option awards was estimated using the Black-Scholes option pricing model, with the assumptions listed in Note A to the Company’s financial statements.

The amount shown in this column represents the grant date fair value calculated under FASB ASC 718.

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.

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Cash compensation is comprised of base salary and an annual performance-based cash bonus opportunity.

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

In setting cash compensation levels, we favor a balance in which base salaries are generally targeted at slightly below the peer average and a bonus opportunity that is targeted at slightly above the average.

The base salary of our CEO has not been increased since 2018.

In 2020, we increased the base salary of Mr.

Sullivan to $225,000 to compensate for the fact that in connection with his promotion to Chief Legal Officer, he would be limited to sales commissions on only three of his existing long term accounts.

Effective January 1, 2021, we increased the base salary of Mr.

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.

In 2020, due to extraordinary efforts in maintaining operations during the pandemic, acquiring PistolStar, and the completing an underwritten public offering, Mr.

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Sullivan were awarded cash bonuses of $50,000 and $35,000, respectively.

Based on the performance of the Company in 2019, we did not award any discretionary incentive compensation to our named executive officers.

We also include an equity component as part of our compensation package because we believe that equity-based compensation aligns the long-term interests of our named executive officers with those of stockholders.

In March 2019, we issued options to Mr.

DePasquale to purchase 4,167 of common stock, to Mr.

Sullivan to purchase 3,125 shares of common stock, and to Ms.

LaCous to purchase 1,563 shares of common stock.

The foregoing options have an exercise price of $9.44 per share, the last sales price of our common stock on the date of grant, have a term of seven years, and vest in three equal annual installments commencing March 21, 2020.

We did not issue any options to the named executive officers in 2020.

In August 2020, we issued 4,125 shares of restricted stock to Mr.

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These shares vest in equal annual installments over a three-year period from the date of grant.

We did not issue any stock options or restricted shares to our named executive officers in 2021.

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.

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.

Since 2018, Mr. DePasquale’s annual base salary has been $275,000, subject to adjustment by the compensation committee.

In addition to the base salary, a “Performance Bonus”

may be awarded to Mr. DePasquale on the basis of the Company achieving certain corporate and strategic performance goals, as determined by the compensation committee in its sole discretion.

The employment agreement contains standard and customary confidentiality, non-solicitation and “work made for hire”

provisions as well as a covenant not to compete which prohibits Mr. DePasquale from doing business with any current or prospective customer of the Company or engaging in a business competitive with that of the Company during the term of his employment and for the one-year period thereafter.

This agreement also contains a number of termination and change in control provisions as described under the captions “

Termination Arrangements ” and “

Change in Control Arrangements ” below.

On April 5, 2017, we entered into an employment agreement with James Sullivan.

The agreement automatically renews for subsequent one-year terms, unless terminated by the Company upon at least two months prior written notice which is treated as termination without cause.

Under this agreement, Mr.

Sullivan’s initial base salary was $150,000 plus commissions, subject to adjustment.

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.

The agreement also contains a number of termination provisions as described under the caption “

Termination Agreements ”

On November 20, 2001, we entered into an employment agreement with Mira LaCous.

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LaCous from doing business with any current or prospective customer of the Company or engaging in any business competitive with that of the Company during the term or her employment and for the one-year period thereafter.

The agreement also contains a number of termination provisions as described under the caption “ Termination Agreements ” below.

The agreement also contains a number of termination provisions as described under the caption “

Termination Agreements ”

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.

Restricted Furthermore, option agreements and restricted stock award agreements contain change of control provisions as described under the caption “

Change in Control Provisions ”

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

DECEMBER 31, 2021

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

The following table sets forth for each named executive officer, information regarding outstanding equity awards as at December 31, 2021.

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

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unexercisable

shares or units

of stock that

have not vested

Market value of

shares of units of

stock that have not

James Sullivan

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

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

Calculated based on the closing market price of the Company’s common stock on December 31, 2021 of $2.21 per share.

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

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Change in Control Provisions

Our 2015 Equity Incentive Plan (the “Plan”) provides for the acceleration of vesting of unvested options and termination of any restriction or forfeiture provisions applicable to restricted stock awards upon a “Change in Control” of the Company.

A Change in Control is defined in the Plans to include (i) a sale or transfer of substantially all of the Company’s assets;

(ii) the dissolution or liquidation of the Company;

(iii) a merger or consolidation to which the Company is a party and after which the prior stockholders of the Company hold less than 50% of the combined voting power of the surviving corporation’s outstanding securities;

(iv) the incumbent directors cease to constitute at least a majority of the Board of Directors;

or (v) a change in control of the Company which would otherwise be reportable under Section 13 or 15(d) of the Exchange Act.

In the event of a “Change In Control” the Plan provides for the immediate vesting of all options issued thereunder and termination of all forfeiture provisions applicable to restricted stock award issued thereunder.

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.

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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.

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DECEMBER 31, 2021

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

The following table sets forth for each director, information regarding their compensation for the year ended December 31, 2021:

Bush, III (3)

Thomas Gilley (3)

Yau Jianhui (4)

Pieter Knook (4)

Robert J Michel (4)

Fabian Shin (6)

Alia, Emmanuel (7)

Emmanual Alia (5)

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.

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Bush and Gilley each held options to purchase 2,325 shares of common stock.

At December 31, 2020, Mr.

Jianhui held options to purchase 188 shares of common stock.

Jianhui was not nominated for re-election to the Board of Directors at Company’s Annual Meeting in 2020.

At December 31, 2021, Messrs.

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At December 31, 2021, Mr.

Shin held options to purchase 501 shares of common stock.

Shin resigned from the Board of Directors on September 2, 2020.

At December 31, 2020, Mr.

Alia held options to purchase 313 shares of common stock.

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All of our directors elected to receive payment in common stock for the last board meeting in 2021.

We recently revised our policy regarding non-employee director fees to provide for payment of $3,000 per board meeting and $1,000 per board committee meeting attended payable in the manner described above.

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.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as of March 26, 2021 information with respect to the securities holdings of all persons that we, pursuant to filings with the SEC and our stock transfer records, have reason to believe may be deemed the beneficial owner of more than 5% of our common stock.

The following table sets forth, as of March 29, 2022, information with respect to the securities holdings of all persons that we, pursuant to filings with the SEC and our stock transfer records, have reason to believe may be deemed the beneficial owner of more than 5% of our common stock.

The following table also sets forth, as of such date, the beneficial ownership of our common stock by all of our current officers and directors, both individually and as a group.

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

The beneficial owners and amount of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Exchange Act and, in accordance therewith, include all shares of our common stock that may be acquired by such beneficial owners within 60 days of March 29, 2022 upon the exercise or conversion of any options, warrants or other convertible securities.

This table has been prepared based on 8,405,209 shares of common stock outstanding on March 28, 2022.

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Thomas Gilley

Emmanuel Alia

Emmanual Alia

Wong Kwok Fong (Kelvin)

All officers and directors as a group (10) persons

All officers and directors as a group ten (10) persons

Lind Global Micro Fund, LP

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Does not include 1,389 shares issuable upon exercise of options subject to vesting.

Consists of shares issuable upon exercise of options and 4,125 shares of restricted stock of which 4,125 remain subject to vesting.

Includes 22,501 of shares issuable upon exercise of options and 34,125 shares of restricted stock of which 32,750 remain subject to vesting.

Does not include 1,041 shares issuable upon exercise of options subject to vesting.

Consists of shares issuable upon exercise of options and 4,125 shares of restricted stock of which 4,125 remain subject to vesting.

Includes 16,147 of shares issuable upon exercise of options and 11,625 shares of restricted stock of which 10,250 remain subject to vesting.

Does not include 521 shares issuable upon exercise of options subject to vesting.

Includes 21,355 shares issuable on exercise of options and 4,125 shares of restricted stock of which 4,125 remain subject to vesting.

Includes 19,793 of shares issuable on exercise of options and 34,125 shares of restricted stock of which 32,750 remain subject to vesting.

Does not include 1,041 shares issuable upon exercise of options subject to vesting.

Includes 2,300 shares issuable on exercise of options.

Includes 2,013 of shares issuable on exercise of options and 5,000 shares of restricted stock which  remain subject to vesting.

Does not include 312 shares issuable upon exercise of options subject to vesting.

Includes 1,648 shares issuable on exercise of options.

Includes 1,752 of shares issuable on exercise of options and 5,000 shares of restricted stock which  remain subject to vesting.

Does not include 312 shares issuable upon exercise of options subject to vesting.

Includes 2,300 shares issuable on exercise of options.

Includes 2,013 of shares issuable on exercise of options and 5,000 shares of restricted stock which remain subject to vesting.

Does not include 312 shares issuable upon exercise of options subject to vesting.

Includes 1,648 shares issuable on exercise of options.

Includes 1,752 of shares issuable on exercise of options and 5,000 shares of restricted stock which 5, remain subject to vesting.

Does not include 312 shares issuable upon exercise of options subject to vesting.

Consists of shares of common stock.

Includes 105 of shares issuable on exercise of options and 5,000 shares of restricted stock  which  remain subject to vesting.

Does not include 208 shares issuable upon exercise of options subject to vesting.

Includes 25,695 shares issuable on exercise of options.

The address of Kelvin is Flat C, 27/F, Block 5, Grand Pacific Views, Siu Lam, Hong Kong N7.

Includes 833,125 shares issuable upon exercise of warrants.

Includes 25,695 of shares issuable on exercise of options and 9,125 shares of restricted stock of which 7,750 remain subject to vesting.

Does not include 1,389 shares issuable upon exercise of options subject to vesting.The address of Kelvin is Flat C, 27/F, Block 5, Grand Pacific Views, Siu Lam, Hong Kong N7.

Consists of shares issuable upon exercise of warrants.

The address of Lind Global Capital Micro Fund, LP is 444 Madison Ave, Floor 41, New York, NY 10022

EQUITY COMPENSATION PLAN INFORMATION

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

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

The following table sets forth, as of December 31, 2021, information with respect to securities authorized for issuance under equity compensation plans.

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

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 789,000 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.

As of December 31, 2021, there were outstanding non-plan options to purchase 121,653 shares of common stock.

The terms of these outstanding options are substantially similar to the provisions of the 2015 Plan and options issued thereunder. 

In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately.

On June 18, 2021, the stockholders approved the 2021 Employee Stock Purchase Plan (“ESPP”).

Under the terms of this plan, 789,000 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.

Plan Category

securities to be

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Equity compensation plans approved by security holders

(1)(2)  

Equity compensation plans not approved by security holders

On January 27, 2016, the stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”).

Under the terms of this plan, 187,500 shares of common stock are reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which may not be below 100-110% of fair market value.

The term of stock options granted may not exceed ten years.

Options issued under the 2015 Plan vest pursuant to the terms of stock option agreements with the recipients.

In the event of a change in control, certain stock awards issued under this plan may be subject to additional acceleration of vesting as may be provided in the participants’ written agreement.

The 2015 Plan expires in December 2025.

In addition to options issued under the 2015 Plan, we have issued options to purchase common stock to employees, officers, directors and consultants outside of the plan.

As of December 31, 2020, there were outstanding non-plan options to purchase 133,091 shares of common stock.

The terms of these outstanding options are substantially similar to the provisions of the 2015 Plan and options issued thereunder.

In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately.

(1)(2)  

Consists of shares of common stock issuable upon the exercise of options outstanding as of December 31, 2021 under the 2015 Plan.

Excludes employee stock purchase rights accruing under the ESPP.

Amount includes 621,744 shares of common stock available as of December 31, 2021 for future issuance under the 2015 Plan and 769,516 shares of common stock available as of December 31, 2021 for future issuance under the ESPP.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

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Pursuant to separate securities purchase agreements dated October 29, 2015 and November 11, 2015 with each of Wong Kwok Fong (Kelvin), Micron, and Giant Leap we issued and sold shares of series A-1 stock to Kelvin and shares of series B-1 stock to Micron and Giant Leap, which were subsequently converted into shares of our common stock.

The forgoing agreements contain a standstill provision (the “Standstill”) which prohibits each of these investors either alone or together with any other person, from acquiring additional shares of our common stock or any of our assets, soliciting proxies, or seeking representation on our board of directors.

Kelvin is the Co-Chairman of the board of directors, and an executive officer.

Loans from Wong Kwok Fong (Kelvin)

Between March 2019 and February 2020, we received a series of non-interest-bearing advances from Mr.

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DePasquale serves as the Chairman of the Board and Chief Executive Officer of the Company.

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

Sales Incentive Agreement with Technology Transfer Institute ( “

On March 25, 2020, we entered into a sales incentive agreement TTI.

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In no event will we be obligated to issue more than 250,000 shares of common stock or warrants to purchase more than 62,500 shares of common stock pursuant to this agreement.

Manny Alia, a member of our board of directors, served as the Chief Executive Officer of TTI until August 12, 2020.

Emmanual Alia, a member of our board of directors, served as the Chief Executive Officer of TTI until August 12, 2020.

Director Independence

As required under the NASDAQ Marketplace Rules, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the board of directors.

Our board considered certain relationships between our directors and us when determining each director’s status as an “independent director” under Rule 5605(a)(2) of the NASDAQ Marketplace Rules.

Based upon such definition and SEC regulations, we have determined that Robert Michel, Pieter Knook, Emmanuel Alia, Thomas Bush, III, and Thomas Gilley are “independent” under NASDAQ standards.

As required under the NASDAQ Marketplace Rules, a majority of the members of a listed company’s board of directors must qualify as “independent,”

as affirmatively determined by the board of directors.

Our board considered certain relationships between our directors and us when determining each director’s status as an “independent director”

under Rule 5605(a)(2) of the NASDAQ Marketplace Rules.

Based upon such definition and SEC regulations, we have determined that Robert Michel, Pieter Knook, Emmanual Alia, Thomas Bush, III, and Thomas Gilley are “independent”

under NASDAQ standards. 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

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

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

(“RMSBG”) for the audit of our annual consolidated financial statements for the years ended December 31, 2021 and 2020:

Audit-Related Fees

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.

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.

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

Audit Committee Pre-Approval Procedures

The audit committee of our board of directors consists of Robert J.

Michel (Chairman), Pieter Knook, and Emmanuel Alia.

Michel (Chairman), Pieter Knook, and Emmanual Alia.

The audit committee approves the engagement of our independent auditors to render audit and non-audit services before they are engaged.

All of the fees for 2020 and 2019 shown above were pre-approved by the audit committee.

All of the fees for 2021 and 2020 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.

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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.

(a) The following documents are filed as part of this Report.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this Report.

Portions of Item 15 are submitted as separate sections of this Report:

(1) Financial statements filed as part of this Report:

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as at December 31, 2020 and 2019

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

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

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

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

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

(1)  Financial statements filed as part of this Report:

Report of Independent Registered Public Accounting Firm ( Rotenberg Meril Solomon Bertiger & Guttilla, P.C.

, Saddle Brook, NJ , PCAOB ID:

Consolidated Balance Sheets as at December 31, 2021 and 2020

Consolidated Statements of Operations—Years ended December 31, 2021 and 2020

Consolidated Statements of Stockholders’ Equity (Deficit)—Years ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows—Years ended December 31, 2021 and 2020

Notes to Consolidated Financial Statements—December 31, 2021 and 2020

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

FORM 10-K SUMMARY

FINANCIAL STATEMENTS

The following financial statements of BIO-key International, Inc.

are included herein at the indicated page numbers:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as at December 31, 2020 and 2019

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

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

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

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

The following financial statements of BIO-key International, Inc.

are included herein at the indicated page numbers:

Report of Independent Registered Public Accounting Firm (Rotenberg Meril Solomon Bertiger & Guttilla, P.C., Saddle Brook, NJ, PCAOB ID:361

Consolidated Balance Sheets as at December 31, 2021 and 2020

Consolidated Statements of Operations—Years ended December 31, 2021 and 2020

Consolidated Statements of Stockholders’ Equity (Deficit) —Years ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows—Years ended December 31, 2021 and 2020

Notes to the Consolidated Financial Statements—December 31, 2021 and 2020

Report of Independent Registered Public Accounting Firm

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We have audited the accompanying consolidated balance sheets of BIO-key International, Inc.

and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”).

and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’

equity (deficit) and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

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Our responsibility is to express an opinion on these financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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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.

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The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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

Revenue Recognition –

Refer to Notes A and B of the consolidated financial statements

Description of the Matter

The Company’s revenues are generated pursuant to written contractual arrangements to provide software licenses and/or hardware and to provide related maintenance and support services or professional services.

The Company’s performance obligations are either satisfied at a point in time when the customer obtains control of the hardware or is granted the software license or satisfied over time for maintenance revenue over the contractual period.

Software licenses may be sold as perpetual licenses or subscription licenses.

Contracts may include multiple performance obligations.

Significant judgment is exercised by the Company in determining revenue recognition for these contractual arrangements, and includes the following:

Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services.

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Our audit procedures included:

We obtained an understanding of the Company’s revenue recognition process including the various product and service offerings;

We reviewed management’s assessment of the terms and conditions of contracts with customers which included an analysis of the distinct performance obligations and a review of the conclusion as to whether revenue from such performance obligations should be recognized over time or at a point in time;

We obtained an understanding of the Company’s revenue recognition process including the various product and service offerings;

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

o Obtained and read customer sales orders and/or sales invoices and other documents that are part of the agreement.

o Tested management’s process for identifying distinct performance obligation(s) in the contract;

o Tested the allocation between software revenue and maintenance revenue including testing any carve out of maintenance from subscription based software and maintenance sales.

Obtained and read customer sales orders and/or sales invoices and other documents that are part of the agreement;

Tested management’s process for identifying distinct performance obligation(s) in the contract;

Tested the allocation between software revenue and maintenance revenue including testing any carve out of maintenance from subscription based software and maintenance sales.

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

PistolStar, Inc.

Acquisition – Refer to Note C of the consolidated financial statements

Description of the Matter

On June 30, 2020, the Company acquired PistolStar, Inc.

The total purchase price included a cash payment of $2,000,000 and the issuance of a $500,000 promissory note.

The Company accounted for the acquisition under the acquisition method of accounting for business combinations.

The promissory note component of the purchase price was adjusted to fair value of $464,000, resulting in total purchase consideration of $2,464,000.

The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values.

Management utilized the services of an outside business valuation and advisory firm to assist with determining the fair values of the purchase consideration, deferred revenue and identified intangible assets.

The fair values of the identified intangible assets and deferred revenue were estimated by the outside firm using discounted cash flow analysis including the relief-from-royalty method for proprietary software and trade names, excess earnings method for customer relationship, and cost to recreate methodology for assembled workforce, the latter of which is included with residual goodwill.

Determining the fair value of the identified intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows and the selected discount rate.

We identified the assumptions related to estimating the amount and timing of the expected future cash flows and discount rate to be a critical audit matters given the inherent judgement involved in estimating these amounts.

Performing audit procedures to evaluate the reasonableness of these estimates and assumptions require a high degree of auditor judgement and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures included:

We obtained an understanding of the Company's process to determine the fair value of the net assets acquired.

We read the stock purchase agreement;

We evaluated the reasonableness of the following:

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

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

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

/s/ ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.

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Saddle Brook, New Jersey

March 29, 2021

BIO-key International, Inc.

March 31, 2022  

BIO-key International,  

and Subsidiaries

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Cash and cash equivalents

$ 7,754,046  

$ 16,993,096  

Accounts receivable, net

970,626  

548,049  

Due from factor

Note receivable

49,500  

60,453  

Note receivable, net of allowance

82,000  

295,000  

4,940,660  

330,947  

Prepaid expenses and other

Investment – debt security

216,041  

201,507  

Investment –

debt security

512,821  

Total current assets

14,012,873  

18,941,873  

Resalable software license rights

48,752  

58,882  

Investment –

debt security, net

452,821  

Equipment and leasehold improvements, net

69,168  

81,793  

Capitalized contract costs, net

249,012  

165,315  

Deposits and other assets

Note receivable, net of allowance

113,000  

Operating lease right-of-use assets

254,100  

487,325  

Intangible assets, net

1,298,077  

1,514,146  

1,262,526  

Total non-current assets

3,756,168  

3,578,699  

$ 17,769,041  

$ 22,520,572  

Accounts payable

Loans payable – related parties

$ 427,772  

$ 244,158  

Accrued liabilities

Convertible notes payable, net of debt discount and debt issuance costs

Note payable – PistolStar acquisition, net of debt discount

828,997  

508,487  

Note payable –

PistolStar acquisition, net of debt discount

232,000  

Deferred revenue - current

565,355  

657,349  

Operating lease liabilities, current portion

177,188  

234,309  

Total current liabilities

Deferred revenue – long term

1,999,312  

1,876,303  

Deferred revenue, net of current portion

67,300  

44,987  

Operating lease liabilities, net of current portion

86,974  

264,163  

Total non-current liabilities

154,274  

309,150  

TOTAL LIABILITIES

STOCKHOLDERS ’ EQUITY (DEFICIT)

Common stock — authorized, 170,000,000 shares;

2,153,586  

2,185,453  

STOCKHOLDERS ’

Common stock —

authorized, 170,000,000 shares;

issued and outstanding;

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Additional paid-in capital

120,190,139  

119,844,026  

Accumulated deficit

TOTAL STOCKHOLDERS ’ EQUITY (DEFICIT)

TOTAL LIABILITIES AND STOCKHOLDERS ’ EQUITY (DEFICIT)

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

The accompanying notes are an integral part of these statements.

BIO-key International, Inc.

( 104,575,470 )

( 99,509,689 )

TOTAL STOCKHOLDERS ’

15,615,455  

20,335,119  

TOTAL LIABILITIES AND STOCKHOLDERS ’

$ 17,769,041  

$ 22,520,572  

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

The accompanying notes are an integral part of these statements.

BIO-key International,  

and Subsidiaries

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Total costs and other expenses

Gross Profit (Loss)

Operating expenses

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Research, development and engineering

Total operating expenses before impairment

Impairment of resalable software license rights

Total operating expenses

Operating loss

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Interest income

Government grant – Paycheck Protection Program

Foreign currency loss

Investment-debt security reserve

Government grant –

Paycheck Protection Program

Interest expense

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Basic and Diluted

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

The accompanying notes are an integral part of these statements.

BIO-key International, Inc.

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

The accompanying notes are an integral part of these statements.

BIO-key International,  

and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY (DEFICIT)

Balance as of December 31, 2018

Issuance of common stock for directors’ fees

Issuance of common stock for commitment fees net of adjustments

Warrant debt discount valuation

Legal and commitment fees

Share-based compensation

CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’

EQUITY (DEFICIT)

Balance as of December 31, 2019

Issuance of common stock for directors’ fees

Issuance of common stock for directors’

Issuance of common stock pursuant to securities purchase agreements

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Balance as of December, 2020

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

The accompanying notes are an integral part of these statements.

BIO-key International, Inc.

Issuance of common stock for directors’

Issuance of restricted common stock to employees

Forfeiture of restricted stock

 (1,250)

Issuance of common stock for Employee stock purchase plan

Share based compensation for employee stock purchase plan

Share-based compensation

Balance as of December, 2021

( 104,575,470

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

The accompanying notes are an integral part of these statements.

BIO-key International,  

and Subsidiaries

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Adjustments to reconcile net loss to cash used for operating activities:

Bad debt expense

Amortization of intangible assets and write-off

Amortization of resalable software license rights

Impairment of resalable software license rights

Loss on foreign currency

Reserve for investment security

Allowance for note receivable

Allowance for doubtful account

Amortization of debt discount

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CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures

Issuance of note receivable

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Purchase of debt security

Cash paid for patents

Capital expenditures

Net cash used for investing activities

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Proceeds from issuance of convertible notes

Proceeds from Employee Stock Purchase Plan

Repayment of convertible notes

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Net repayments of loans payable to related parties

Net cash provided by financing activities

Net cash (used in) provided by financing activities

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

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CASH AND CASH EQUIVALENTS, END OF YEAR

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements.

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

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Deemed dividends related to down-round features

Debt issuance cost allocated to equity

Debt discount issued with convertible note

The accompanying notes are an integral part of these statements.

BIO-key International, Inc.

The accompanying notes are an integral part of these statements.

BIO-key International,  

and Subsidiaries

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020 and 2019

NOTE A — THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

December  

31, 2021 and 2020

NOTE A —

THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

The Company, founded in 1993, develops and markets proprietary fingerprint identification biometric technology and software solutions enterprise-ready identity access management solutions to commercial, government and education customers throughout the United States and internationally.

The Company was a pioneer in developing automated, finger identification technology that supplements or compliments other methods of identification and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, PKI, credit cards, passports, driver’s licenses, OTP or other form of possession or knowledge-based credentialing.

Additionally, advanced BIO-key® technology has been, and is, used to improve both the accuracy and speed of competing finger-based biometrics.

Additionally, advanced BIO-key®

technology has been, and is, used to improve both the accuracy and speed of competing finger-based biometrics.

Going Concern and Basis of Presentation

We have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables.

We currently require approximately $735,000 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation.

During 2020, we generated approximately $2,837,000 of revenue, which is below our average monthly requirements.

During 2020, we raised approximately $24,000,000 from financing activities and at December 31, 2020 had approximately $17,000,000 in cash.

As of the date of this report, the Company has enough cash for twelve to eighteen months of operations, and therefore, there is no longer uncertainty in our going concern status.

The Company has 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.

The Company currently requires approximately $ 735,000 per month to conduct operations, a monthly amount that it has been unable to consistently achieve through revenue generation.

During 2021, the Company generated approximately $5,114,000 of revenue, which is below its average monthly requirements.

During 2020, the Company raised approximately $24,000,000 from financing activities and at December 31, 2021 had approximately $7,800,000 in cash.

With the addition of the Swivel Secure Europe, SA (see Note W), the Company expects $1,000,000 of additional cash flow, based on Swivel Secure’s current recurring revenue and expenses, to provide additional operating income.

As of the date of this report, the Company has enough cash and receivables for twelve months of operations.

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

All share figures and results are reflected on a post-split basis.

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.

Summary of Significant Accounting Policies

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

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.

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. 

Use of Estimates

Our consolidated financial statements are prepared in accordance with GAAP as set forth in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) and consider the various staff accounting bulletins and other applicable guidance issued by the U.S.

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).

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To the extent there are material differences between these estimates, judgments or assumptions and actual results, its consolidated financial statements will be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application.

There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application.

There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result.

Revenue Recognition

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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

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Software licenses

Software license revenue consist of fees for perpetual and subscription licenses for one or more of the Company’s biometric fingerprint solutions or identity access management solutions.

Revenue is recognized at a point in time once the software is available to the customer for download.

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Support and maintenance revenue consists of fees for unspecified upgrades, telephone assistance and bug fixes.

The Company satisfies its support and maintenance performance obligation by providing “stand-ready” assistance as required over the contract period.

The Company records deferred revenue (contract liability) at time of prepayment until the contracts term occurs.

The Company satisfies its support and maintenance performance obligation by providing “stand-ready”

assistance as required over the contract period.

The Company records deferred revenue (contract liability) at time of prepayment until the contracts term occurs.

Revenue is recognized over time on a ratable basis over the contract term.

Support and maintenance contracts are up to one to five years in length and are generally invoiced in advance at the beginning of the term.

Support and maintenance 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.

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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.

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The standalone selling prices are determined based on overall pricing objectives, taking into consideration market conditions and other factors, including the value of the contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users within the contracts.

The Company considered several factors in determining that control transfers to the customer upon shipment of hardware and availability of download of software.

These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership.

Accounts receivable from customers are typically due within 30 days of invoicing.

The Company does not record a reserve for product returns or warranties as amounts are deemed immaterial based on historical experience.

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Amortization expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Deferred Revenue

Deferred revenue includes customer advances and amounts that have been paid by customer for which the contractual maintenance terms have not yet occurred.

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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.

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.

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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.

The annual goodwill impairment test will be performed as of 

December 31st  of each year.

To date, the Company has not identified any impairment to goodwill.

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Cash Equivalents

Cash equivalents consist of liquid investments with original maturities of three months or less.

At December 31, 2020 and 2019, cash equivalents consisted of a money market account.

Cash equivalents consist of liquid investments with original maturities of three months or less. At December 31, 2021 and 2020, cash equivalents consisted of a money market account.

Accounts Receivable

Accounts receivable are carried at original amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.

Management determines the allowance for doubtful receivables by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions.

Accounts receivable are written off when deemed uncollectible.

As a result of the payment delays for a large customer, the Company has reserved $1,720,000 at December 31, 2020 and 2019, which represents 100% of the remaining balance owed under the contract.

Recoveries of accounts receivable previously written off are recorded when received.

The Company made a license sale to a Chinese reseller in December 2018.

Revenue was recognized in accordance with ASC 606 in the amount of $1.1 million in 2018.

As of December 31, 2019, the second payment for $555,555 was still outstanding and payable.

The Company wrote off directly to bad debt expense $555,555 that was promised to be paid in March 2019, but not received.

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

Accounts receivable - current

Accounts receivable - non current

Allowance for doubtful accounts - current

Allowance for doubtful accounts - non current

Accounts receivable, net of allowances for doubtful accounts

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

Year Ended December 31, 2020

Allowance for Doubtful Accounts

Year Ended December 31, 2019

Accounts receivable at December 31, 2021 and 2020 consisted of the following: 

Accounts receivable

$ 1,234,411  

$ 561,834  

Loss on foreign currency  

( 50,000 )  

Allowance for doubtful accounts

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

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.

Accounts receivable, net of allowances for doubtful accounts

$ 970,626  

$ 548,049  

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

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.

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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.

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.

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If these estimates or related assumptions change in the future, the Company may be required to record impairment charges.

Intangible assets with determinable lives are amortized over their estimated useful lives, based upon the pattern in which the expected benefits will be realized, or on a straight-line basis, whichever is greater.

The Company recorded an impairment charge in 2019 with respect to the FingerQ Resalable Software License Rights.

Refer to Note I – Resalable License Rights for additional information.

Advertising Expense

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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.

Earnings Per Share of Common Stock ( “ EPS ” )

The Company’s EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding during the reporting period.

Diluted EPS includes the effect from potential issuances of common stock, such as stock issuable pursuant to the conversion of preferred stock, exercise of stock options and warrants, when the effect of their inclusion is dilutive.

All costs associated with research and development are expensed as incurred. 

Earnings Per Share of Common Stock ( “

The Company’s EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding during the reporting period.

Diluted EPS includes the effect from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options and warrants, when the effect of their inclusion is dilutive.

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 Company accounts for share based compensation in accordance with the provisions of ASC 718 - 10, “Compensation —

Stock Compensation,”

which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest.

The majority of its share-based compensation arrangements vest over either a three or four year vesting schedule.

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The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of highly subjective assumptions.

These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of its common stock price over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield.

Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized as an expense in the consolidated statements of operations.

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Options and warrants to outsiders are accounted for under ASC 718.

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

Selling, general and administrative

$ 269,368  

$ 705,971  

Research, development and engineering

45,347  

86,124  

$ 314,715  

$ 792,095  

Valuation Assumptions for Stock Options

For 2020 and 2019, 28,440 and 30,167 stock options were granted, respectively.

2020, 28,440 stock options were granted.

No options were granted in 2021.

The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

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Weighted average Volatility of stock price

The stock volatility for each grant is determined based on the review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected option term.

The expected term was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla” options;

The expected term was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla”

and the risk-free rate is based on the U.S.

Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

Derivative Liabilities

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Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception.

Under ASU 2017-11, down round features do not meet the criteria for derivative accounting and no liability is to be recorded until an actual issuance of securities triggers the down-round feature.

Under ASU 2017 - 11, down round features do not meet the criteria for derivative accounting and no liability is to be recorded until an actual issuance of securities triggers the down-round feature.

Prior to these provisions, the liabilities were recorded without the actual issuance of the securities triggering the down-round feature.

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Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized.

The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.

Because of the Company’s historical performance and estimated future taxable income, a full valuation allowance has been established.

The Company accounts for uncertain tax provisions in accordance with ASC 740-10-05, “Accounting for Uncertainty in Income Taxes.” The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.

The evaluation, as prescribed by ASC 740 - 10, “Income Taxes,”

includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.

Because of the Company’s historical performance and estimated future taxable income, a full valuation allowance has been established.

The Company accounts for uncertain tax provisions in accordance with ASC 740 - 10 - 05, “Accounting for Uncertainty in Income Taxes.”

The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.

The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

In accordance with ASC 842, Lease s (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.

In accordance with ASC 842,  

Lease s (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.

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 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.

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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.

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.

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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.

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The Company is currently assessing the impact ASU 2016 - 13 will have on its consolidated financial statements.

Effective January 1, 2021, the Company adopted ASU 2019 - 12, Simplifying the Accounting for Income Taxes (“ASU 2019 - 12”

) to reduce the cost and complexity in accounting for income taxes.

ASU 2019 - 12 removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences.

ASU 2019 - 12 also amends other aspects of the guidance to help simplify and promote consistent application of U.S.

Most amendments within ASU 2019 - 12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.

The adoption of ASU 2019 - 12 did not have a significant impact on the Company’s consolidated financial statements.

Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.

NOTE B — REVENUE FROM CONTRACTS WITH CUSTOMERS

NOTE B —

REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Revenue

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

The following table summarizes revenue from contracts with customers for the years ended December 31, 2021 and 2020:

Total Revenues

* EMEA – Europe, Middle East, Africa

Revenue recognized during the year ended December 31, 2020 from amounts included in deferred revenue at the beginning of the period was approximately $290,000.

* EMESA –

Europe, Middle East, South America

Revenue recognized during the year ended December 31, 2021 

from amounts included in deferred revenue at the beginning of the year was approximately $ 529,000 .

Revenue recognized during the year ended December 31, 2020 from amounts included in deferred revenue at the beginning of the year was approximately $ 290,000 .

The Company did not recognize any revenue from performance obligations satisfied in prior periods.

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ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as at December 31, 2021.

The guidance provides certain practical expedients that limit this requirement, which the Company’s contracts meet as follows:

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

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

NOTE C — PISTOLSTAR, INC.

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

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

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

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

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 —

PISTOLSTAR, INC.

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

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

The acquisition of PistolStar was accounted for as a business combination 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 final purchase price allocation:

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Total cash paid, net of acquired cash

$ 2,000,000  

Present value of 4 % Promissory note

464,000  

Total purchase price consideration

$ 2,464,000  

Fair value of assets acquired and liabilities assumed:

Cash and cash equivalents

$ 100,747  

Accounts receivable

184,792  

Prepaid expenses and other current assets

36,467  

Intangible assets

1,480,000  

1,262,526  

Total assets acquired

3,074,017  

Accrued expenses and other current liabilities

Accrued payroll

19,279  

Deferred revenue

590,000  

Total fair value of assets acquired and liabilities assumed

The promissory note, which was issued to the previous owner of PistolStar, carries interest at 4% per annum and is payable in four installments over the 12-month period following the closing.

$ 2,464,000  

The promissory note accrued interest at 4 % per annum and was payable in four installments over the 12 -month period following the closing.

The balance of the note at December 31, 2020 was $ 232,000 , net of the unamortized debt discount.

On January 21, 2021, the Company paid the $ 250,000 balance due on the note.

In the year ended December 31, 2020, acquisition-related expenses were immaterial.

Acquisition-related expenses have been included primarily in general and administrative expenses in the consolidated statements of operations.

The operating results of PistolStar have been included in the consolidated statements of operations beginning on July 1, 2020.

Revenue from PistolStar for the period from July 1, 2020 through December 31, 2020 totaled $1,064,384.

The income from PistolStar for the period from July 1, 2020 through December 31, 2020 was $202,558.

The 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.

The significant intangible assets identified in the purchase price allocation discussed above include the trade name, proprietary software, and customer relationships.

To value the trade name and proprietary software, the Company utilized the Relief from Royalty Method, which quantifies the cost savings associated with asset ownership via a discounted cashflow analysis.

To value the customer relationships, the Company utilized the Excess Earnings Method, which isolates the value of the specific intangible asset by discounting its income stream to present value.

The fair value of the assets acquired and liabilities assumed reflected in the tables above is less than the purchase price, resulting in the recognition of goodwill.

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Total identifiable intangible assets

NOTE D — FACTORING

NOTE D —

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

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Factored accounts receivable

The Company entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to October 31, 2021.

Pursuant to the terms of the arrangement, the Company, from time to time, sells to the Factor a minimum of $150,000 per quarter of certain of its accounts receivable balances on a non-recourse basis for credit approved accounts.

The Factor remits 35% of the foreign and 75% of the domestic accounts receivable balance to the Company (the “Advance Amount”), with the remaining balance, less fees, forwarded to the Company once the Factor collects the full accounts receivable balance from the customer.

The Company entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to 

October 31, 

 Pursuant to the terms of the arrangement, the Company, from time to time, sells to the Factor a minimum of $ 150,000  per quarter of certain of its accounts receivable balances on a non-recourse basis for credit approved accounts.

The Factor remits 

35 % of the foreign and 

75 % of the domestic accounts receivable balance to the Company (the “Advance Amount”), with the remaining balance, less fees, forwarded to the Company once the Factor collects the full accounts receivable balance from the customer.

In addition, the Company, from time to time, receives over advances from the Factor.

Factoring fees range from 2.75% to 15% of the face value of the invoice factored and are determined by the number of days required for collection of the invoice.

Factoring fees range from 

2.75 % to 

15 % of the face value of the invoice factored and are determined by the number of days required for collection of the invoice.

The cost of factoring is included in selling, general and administrative expenses.

The cost of factoring was as follows:

Years Ended December 31,

Factoring fees

NOTE E — FAIR VALUES OF FINANCIAL INSTRUMENTS

NOTE E —

FAIR VALUES OF FINANCIAL INSTRUMENTS

Cash and cash equivalents, accounts receivable, due from factor, accounts payable and accrued liabilities are carried at, or approximate, fair value because of their short-term nature.

The carrying value of the Company’s notes and loan payables approximated fair value as the interest rates related to the financial instruments approximated market.

NOTE F — CONCENTRATION OF RISK

The carrying value of the Company’s notes and loan payables approximated fair value as the interest rates related to the financial instruments approximated market.

NOTE F —

CONCENTRATION OF RISK

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

The Company maintains its cash and cash equivalents with various financial institutions, which, at times may exceed insured limits.

The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions.

The Company was in excess of coverage of approximately $16,020,000 and $0 at December 31, 2020 and 2019, respectively.

The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company was in excess of coverage of approximately $ 7,057,000 and $ 16,020,000 at December 31, 2021 and 2020, respectively.

The Company has not incurred any losses on these accounts.

The Company extends credit to customers on an unsecured basis in the normal course of business.

The Company’s policy is to perform an analysis of the recoverability of its receivables at the end of each reporting period and to establish allowances where appropriate.

The Company analyzes historical bad debts and contract losses, customer concentrations, and customer credit-worthiness when evaluating the adequacy of the allowances.

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

During the year ended December 31, 2019, two customers accounted for 22% and 14% of total revenue, respectively.

One customer accounted for 31% of total accounts receivable, as of December 31, 2020.

Three customers accounted for 18%, 16% and 14% of total accounts receivable, respectively, as of December 31, 2019.

NOTE G — NOTE RECEIVABLE

During the third quarter 2020, the Company loaned $295,000 as an advance to Technology Transfer Institute (“TTI”) to aid in fulfilling the African contracts.

For the year ended December 31, 2021 and 2020,  

one  customer accounted for 

13 % and 18 % of total revenue, respectively.

Three customers accounted for 87 % and one customer accounted for 31 % of total accounts receivable, as of December 31, 2021 and 2020, respectively.

NOTE G —

NOTE RECEIVABLE

During the third quarter 2020, the Company loaned $ 295,000 as an advance to Technology Transfer Institute (“TTI”) to aid in fulfilling the African contracts.

The note does not bear any interest if paid within the nine ( 9 ) monthly installments beginning December 31, 2020.

The note bears a default rate of 5 %.

Currently, TTI is in the process of raising capital to repay the loan, and facilitate fulfilling the African contracts.

NOTE H — INVENTORY

Due to the ongoing delays in payment, the Company reserved $ 100,000 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.

A member of our board of directors served as Chief Executive Officer off TTI until August 12, 2020.

Note receivable

Allowance for doubtful account

Note receivable, net of allowance

Current portion, net of allowance

Noncurrent portion, net of allowance

NOTE H —

Inventory is stated at the lower of cost, determined on a first in, first out basis, or realizable value, and consists primarily of fabricated assemblies and finished goods.

Inventory is comprised of the following as of December 31:

Finished goods

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Total inventory

NOTE I — RESALABLE SOFTWARE LICENSES RIGHTS

On November 11, 2015, the Company entered into a license agreement for the rights to all software and documentation regarding the technology currently known as or offered under the FingerQ name.

The license agreement grants the Company the exclusive right to reproduce, create derivative works and distribute copies of the FingerQ software and documentation, create new FingerQ related products, and grant sub-licenses of the licensed technology to end users.

The license rights have been granted to the Company in perpetuity, with a stated number of end-user resale sub-licenses allowed under the contract for a total of $12,000,000.

The Company initially determined the software license rights to be a finite lived intangible asset and estimated that the software license rights shall be economically used over a 10-year period, with a weighting towards the beginning years of that time frame.

During the fourth quarter of 2019, the Company re-evaluated the recoverability of the carrying amount of the balance of license rights and concluded that there were no significant undiscounted cash flows expected to be generated from the future sale of the license rights.

Accordingly, an impairment charge of $6,957,516 was recorded in the fourth quarter of 2019, which reduced the carrying amount of the FingerQ license rights to zero.

A total of $843,888 (prior to the impairment charge) was expensed during 2019.

On December 31, 2015, the Company purchased third-party software licenses in the amount of $180,000 in anticipation of a large pending deployment that has yet to materialize.

The Company is amortizing the total cost over the same methodology described above with the greater of the two approaches being the actual unit cost per license sold.

NOTE I —

RESALABLE SOFTWARE LICENSES  

On December 31, 2015, the Company purchased third -party software licenses in the amount of $ 180,000  in anticipation of a large pending deployment that has yet to materialize.

The Company is amortizing the total cost at the greater of the actual unit cost per license sold or straight line amortization over 10 years.

A total of $ 10,130 and $ 14,920 was charged to cost of sales during the years ended December 31, 2021 and 2020, respectively.

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

Estimated minimum amortization expense based on straight line amortization of the software license rights for each of the next five years and thereafter approximates the following:

Estimated minimum amortization expense based on straight line amortization of the software license rights over the remaining useful life approximates the following:

Years ending December 31

NOTE J — INVESTMENT IN DEBT SECURITY

NOTE J —

INVESTMENT IN DEBT SECURITY

During 2019, the Company purchased a 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong.

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The new Bond Certificate translated to $ 512,821 U.S.

Dollars, based on the exchange rate at the purchase date.

The Company can invest up to 20,000,000 Hong Kong dollars under the terms of the certificate, bearing interest at 5% per annum.

The investment is recorded at amortized cost which approximates fair value and is currently planned to be held to maturity.

NOTE K — EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

Dollars, based on the exchange rate at the purchase date. The Company can invest up to 20,000,000 Hong Kong dollars under the terms of the certificate, bearing interest at 5 % per annum.

The investment is recorded at amortized cost which approximates fair value was held to maturity. The Company has yet to receive the proceeds and accrued interest from the investment.

The Company has sent a legal letter of demand to confirm the status of the bond, and as such, the debt security was classified as noncurrent.

In addition, due to the delay in the receipt of the proceeds, the Company recorded a $ 60,000 reserve.

NOTE K —

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consisted of the following as of December 

Furniture and fixtures

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Amounts are recorded in selling, general, and administrative expense as well as in cost of services.

NOTE L — INTANGIBLE ASSETS

Intangible assets consisted of the following as of December 31:

NOTE L —

INTANGIBLE ASSETS

Intangible assets consisted of the following as of December 

Proprietary software

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Patents and patents pending

Aggregate amortization expense for 2020 and 2019 was $120,240 and $28,256, respectively.

Aggregate amortization expense for 2021 and 

2020 was approximately $ 216,000 and $ 120,000 , 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

NOTE M — ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of December 31:

NOTE M —

ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of December 

Compensated absences

Accrued legal and accounting fees

Franchise taxes

Employee expenses reimbursement

Sales tax payable

Factoring fees

NOTE N — RELATED PARTY TRANSACTIONS

Licensing Agreement with Subsidiaries of GSFG.

On November 11, 2015, BIO-key Hong Kong Limited, a subsidiary of the Company, entered into a license purchase agreement with certain subsidiaries of China Goldjoy Group Limited (“CGG”).

The license agreement provides for the grant of a perpetual, irrevocable, exclusive, worldwide, fully paid license to all software and documentation regarding the software code, toolkit, electronic libraries and related technology currently known as or offered under the name, together with perpetual license under all related patents held by the licensors and any other intellectual property rights owned by the licensors related to the forgoing software.

The Company made a one-time payment of $12,000,000 to the licensors.

Yao Jianhu is the chairman and chief executive officer of CGG and served as a director of the Company until August 6, 2020.

Wong Kwok Fong served as the chief technology officer of CGG through October 2016 and is principal stockholder, a director and executive officer of the Company.

During the fourth quarter of 2019, the Company recorded an impairment charge of approximately $7 million, bringing the carrying value of FingerQ license rights to zero.

Refer to Note I - Resalable License Rights for additional information.

NOTE N —

RELATED PARTY TRANSACTIONS

Non-Interest-Bearing Advances

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The balance of the advances as at December 31, 2019 was $ 74,737 and $ 114,000 , respectively, which were both repaid in full during 2020.

NOTE O — CONVERTIBLE NOTES PAYABLE

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

Securities Purchase Agreement dated July 10, 2019

January 2020 Note

February 2020 Note

May 2020 Note

June 2020 Note

Convertible notes payable, net

NOTE O —

CONVERTIBLE NOTES PAYABLE

There was no balance outstanding for convertible notes payable as of December 31, 2021 and 2020.

Details for Notes that were either converted or redeemed during the 2020 fiscal year were as follows: 

Securities Purchase Agreement dated July 10, 2019

On July 10, 2019, the Company issued a $3,060,000 principal amount senior secured convertible note (the “Original Note”).

At closing, a total of $2,550,000 was funded.

The original issue discount was $510,000.

On July 10, 2019, the Company issued a $ 3,060,000 principal amount senior secured convertible note (the “Original Note”).

At closing, a total of $ 2,550,000 was funded. The original issue discount was $ 510,000 .

The principal amount due of the Original Note was due and payable as follows:

$ 918,000 was due 180 days after funding, $ 1,071,000 was due 270 days after funding, and the remaining balance due 12 months after the date of funding.

The Original Note was secured by a lien on substantially all of the Company’s assets and properties and was convertible at the option of the Investor in shares of common stock at a fixed conversion price of $12.00 per share.

In connection with the closing of the Original Note, the Company issued a five -year warrant to the Investor to purchase 250,000 shares of common stock at a fixed exercise price of $ 12.00 per share, paid a $ 50,000 commitment fee, and issued 33,334 shares of common stock in payment of a $ 400,000 due diligence fee.

1 unchanged sentence

The valuation of the warrant of $ 595,662 was recorded to debt discount and was amortized over the life of the Original Note.

The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital based on the respective ratio of the valuation of the note and warrant.

Amortization of the debt issuance costs and debt discount are included in interest expense on the statement of operations.

On March 12, 2020, the Company issued a $3,789,000 principal amount senior secured convertible note (the “Amended Note”), which replaced the Original Note and included an additional $729,000 in interest due to the debt restructuring.

The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount are included in interest expense on the statement of operations.

On March 12, 2020, the Company issued a $ 3,789,000 principal amount senior secured convertible note (the “Amended Note”), which replaced the Original Note and included an additional $ 729,000 in interest due to the debt restructuring.

The principal amount was due and payable in full on April 13, 2020.

The Amended Note was secured by a lien on substantially all of the Company’s assets and properties and was convertible at the option of the Investor into shares of common stock at a fixed conversion price of $5.20 per share.

The Company accounted for the transaction as a debt extinguishment and, therefore, the balance of the fees and unamortized discount associated with the Original Note were written off and included as loss on extinguishment of debt.

On the day of the amendment, the closing stock price for the day was $ 6.08 , which resulted in a beneficial conversion of $ 0.88 per share outstanding or $ 641,215 to be amortized to interest expense over the term of the Amended Note, as adjusted for any debt conversion.

On April 12, 2020, and May 6, 2020, the Company entered into amendments (the “Amendments”) to the Amended Note.

The Amendments extended the maturity date to June 12, 2020 and extended the Investor’s right to convert the Amended Note into shares of the Company’s common stock at a price of $5.20 per share through June 12, 2020.

On April 12, 2020 and May 6, 2020, the Company entered into amendments (the “Amendments”) to the Amended Note.

All other provisions of the Amended Note remained the same.

Until the second anniversary of the closing, the investor had the right to purchase up to 20% of the securities the Company issues in any future private placement, subject to certain exceptions for, among other things, strategic investments.

On June 10, 2020, the investor converted the last of the remaining principal into shares of common stock for payment in full, and the remaining principal balance was $ 0 .

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

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

Principal amount

conversion of principal into shares of common stock

Net Principal amount

unamortized debt discount and beneficial conversion feature

unamortized debt issuance costs

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

The Amended Note amount of $ 3,789,000 was converted into 728,654 shares of common stock in 2020.

January 2020 Note

On January 13, 2020, the Company issued a $157,000 principal amount secured 10% convertible redeemable note (the “January 2020 Note”) to an institutional investor with a maturity date of June 13, 2020 which was convertible into common stock at a conversion price of $12.00 per share.

The January 2020 Note was redeemable at any time by payment of a premium to the principal balance starting at 10% and increasing to 30%.

On January 13, 2020, the Company issued a $ 157,000 principal amount secured 10 % convertible redeemable note (the “January 2020 Note”) to an institutional investor with a maturity date of June 13, 2020 which was convertible into common stock at a conversion price of $ 12.00 per share.

At the closing, the Company agreed to issue 81,250 shares of common stock in lieu of payment of a $ 75,000 commitment fee which was reduced to 6,250 shares as the January 2020 Note was repaid prior to the maturity date.

The Company paid $7,000 of legal fees for the January 2020 Note.

On June 12, 2020, the January 2020 Note was paid in full by payment of $ 211,984 .

The 75,000 shares were returned to the Company in July 2020.

February 2020 Note

On February 13, 2020, the Company issued a $126,000 principal amount secured 10% convertible redeemable note (the “February 2020 Note”) to an institutional investor with a maturity date of July 13, 2020 which was convertible into common stock at a conversion price of $9.20 per share.

The February 2020 Note was redeemable at any time by payment of a premium to the principal balance starting at 10% and increasing to 30%.

On February 13, 2020, the Company issued a $ 126,000 principal amount secured 10 % convertible redeemable note (the “February 2020 Note”) to an institutional investor with a maturity date of July 13, 2020 which was convertible into common stock at a conversion price of $ 9.20 per share. 

On March 12, 2020, the Original Note was amended to reduce the conversion price to $ 5.20 per share, which reduced the conversion price of the February Note to $5.20 and resulted in a deemed dividend of $ 70,998 . The February 2020 Note was redeemable at any time by payment of a premium to the principal balance starting at 10 % and increasing to 30 %.  

The Company issued 6,250 shares of common stock to the investor in lieu of payment of a $ 57,500 commitment fee.

The Company paid $6,000 of legal fees in connection with the issuance of February 2020 Note.

The Company paid $ 6,000 of legal fees in connection with the issuance of February 2020 Note. 

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

May 2020 Note

On May 6, 2020, the Company issued a $2,415,000 principal amount senior secured convertible note (the “May 2020 Note”).

At closing, $2,100,000 was funded.

The principal amount was due and payable in five equal monthly installments of $268,333 beginning seven months after the funding date with the remaining balance due on the twelfth month after the date of funding.

On May 6, 2020, the Company issued a $ 2,415,000 principal amount senior secured convertible note (the “May 2020 Note”).

At closing, $ 2,100,000 was funded. The principal amount was due and payable in five equal monthly installments of $ 268,333 beginning seven months after the funding date with the remaining balance due on the twelfth month after the date of funding.

The May 2020 Note was convertible at a fixed convertible price of $ 9.28 per share.

In connection with the issuance of the May 2020 Note, the Company paid a $133,333 due diligence fee by issuing 14,368 shares of common stock to the Investor priced at $9.28 per share.

In connection with the issuance of the May 2020 Note, the Company paid a $ 133,333 due diligence fee by issuing 14,368 shares of common stock to the Investor priced at $ 9.28 per share.

The Company also paid a placement fee of 7 % of the gross proceeds to a placement agent.

In connection with the closing of the May 2020 Note, the Company issued a five-year warrant to the investor to purchase 237,500 shares of common stock at a fixed exercise price of $9.28 and was immediately exercisable.

In connection with the closing of the May 2020 Note, the Company issued a five -year warrant to the investor to purchase 

237,500 shares of common stock at a fixed exercise price of $ 9.28 and was immediately exercisable.

The valuation of the warrant of $ 876,937 was recorded to debt discount and was amortized over the life of the May 2020 Note.

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

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

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

June 2020 Note

On June 29, 2020, the Company issued a $1,811,250 principal amount senior secured convertible note (the “June 2020 Note”).

At closing, $1,575,000 was funded.

The principal amount was due and payable in nine equal monthly installments of $201,250 beginning four months after the funding date with the remaining balance due on the twelfth month after the date of funding.

On June 29, 2020, the Company issued a $ 1,811,250 principal amount senior secured convertible note (the “June 2020 Note”). 

At closing, $ 1,575,000 was funded. The principal amount was due and payable in nine equal monthly installments of $ 201,250 beginning four months after the funding date with the remaining balance due on the twelfth month after the date of funding.

The June 2020 Note was convertible at a fixed convertible price of $ 9.28 per share.

2 unchanged sentences

In connection with the closing of the June 2020 Note, the Company issued a five -year warrant to the Investor to purchase 178,125 shares of common stock at a fixed exercise price of $ 9.28 per share and was immediately exercisable.

The valuation of the warrant of $511,402 was recorded to debt discount and was amortized over the life of the June 2020 Note.

The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital based on the respective ratio of the valuation of the note and warrant.

Amortization of the debt issuance costs and debt discount are included in interest expense on the statement of operations.

The valuation of the warrant of $ 511,402 was recorded to debt discount and is was amortized over the life of the June 2020 Note.

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

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

NOTE P — LEASES

The Company’s leases office space in New Jersey, Hong Kong, Minnesota, and New Hampshire with lease termination dates of 2023, 2022, 2022, and 2022, respectively.

NOTE P —

The Company’s leases office space in New Jersey under a lease terminating in 2023 and Hong Kong, Minnesota, and New Hampshire with lease termination dates in 2022.

The property leased in China is paid monthly as used, without a formal agreement.

The leases include non-lease components with variable payments.

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Total operating lease liabilities

Weighted average remaining lease term (in years) – operating leases

Weighted average discount rate – operating leases

Weighted average remaining lease term (in years) –

operating leases

Weighted average discount rate –

operating leases

Supplemental cash flow information related to leases were as follows:

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imputed interest

NOTE Q — COMMITMENTS AND CONTINGENCIES

NOTE Q —

COMMITMENTS AND CONTINGENCIES

Sales Incentive Agreement with TTI

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

Terms of the agreement include the following:

The term of the agreement is one year unless notice to terminate (as defined) is given.

The agreement will be automatically extended for additional one-year terms unless terminated.

For each $5,000,000 in revenue (up to a maximum of $20,000,000) TTI generates during the first year that results in net income of at least 20% (as defined), the Company will pay TTI a sales incentive fee of $500,000 payable by the issuance of 62,500 shares of common stock.

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

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

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

The original term of the agreement was one year and has been automatically extended for an additional one -year term.

For each $ 5,000,000 in revenue (up to a maximum of $ 20,000,000 ) the Company generates from contracts sourced by TTI which are executed during the original term and generate net income of at least 20 % (as defined) within eighteen months after the date such contract is executed, the Company will pay TTI a sales incentive fee of $ 500,000 payable by the issuance of 62,500 shares of common stock.

In the event that the Company generates revenue in excess of $20,000,000 from contracts sourced by TTI which are executed during the original term and generate net income of at least 20% (as defined) within eighteen months after the date such contract is executed, the Company will issue TTI a five -year warrant to purchase 12,500 shares of Common Stock at an exercise price of $ 12.00 per share for each $1,000,000 of revenue in excess of $20,000,000 (up to a maximum of $ 25,000,000 ).

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

There has been no revenue generated nor sales incentive fees paid during the periods ended December 31, 2021 and 2020.

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

As of December 31, 2021, the Company was not a party to any pending lawsuits.

NOTE R — EQUITY

NOTE R —

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.

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

The number of authorized shares and the par value of the Company's common stock and preferred stock were not affected by the reverse stock split.

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.

Effective November 20, 2020, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1 -for- 8 . The number of authorized shares and the par value of the Company's common stock and preferred stock were not affected by the reverse stock split.

Stockholders who otherwise would be entitled to receive fractional shares were rounded up to the nearest whole share.

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Issuances of Common Stock

On June 18, 2021, the stockholders approved the Employee Stock Purchase Plan.

Under the terms of this plan, 789,000 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.

On December 31, 2021, 19,484 shares were issued to employees which resulted in a $ 10,680 non-cash compensation expense for the Company.

On July 23, 2020, the Company completed an underwritten public offering of shares of common stock and warrants resulting in net proceeds of approximately $ 22.7 million, after deducting underwriting discounts and commissions and estimated offering expenses.

1 unchanged sentence

On March 30, 2020, the Company issued 121,500 shares of common stock upon exercise of warrants at $ 12.00 per share, resulting in proceeds of $ 1,458,000 to the Company.

See Note O Convertible Notes Payable for common stock issuances related to conversion of convertible notes payable and shares of common stock issued for fees in connection with the agreements during fiscal 2020 and 2019.

Issuances of Nonvested Stock

Nonvested stock consists of shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions.

See Note O Convertible Notes Payable for common stock issuances related to conversion of convertible notes payable and shares of common stock issued for fees in connection with the agreements during fiscal 2020.

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.

Nonvested stock is expensed ratably over the term of the restriction period.

Restricted stock is expensed ratably over the term of the restriction period.

The Company issued 13,125 shares of restricted common stock to certain employees of the Company and 1,250 of shares of restricted common stock were forfeited during fiscal year 2021.

These shares vest in equal annual installments over a three -year period from the date of grant and had a fair value on the date of issuance of $ 44,025 .

The Company issued 38,250 and 3,125 shares of restricted common stock in August and November of 2020, respectively to certain employees and directors of the Company.

These shares vest in equal annual installments over a three -year period from the date of grant and had a fair value on the date of issuance of $ 198,900 , and $ 11,250 , respectively.

Nonvested stock compensation for the year ended December 31, 2020 was $23,764.

Restricted stock compensation for the years ended December 31, 2021 and 2020 was $ 71,819 and $ 23,764 , respectively.

Issuances to Directors, Executive Officers & Consultants

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

Employees ’ exercise options

Employees ’

exercise options

During 2021 and 2020, no employee stock options were exercised.

Securities Purchase Agreement dated November 13, 2014:

As part of a Securities Purchase Agreement, dated November 13, 2014, by and between the Company and a number of private and institutional investors, the Company issued to certain private investors warrants to purchase 124,610 shares of common stock.

The warrants expired in November 2019.

Securities Purchase Agreement dated September 23, 2015:

On September 23, 2015, the Company issued warrants (the “2015 Warrants”) to purchase 8,681 shares of common stock in connection with the issuance of a promissory note.

The warrants were immediately exercisable at an initial exercise price of $28.80 per share and had a term of five years.

The 2015 Warrants expired in September 2020.

The 2015 Warrants had a "full ratchet" anti-dilution adjustment provision which could be triggered in the event the Company sold or granted any additional shares of common stock, options, warrants or other securities that were convertible into common stock at a price lower than $28.80 per share.

The anti-dilution was not triggered by certain “exempt issuances” which among other issuances, includes the issuance of shares of common stock, options or other securities to officers, employees, directors, consultants or service providers.

Anti-dilution features were triggered as follows:

On February 14, 2020, the February 2020 Note was issued at a conversion price of $9.20 that triggered the anti-dilution provisions included in the 2015 Warrants.

In addition, the amendments to the Original Note reduced the conversion price of the Original Note to $5.20 which also triggered the anti-dilution provision of the 2015 Warrants.

As a result of the forgoing transactions, the number of shares of common stock issuable upon the full exercise of the 2015 Warrants increased to 48,078, the exercise was reduced to $5.20 per share, and the Company recorded a non-cash deemed dividend in amount of $41,688.

There were no warrants issued during fiscal 2021.

Warrants Issued for Services:

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Warrants Issued with Convertible Notes:

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

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

See Note O Convertible Notes Payable for warrants issued with convertible notes in connection with the agreements during fiscal 2020.

Valuation Assumptions for Warrants:

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Weighted average price

$ 9.25  

Weighted average exercise period

Weighted average Volatility of stock price

The warrant volatility for each issuance is determined based on the review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected exercise period.

The risk-free rate is based on the U.S.

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Outstanding, as of December 31, 2019

Granted – public offering

Granted – prefunded warrants from the public offering

Granted – other

423,559  

Granted –

public offering

4,264,313  

Granted –

prefunded warrants from the public offering

512,500  

Granted –

434,375  

Increase due to trigger of anti-dilution provision feature

Exercised – public offering

Exercised – prefunded warranted from the public offering

Exercised – other

27,244  

Exercised –

public offering

Exercised –

prefunded warranted from the public offering

Exercised –

Outstanding, as of December 31, 2020

NOTE S — STOCK OPTIONS

4,689,387  

Outstanding, as of December 31, 2021

4,689,387  

The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $ 2.21 , $ 3.52 and $ 4.00 as of December 31, 2021, 2020 and 2019, 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, 2021, 2020 and 2019.

Securities Purchase Agreement dated September 23, 2015

On September 23, 2015, the Company issued warrants (the “2015 Warrants”) to purchase 8,681 shares of common stock in connection with the issuance of a promissory note.

The warrants were immediately exercisable at an initial exercise price of $ 28.80 per share and had a term of five years. 

The 2015 Warrants expired in September 2020.

The 2015 Warrants had a “full ratchet”

anti-dilution adjustment provision. 

The anti-dilution adjustment provision was triggered in the first quarter of 2020 from the February 2020 Note and amendments to the Original Note.

As a result of the forgoing transactions, the number of shares of common stock issuable upon the full exercise of the 2015 Warrants increased to 48,078 , the exercise price was reduced to $ 5.20 per share, and the Company recorded a non-cash deemed dividend in amount of $ 41,688 . 

NOTE S —

STOCK OPTIONS

2004 Stock Option Plan

On October 12, 2004, the Board of Directors of the Company approved the 2004 Stock Option Plan (the “2004 Plan”).

The 2004 Plan was not presented to stockholders for approval and thus incentive stock options were not available under this plan.

On October 

12, 2004, the Board of Directors of the Company approved the 2004 Stock Option Plan (the “2004 Plan”).

The 2004 Plan was not presented to stockholders for approval and thus incentive stock options were not available under this plan.

Under the terms of this plan, 20,834 shares of common stock were reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which may not be below 85 % of fair market value.

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In the event of a change in control, as defined, all options outstanding vest immediately.

The 2004 Plan expired in October 2014.

The 2004 Plan expired in October 

2015 Stock Option Plan

On January 27, 2016, the shareholders approved the 2015 Equity Incentive Plan (the “2015 Plan”).

At our annual shareholders meeting in 2019, we adopted an amendment to the 2015 Plan which increases the number of shares of common stock authorized for issuance under the 2015 Plan from 83,334 shares to 187,500 shares and also effected certain changes in light of the Tax Cuts and Jobs Act of 2017 and its impact on Section 162(m) of the United States Internal Revenue Code of 1986, as amended.

The term of stock options granted may not exceed ten years.

Options issued under the 2015 Plan vest pursuant to the terms of stock option agreements with the recipients.

In the event of a change in control, certain stock awards issued under this plan may be subject to additional acceleration of vesting as may be provided in the participants’ written agreement.

On January 27, 2016, the stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”).

The 2015 Plan initially reserved 187,500 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 2019, the stockholders approved an amendment to the 2015 Plan which increases the number of shares of common stock authorized for issuance under the 2015 Plan from 83,334 shares to 187,500 shares and also effected certain changes in light of the Tax Cuts and Jobs Act of 2017 and its impact on Section 162 (m) of the United States Internal Revenue Code of 1986, as amended.

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 187,500 shares to 789,000 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.

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Outstanding, as of December 31, 2019

70,991  

144,070  

218,967  

$ 20.08  

28,440  

Outstanding, as of December 31, 2020

94,183  

133,091  

227,274  

$ 17.61  

‐—

Outstanding, as of December 31, 2021

90,808  

121,653  

212,461  

$ 16.65  

Vested or expected to vest at December 31, 2021

206,283  

$ 16.98  

Exercisable at December 31, 2021

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

186,538  

$ 18.04  

The options outstanding and exercisable at December 

31, 2021 were in the following exercise price ranges:

Options Outstanding

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life (in years)

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

The total number of in-the-money options exercisable as of December 31, 2020 was 0.

The weighted average fair value of options granted during the years ended December 31, 2020 and 2019 was $3.16 and $8.24 per share, respectively.

The total intrinsic value of options exercised during the years ended December 31, 2020 and 2019 was $0.

$ 4.08 - 5.20  

24,940  

$ 5.19  

$ 5.17  

$ 5.21 - 15.68  

49,669  

40,284  

$ 15.69 - 39.36  

137,852  

$ 4.08 - 39.36  

212,461  

186,538  

The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $ 2.21 , $ 3.52 and $ 4.00 as of December 

31, 2021, 2020 and 2019, 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, 2021, 2020 and 2019.

The weighted average fair value of options granted during the year ended December 31, 2020 was $ 3.16 per share.

The total intrinsic value of options exercised during the years ended December 31, 2021 and 2020 was $ 0 as no options were exercised in either year.

The total fair value of shares vested during the years ended December 31, 2021 and 2020 was $ 252,874 and $ 899,750 , respectively.

As of December 31, 2020, future forfeiture adjusted compensation cost related to nonvested stock options is $232,547 and will be recognized over an estimated weighted average period of 1.21 years.

NOTE T — INCOME TAXES

As of December 

31, 2021, future forfeiture adjusted compensation cost related to nonvested stock options is $ 75,035 and will be recognized over an estimated weighted average period of 0.86 years.

NOTE T —

There was no provision for federal or state taxes as at December 31, 2021 and 2020.

The Company has deferred taxes due to income tax credits, net operating loss carryforwards, and the effect of temporary differences between the carrying values of certain assets and liabilities for financial reporting and income tax purposes.

Significant components of deferred taxes are as follows at December 31:

Significant components of deferred taxes are as follows at December 

Accrued compensation

$ 135,000  

$ 81,000  

Accounts receivable allowance

75,000  

474,000  

Stock-based compensation

1,149,000  

1,073,000  

Basis differences in fixed assets

Basis differences in intangible assets

75,000  

65,000  

Net operating loss and credit carryforwards

14,467,000  

13,337,000  

Valuation allowances

( 15,891,000 )

( 15,016,000 )

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.

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Similarly, income tax benefits related to stock options exercised have not been recognized in the financial statements.

As of December 31, 2020, the Company has federal net operating loss carryforwards of approximately $63 million.

Approximately $52 million are subject to expiration between 2020 and 2037, and $11 million net operating loss carryforwards have no expiration date.

These net operating loss carryforwards are subject to the limitations under Section 382 of the Internal Revenue Code due to changes in the equity ownership of the Company.

As of December 

31, 2021, the Company has federal net operating loss carryforwards of approximately $ 61 million.

Approximately $ 46 million are subject to expiration between 2021 and 2037, and $ 15 million net operating loss carryforwards have no expiration date.

These net operating loss carryforwards are subject to the limitations under Section 

382 of the Internal Revenue Code due to changes in the equity ownership of the Company.

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.

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Effective tax rate

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.

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The Company believes it is not subject to any tax audit risk beyond those periods.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense incurred during the years ended December 31, 2020 and 2019.

NOTE U — PROFIT SHARING PLAN

The Company has established a savings plan under section 401(k) of the Internal Revenue Code.

All employees of the Company, after completing one day of service, are eligible to enroll in the 401(k) plan.

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, 2021 and 2020.

NOTE U —

PROFIT SHARING PLAN

The Company has established a savings plan under section 

401 (k) of the Internal Revenue Code.

All employees of the Company, after completing one day of service, are eligible to enroll in the 401 (k) plan.

Participating employees may elect to defer a portion of their salary on a pre-tax basis up to the limits as provided by the IRS Code.

The Company is not required to match employee contributions but may do so at its discretion.

The Company made no contributions during the years ended December 31, 2020 and 2019.

NOTE V — EARNINGS PER SHARE (EPS)

The Company’s basic EPS is calculated using net income (loss) available to common shareholders and the weighted-average number of shares outstanding during the reporting period.

The Company made no contributions during the years ended December 

31, 2021 and 2020.

NOTE V —

EARNINGS PER SHARE (EPS)

The Company’s basic EPS is calculated using net income (loss) available to common shareholders and the weighted-average number of shares outstanding during the reporting period.

Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of preferred stock.

The reconciliation of the numerator of the basic and diluted EPS calculations for the following fiscal years ended December 31:

The reconciliation of the numerator of the basic and diluted EPS calculations for the following fiscal years ended December 

Basic Numerator:

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Restricted stock

Convertible notes

Potentially dilutive securities

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Stock options

NOTE W — SUBSEQUENT EVENTS

On March 4, 2021, the Company issued 1,375 shares of common stock to its directors in payment of board fees.

Additionally, the Company issued an aggregate of 1,250 shares of restricted common stock to two new employees which vest in equal annual installments over a three-year period from the date of grant.

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

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

EXHIBIT INDEX

NOTE W —

SUBSEQUENT EVENTS

On March 8, 2022, the Company completed the acquisition of 100 % of the issued and outstanding capital stock of Swivel Secure Europe, SA 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 up to $ 500,000 .

At the closing, the Company made a cash payment of $ 1.27 million and issued 269,060 shares of common stock of which 89,687 shares were held back by the Company to secure certain indemnification obligations under the stock purchase agreement.

On March 10, 2022, the Company issued 6,360 shares of common stock to its directors in payment of board fees. Additionally, the Company issued an aggregate of 848 shares of common stock to its directors in payment of board committee fees. 

On March 11, 2022, the Company issued 932 shares of common stock to its directors in payment of board committee fees. The Company issued an aggregate of 274,250 shares of restricted common stock to employees and the board of directors which vest in equal annual installments over a three -year period from the date of grant.

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

EXHIBIT  

Exhibit  

Stock Purchase Agreement by and among the Company, Thomas J.

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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)

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)

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)

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)

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2 to the Registration Statement on Form S-1/A, filed with the SEC on July 20, 2020)

BIO-key International, Inc.

Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934*

Employment Agreement by and between BIO-key International, Inc.

and Mira LaCous dated November 20, 2001 (incorporated by reference to Exhibit 10.39 to the current report on Form 8-K, filed with the SEC on January 22, 2002)***

BIO-key International, Inc.

BIO-key International, Inc.

2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.48 to amendment no.

1 the registrant’s registration statement on Form SB-2, File No.

33-120104, filed with the SEC on December 14, 2004)***

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and Cecilia Welch dated May 15, 2013 (incorporated by reference to Exhibit 10.42 to the annual report on Form 10-K, filed with the SEC on March 31, 2014)***

Third Amendment to Lease Agreement by and between BIO-key International, Inc.

and Victor AOP, Inc.

dated June 30, 2013 (incorporated by reference to Exhibit 10.43 to the annual report on Form 10-K, filed with the SEC on March 31, 2014)

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)***

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)

BIO-key International, Inc.

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)***

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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)

BIO-key International, Inc.

BIO-key International, Inc.

Amended and Restated 2015 Equity Incentive Plan (incorporated by reference to Appendix A to the definitive proxy statement filed with the SEC on April 30, 2019)***

27 unchanged sentences

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)***

Employment Agreement by and between BIO-key International, Inc.

and James Sullivan dated April 5, 2017 ***

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)

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)

List of subsidiaries of BIO-key International, Inc.

Consent of RMSBG

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

XBRL Instance

XBRL Taxonomy Extension Schema

XBRL Taxonomy Extension Calculation

XBRL Taxonomy Extension Definition

XBRL Taxonomy Extension Labels

XBRL Taxonomy Extension Presentation

Certification of the Chief Executive Officer pursuant to Section  302 of the Sarbanes-Oxley Act of 2002

Certification of the Chief Financial Officer pursuant to Section  302 of the Sarbanes-Oxley Act of 2002

Certification of the Chief Executive Officer pursuant to Section  906 of the Sarbanes-Oxley Act of 2002

Certification of the Chief Financial Officer pursuant to Section  906 of the Sarbanes-Oxley Act of 2002

Inline XBRL Instance

Inline XBRL Taxonomy Extension Schema

Inline XBRL Taxonomy Extension Calculation

Inline XBRL Taxonomy Extension Definition

Inline XBRL Taxonomy Extension Labels

Inline XBRL Taxonomy Extension Presentation

Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

filed herewith

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*** Management compensatory plan.

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.

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.

March 31, 2022

/s/ MICHAEL W.

/s/  MICHAEL W.

CHIEF EXECUTIVE OFFICER

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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.

/s/ MICHAEL W.

/s/  MICHAEL W.

Chairman of the Board of Directors, Chief Executive Officer and Director

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March 31, 2022

/s/ CECILIA WELCH

/s/  CECILIA WELCH

Chief Financial Officer (Principal Financial and Accounting Officer)

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March 31, 2022

/s/ THOMAS E.

/s/  THOMAS E.

March 31, 2022

/s/ THOMAS GILLEY

/s/  THOMAS GILLEY

March 31, 2022

Thomas Gilley

/s/ WONG KWOK FONG

/s/  WONG KWOK FONG

March 31, 2022

Wong Kwok Fong

/s/ PIETER KNOOK

March 29, 2021

/s/ MANNY ALIA

/s/  PIETER KNOOK

March 31, 2022

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BIO-KEY INTERNATIONAL, INC.

/s/  MANNY ALIA

March 31, 2022

/s/ Michael DePasquale

Michael DePasquale

Chief Executive Officer

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures