BIO KEY INTERNATIONAL INC 10-K

ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2023, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were ineffective. Management ’ s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our CEO and CFO, we have conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023, based upon the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that our internal control over financial reporting was not effective as of December 31, 2023 as a result of certain material weaknesses discovered during the course of their review. In particular, in connection with the audit of our financial statements as of and for the year ended December 31, 2023, our management identified a lack of control over properly assessing revenue, allowances for accounts receivable and certain reserves for inventory. This resulted in certain errors in the manner in which we recognized revenue generated by our European subsidiary, Swivel Secure Europe, SA, in the first quarter of 2023. In addition, certain allowances for accounts receivable and certain reserves for inventory were understated. We are currently working to implement appropriate corrective actions to remediate the material weakness to strengthen our internal controls over the recording of revenues. Each of the material weaknesses noted will only be deemed to have been remediated after the new controls and procedures have been in place for a sufficient period and management has concluded through appropriate testing that the controls are operating effectively. However, we cannot assure you that these or other measures will fully remediate the material weaknesses in a timely manner. As we are a smaller reporting company, this annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting Going forward, we will change our internal control over financial reporting for the year ended December 31, 2023 to thoroughly access all accounts for potential adjustments required for proper presentation of the value of the accounts. ITEM 9B. OTHER INFORMATION None . ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not Applicable. 26 Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The following sets forth certain information about each director and executive officer of the Company. NAME AGE POSITIONS HELD Michael W. DePasquale 69 Chairman of the Board of Directors and Chief Executive Officer Cameron Williams (a)* (b) (c) 77 Director Robert J. Michel (a) (b)*(c) 67 Director Wong Kwok Fong (Kelvin) 60 Director and Vice-Chairman of the Board of Directors Emmanuel Alia (b) (c)* 59 Director Cecilia C. Welch 64 Chief Financial Officer Mira K. LaCous 62 Chief Technology Officer James D. Sullivan 56 Vice President of Strategy and Compliance, Chief Legal Officer (a) Compensation Committee Member (b) Audit Committee Member (c) Nominating Committee Member * Indicates chair of committee Set forth below is a brief description of the background and business experience of our directors and executive officers for the past five years. Directors Michael W. DePasquale has served as our Chief Executive Officer and a Director since January 3, 2003, and Chairman of the Board since January 29, 2014. He served as Co-Chief Executive Officer of the Company from July 2005 to August 2006. Mr. DePasquale brings more than 30 years of executive management, sales and marketing experience to the Company. Mr. DePasquale has held executive management positions with McGraw-Hill, Digital Equipment Corporation, and other companies in the software and professional services industries. Mr. DePasquale earned a Bachelor of Science degree from the New Jersey Institute of Technology. He serves as the Vice Chairman on the Board of Directors of the International Biometrics and Identification Industry Association. We believe Mr. DePasquale’s qualifications to sit on the board of directors include his extensive executive management experience in the technology sector and biometric industry expertise which strengthen the board’s collective qualifications, skills and experience. Cameron E. Williams was appointed Director of the Company on June 2, 2023. Mr. Williams has over 40 years of financial and executive management experience. Since 2014, he has served as the principal of CEW Advisory Services, a consulting firm he founded which provides strategic planning and related services to the consumer lending industry. He previously founded CEW Solutions which provided fraud investigation services to insurance companies, law firms, and third-party administrators. From 2007 to 2009, Mr. Williams served as COO of Asta Funding, Inc., a publicly traded diversified financial services company where he was responsible for the sourcing and financial analysis of distressed consumer assets. From 1998 to 2007, Mr. Williams served as President of Popular Financial Holdings, an affiliate of Popular, Inc., a $36 billion banking organization. Mr. Williams began his career in the banking industry holding financial management positions with Security Pacific Financial Services, BankAmerica Financial, Inc., and Security Pacific Financial Services System, Inc. Mr. Williams earned a Bachelor’s in Accounting and completed graduate coursework at San Diego State University. We believe Mr. Williams’ extensive financial and executive management experience in a variety of industries strengthens the Board’s collective qualifications, skills, and experience. 27 Table of Contents Robert J. Michel has served as a Director of the Company since April 10, 2017. He has over 30 years of accounting and financial management experience. Since September, 2018, he has served as the Chief Financial Officer of Daxor Corporation (Nasdaq: DXR), a medical device manufacturing company specializing in blood volume analysis. Prior to Daxor, from November, 2017 until September 2018, Mr. Michel served as the CFO of Roadway Moving, Inc., a transportation, moving and storage company located in New York City. Mr. Michel spent 15 years at Asta Funding, Inc. (Nasdaq: ASFI), a diversified financial services company, including serving as its Chief Financial Officer from 2009 until 2017 where he was responsible for all financial matters and SEC reporting. Mr. Michel is a certified public accountant, earned an MBA in Taxation from St. John’s University, and a BS in Business Administration from Villanova University. We believe Mr. Michel’s qualifications to sit on the board of directors include his substantial experience in accounting and financial management for public companies which provide the board with a deep knowledge of financial and SEC reporting and strengthen the board’s collective qualifications, skills, and experience. Wong Kwok Fong (Kelvin) has served as a Director of the Company since December 4, 2015, as Managing Director of our Hong Kong Subsidiary since August 2016, and as Vice-Chairman of the Board of Directors since March 2019. He is the co-founder of China Goldjoy Group (previously World Wide Touch Technology Holdings Limited), a company listed on The Stock Exchange of Hong Kong. From 1997 until August, 2015, Mr. Wong served as the Chairman of China Goldjoy Group and served as its Chief Technology Officer through October 2016. During this time, Kelvin played a significant role in the substantial growth of the business. Kelvin brings over 25 years of senior management experience in manufacturing, supply chain, and marketing functions in the electronics and technology industries, including establishing manufacturing plants in Hong Kong and China, and building an extensive network in the electronics and technology industries. We believe Kelvin’s qualifications to sit on the board of directors include his substantial experience in the technology industry, including biometrics and payment systems, and serving the Asian markets, which broaden and strengthen the board’s collective qualifications, skills, and experience. Emmanuel Alia was appointed Director of the Company on April 3, 2020. Since 2018, Mr. Alia has been providing management consulting services as an advisor to businesses seeking market entry strategies to emerging markets such as Africa and the Caribbean. From 2011 to 2018, Mr. Alia served as an Executive Director at the Corporate and Investment division of JPMorgan, and as a Senior Vice-President at CHASE Bank’s Consumer and Community Banking specializing in the financial and banking services industry and opportunities in Africa. During Mr. Alia’s tenure with JPMorgan, he served as head of Wholesale Operations in the Receivables Operations of the Global banking operations in the US and Canada, head of Retail Banking in the Greater Detroit area, and head of branches in the New York and New Jersey areas. For two years Mr. Alia was co-chair of the Black Organizational Leadership Development, an employee networking group in JPMorgan that works with firm’s leadership to strengthen the firm’s message, strategies and community outreach globally. Mr. Alia received a Bachelor of Arts in Accounting from Southeastern University and a Master’s of Business Administration (MBA) from Cornell University. We believe Mr. Alia’s qualifications to sit on the board of directors include his extensive industry experience and connection and networking abilities in the African communities and markets which further broaden and strengthen the board’s collective qualifications, skills, and experience. Executive Officers Cecilia C. Welch has served as the Chief Financial Officer of the Company since December 21, 2009. Ms. Welch joined the Company in 2007 as Corporate Controller. Prior to joining the Company, Ms. Welch has held senior financial management positions in various industries, including software and manufacturing. Ms. Welch has a bachelor’s degree in accounting from Franklin Pierce University. Mira K. LaCous has served as Chief Technology Officer of the Company since March 13, 2014, as Senior Vice President of Technology & Development since 2012, and as our Vice President of Technology and Development since 2000. Ms. LaCous has over 35 years of product/project management, solution architecture, software development, team leadership and customer relations experience, with a background that includes successfully bringing numerous innovative products and technologies to market, including automated voice response systems, automated building control systems, software piracy protection, internet training materials and testing, WYSIWYG page layout and design software, image scanning / recognition software and systems, biometric security systems and algorithms, automated national ID systems using biometrics, and mobile applications with secure frameworks. Ms. LaCous has been a speaker at multiple events/conferences and has worked with teams around the globe bringing biometric technology deployments to life. Ms. LaCous is the author of eight (8) US patented technologies, multiple international patents and lead the engineering team in developing other patents and inventive technologies. Ms. LaCous earned a bachelor’s degree in Computer Science, with mathematics and physics from North Dakota State University. 28 Table of Contents James D. Sullivan has served as BIO-key’s Senior Vice President of Strategy and Compliance and BIO-key’s Chief Legal Officer since February 2020, as Senior Vice President of Strategy and Business Development from April 2012 through December 2018, and the dual role as Senior Vice President of Global Sales from August 2015 through December of 2016. Mr. Sullivan is a recognized expert in privacy, cybersecurity, and biometric authentication for workforce and consumer applications. During his twenty years with the Company, Mr. Sullivan has directly worked with dozens of the Company’s customers, including AT&T, Israel Defense Forces, LexisNexis, NCR and Omnicell, as well as large-scale biometric-centered identity management projects that interface daily with millions of corporate and consumer users. Mr. Sullivan earned a Juris Doctor with Honors from Georgia State University College of Law, is a member of the Georgia Bar, and enrolled to practice before the IRS. Mr. Sullivan has an undergraduate degree in Computer Science from Brown University and has over 26 years of experience in IT projects and implementation, including directly working with security and identity management solutions at the Company, Computer Associates, Platinum Technology, and Memco Software. Committees of the Board of Directors Audit Committe e Our audit committee is comprised of Robert J. Michel (Chair), Cameron Williams, and Emmanuel Alia each of whom meets the independence standards for purposes of serving on an audit committee established by NASDAQ and under the Exchange Act. Our audit committee (i) assists the board of directors in its oversight of the integrity of our financial statements, compliance with legal and regulatory requirements, and corporate policies and controls, (ii) has the sole authority to retain and terminate our independent registered public accounting firm, approve all auditing services and related fees and the terms thereof, and pre-approve any non-audit services to be rendered by our independent registered public accounting firm, and (iii) is responsible for confirming the independence and objectivity of our independent registered public accounting firm. Our independent registered public accounting firm has unrestricted access to our audit committee. Our board of directors has determined that Robert J. Michel qualifies as an “audit committee financial expert,” as such term is defined in Item 407 of Regulation S-K. Our audit committee operates under a written charter that is reviewed annually. The charter is available on our website at www.bio-key.com . Compensation Committee Our compensation committee is comprised of Cameron Williams (Chair) and Robert Michel, both of whom meet the independence standards established by NASDAQ and under the Exchange Act. The compensation committee’s duties include overseeing our overall compensation philosophy, policies and programs. This includes reviewing and analyzing the design and function of our various compensation components, establishing salaries, incentives and other forms of compensation for officers and non-employee directors, and administering our equity incentive plan. In fulfilling its responsibilities, the compensation committee has the authority to delegate any or all of its responsibilities to a subcommittee of the compensation committee. Our compensation committee operates under a written charter that is reviewed annually. The charter is available on our website at www.bio-key.com . Code of Ethics We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Our Code of Ethics is designed to deter wrongdoing and promote: (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in our other public communications; (iii) compliance with applicable governmental laws, rules, and regulations; (iv) the prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and (v) accountability for adherence to the code. We intend to disclose amendments or waivers of the Code of Ethics on our website within four business days. Any person may obtain a copy of our Code of Ethics free of charge by sending a written request for such to the attention of the Chief Financial Officer of the Company, 101 Crawfords Corner Road, Suite 4116, Holmdel, NJ 07733. 29 Table of Contents Term of Office Our directors are elected at the annual meeting of stockholders and hold office until the annual meeting of the stockholders next succeeding his or her election, or until his or her prior death, resignation or removal in accordance with our bylaws. Our officers are appointed by the Board and hold office until the annual meeting of the Board next succeeding his or her election, and until his or her successor shall have been duly elected and qualified, subject to earlier termination by his or her death, resignation or removal. Delinquent Section 16(a) Reports Reports of all transactions in our common stock by officers, directors and ten percent (10%) stockholders are required to be filed with the SEC pursuant to Section 16(a) of the Exchange Act. Based solely on our review of copies of the reports received, or representations of such reporting persons, we believe that during the year ended December 31, 2023, all Section 16(a) filing requirements applicable to our officers, directors and ten percent (10%) stockholders were satisfied in a timely fashion, ITEM 11. EXECUTIVE COMPENSATION The following table sets forth a summary of the compensation paid to or accrued by our chief executive officer and the two most highly compensated executive officers other than our chief executive officer, for the fiscal years ended December 31, 2023 and 2022: SUMMARY COMPENSATION TABLE Stock All Other Name and Principal Salary Awards Compensation Total Position Year ($) ($) (1) ($) (2) ($) Michael W. DePasquale 2023 271,250 19,250 1,027 291,527 Chief Executive Officer 2022 295,833 75,250 997 372,080 Cecilia C. Welch 2023 189,875 16,500 1,320 207,695 Chief Financial Officer 2022 204,167 64,500 1,119 269,786 James D. Sullivan 2023 212,479 16,500 6,433 (3) 235,412 Chief Legal Officer 2022 233,333 64,500 134,157 (4) 431,990 (1) The aggregate grant date fair value of the restricted shares is calculated by the multiplying the quantity of shares issued by the closing trading price of the shares on the date of issuance calculated under FASB ASC 718. (2) Consists of life insurance premiums paid by the Company except as otherwise noted. (3) Consists of $5,102 of sales commissions and $1,331 of life insurance premiums paid by the Company. (4) Consists of $132,826 of sales commissions and $1,331 of life insurance premiums paid by the Company. Narrative Disclosure to Summary Compensation Table Compensation for our executives is comprised of three main components: base salary, annual performance-based cash bonus, and long-term equity awards. We do not target a specific weighting of these three components or use a prescribed formula to establish pay levels. Rather, the board of directors and compensation committee considers changes in the business, external market factors and our financial position each year when determining pay levels and allocating between long-term and current compensation for the named executive officers. Cash compensation is comprised of base salary and an annual performance-based cash bonus opportunity. The compensation committee generally seeks to set a named executive officer’s targeted total cash compensation opportunity within a range that is the average of the applicable peer company and/or general industry compensation survey data, adjusted as appropriate for individual performance and internal pay equity and labor market conditions. In setting cash compensation levels, we favor a balance in which base salaries are generally targeted at slightly below the peer average and a bonus opportunity that is targeted at slightly above the average. Effective January 16, 2023, we decreased the base compensation of Mr. DePasquale, Mr. Sullivan and Ms. Welch as part of the revised budget for the year. Effective March 1, 2022, we increased the base compensation of Mr. DePasquale, Mr. Sullivan and Ms. Welch. Performance-based bonuses have historically been based upon the achievement of certain revenue milestones established by the compensation committee. The committee believes that this higher emphasis on performance-based cash bonuses places an appropriate linkage between a named executive officer’s pay, his or her individual performance, and the achievement of specific business goals by placing a higher proportion of annual cash compensation at risk, thereby aligning executive opportunity with the interests of stockholders. 30 Table of Contents We also include an equity component as part of our compensation package because we believe that equity-based compensation aligns the long-term interests of our named executive officers with those of stockholders. In 2022 and 2023, we issued restricted stock awards to each of our named executive officers in recognition of the revenue growth of the Company in 2021 and successful integration of Portal Guard, and revenue growth of the Company in 2022 and successful integration of Swivel Secure, respectively. These cash and equity compensation components of pay are supplemented by various benefit plans that provide health, life, accident, disability and severance benefits, most of which are the same as the benefits provided to all of our US based employees. Employment Agreements On March 26, 2010, we entered into an employment agreement, effective as of March 25, 2010, with Michael W. DePasquale to serve as our Chief Executive Officer until March 24, 2011. The agreement automatically renews for subsequent one-year terms, unless the employment relationship is terminated by either party, or modified in accordance with the terms and conditions of the agreement. Since 2018, Mr. DePasquale’s annual base salary has been $275,000, subject to adjustment by the compensation committee. In addition to the base salary, a “Performance Bonus” may be awarded to Mr. DePasquale on the basis of the Company achieving certain corporate and strategic performance goals, as determined by the compensation committee in its sole discretion. The employment agreement contains standard and customary confidentiality, non-solicitation and “work made for hire” provisions as well as a covenant not to compete which prohibits Mr. DePasquale from doing business with any current or prospective customer of the Company or engaging in a business competitive with that of the Company during the term of his employment and for the one-year period thereafter. This agreement also contains a number of termination and change in control provisions as described under the captions “ Termination Arrangements ” and “ Change in Control Arrangements ” below. On April 5, 2017, we entered into an employment agreement with James Sullivan. The agreement automatically renews for subsequent one-year terms, unless terminated by the Company upon at least two months prior written notice which is treated as termination without cause. Since 2021, Mr. Sullivan’s annual base salary has been $225,000, subject to adjustment by the compensation committee. The agreement contains standard and customary confidentiality, technical invention provisions as well as non-competition and non-solicitation covenants which prohibit Mr. Sullivan from doing business with any current or prospective customer of the Company or engaging in any business competitive with that of the Company during the term or his employment and for the one-year period thereafter. The agreement also contains a number of termination provisions as described under the caption “ Termination Agreements ” below. On May 15, 2013, we entered into an employment agreement with Cecilia Welch to serve as the Chief Financial Officer of the Company until May 2014. The agreement automatically renews for subsequent one-year terms, unless the employment relationship is terminated by either party, or modified in accordance with the terms and conditions of the agreement. The employment agreement contains standard and customary confidentiality, technical invention provisions, as well as a covenant not to compete, which prohibits Ms. Welch from doing business with any current or prospective customer of the Company or engaging in a business competitive with that of the Company during the term of her employment and for the one-year period thereafter. This agreement also contains a number of termination provisions as described in “Termination and Change in Control Arrangements” in this Item. Stock Option Grants and Restricted Stock Awards In the event of any change in the outstanding shares of our common stock by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the board deems to be similar circumstances, the number and kind of shares subject to outstanding options and restricted stock awards, and the exercise price of such options shall be appropriately adjusted. Restricted Furthermore, option agreements and restricted stock award agreements contain change of control provisions as described under the caption “ Change in Control Provisions ” below. 31 Table of Contents OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END The following table sets forth for each named executive officer, information regarding outstanding equity awards as at December 31, 2023. Option Awards Stock Awards Market value Number of Number of of securities shares or shares of underlying units units of unexercised Option of stock that stock that options exercise Option have not have not exercisable price expiration vested vested Name (#) ($) date (#) ($)(1) Michael W. DePasquale 1,737 381.60 3/16/2024 3,242 9,726 232 282.24 3/23/2025 - - 232 169.92 3/21/2026 - - Cecilia C. Welch 903 381.60 3/16/2024 2,779 8,337 174 282.24 3/23/2025 - - 174 169.92 3/21/2026 - - James D. Sullivan 695 381.60 3/16/2024 2,779 8,337 174 282.24 3/23/2025 - - 174 169.92 3/21/2026 - - (1) Calculated based on the closing market price of the Company’s common stock on December 31, 2023 of $3.00 per share. Narrative Disclosure to Outstanding Equity Awards at Fiscal Year End Table The following are the material terms of each agreement, contract, plan or arrangement that provide for payments to one or more of our named executive officers at, following or pursuant to their resignation, retirement or termination, or in connection with a change in control of the Company. Termination Arrangements We may terminate our employment agreement with Mr. DePasquale at any time with or without cause. In the event of termination by us without cause, we will continue to pay Mr. DePasquale his then current base salary for the greater of nine months from the date of such termination or the number of months remaining until the end of the term of the agreement. We may terminate our employment agreement with Mr. Sullivan at any time with or without cause. In the event of termination by us without cause, we will continue to pay Mr. Sullivan his then current base salary, plus earned commissions, for the greater of six months from the date of such termination or the number of months remaining until the end of the term of the agreement. We may terminate our employment agreement with Ms. Welch at any time with or without cause. In the event of termination by us without cause, we will continue to pay Ms. Welch her then current base salary for the greater of six months from the date of such termination or the number of months remaining until the end of the term of the Agreement. Change in Control Provisions Our 2015 Equity Incentive Plan (the “Plan”) provides for the acceleration of vesting of unvested options and termination of any restriction or forfeiture provisions applicable to restricted stock awards upon a “Change in Control” of the Company. A Change in Control is defined in the Plans to include (i) a sale or transfer of substantially all of the Company’s assets; (ii) the dissolution or liquidation of the Company; (iii) a merger or consolidation to which the Company is a party and after which the prior stockholders of the Company hold less than 50% of the combined voting power of the surviving corporation’s outstanding securities; (iv) the incumbent directors cease to constitute at least a majority of the Board of Directors; or (v) a change in control of the Company which would otherwise be reportable under Section 13 or 15(d) of the Exchange Act. In the event of a “Change In Control” the Plan provides for the immediate vesting of all options issued thereunder and termination of all forfeiture provisions applicable to restricted stock award issued thereunder. Options issued to executive officers outside of the Plans contain change in control provisions substantially similar to those contained in the Plans. Our employment agreement with Mr. DePasquale contains a change in control provision that is triggered if Mr. DePasquale is not offered continued employment with us or any successor, or within five years following such Change of Control, we or any successor terminate Mr. DePasquale’s employment without cause. If this occurs, then we will pay Mr. DePasquale his base salary and benefits earned but unpaid through the date of termination, and any prorated bonus earned during the then current bonus year, plus two times his then current base salary. 32 Table of Contents DIRECTOR COMPENSATION The following table sets forth for each director, information regarding their compensation for the year ended December 31, 2023: Stock Awards Total Name (1) ($) (2) ($) Thomas E. Bush, III (3) 7,001 7,001 Pieter Knook (4) 7,001 7,001 Robert J. Michel (5) 11,002 11,002 Emmanuel Alia (6) 10,002 10,002 Cameron Williams (7) 4,001 4,001 (1) Mr. DePasquale and Kelvin Wong have been omitted from the above table because they do not receive any additional compensation for serving on our Board of Directors. (2) The aggregate fair value of the common stock issued was calculated based on the closing price of our common stock on the date of issuance in accordance with FASB ASC 718. (3) Mr. Bush resigned from the Board of Directors effective November 8, 2023. (4) Mr. Knook resigned from the Board of Directors effective May 13, 2023 (5) At December 31, 2023, Mr. Michel held options to purchase 117 shares of common stock and held 278 shares of restricted common stock. (6) At December 31, 2023, Mr. Alia held options to purchase 18 shares of common stock and held 278 shares of restricted common stock. (7) Mr. Williams joined the Board of Directors on June 2, 2023. At December 31, 2023 Mr. Williams held 278 shares of restricted common stock. Narrative Disclosure to Director Compensation Table During 2023, we had a policy to pay each non-employee director $3,000 per board meeting, $1,000 per telephonic board meeting, and $1,000 per board committee meeting attended. Fees for attendance at regular quarterly board meetings held during the first three quarters of each fiscal year are paid through the issuance of common stock and payments for the last meeting of the year are paid in cash or, at the option of the director, in shares of common stock. All of our directors elected to receive payment in common stock for the last board meeting in 2023. All directors will be indemnified by us for actions associated with being a director to the fullest extent permitted under Delaware law. We reimburse each of our non-employee directors for their reasonable expenses incurred in connection with attending meetings of the board of directors and related committees. 33 Table of Contents ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth, as of May 31, 2024 information with respect to the securities holdings of all persons that we, pursuant to filings with the SEC and our stock transfer records, have reason to believe may be deemed the beneficial owner of more than 5% of our common stock. The following table also sets forth, as of such date, the beneficial ownership of our common stock by all of our current executive officers and directors, both individually and as a group. The beneficial owners and number of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as awarded, and, in accordance therewith, include all shares of our common stock that may be acquired by such beneficial owners within 60 days of June 4, 2024 upon the exercise or conversion of any options, warrants or other convertible securities. This table has been prepared based on 1,814,228 Amount and Nature Percentage of Beneficial of Name and Address of Beneficial Owner (1) Ownership Class Directors and Executive Officers Michael W. DePasquale 24,872 (2) 1.4 % Cecilia C. Welch 2,244 (3) * Mira K. LaCous 1,515 (4) * James D. Sullivan 34,949 (5) 1.9 % Robert J. Michel 2,290 (6) * Emmanuel Alia 1,957 (7) * Cameron E. Williams 624 (8) * Wong Kwok Fong (Kelvin) 31,462 (9) 1.7 % All officers and directors as a group (eight (8) persons) 99,913 5.5 % Beneficial Owner Armistice Capital, LLC 121,494 (10) 6.7 % * Less than 1% (1) Unless otherwise indicated, the address of each person listed below is c/o BIO-key International, Inc., 101 Crawfords Corner Rd, Suite 4116, Holmdel, NJ 07733 (2) Includes 464 shares issuable on exercise of options, 9,167 shares issuable upon exercise of warrants, and 4,121 shares of restricted stock of which 3,242 remain subject to vesting. (3) Includes 348 of shares issuable upon exercise of options and 3,565 shares of restricted stock of which 2,779 remain subject to vesting. (4) Includes 174 of shares issuable upon exercise of options and 1,203 shares of restricted stock of which 834 remain subject to vesting. (5) Includes 348 of shares issuable on exercise of options, 12,667 shares issuable upon exercise of warrants, and 3,565 shares of restricted stock of which 2,779 remain subject to vesting. (6) Includes 470 of shares issuable on exercise of options and 278 shares of restricted stock of which 186 remain subject to vesting. (7) Includes 278 shares of restricted stock of which 278 remain subject to vesting. (8) Includes 278 of shares of restricted stock of which 278 remain subject to vesting. (9) Includes 464 of shares issuable on exercise of options and 787 shares of restricted stock of which 464 remain subject to vesting. The address of Kelvin is Flat C, 27/F, Block 5, Grand Pacific Views, Siu Lam, Hong Kong N7. (10) Armistice Capital, LLC (“Armistice Capital”) is the investment manager of Armistice Capital Master Fund Ltd. (the “Master Fund”), the direct holder of the 121,494 shares of common stock, and pursuant to an Investment Management Agreement, Armistice Capital exercises voting and investment power over the securities held by the Master Fund and thus may be deemed to beneficially own the securities held by the Master Fund. Steven Boyd, as the managing member of Armistice Capital, may be deemed to beneficially own the securities held by the Master Fund. The Master Fund specifically disclaims beneficial ownership of the securities directly held by it by virtue of its inability to vote or dispose of such securities as a result of its Investment Management Agreement with Armistice Capital. The address of Armistice Capital, LLC is 510 Madison Avenue, 7th Floor, New York, NY 10022. 34 Table of Contents EQUITY COMPENSATION PLAN INFORMATION The following table sets forth, as of December 31, 2023, information with respect to securities authorized for issuance under equity compensation plans. On January 27, 2016, the stockholders approved the 2015 Equity Incentive Plan, which was amended on June 13, 2019 by vote of stockholders, and amended and restated by vote of stockholders on June 18, 2021 (as amended and restated, the “2015 Plan”). The 2015 Plan reserves 43,834 shares of common stock for issuance of options, restricted stock, and other equity based awards to employees, officers, directors, and consultants of the Company. Options are issued at exercise prices which may not be below 100-110% of fair market value and have terms not to exceed ten years. Options issued under the 2015 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, certain stock awards issued under this plan may be subject to additional acceleration of vesting as may be provided in the participants’ written agreement. The 2015 Plan expires in December 2025. In addition to options issued under the 2015 Plan, we have issued options to purchase common stock to employees, officers, directors and consultants outside of the plan. The terms of these outstanding options are substantially similar to the provisions of the 2015 Plan and options issued thereunder. In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately. On June 18, 2021, the stockholders approved the 2021 Employee Stock Purchase Plan (“ESPP”). Under the terms of this plan, 43,834 shares of common stock are reserved for issuance and sale to employees and officers of the Company at a purchase price equal to 85% of the lower of the closing price of our common stock as reported on the Nasdaq Capital Market on the first day or the last day of the offering period. Eligible employees are granted an option to purchase shares of common stock funded by payroll deductions. The Board may suspend or terminate the plan at any time, otherwise the plan expires June 17, 2031. On December 14, 2023, the stockholders approved the 2023 Stock Incentive Plan. The 2023 Plan reserves 333,334 shares of common stock for issuance of options, restricted stock, and other equity based awards to employees, officers, directors, consultants advisors and independent contractors of the Company. Options are issued at exercise prices which may not be below 100% of fair market value (or 110% of the fair market value if, at the time the option is granted, the participant owns, directly or indirectly, more than 10% of the total combined voting power of all classes of our stock) and have terms not to exceed ten years. Options issued under the 2023 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, certain awards issued under this plan may be subject to additional acceleration of vesting as may be provided in the participants’ written agreement. The 2023 Plan expires on December 13, 2033, unless terminated earlier. No awards have yet been granted under the 2023 Plan. Number of securities remaining available for Number of future issuance securities to be Weighted- under equity issued average compensation upon exercise exercise price plans of outstanding of outstanding (excluding options, options, securities warrants and warrants and reflected in rights rights column (a)) Plan Category (a) (b) (c) Equity compensation plans approved by security holders 3,373 (1)(2) $ 186.55 374,401 (3) Equity compensation plans not approved by security holders 5,893 $ 381.89 — Total 9,266 (1)(2) $ 311.16 374,401 (3) (1) Consists of shares of common stock issuable upon the exercise of options outstanding as of December 31, 2023 under the 2015 Plan. (2) Excludes employee stock purchase rights accruing under the ESPP. (3) Amount includes 4,627 shares of common stock and 333,334 shares of common stock available as of December 31, 2023 for future issuance under the 2015 Plan and the 2023 Plan, respectively, and 36,440 shares of common stock available as of December 31, 2023 for future issuance under the ESPP. 35 Table of Contents ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Standstill Agreement with Principal Stockholders Pursuant to separate securities purchase agreements dated October 29, 2015 and November 11, 2015 with Wong Kwok Fong (Kelvin), we issued and sold shares of series A-1 stock to Kelvin which were subsequently converted into shares of our common stock. The forgoing agreements contain a standstill provision (the “Standstill”) which prohibits Kelvin either alone or together with any other person, from acquiring additional shares of our common stock or any of our assets, soliciting proxies, or seeking representation on our board of directors. Kelvin is the Co-Chairman of the board of directors and an executive officer. 2023 Public Securities Offering On October 31, 2023, we completed a public offering of shares of common stock and warrants resulting in net proceeds of approximately $3.3 million, after deducting placement agent fees and estimated offering expenses. Units comprised of shares of common stock and warrants to purchase common stock were purchased at a per unit price of $3.15, and warrants have an exercise price of $3.15. Michael W. DePasquale, our Chairman of the Board of Directors and Chief Executive Officer, James D. Sullivan, our Vice President of Strategy and Compliance, Chief Legal Officer, and Mr. Sullivan’s spouse each participated in the public offering. Mr. DePasquale purchased 9,167 shares of common stock and a warrant to purchase 9,167 shares of common stock for a total purchase price of $28,875. Mr. Sullivan purchased 12,667 shares of common stock and a warrant to purchase 12,667 shares of common stock for a total purchase price of $39,000, and his spouse purchased 3,173 shares of common stock and a warrant to purchase 3,173 shares of common stock for a total purchase price of $9,993. Director Independence As required under the NASDAQ Marketplace Rules, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the board of directors. Our board considered certain relationships between our directors and us when determining each director’s status as an “independent director” under Rule 5605(a)(2) of the NASDAQ Marketplace Rules. Based upon such definition and SEC regulations, we have determined that Robert Michel, Emmanuel Alia, and Cameron Williams, are “independent” under NASDAQ standards. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table shows fees for professional services and audit fees billed to us by Bush and Associates CPA for the audit of our annual consolidated financial statements for the year ended December 31, 2023. The following table also shows fees for professional services and audit fees billed to us by Marcum LLC for review of our financial statements for the first, second and third quarters of 2023 and the second and third quarters of 2022, and audit of our financial statements for the year ended December 31, 2022. The table also includes the review of our financial statements for the first quarter 2022 by Rotenberg Meril Solomon Bertiger & Guttilla, P.C. (“RMSBG”), prior to RMSBG’s merger with Marcum: 2023 2022 Audit Fees $ 280,000 $ 133,000 Audit-Related Fees 73,151 27,913 Tax Fees 17,000 17,000 Other Fees - - Total Fees $ 370,151 $ 177,913 Audit Fees consist of fees billed for professional services rendered for the audit of our financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by our auditors in connection with statutory and regulatory filings or engagements. Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and which are not reported under audit fees. These fees relate primarily to services provided in connection with registration of securities and review of documents filed with the SEC. Tax Fees consist of fees billed for professional services for tax compliance assistance rendered during the fiscal year. 36 Table of Contents Audit Committee Pre-Approval Procedures The audit committee approves the engagement of our independent auditors to render audit and non-audit services before they are engaged. All of the fees for 2023 and 2022 shown above were pre-approved by the audit committee. The audit committee pre-approves all audit and other permitted non-audit services provided by our independent auditors. Pre-approval is generally provided for up to one year, is detailed as to the particular category of services and is subject to a monetary limit. Our independent auditors and senior management periodically report to the audit committee the extent of services provided by the independent auditors in accordance with the pre-approval, and the fees for the services performed to date. The audit committee may also pre-approve particular services on a case-by-case basis. Our audit committee will not approve engagements of our independent registered public accounting firm to perform non-audit services for us if doing so will cause our independent registered public accounting firm to cease to be independent within the meaning of applicable SEC rules. In addition, our audit committee considers, among other things, whether our independent registered public accounting firm is able to provide the required services in a more or less effective and efficient manner than other available service providers. PART IV ITEM 15. – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this Report. Portions of Item 15 are submitted as separate sections of this Report: (1) Financial statements filed as part of this Report: Report of Independent Registered Public Accounting Firm (Bush and Associates CPA., PCAOB ID:6797) Report of Independent Registered Public Accounting Firm (Marcum LLP, PCAOB ID:688) Consolidated Balance Sheets as of December 31, 2023 and 2022 Consolidated Statements of Operations—Years ended December 31, 2023 and 2022 Consolidated Statements of Stockholders’ Equity—Years ended December 31, 2023 and 2022 Consolidated Statements of Cash Flows—Years ended December 31, 2023 and 2022 Notes to Consolidated Financial Statements—December 31, 2023 and 2022 (b) The exhibits listed in the Exhibits Index immediately preceding such exhibits are filed as part of this Report 37 Table of Contents ITEM 16. – FORM 10-K SUMMARY None. FINANCIAL STATEMENTS The following financial statements of BIO-key International, Inc. are included herein at the indicated page numbers: Report of Independent Registered Public Accounting Firm ( Bush and Associates CPA ., PCAOB ID: 6797 ) 39 Report of Independent Registered Public Accounting Firm (Marcum LLC., PCAOB ID:688) 40 Consolidated Balance Sheets as of December 31, 2023 and 2022 41 Consolidated Statements of Operations and Comprehensive Loss—Years ended December 31, 2023 and 2022 42 Consolidated Statements of Stockholders’ Equity —Years ended December 31, 2023 and 2022 43 Consolidated Statements of Cash Flows—Years ended December 31, 2023 and 2022 44 Supplementary Disclosures of Cash Flow Information—Years ended December 31, 2023 and 2022 45 Notes to the Consolidated Financial Statements—December 31, 2023 and 2022 46 38 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholder and the Board of Directors of BIO-key International, Inc. Holmdel, NJ Opinion on the Financial Statements We have audited the retrospective adjustments related to the reverse stock split discussed in Note A, the accompanying consolidated balance sheet of BIO-key International, Inc. (the “Company”) as of December 31, 2022. Additionally, we have audited the accompanying consolidated balance sheet of BIO-key International, Inc. and Subsidiaries (the “Company”) as of December 31, 2023, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements and the retrospective adjustments related to the reverse stock split present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Substantial Doubt about the Company's ability to continue as a Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in Note A of the financial statements, the Company has suffered substantial net losses and negative cash flows from operations in recent years and is dependent on debt and equity financing to fund its operations, all of which raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are disclosed in Note A. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgements. We determined that there are no critical audit matters. /s/Bush & Associates CPA LLC We have served as the Company’s auditor since 2024. Henderson, Nevada June 5, 2024 39 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of BIO-key International, Inc. Holmdel, NJ Opinion on the Financial Statements We have audited, before the effects of the retrospective adjustments related to the reverse stock split discussed in Note A, the accompanying consolidated balance sheet of BIO-key International, Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, before the effects of the retrospective adjustments related to the reverse stock split discussed in Note A, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. We were not engaged to audit, review, or apply any procedures to the effects of the retrospective adjustments related to the reverse stock split discussed in Note A and, accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in Note A of the financial statements, the Company has suffered substantial net losses and negative cash flows from operations in recent years and is dependent on debt and equity financing to fund its operations, all of which raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are disclosed in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ Marcum LLP Marcum LLP We served as the Company’s auditor from 2010 to 2024 Saddle Brook, New Jersey June 5, 2024 40 Table of Contents BIO-key International, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 2023 2022 ASSETS Cash and cash equivalents $ 511,400 $ 2,635,522 Accounts receivable, net 1,201,526 1,522,784 Due from factor 99,320 49,500 Inventory, net of reserve 445,740 4,434,369 Prepaid expenses and other 364,171 342,706 Total current assets 2,622,157 8,984,881 Equipment and leasehold improvements, net 220,177 107,413 Capitalized contract costs, net 229,806 283,069 Deposits and other assets - 8,712 Operating lease right-of-use assets 36,905 197,355 Intangible assets, net 1,407,990 1,762,825 Total non-current assets 1,894,878 2,359,374 TOTAL ASSETS $ 4,517,035 $ 11,344,255 LIABILITIES Accounts payable $ 1,316,014 $ 1,108,279 Accrued liabilities 1,305,848 1,009,123 Convertible note payable - 2,596,203 Government loan – BBVA Bank, current portion 138,730 120,000 Deferred revenue - current 414,968 462,418 Operating lease liabilities, current portion 37,829 159,665 Total current liabilities 3,213,389 5,455,688 Deferred revenue, net of current portion 28,296 52,134 Deferred tax liability 22,998 170,281 Government loan – BBVA Bank, net of current portion 188,787 326,767 Operating lease liabilities, net of current portion - 37,829 Total non-current liabilities 240,081 587,011 TOTAL LIABILITIES 3,453,470 6,042,699 Commitments (Note O) STOCKHOLDERS’ EQUITY Common stock — authorized, 170,000,000 shares; issued and outstanding; 1,032,777 and 552,739 of $.0001 par value at December 31, 2023 and December 31, 2022, respectively 103 55 Additional paid-in capital 126,047,851 122,029,476 Accumulated other comprehensive loss 22,821 ( 242,602 ) Accumulated deficit ( 125,007,210 ) ( 116,485,373 ) TOTAL STOCKHOLDERS’ EQUITY 1,063,565 5,301,556 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 4,517,035 $ 11,344,255 All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023. The accompanying notes are an integral part of these statements. 41 Table of Contents BIO-key International, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Years ended December 31, 2023 2022 Revenues Services $ 2,218,885 $ 1,789,720 License fees 4,342,010 4,584,052 Hardware 1,194,010 646,486 Total revenues 7,754,905 7,020,258 Costs and other expenses Cost of services 861,936 722,152 Cost of license fees 1,174,919 906,417 Cost of hardware 700,231 411,001 Cost of hardware reserve 3,586,500 400,000 Total costs and other expenses 6,323,586 2,439,570 Gross Profit 1,431,319 4,580,688 Operating expenses Selling, general and administrative 7,862,710 9,364,887 Research, development and engineering 2,394,926 3,252,236 Reversal of earnout payable – Swivel acquisition - ( 500,000 ) Impairment of goodwill - 2,387,193 Total operating expenses 10,257,636 14,504,316 Operating loss ( 8,826,317 ) ( 9,923,628 ) Other income (expense) Interest income 11,533 233 Gain from sale of asset 20,000 - Loss on foreign currency transactions ( 39,000 ) - Investment-debt security reserve - ( 452,821 ) Loan transaction costs - ( 1,147,456 ) Change in fair value of convertible note 396,203 ( 396,203 ) Interest expense ( 218,270 ) ( 10,462 ) Total other income (expense) 170,466 ( 2,006,709 ) Loss before provision for income tax benefit ( 8,655,851 ) ( 11,930,337 ) Provision for income tax benefit 134,014 20,434 Net loss $ ( 8,521,837 ) $ ( 11,909,903 ) Comprehensive loss: Net loss $ ( 8,521,837 ) $ ( 11,909,903 ) Other comprehensive loss- Foreign translation adjustment 265,423 ( 242,602 ) Comprehensive loss $ ( 8,256,414 ) $ ( 12,152,505 ) Basic and Diluted Loss per Common Share $ ( 15.21 ) $ ( 27.26 ) Weighted Average Shares Outstanding: Basic and Diluted 560,278 436,821 All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023. The accompanying notes are an integral part of these statements. 42 Table of Contents BIO-key International, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY Accumulated Additional Other Common Stock Paid-in Comprehensive Accumulated Shares (1) Amount Capital Income (Loss) Deficit Total Balance as of December 31, 2021 478,475 $ 48 $ 120,190,877 $ - $ ( 104,575,470 ) $ 15,615,455 Issuance of common stock for directors’ fees 2,202 - 76,043 - - 76,043 Issuance of restricted common stock to employees 15,444 1 ( 1 ) - - - Forfeiture of restricted stock ( 583 ) - - - - - Issuance of common stock pursuant to Swivel purchase agreement 14,948 2 600,001 - - 600,003 Issuance of common stock for note issuance fees 38,889 4 699,996 - - 700,000 Issuance of warrant in conjunction with note payable - - 94,316 - 94,316 Issuance of common stock for employee stock purchase plan 3,364 - 56,380 - - 56,380 Share based compensation for employee stock purchase plan - - 18,787 - - 18,787 Foreign currency translation adjustment - - ( 242,602 ) - ( 242,602 ) Share-based compensation - - 293,077 - - 293,077 Net loss - - - - ( 11,909,903 ) ( 11,909,903 ) Balance as of December 31, 2022 552,739 $ 55 $ 122,029,476 $ ( 242,602 ) $ ( 116,485,373 ) $ 5,301,556 Issuance of common stock for directors’ fees 3,078 - 39,007 - - 39,007 Issuance of restricted common stock to employees 16,404 1 ( 1 ) - - - Forfeiture of restricted stock ( 3,752 ) - ( 3,105 ) - - ( 3,105 ) Exercise of warrants 177,889 18 302 - - 320 Issuance of warrants - - 3,403,322 - - 3,403,322 Issuance of stock for securities purchase agreements 283,472 29 892,909 - - 892,938 Issuance of common stock for employee stock purchase plan 2,947 - 17,478 - - 17,478 Share based compensation for employee stock purchase plan - - 4,343 - - 4,343 Foreign currency translation adjustment - - - 265,423 - 265,423 Share-based compensation - - 225,487 - - 225,487 Issuance costs - - ( 561,367 ) - - ( 561,367 ) Net loss - - - - ( 8,521,837 ) ( 8,521,837 ) Balance as of December 31, 2023 1,032,777 $ 103 $ 126,047,851 $ 22,821 $ ( 125,007,210 ) $ 1,063,565 All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023. The accompanying notes are an integral part of these statements. 43 Table of Contents BIO-key International, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2023 2022 CASH FLOW FROM OPERATING ACTIVITIES: Net loss $ ( 8,521,837 ) $ ( 11,909,903 ) Adjustments to reconcile net loss to cash used for operating activities: Depreciation 75,136 43,794 Impairment of goodwill - 2,387,193 Reversal of earnout payable – Swivel acquisition - ( 500,000 ) Amortization of intangible assets and write-off 354,558 298,113 Amortization of resalable software license rights - 48,752 Loan transaction costs - 1,147,456 Loss on foreign currency 39,000 - Reserve for investment security - 452,821 Reserve for inventory 3,586,500 400,000 Reserve for note receivable - 186,000 Allowance for doubtful account 750,000 360,000 Amortization of debt discount - - Amortization of capitalized contract costs 171,291 106,624 Share based and warrant compensation for employees and consultants 226,725 311,864 Stock based fees to directors 39,007 76,043 Bad debt expense 100,000 130,111 Change in fair value of convertible note ( 396,203 ) 396,203 Deferred income tax benefit ( 134,014 ) ( 20,434 ) Amortization of operating lease right-of-use assets 160,449 155,353 Change in operating assets and liabilities: Accounts receivable ( 428,742 ) ( 339,383 ) Due from factor ( 49,820 ) - Capitalized contract costs ( 118,028 ) ( 140,681 ) Inventory 402,129 106,291 Prepaid expenses and other ( 21,465 ) ( 46,655 ) Accounts payable 57,725 239,144 Income tax payable ( 121,764 ) Accrued liabilities 275,561 167,614 Deferred revenue ( 71,288 ) ( 120,078 ) Operating lease liabilities ( 168,376 ) ( 165,276 ) Net cash used for operating activities ( 3,793,456 ) ( 6,229,034 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Swivel Secure, net of cash acquired of $ 729,905 - ( 623,578 ) Receipt of cash from note receivable - 9,000 Capital expenditures ( 1,000 ) ( 82,040 ) Net cash used for investing activities ( 1,000 ) ( 696,618 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from public offerings 4,296,260 - Repayment of convertible notes ( 2,200,000 ) - Proceeds from the exercise of warrants 320 - Costs incurred for issuance of common stock ( 561,367 ) - Proceeds from issuance of convertible notes - 2,002,000 Costs incurred for issuance of convertible note - ( 155,140 ) Repayment of government loan ( 119,251 ) - Proceeds from Employee Stock Purchase Plan 17,478 56,380 Net cash (used in) provided by financing activities 1,433,440 1,903,240 Effect of exchange rate changes 236,894 ( 96,112 ) NET DECREASE IN CASH AND CASH EQUIVALENTS ( 2,124,122 ) ( 5,118,524 ) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,635,522 7,754,046 CASH AND CASH EQUIVALENTS, END OF YEAR $ 511,400 $ 2,635,522 All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023. The accompanying notes are an integral part of these statements. 44 Table of Contents SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION Years ended December 31, 2023 2022 Cash paid during the year for: Taxes $ - $ 25,682 Interest $ 218,270 $ 10,462 Noncash investing and financing activities: Accounts receivable acquired from Swivel Secure $ - $ 702,886 Equipment acquired from Swivel Secure $ - $ 65,640 Other assets acquired from Swivel Secure $ - $ 20,708 Intangible assets acquired from Swivel Secure $ - $ 762,860 Goodwill resulting from the acquisition from Swivel Secure $ - $ 1,258,087 Accounts payable and accrued expenses acquired from Swivel Secure $ - $ 431,884 Government loan acquired from Swivel Secure $ - $ 544,000 Deferred tax liability from the acquisition of Swivel Secure $ - $ 190,715 Common stock issued for acquisition of Swivel Secure $ - $ 600,004 Common stock issued for acquisition of note payable $ - $ 700,000 Issuance of warrant for acquisition of note payable $ - $ 94,316 Operating lease right-of-use asset and liability for new lease $ - $ 105,893 All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023. The accompanying notes are an integral part of these statements. 45 Table of Contents BIO-key International, Inc. and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS December 31, 2023 and 2022 NOTE A — THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business The Company, founded in 1993, develops and markets proprietary fingerprint identification biometric technology and software solutions enterprise-ready identity access management solutions to commercial, government and education customers throughout the United States and internationally. The Company was a pioneer in developing automated, finger identification technology that supplements or compliments other methods of identification and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, PKI (public key infrastructure), credit cards, passports, driver’s licenses, OTP or other form of possession or knowledge-based credentialing. Additionally, advanced BIO-key® technology has been, and is, used to improve both the accuracy and speed of competing finger-based biometrics. Going Concern and Basis of Presentation The Company has historically financed operations through access to the capital markets by issuing convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. As of the date of this report, the Company does not have enough cash for twelve months of operations. The history of significant losses, the negative cash flow from operations, the limited cash resources on hand and the dependence by the Company on its ability, to obtain additional financing to fund its operations after the current cash resources are exhausted raises substantial doubt about the Company's ability to continue as a going concern. The Company has lowered expenses through decreasing spending in marketing, and research and development. In addition, the Company has purchased inventory for projects in Nigeria, which have been delayed in deployment, and is, therefore looking into other markets and opportunities to sell or return the product to generate additional cash. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which contemplate continuation of the Company as a going concern, and assumes continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has suffered substantial net losses and negative cash flows from operations in recent years and is dependent on debt and equity financing to fund its operations all of which raise substantial doubt about the Company’s ability to continue as a going concern. Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon the Company’s ability to increase its revenue and meet its financing requirements on a continuing basis and become profitable in its future operations. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. Reverse Stock Split All references to issued and outstanding shares for all periods reflect the 1 -for- 18 reverse stock split, which was effective December 21, 2023. As a result, all share numbers for all periods, including the number of shares underlying warrants, options, and other convertible securities, and all exercise prices applicable to such warrants, options and convertible securities have been adjusted retrospectively to reflect the 1 -for- 18 reverse stock split. Foreign Currency The Company accounts for foreign currency transactions pursuant to ASC 830, Foreign Currency Matters ("ASC 830” ). The functional currency of the Company is the U.S. dollar, which is the currency of the primary economic environment in which it operates. In accordance with ASC 830, monetary balances denominated in or linked to foreign currency are stated on the basis of the exchange rates prevailing at the applicable balance sheet date. For foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used. Gains or losses arising from changes in the exchange rates used in the translation of such transactions and from the remeasurement of the monetary balance sheet items are recorded as gain (loss) on foreign currency transactions. The functional currency of Swivel Secure Europe, SA is the Euro. Under ASC 830, all assets and liabilities are translated into U. S. dollars using the current exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated in Euros are reflected in the statement of operations as appropriate. Translation adjustments are included in accumulated other comprehensive loss. Summary of Significant Accounting Policies A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows: 1. Principles of Consolidation The accompanying consolidated financial statements include the accounts of BIO-key International, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Intercompany accounts and transactions have been eliminated in consolidation. 46 Table of Contents 2. Use of Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) as set forth in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) and consider the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission (SEC). These accounting principles require us to make certain estimates, judgments and assumptions. The Company believes that the estimates, judgments and assumptions upon which it relies are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Certain significant accounting policies that contain subjective management estimates and assumptions include those related to accounts receivable, inventory, intangible assets and goodwill, fair value of convertible note payable, and income taxes. 3. Revenue Recognition In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps: ● Identify the contract with a customer ● Identify the performance obligations in the contract ● Determine the transaction price ● Allocate the transaction price to performance obligations in the contract ● Recognize revenue when or as the Company satisfies a performance obligation All of the Company's performance obligations, and associated revenues, are generally transferred to customers at a point in time, with the exception of support and maintenance, and professional services, which are generally transferred to the customer over time. Software licenses Software license revenue consists of fees for perpetual and subscription licenses for one or more of the Company’s biometric fingerprint solutions or identity access management solutions. Revenue is recognized at a point in time once the software is available to the customer for download. Software license contracts are generally invoiced in full on execution of the arrangement. Hardware Hardware revenue consists of fees for associated equipment sold with or without a software license arrangement, such as servers, locks and fingerprint readers. Customers are not obligated to buy third party hardware from the Company, and may procure these items from a number of suppliers. Revenue is recognized at a point in time once the hardware is shipped to the customer. Hardware items are generally invoiced in full on execution of the arrangement. Support and Maintenance Support and maintenance revenue consists of fees for unspecified upgrades, telephone assistance and bug fixes. The Company satisfies its support and maintenance performance obligation by providing “stand-ready” assistance as required over the contract period. The Company records deferred revenue (contract liability) at time of prepayment until the term of the contract begins. Revenue is recognized over time on a ratable basis over the contract term. Support and maintenance contracts are one to five years in length and are generally invoiced in advance at the beginning of the term. Support and Maintenance revenue for subscription licenses is carved out of the total license cost at 18 % and recognized on a ratable basis over the license term. Professional Services Professional services revenues consist primarily of fees for deployment and optimization services, as well as training. The majority of the Company’s consulting contracts are billed on a time and materials basis, and revenue is recognized based on the amount billable to the customer in accordance with practical expedient ASC 606 - 10 - 55 - 18. For other professional services contracts, the Company utilizes an input method and recognizes revenue based on labor hours expended to date relative to the total labor hours expected to be required to satisfy its performance obligation. Contracts with Multiple Performance Obligations Some contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The standalone selling prices are determined based on overall pricing objectives, taking into consideration market conditions and other factors, including the value of the contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users within the contracts. 47 Table of Contents The Company considered several factors in determining that control transfers to the customer upon shipment of hardware and availability of download of software. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership. Accounts receivable from customers are typically due within 30 days of invoicing. The Company does not record a reserve for product returns or warranties as amounts are deemed immaterial based on historical experience. Costs to Obtain and Fulfill a Contract Costs to obtain and fulfill a contract are predominantly sales commissions earned by the sales force and are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit determined to be four years. These costs are included as capitalized contract costs on the balance sheet. The period of benefit was determined by taking into consideration customer contracts, technology, and other factors based on historical evidence. Amortization expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. Deferred Revenue Deferred revenue includes customer advances and amounts that have been paid by customers for which the contractual maintenance terms have not yet occurred. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which generally is 12 - 60 months. Contracts greater than 12 months are segregated as long term deferred revenue. Maintenance contracts include provisions for unspecified when-and-if available product updates and customer telephone support services. At December 31, 2023 and 2022 , amounts in deferred revenue were approximately $ 443,000 and $ 515,000 , respectively. 4. Business Combinations In accordance with ASC 805, Business Combinations (ASC 805 ), the Company recognizes the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Determining these fair values requires management to make significant estimates and assumptions, especially with respect to intangible assets. The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair value. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net acquisition date fair value of the assets acquired and the liabilities assumed and represents the expected future economic benefits arising from other assets acquired that are not individually identified and separately recognized. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Assumptions may be incomplete or inaccurate, and unanticipated events or circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. 5. Goodwill and acquired intangible assets Goodwill is not amortized, but is evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that there is a single reporting unit for the purpose of conducting this goodwill impairment assessment. For purposes of assessing potential impairment, the Company estimates the fair value of the reporting unit, based on the Company’s market capitalization, and compares this amount to the carrying value of the reporting unit. If the Company determines that the carrying value of the reporting unit exceeds its fair value, an impairment charge would be required. The annual goodwill impairment test will be performed as of December 31st of each year. Refer Note K for more information regarding the impairment of goodwill in 2022. Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. The Company amortizes acquired definite-lived intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis. 6. Cash Equivalents Cash equivalents consist of liquid investments with original maturities of three months or less. At December 31, 2023 and 2022 , cash equivalents consisted of a money market account. 48 Table of Contents 7. Accounts Receivable Accounts receivable are carried at original amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful receivables by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Accounts receivable are written off when deemed uncollectible. Accounts receivable at December 31, 2023 and 2022 consisted of the following: December 31, 2023 2022 Accounts receivable $ 2,207,311 $ 2,096,569 Allowance for doubtful accounts ( 1,005,785 ) ( 573,785 ) Accounts receivable, net of allowances for doubtful accounts $ 1,201,526 $ 1,522,784 Bad debt expenses (if any) are recorded in selling, general, and administrative expense. The allowance for doubtful accounts for the years ended December 31, 2023 and 2022 is as follows: Balance at Beginning of Year Charged to Costs and Expenses Deductions from Reserves Balance at End of Year Year ended December 31, 2023 Allowance for Doubtful Accounts $ 573,785 $ 750,000 $ ( 318,000 ) $ 1,005,785 Year ended December 31, 2022 Allowance for Doubtful Accounts $ 213,785 $ 360,000 $ - $ 573,785 8. Equipment and Leasehold Improvements, Intangible Assets and Depreciation and Amortization Equipment and leasehold improvements are stated at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over the estimated service lives, principally using straight-line methods. Leasehold improvements are amortized over the shorter of the life of the improvement or the lease term, using the straight-line method. The estimated useful lives used to compute depreciation and amortization for financial reporting purposes are as follows: Years Equipment and leasehold improvements Equipment 3 - 5 Furniture and fixtures 3 - 5 Software 3 Leasehold improvements life or lease term Intangible assets other than goodwill consist of patents, trade name, proprietary software, and customer relationships. Patent costs are capitalized until patents are awarded. Upon award, such costs are amortized using the straight-line method over their respective economic lives. If a patent is denied, all costs are charged to operations in that year. Trade names, proprietary software, and customer relationships are amortized over the economic useful life. 9. Impairment or Disposal of Long Lived Assets, including Intangible Assets The Company reviews long-lived assets, including intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is equal to the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. In assessing recoverability, the Company must make assumptions regarding estimated future cash flows and discount factors. If these estimates or related assumptions change in the future, the Company may be required to record impairment charges. Intangible assets with determinable lives are amortized over their estimated useful lives, based upon the pattern in which the expected benefits will be realized, or on a straight-line basis, whichever is greater. There were no impairments in 2023 and 2022 . 10. Advertising Expense The Company expenses the costs of advertising as incurred. Advertising expenses for 2023 and 2022 were approximately $ 340,000 and $ 842,000 , respectively. 11. Research and Development Expenditures Research and development expenses include costs directly attributable to the conduct of research and development programs primarily related to the development of our software products and improving the efficiency and capabilities of our existing software. Such costs include salaries, payroll taxes, employee benefit costs, materials, supplies, depreciation on research equipment, services provided by outside contractors, and the allocable portions of facility costs, such as rent, utilities, insurance, repairs and maintenance, depreciation and general support services. All costs associated with research and development are expensed as incurred. 49 Table of Contents 12. Earnings Per Share of Common Stock ( “ EPS ” ) The Company’s EPS is calculated by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options and warrants, when the effect of their inclusion is dilutive. All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1 -for- 18 reverse stock split, which was effective December 21, 2023. 13. Accounting for Stock-Based Compensation The Company accounts for share based compensation in accordance with the provisions of ASC 718 - 10, “Compensation — Stock Compensation,” which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The majority of its share-based compensation arrangements vest over a three year vesting schedule. The Company expenses its share-based compensation under the ratable method, which treats each vesting tranche as if it were an individual grant. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of certain assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of its common stock price over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized as an expense in the consolidated statements of operations. As required under the accounting rules, the Company reviews its valuation assumptions at each grant date and, as a result, the Company is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the service period, net of estimated forfeitures (the number of individuals that will ultimately not complete their vesting requirements). The estimation of stock awards that will ultimately vest requires significant judgment. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from current estimates. Options and warrants to outsiders are accounted for under ASC 718. The following table presents share-based compensation expenses included in the Company’s consolidated statements of operations: Year ended December 31, 2023 2022 Selling, general and administrative $ 209,134 $ 310,017 Research, development and engineering 56,598 77,890 $ 265,732 $ 387,907 50 Table of Contents 14. Income Taxes The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. The Company evaluates, on a quarterly basis whether, based on all available evidence, if it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740 - 10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Because of the Company’s historical performance and estimated future taxable income, a full valuation allowance has been established. The Company accounts for uncertain tax provisions in accordance with ASC 740. The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. 15 . Leases In accordance with ASC 842, Leases (ASC 842 ), the Company records a right-of-use (ROU) asset and a lease liability on the balance sheet for all leases with terms longer than 12 months and classifies them as either operating or finance leases. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of the lease including whether the contract involves the use of a distinct identified asset, whether the Company obtains the right to substantially all the economic benefit from the use of the asset, and whether the Company has the right to direct the use of the asset. Leases with a term greater than one year are recognized on the balance sheet as ROU assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less under practical expedient in paragraph ASC 842 - 20 - 25 - 2. For contracts with lease and non-lease components, the Company has elected not to allocate the contract consideration, and to account for the lease and non-lease components as a single lease component. Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The implicit rate within our operating leases are generally not determinable and, therefore, the Company uses the incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The Company determines the incremental borrowing rate for each lease using our estimated borrowing rate, adjusted for various factors including level of collateralization, term and currency to align with the terms of the lease. The operating lease ROU asset also includes any lease prepayments, offset by lease incentives. An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option. An option to terminate is considered unless it is reasonably certain we will not exercise the option. 16. The Fair Value Measurement Option The Company has elected the fair value measurement option for convertible debt with embedded derivatives that require bifurcation, and record the entire hybrid financing instrument at fair value under the guidance of ASC 825, Financial Instruments . As a result, the convertible promissory note was recorded at fair value upon issuance and will subsequently be remeasured at each reporting date until settled or converted. The Company recognized the note initially at fair value, which exceeded the proceeds received resulting in a day one loss that has been recognized in net loss. The Company reports interest expense, including accrued interest, related to the convertible debt under the fair value option, separately from within the change in fair value of the convertible debt in the accompanying consolidated statement of operations. 17. Fair Value Measurements Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. GAAP establishes a three -tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities; Level 2: Quoted prices in markets that are not active or inputs which are observable either directly or indirectly for substantially the full term of the asset or liability; and Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity). The Company issued a convertible note which included an original issue discount, conversion features and a detachable warrant, as further discussed in Note M. The detachable warrant represents a freestanding, separable equity-linked financial instrument recorded at fair value. The fair value of the detachable warrant was calculated using a Black-Scholes valuation model. The Company elected the fair value option for the convertible debt which was determined based on significant unobservable inputs including the likelihood of default, the estimated date at which the default could take place, and the present value discount rate, which causes it to be classified as a Level 3 measurement within the fair value hierarchy. The fair value option requires recognition at fair value upon issuance and on each balance sheet date thereafter. Changes in the estimated fair value are recognized as change in fair value of convertible note in the consolidated statements of operations. As a result of applying the fair value option, direct costs and fees related to the issuance of the convertible note were expensed and not deferred. 51 Table of Contents The Company estimated the fair value of the convertible note using a probability-weighted discounted cash flow model with the following assumptions and significant terms of the convertible note at December 22, 2022: 1. Face amount - $ 2,200,000 2. Nominal interest rate – 10 % - 12 % 3. Default interest rate – 18 % 4. Increase in principal upon a default – 30 % 5. Present value discount rate – 15.18 % 6. Likelihood of default – estimated to be 50 % at the extended maturity date The following table shows the changes in fair value measurements for the convertible note using significant unobservable inputs (Level 3 ) during the year ended December 31, 2023 : Beginning balance $ 2,596,203 Purchases and issuances ( 2,200,000 ) Day one change in value of hybrid instrument ( 396,203 ) Ending balance $ - 18. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016 - 13, Financial Instruments-Credit Losses (Topic 326 ), referred to herein as ASU 2016 - 13, which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016 - 13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU 2016 - 13 credit impairment is recognized as an allowance for credit losses, rather than as a direct writedown of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016 - 13. ASU 2016 - 13 is effective for the Company for annual periods, including interim periods within those annual periods, beginning on January 1, 2023. The Company has adopted the accounting standard. NOTE B — REVENUE FROM CONTRACTS WITH CUSTOMERS Disaggregation of Revenue The following table summarizes revenue from contracts with customers for the years ended December 31, 2023 and 2022 : North December 31, America Africa EMESA* Asia 2023 License fees $ 1,971,348 $ 552,630 $ 1,801,381 $ 16,651 $ 4,342,010 Hardware 147,815 0 1,013,295 32,900 1,194,010 Services 1,116,935 101,816 981,848 18,286 2,218,885 Total revenues $ 3,236,098 $ 654,446 $ 3,796,524 $ 67,837 $ 7,754,905 52 Table of Contents North December 31, America Africa EMESA* Asia 2022 License fees $ 1,856,814 $ 517,161 $ 2,124,088 $ 85,989 $ 4,584,052 Hardware 422,275 25,833 19,914 178,464 646,486 Services 1,270,067 83,306 436,293 54 1,789,720 Total revenues $ 3,549,156 $ 626,300 $ 2,580,295 $ 264,507 $ 7,020,258 * EMESA – Europe, Middle East, South America Revenue recognized during the year ended December 31, 2023 from amounts included in deferred revenue at the beginning of the year was approximately $ 467,000 . Revenue recognized during the year ended December 31, 2022 from amounts included in deferred revenue at the beginning of the year was approximately $ 489,000 . Total deferred revenue (contract liability) was approximately $ 443,000 and $ 515,000 at December 31, 2023 and 2022 , respectively. Transaction Price Allocated to the Remaining Performance Obligations ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied. The guidance provides certain practical expedients that limit this requirement, which the Company’s contracts meet as follows: ● The performance obligation is part of a contract that has an original expected duration of one year or less, in accordance with ASC 606 - 10 - 50 - 14. Deferred revenue represents the Company’s remaining performance obligations related to prepaid support and maintenance, all of which is expected to be recognized from one to five years. NOTE C — SWIVEL SECURE EUROPE, SA ACQUISITION On March 8, 2022, the Company completed the acquisition of 100 % of the issued and outstanding capital stock of Swivel Secure based in Madrid, Spain, pursuant to the terms of a stock purchase agreement. The aggregate purchase price consisted of a base purchase price of $ 1.75 million, subject to closing adjustments based on the closing date working capital, indebtedness and unpaid transaction expenses, and an earn-out of $ 500,000 . The earn-out was payable based on Swivel Secure generating $ 3,000,000 of revenue and $ 1,000,000 of operating profit during an earn-out period commencing on the closing date and ending on January 31, 2023, which was not attained. At the closing, the Company made a cash payment of $ 1.27 million and issued 14,948 shares of common stock of which 4,983 shares were held back by the Company to secure certain indemnification obligations under the stock purchase agreement. The shares of Company common stock were priced at $ 2.23 , the contractual 20 day volume-weighted average price of the Company’s common stock immediately prior to the payment date as reported on the Nasdaq Capital Market. The business combination has been accounted for as an acquisition and, in accordance with ASC 805. The Company recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following table summarizes the purchase price allocation, with no earnout payment: Purchase consideration: Total cash paid, including working capital adjustment $ 1,273,483 Earnout payable 500,000 Common stock issued 600,004 Total purchase price consideration $ 2,373,487 Fair value of assets acquired and liabilities assumed: Cash and cash equivalents $ 729,905 Accounts receivable 702,886 Equipment acquired 65,640 Other assets 20,708 Intangible assets 762,860 Goodwill 1,258,087 Total estimated assets acquired 3,540,086 Accounts payable and accrued expenses 431,884 Government loan 544,000 Deferred tax liability 190,715 Total liabilities assumed 1,166,599 Total estimated fair value of assets acquired and liabilities assumed $ 2,373,487 53 Table of Contents The fair value of the assets acquired and liabilities assumed was less than the purchase price, resulting in the recognition of goodwill. The goodwill reflected the value of the synergies the Company expected to realize and the assembled workforce. Refer to Note K for more information regarding the impairment of goodwill. The significant intangible asset identified in the purchase price allocation discussed above was Customer Relationships. To value the Customer Relationships, the Company utilized the Excess Earnings Method, which isolates the value of the specific intangible asset by discounting its income stream to present value. The government loan was issued through BBVA Bank during the COVID- 19 pandemic. The loan bears interest at the rate of 1.75 % per annum and is payable in monthly installments of approximately $ 11,900 inclusive of interest from May 2022 through April 2026. The installment payments have been paid monthly as per the schedule, as of the date of this report. The following table presents the final fair values and useful lives of the identifiable intangible assets acquired: Estimated useful life Amount (in years) Customer relationships $ 762,860 7 Total identifiable intangible assets $ 762,860 As discussed above, the earnout payable was not achieved. As such, the Company reversed the earnout payable of $ 500,000 and recognized the income on the reversal of the earnout payable. NOTE D — FAIR VALUES OF FINANCIAL INSTRUMENTS Cash and cash equivalents, accounts receivable, due from factor, accounts payable and accrued liabilities are carried at, or approximate, fair value because of their short-term nature. The carrying value of the Company’s notes and loan payables approximated fair value as the interest rates related to the financial instruments approximated market. 54 Table of Contents NOTE E — CONCENTRATION OF RISK Financial instruments which potentially subject the Company to risk primarily consist of cash, and cash equivalents, investment in debt security, and accounts receivables. The Company maintains its cash and cash equivalents with various financial institutions, which, at times may exceed insured limits. The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company was not in excess of coverage at December 31, 2023. The Company was in excess of coverage of approximately $ 2,000,000 December 31, 2022. The Company has not incurred any losses on these accounts. The Company extends credit to customers on an unsecured basis in the normal course of business. The Company’s policy is to perform an analysis of the recoverability of its receivables at the end of each reporting period and to establish allowances where appropriate. The Company analyzes historical bad debts and contract losses, customer concentrations, and customer credit-worthiness when evaluating the adequacy of the allowances. For the year ended December 31, 2023 three customers accounted for 34 % of total revenue. For the year ended December 2022 , no customer accounted for greater than 10% of total revenue. At December 31, 2023 , three customers accounted for 66 % of the total accounts receivable. At December 31, 2022 , one customer accounted for 35 % of total accounts receivable. NOTE F — NOTE RECEIVABLE During the third quarter of 2020, the Company loaned $ 295,000 as an advance to Technology Transfer Institute (“TTI”) to aid in fulfilling the African contracts. The note did not bear any interest if paid within the nine ( 9 ) monthly installments beginning December 31, 2020. The note bore a default rate of 5 %. Due to the ongoing delays in payment, the Company reserved $ 186,000 of the note as an allowance. On February 17, 2022, the Company amended the note to modify the payment terms to provide for lower monthly payments, with an updated maturity date on or before December 6, 2023. On May 5, 2022, the Company amended the note to modify the payment terms to eight biweekly installments of $ 1,000 beginning February 25, 2022, nineteen consecutive monthly installments of $ 15,000 beginning on July 6, 2022, and $ 2,000 on or before February 6, 2024. The payments are behind schedule. Due to the delay in payments, the Company has increased the allowance for the remainder of the balance owed under the note in 2022. The Company is continuing to pursue payment with an outside collection agency. A member of the Company's board of directors served as Chief Executive Officer of TTI until August 12, 2020. December 31, December 31, 2023 2022 Note receivable $ - $ 195,000 Repayment of note - ( 9,000 ) Allowance for doubtful account - ( 186,000 ) Note receivable, net of allowance - - Current portion, net of allowance $ - $ - Noncurrent portion, net of allowance $ - $ - NOTE G — INVENTORY Inventory is stated at the lower of cost, determined on a first in, first out basis, or realizable value. The Company periodically evaluates inventory items and establishes reserves for obsolescence accordingly. The Company also reserves for excess quantities, slow moving goods, and for other impairment of value based upon assumptions of future demand and market conditions. The reserve on inventory in 2022 and 2023 is due to slow moving inventory purchased for projects in Nigeria. The Company is looking into other markets and opportunities to sell or return the product. Inventory is comprised of the following as of December 31: 2023 2022 Finished goods $ 4,373,056 $ 4,764,643 Fabricated assemblies 59,184 69,726 Reserve on finished goods ( 3,986,500 ) ( 400,000 ) Total inventory $ 445,740 $ 4,434,369 55 Table of Contents NOTE H — RESALABLE SOFTWARE LICENSES RIGHTS On December 31, 2015, the Company purchased third -party software licenses in the amount of $ 180,000 in anticipation of a large pending deployment that has yet to materialize. The Company was amortizing the total cost at the greater of the actual unit cost per license sold or straight-line amortization over 10 years. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $ 141,190 has been charged to cost of sales. Since the Company did not receive any sales for the license in 2021 or 2022, it accelerated the amortization for the balance of the license in 2022, leaving a carrying balance of $ 0 as of both December 31, 2023 and 2022 . A total of $ 48,752 was charged to cost of sales during the year ended December 31, 2022. NOTE I — INVESTMENT IN DEBT SECURITY The Company purchased a 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong in September 2020 bearing interest at 5 % per annum. The Bond Certificate translated to $ 512,821 U.S. Dollars, based on the exchange rate at the purchase date. The investment was originally recorded at amortized cost and was scheduled to mature in June 2021. The Company never received the proceeds and accrued interest from the investment and as such, wrote off the investment during 2022 as the bond issuer defaulted on repayment, and the Company had no recourse. NOTE J — EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consisted of the following as of December 31: 2023 2022 Equipment $ 1,012,958 $ 825,058 Furniture and fixtures 225,978 225,978 Software 49,143 49,143 Leasehold improvements 34,903 34,903 1,322,982 1,135,082 Less accumulated depreciation and amortization ( 1,102,805 ) ( 1,027,669 ) Total $ 220,177 $ 107,413 Depreciation was $ 75,136 and $ 43,794 for 2023 and 2022 , respectively. Amounts are recorded in selling, general, and administrative expense as well as in cost of services. NOTE K — INTANGIBLE ASSETS AND GOODWILL Intangible assets consisted of the following as of December 31: 2023 2022 Trade name $ 130,000 $ 130,000 Proprietary software 420,000 420,000 Customer relationships 1,692,860 1,692,860 Patents and patents pending 365,080 365,080 2,607,940 2,607,940 Less accumulated amortization ( 1,199,950 ) ( 845,115 ) Total $ 1,407,990 $ 1,762,825 56 Table of Contents Aggregate amortization expense for 2023 and 2022 was approximately $ 355,000 and $ 298,000 , respectively. Estimated minimum amortization expense based on straight line amortization of the software license rights for each of the next five years and thereafter approximates the following: Years ending December 31 2024 $ 311,000 2025 $ 267,000 2026 $ 224,000 2027 $ 223,000 2028 $ 141,000 Thereafter $ 241,990 Total $ 1,407,990 Goodwill The Company concluded the amounts in goodwill had been fully impaired and accordingly wrote-off the entire balance in full as at December 31, 2022. NOTE L — ACCRUED LIABILITIES Accrued liabilities consisted of the following as of December 31: 2023 2022 Compensation $ 326,007 $ 377,958 Compensated absences 327,252 378,874 Accrued legal and accounting fees 264,976 110,008 Taxes 152,986 7,000 Employee expenses reimbursement 124,209 114,209 Sales tax payable 19,282 17,594 Other 91,136 3,480 Total $ 1,305,848 $ 1,009,123 NOTE M — CONVERTIBLE NOTE PAYABLE Securities Purchase Agreement dated December 22, 2022 On December 22, 2022, the Company entered into and closed a securities purchase agreement (the “Purchase Agreement”) which issued a $ 2,200,000 principal amount senior secured promissory note (the “Note”). At closing, a total of $ 2,002,000 was funded, with the proceeds to be used for general working capital. 57 Table of Contents The principal amount of the Note was due six months following the date of issuance, subject to one six -month extension by the Company. Interest under the Note accrues at a rate of 10 % per annum, payable monthly through month six and at the rate of 12 % per annum in months seven through twelve, payable monthly. The Note is secured by a lien on substantially all of the Company’s assets and properties can be prepaid in whole or in part without penalty at any time. In connection with the issuance of the Note, the Company issued to the investor 38,889 shares of Common Stock (the “Commitment Shares”) valued at $ 18.00 per share and a warrant (the “Warrant”) to purchase 11,112 shares of common stock (the “Warrant Shares”) at an exercise price of $ 54.00 per share, exercisable commencing on the date of issuance with a term of five years. The warrant was valued at $ 94,316 (see Note P. #3 ). On October 31, 2023 the Company repaid $ 1,400,000 of principal due under the Note, and on December 21, 2023 the Company repaid the remaining principal balance of $ 800,000 due under the Note. As of December 31, 2023 , the Note was paid in full. 58 Table of Contents NOTE N — LEASES The Company’s leases office space in New Jersey, Minnesota, New Hampshire, Madrid and Hong Kong with lease termination dates in 2023 and 2024. The property leased in China is paid monthly as used, without a formal agreement. The following tables present the components of lease expense and supplemental balance sheet information related to the operating leases were: Year ended Year ended December 31, December 31, 2023 2022 Lease cost Operating lease cost $ 166,161 $ 254,649 Total lease cost $ 166,161 $ 254,649 Balance sheet information Operating right-of-use assets $ 36,905 $ 197,355 Operating lease liabilities, current portion $ 37,829 $ 159,665 Operating lease liabilities, non-current portion - 37,829 Total operating lease liabilities $ 37,829 $ 197,494 Weighted average remaining lease term (in years) – operating leases 0.67 0.96 Weighted average discount rate – operating leases 5.50 % 5.50 % Supplemental cash flow information related to leases were as follows: Cash paid for amounts included in the measurement of operating lease liabilities $ 213,783 $ 259,558 Maturities of operating lease liabilities were as follows as of December 31, 2023: 2024 $ 38,808 2025 - Total future lease payments $ 38,808 Less: imputed interest ( 979 ) Total $ 37,829 59 Table of Contents NOTE O — COMMITMENTS AND CONTINGENCIES Distribution Agreement Swivel Secure has a distribution agreement with Swivel Secure Limited (“SSL”). Terms of the agreement include the following: 1. The initial term of the agreement ends on January 31, 2027 and will be automatically extended for additional one -year terms thereafter unless either party provides written notice to the other party not later than 30 days before the end of the term that it does not wish to extend the term. 2. SSL appoints Swivel Secure as the exclusive distributor of SSL’s products, to market, sell and distribute in the EMEA (Europe, Middle East and Africa), excluding the United Kingdom and Republic of Ireland, for a defined discount on the sale price. 3. Swivel Secure is expected to generate a certain minimum level of orders of SSL products each year during the term of the agreement. If Swivel Secure fails to meet such minimum level of orders in any year, the exclusive distribution rights will terminate and Swivel Secure will serve as a non-exclusive distributer of SSL Products. The Company expects the revenue targets to continue to be met based on historical performance and increasing distribution by Swivel Secure. Litigation From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. As of December 31, 2023 , the Company was not a party to any pending lawsuits. NOTE P — EQUITY 1. Preferred Stock Within the limits and restrictions provided in the Company’s Certificate of Incorporation, the Board of Directors has the authority, without further action by the shareholders, to issue up to 5,000,000 shares of preferred stock, $. 0001 par value per share, in one or more series, and to fix, as to any such series, any dividend rate, redemption price, preference on liquidation or dissolution, sinking fund terms, conversion rights, voting rights, and any other preference or special rights and qualifications. 2. Common Stock Holders of common stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Holders of common stock have one vote for each share held of record and do not have cumulative voting rights. Holders of common stock are entitled, upon liquidation of the Company, to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of common stock are not redeemable and have no preemptive or similar rights. All outstanding shares of common stock are fully paid and nonassessable. Issuances of Common Stock On December 22, 2022, the Company issued the Commitment Shares. See Note M - Convertible Note Payable for more information. On March 8, 2022, the Company issued 14,948 shares of common stock of which 4,983 shares were held back by the Company to secure certain indemnification obligations under the Swivel Secure stock purchase agreement. The shares of Company common stock were issued at a total cost of $ 600,004 , priced at $ 40.14 , based on the contractual 20 -day volume-weighted average price of the Company’s common stock immediately prior to the payment date as reported on the Nasdaq Capital Market. On June 18, 2021, the stockholders approved the 2021 Employee Stock Purchase Plan. Under the terms of this plan, 43,834 shares of common stock are reserved for issuance to employees and officers of the Company at 85 % of the lower of the closing price of the common stock as reported on the Nasdaq Capital Market at the first day or the last day of the offering period. Eligible employees are granted an option to purchase shares under the plan funded by payroll deductions. The Board may suspend or terminate the plan at any time, otherwise the plan expires June 17, 2031. During 2023 and 2022 , 2,947 , and 3,364 shares respectively were issued under the ESPP to employees, which resulted in a $ 4,343 , and $ 18,787 non-cash compensation expense respectively for the Company. 60 Table of Contents Issuances of Restricted Stock Restricted stock consists of shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions. The fair value of nonvested shares is determined based on the market price of the Company's common stock on the grant date. Restricted stock is expensed ratably over the term of the restriction period. The Company issued 16,404 shares of restricted common stock to certain employees of the Company and 3,752 of shares of restricted common stock were forfeited during fiscal year 2023 . The Company issued 15,444 shares of restricted common stock to certain employees of the Company and 583 of shares of restricted common stock were forfeited during fiscal year 2022. These shares vest in equal annual installments over a three -year period from the date of grant. Restricted stock compensation for the years ended December 31, 2023 and 2022 was $ 205,517 and $ 218,552 , respectively. Issuances to Directors, Executive Officers & Consultants During the 2023 and 2022 years, the Company issued 3,078 and 2,202 shares of common stock respectively to its directors in lieu of payment of board fees, valued at $ 39,007 and $ 76,043 respectively. Warrants Warrants Issued with Convertible Note: See Note M - Convertible Note Payable for the warrant issued with a convertible note in 2022. Valuation Assumptions for Warrants: The Company records the warrants at their fair value which is determined using the Black-Scholes valuation model on the date of the grant. The fair value of the warrants issued in 2023 and 2022 were estimated with the following assumptions: Years ended December 31, 2023 2022 Weighted average risk-free interest rate 4.63 % 3.70 % Weighted average exercise price $ 3.15 $ 3.00 Weighted average exercise period 5 5 Weighted average Volatility of stock price 817 % 108.60 % The volatility for each issuance is determined based on the review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected exercise period. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the years to maturity. A summary of warrant activity is as follows: Weighted Weighted average average remaining Aggregate Total exercise life intrinsic Warrants price (in years) value Outstanding, as of December 31, 2021 260,525 106.42 3.48 — Granted 11,112 54.00 Exercised — — Forfeited — — Expired ( 965 ) 518.40 Outstanding, as of December 31, 2022 270,672 $ 104.95 2.59 — Granted 2,534,148 3.15 Exercised ( 177,890 ) 0.0018 Forfeited — — Expired ( 438 ) — Outstanding, as of December 31, 2023 2,626,492 $ 19.09 4.37 — 61 Table of Contents The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $ 3.00 , $ 10.62 , and $ 39.78 as of December 31, 2023, 2022 and 2021 , respectively, which would have been received by the warrant holders had all warrant holders exercised their options as of that date. There were no in-the-money warrants exercisable as of December 31, 2023, 2022 and 2021 . NOTE Q — STOCK OPTIONS 2023 Stock Incentive Plan On December 14, 2024, the stockholders approved the 2023 Stock Incentive Plan. The 2023 Plan reserves 333,334 shares of common stock for issuance of options, restricted stock, and other equity based awards to employees, officers, directors, consultants advisors and independent contractors of the Company. Options are issued at exercise prices which may not be below 100 % of fair market value (or 110 % of the fair market value if, at the time the option is granted, the participant owns, directly or indirectly, more than 10% of the total combined voting power of all classes of our stock) and have terms not to exceed ten years. Options issued under the 2023 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, certain awards issued under this plan may be subject to additional acceleration of vesting as may be provided in the participants’ written agreement. The 2023 Plan expires on December 13, 2033, unless terminated earlier. No awards have yet been granted under the 2023 Plan. 2015 Stock Option Plan On January 27, 2016, the stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan initially reserved 10,417 shares of common stock for issuance of options, restricted stock, and other equity based awards to employees, officers, directors, and consultants of the Company. In 2021, the stockholders approved an amendment to the 2015 to increase the shares of common stock authorized for issuance under the 2015 Plan from 10,417 shares to 43,834 shares together with other technical changes. The term of stock options granted under the 2015 Plan, may not exceed ten years, exercise prices may not be below 100 - 110 % of fair market value, and vesting occurs over time periods set forth in written agreements with the recipients. In the event of a change in control, certain stock awards issued under the 2015 Plan may be subject to additional acceleration of vesting as may be provided in the participants’ written agreement. The 2015 Plan expires in December 2025. Non-Plan Stock Options Periodically, the Company has granted options outside of the 2015 Plan to various employees and consultants. In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately. Stock Option Activity Information summarizing option activity is as follows: Weighted Weighted average Number of Options average remaining Aggregate 2015 Non Total exercise life intrinsic Plan Plan price (in years) value Outstanding, as of December 31, 2021 5,072 6,771 11,843 $ 299.61 3.03 $ 0 Granted — — — — Exercised — — — — Forfeited — — — — Expired — ( 530 ) ( 530 ) 311.11 Outstanding, as of December 31, 2022 5,072 6,241 11,313 $ 299.07 2.07 $ 0 Granted — — — — Exercised — — — — Forfeited ( 151 ) — ( 151 ) 94.44 Expired ( 1,548 ) ( 348 ) ( 1,896 ) 256.30 Outstanding, as of December 31, 2023 3.373 5,893 9,266 $ 311.16 0.96 $ 0 Vested or expected to vest at December 31, 2023 9,266 $ 311.16 0.96 $ 0 Exercisable at December 31, 2023 9,266 $ 311.16 0.96 $ 0 62 Table of Contents The options outstanding and exercisable at December 31, 2023 were in the following exercise price ranges: Options Outstanding Options Exercisable Weighted Weighted Weighted average average average Number of exercise remaining Number exercise Range of exercise prices shares price life (in years) exercisable price $93.60 - 169.92 2,205 $ 136.65 2.85 2,205 $ 136.65 $169.93 - 504.00 7,061 365.66 0.38 7,061 365.66 $93.60 - 504.00 9,266 9,266 The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $ 3.00 , $ 10.62 , and $ 39.78 as of December 31, 2023, 2022 and 2021 , respectively, which would have been received by the option holders had all option holders exercised their options as of that date. There were no in-the-money options exercisable as of December 31, 2023, 2022 and 2021 . The weighted average fair value of options granted during the years ended December 31, 2023 and 2022 was $ 0 as no options were granted in either year. The total intrinsic value of options exercised during the years ended December 31, 2023 and 2022 was $ 0 as no options were exercised in either year. The total fair value of shares vested during the years ended December 31, 2023 and 2022 was $ 18,310 and $ 100,668 , respectively. As of December 31, 2023 , there was no future forfeiture adjusted compensation costs related to nonvested stock options. NOTE R — INCOME TAXES The components of net loss consist of the following: Year ended Year ended December 31, December 31, 2023 2022 United States $ ( 7,279,970 ) $ ( 10,416,593 ) Hong Kong ( 627,146 ) ( 458,839 ) Nigeria ( 203,700 ) ( 143,499 ) Spain ( 411,021 ) ( 890,972 ) Total $ ( 8,521,837 ) $ ( 11,909,903 ) 63 Table of Contents There was no provision for current federal, foreign or state taxes for both of the years ended December 31, 2023 and 2022 as a result of taxable losses incurred in these jurisdictions. The provision for income tax benefits consist of the following (in thousands): Year ended Year ended December 31, December 31, 2023 2022 Current – federal, $ - $ - state foreign 40,986 Deferred- Federal 1,175,000 States 122,000 Foreign ( 175,000 ) ( 20,434 ) Total ( 134,014 ) 1,276,566 Change in valuation allowance ( 1,297,000 ) Provision for income tax expense (benefit) $ ( 134,014 ) $ ( 20,434 ) Significant components of deferred tax assets and liabilities are as follows at December 31, 2023 and 2022 (in thousands): December 31, December 31, 2023 2022 Accrued compensation $ 112,201 $ 113,000 Allowance for doubtful accounts 90,405 169,000 Research and development expenses 1,017,551 633,000 Capital loss carry forward 114,251 114,000 Stock-based compensation 32,408 456,000 Equipment and leasehold improvements ( 12,353 ) ( 19,000 ) Intangible assets - US - 341,000 Intangible assets - Foreign ( 145,000 ) ( 170,000 ) Reserve - Foreign 150,000 - Inventory reserve 828,668 89,000 Interest expense - 44,000 Operating lease liabilities - 44,000 Other 1,000 - Tax credits 1,748,235 - Operating lease right-of-use assets 206 ( 44,000 ) Net operating loss and research and credit carryforwards 13,277,118 15,248,000 Valuation allowance ( 17,214,690 ) ( 17,188,000 ) Net deferred tax liability $ - $ ( 170,000 ) The Company has a valuation allowance against the full amount of its net deferred taxes due to the uncertainty of realization of the deferred tax assets due to operating loss history of the Company. The Company currently provides a valuation allowance against deferred taxes when it is more likely than not that some portion, or all of its deferred tax assets will not be realized. The valuation allowance could be reduced or eliminated based on future earnings and future estimates of taxable income. With a full valuation allowance, any change in the deferred tax asset or liability is fully offset by a corresponding change in the valuation allowance. At December 31, 2023 and 2022 , the Company provided a valuation allowance on its net deferred tax assets of $ 17,239,173 and $ 17,188,000 , respectively. 64 Table of Contents As of December 31, 2023 , the Company has U.S. federal net operating loss carryforwards of approximately $ 60.3 million. Approximately $ 39.7 million are subject to expiration between 2024 and 2037, and $ 18.6 million net operating loss carryforwards have no expiration date. These net operating loss carryforwards could be subject to the limitations under Section 382 of the Internal Revenue Code due to changes in the equity ownership of the Company. In addition, the Company has net operating loss carry forwards from various states of approximately $ 5.3 million which expire from 2026 through 2042. A reconciliation of the effective income tax rate on operations reflected in the statements of operations to the US federal statutory income tax rate is presented below. Year ended Year ended December 31, December 31, 2023 2022 Federal statutory income tax rate 21 % 21 % State taxes, net of federal benefit ( 1.41 ) 0.9 Permanent differences 1.97 ( 4.7 ) Expiration of net operating loss and research credit carryforwards ( 7.84 ) ( 5.7 ) Expiration and forfeiture of stock options - ( 0.3 ) foreign rate differential ( 5.84 ) rate change ( 1.05 ) Other ( 9.08 ) ( 0.5 ) Valuation allowance ( 0.24 ) ( 10.9 ) Effective tax rate (2.5 )% ( 0.2 )% The Company has not been audited by the Internal Revenue Service (“IRS”) or any states in connection with income taxes. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The periods from 2019 through 2022 remain open to examination by the IRS and state jurisdictions. The Company's subsidiary in Nigeria has not filed its required returns since inception. Management believes that when the returns are filed, no taxes will be owed due to the losses incurred during those periods. The Company is not subject to minimum tax during the first four years of operations. As a result, management could not calculate the amount of net operating loss carryforwards that are available to offset future taxable income. The Company's subsidiary in Hong Kong has not filed its required returns in several years. Management believes that when the returns are filed, no taxes will be owed due to losses incurred during those periods. As a result, management could not calculate the amount of net operating loss carryforwards are available to offset future taxable income. The Company believes it is not subject to any tax audit risk beyond those periods. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense incurred during the years ended December 31, 2023 and 2022 . NOTE S The Company has established a savings plan under section 401 (k) of the Internal Revenue Code. All employees of the Company, after completing one day of service, are eligible to enroll in the 401 (k) plan. Participating employees may elect to defer a portion of their salary on a pre-tax basis up to the limits as provided by the IRS Code. The Company is not required to match employee contributions but may do so at its discretion. The Company made no matching contributions during the years ended December 31, 2023 and 2022 . 65 Table of Contents NOTE T — EARNINGS PER SHARE (EPS) The following table summarizes the weighted average securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive. Years ended December 31, 2023 2022 Stock options - - Warrants 1,913,566 - Total 1,913,566 - Items excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares: Years ended December 31, 2023 2022 Stock options 9,266 11,313 Warrants 270,234 270,672 Total 279,500 281,985 NOTE U — QUARTERLY FINANCIAL DATA (UNAUDITED AND RESTATED) The Company is providing restated quarterly unaudited consolidated financial information for interim periods occurring within the year ended December 31, 2023. The need for the restatement arose out of the results of certain financial analysis the Company performed in the course of preparing its fiscal year-end 2023 consolidated financial statements. In the course of the audit of the Company’s consolidated financial statements for the fiscal year ended December 31, 2023, the Company determined that certain errors were made which require the restatement of the Company’s previously issued financial statements for the interim periods occurring within the year ended December 31, 2023. These errors resulted in the overstatement of accounts receivable and revenue, understatements in certain allowances for accounts receivable and certain reserves for inventory, and an understatement of net loss and total stockholders’ equity which errors may also impact other amounts included in the financial statements. The Company attributes the errors principally to a material weakness in internal controls over the recording and processing of revenues, allowances for accounts receivable and certain reserves for inventory, which the Company is working to remediate in fiscal year 2024. The restated consolidated balance sheet line items for the first, second and third fiscal quarters of 2023 are as follows: Originally Reported Adjustment Restated Three Months Ended Six Months Ended Nine Months Ended Three Months Ended Six Months Ended Nine Months Ended Three Months Ended Six Months Ended Nine Months Ended March 31, 2023 June 30, 2023 September 30, 2023 March 31, 2023 June 30, 2023 September 30, 2023 March 31, 2023 June 30, 2023 September 30, 2023 Accounts receivable, net $ 3,362,203 $ 3,178,785 $ 2,799,218 $ ( 900,000 ) $ ( 1,100,000 ) $ ( 1,300,000 ) $ 2,462,203 $ 2,078,785 $ 1,499,218 Inventory 4,427,815 4,384,098 4,289,213 ( 500,000 ) ( 1,500,000 ) ( 2,500,000 ) 3,927,815 2,884,098 1,789,213 Total current assets 8,936,084 8,531,330 7,820,339 ( 1,400,000 ) ( 2,600,000 ) ( 3,800,000 ) 7,536,084 5,931,330 4,020,339 Accumulated deficit ( 116,773,695 ) ( 118,196,573 ) ( 118,834,397 ) ( 1,400,000 ) ( 2,600,000 ) ( 3,800,000 ) ( 118,173,695 ) ( 120,796,573 ) ( 122,634,397 ) Total Stockholders' Equity 5,156,755 3,845,091 3,314,451 ( 1,400,000 ) ( 2,600,000 ) ( 3,800,000 ) 3,756,755 1,245,091 ( 485,549 ) Total Liabilities and Stockholders' Equity 11,106,057 10,583,245 9,749,380 ( 1,400,000 ) ( 2,600,000 ) ( 3,800,000 ) 9,706,057 7,983,245 5,949,380 66 Table of Contents The restated line items of the consolidated statements of comprehensive income for the three -month periods ended March 31, 2023, June 30, 2023, and September 30, 2023 are as follow: Originally Reported Adjustment Restated Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 License fees $ 2,478,556 $ 1,235,771 $ 950,015 $ ( 900,000 ) - - $ 1,578,556 $ 1,235,771 $ 950,015 Total revenues 3,083,767 1,928,929 1,817,108 ( 900,000 ) - - 2,183,767 1,928,929 1,817,108 Cost of hardware - Reserve - - - 500,000 1,000,000 1,000,000 500,000 1,000,000 1,000,000 Total costs and other expenses 820,274 606,111 476,604 500,000 1,000,000 1,000,000 1,320,274 1,606,111 1,476,604 Gross profit 2,263,493 1,322,818 1,340,504 ( 1,400,000 ) ( 1,000,000 ) ( 1,000,000 ) 863,493 322,818 340,504 Selling, general and administrative 1,931,732 1,943,164 1,547,376 - 200,000 200,000 1,931,732 2,143,164 1,747,376 Total Operating Expenses 2,621,891 2,501,345 2,106,062 - 200,000 200,000 2,621,891 2,701,345 2,306,062 Operating loss ( 358,398 ) ( 1,178,527 ) ( 765,558 ) ( 1,400,000 ) ( 1,200,000 ) ( 1,200,000 ) ( 1,758,398 ) ( 2,378,527 ) ( 1,965,558 ) Loss before provision for income tax ( 288,322 ) ( 1,279,878 ) ( 638,013 ) ( 1,400,000 ) ( 1,200,000 ) ( 1,200,000 ) ( 1,688,322 ) ( 2,479,878 ) ( 1,838,013 ) Net loss ( 288,322 ) ( 1,422,878 ) ( 637,824 ) ( 1,400,000 ) ( 1,200,000 ) ( 1,200,000 ) ( 1,688,322 ) ( 2,479,878 ) ( 1,838,013 ) Comprehensive Net loss ( 288,322 ) ( 1,422,878 ) ( 637,824 ) ( 1,400,000 ) ( 1,200,000 ) ( 1,200,000 ) ( 1,688,322 ) ( 2,479,878 ) ( 1,838,013 ) Comprehensive loss ( 216,176 ) ( 1,402,994 ) ( 602,460 ) ( 1,400,000 ) ( 1,200,000 ) ( 1,200,000 ) ( 1,616,176 ) ( 2,459,994 ) ( 1,802,649 ) Basic and Diluted Loss per Common Share ( 0.52 ) ( 2.56 ) ( 1.12 ) ( 2.52 ) ( 2.16 ) ( 2.11 ) ( 3.04 ) ( 4.45 ) ( 3.22 ) The restated line items of the consolidated statements of comprehensive income for the six -month period ended June 30, 2023 and nine -month period ended September 30, 2023 are as follows: Originally Reported Adjustment Restated Six Months Ended Nine Months Ended Six Months Ended Nine Months Ended Six Months Ended Nine Months Ended June 30, 2023 September 30, 2023 June 30, 2023 September 30, 2023 June 30, 2023 September 30, 2023 License fees $ 3,714,327 $ 4,664,341 $ ( 900,000 ) $ ( 900,000 ) $ 2,814,327 $ 3,764,341 Total revenues 5,012,696 6,829,804 ( 900,000 ) ( 900,000 ) 4,112,696 5,929,804 Cost of hardware - reserve - - 1,500,000 2,500,000 1,500,000 2,500,000 Total costs and other expenses 1,426,385 1,902,989 1,500,000 2,500,000 2,926,385 4,402,989 Gross profit 3,586,311 4,926,815 ( 2,400,000 ) ( 3,400,000 ) 1,186,311 1,526,815 Selling, general and administrative 3,874,896 5,422,272 200,000 400,000 4,074,896 5,822,272 Total Operating Expenses 5,123,237 7,229,298 200,000 400,000 5,323,237 7,629,298 Operating loss ( 1,536,926 ) ( 2,302,483 ) ( 2,600,000 ) ( 3,800,000 ) ( 4,136,926 ) ( 6,102,483 ) Loss before provision for income tax ( 1,568,200 ) ( 2,206,212 ) ( 2,600,000 ) ( 3,800,000 ) ( 4,168,200 ) ( 6,006,212 ) Net loss ( 1,711,200 ) ( 2,349,023 ) ( 2,600,000 ) ( 3,800,000 ) ( 4,311,200 ) ( 6,149,023 ) Comprehensive net loss ( 1,711,200 ) ( 2,349,023 ) ( 2,600,000 ) ( 3,800,000 ) ( 4,311,200 ) ( 6,149,023 ) Comprehensive loss ( 1,619,170 ) ( 2,221,629 ) ( 2,600,000 ) ( 3,800,000 ) ( 4,219,170 ) ( 6,021,629 ) Basic and Diluted Loss per Common Share ( 3.07 ) ( 4.12 ) ( 4.67 ) ( 6.67 ) ( 7.74 ) ( 10.79 ) NOTE V — SUBSEQUENT EVENTS On January 4, 2024, the Company issued 347,000 shares of common stock upon the exercise of prefunded warrants. On January 5, 2024, the Company issued 142,000 shares of common stock upon the exercise of prefunded warrants. On January 12, 2024, the Company issued 158,000 shares of common stock upon the exercise of prefunded warrants. On February 15, 2024, 243 shares of restricted common stock were forfeited by employees who left the Company before the lapse of the restriction period applicable to such shares. On March 21, 2024, 73 shares of restricted common stock were forfeited by employees who left the Company before the lapse of the restriction period applicable to such shares. On March 27, 2024, the Company issued 4,287 shares of common stock to its directors in payment of board fees. On May 6, 2024, 186 shares of restricted common stock were forfeited by an employee who left the Company before the lapse of the restriction period applicable to such shares. 67 Table of Contents EXHIBIT INDEX Exhibit Exhibit No. 2.1 Stock Purchase Agreement by and among the Company, Thomas J. Hoey, and PistolStar, Inc. dated June 6, 2020 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed with the SEC on July 7, 2020) 2.2 Stock Purchase Agreement by and among the Company, Alex Rocha and Swivel Secure Europe, SA dated February 2, 2022 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed with the SEC on February 3, 2022) 2.3 Amendment No. 1 to Stock Purchase Agreement by and among the Company, Alex Rocha and Swivel Secure Europe, SA dated March 4, 2022 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed with the SEC on March 9, 2022) 3.1 Certificate of Incorporation of BIO-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on January 5, 2005) 3.2 Bylaws (incorporated by reference to Exhibit 3.3 to the current report on Form 8-K, filed with the SEC on January 5, 2005) 3.3 Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Appendix A to the definitive proxy statement, filed with the SEC on January 18, 2006) 3.4 Certificate of Amendment of Certificate of Incorporation of Bio-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.4 to the annual report on Form 10-K, filed with the SEC on March 31, 2015) 3.5 Certificate of Elimination of BIO-key International, Inc. filed October 6, 2015 (incorporated by reference to Exhibit 3.5 to the registration statement on Form S-1 File No. 333-208747 filed with the SEC on December 23, 2015) 3.6 Certificate of Designation of Preferences, Rights and Limitations of Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on November 2, 2015) 3.7 Certificate of Designation of Preferences, Rights and Limitations of Series B-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the quarterly report on Form 10-Q, filed with the SEC on November 16, 2015) 3.8 Certificate of Amendment of Certificate of Incorporation of Bio-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on December 28, 2016) 3.9 Certificate of Amendment of Certificate of Incorporation of Bio-Key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on November 19, 2020) 3.10 Certificate of Amendment to Certificate of Incorporation of BIO-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K filed with the SEC on December 19, 2023) 4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the registration statement on Form SB-2, File No. 333-16451) 4.2 Common Stock Purchase Warrant dated May 6, 2020 (incorporated by reference to Exhibit 10.7 to the quarterly report on Form 10-Q filed with the SEC on June 8, 2020) 4.3 Common Stock Purchase Warrant dated June 29, 2020 (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K filed with the SEC on July 1, 2020) 4.4 Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.3 to Amendment No. 1 to the Registration Statement on Form S-1/A, filed with the SEC on July 17, 2020) 68 Table of Contents 4.5 Form of Warrant (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registration Statement on Form S-1/A, filed with the SEC on July 17, 2020) 4.6 Form of Common Warrant (incorporated by reference to Exhibit 4.9 to Amendment No. 1 to Registration Statement on Form S-1 filed with the SEC on October 26, 2023) 4.7 Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.10 to Amendment No. 1 to the Registration Statement on Form S-1, filed with the SEC on October 26, 2023) 4.8 Form of Warrant Agency Agreement (incorporated by reference to Exhibit 4.11 to Amendment No. 1 to the Registration Statement on Form S-1, filed with the SEC on October 26, 2023) 4.9 Form of Common Warrant (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed with the SEC on December 21, 2023) 4.10 Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.2 to the current report on Form 8-K filed with the SEC on December 21, 2023) 4.11 BIO-key International, Inc. Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.5 to the annual report on From 10-K filed with the SEC on April 1, 2022 10.1 Employment Agreement by and between BIO-key International, Inc. and Mira LaCous dated November 20, 2001 (incorporated by reference to Exhibit 10.39 to the current report on Form 8-K, filed with the SEC on January 22, 2002) 69 Table of Contents 10.2 Employment Agreement, effective March 25, 2010, by and between the Company and Michael W. DePasquale (incorporated by reference to Exhibit 10.93 to the annual report on Form 10-K, filed with the SEC on March 26, 2010) 10.3 Employment Agreement by and between BIO-key International, Inc. and Cecilia Welch dated May 15, 2013 (incorporated by reference to Exhibit 10.42 to the annual report on Form 10-K, filed with the SEC on March 31, 2014) 10.4 Employment Agreement by and between BIO-key International, Inc. and James Sullivan dated April 5, 2017 (incorporated by reference to Exhibit 10.42 to the annual report on Form 10-K, filed with the SEC on March 29, 2021) 10.5 First Amendment to Lease Agreement by and between BIO-key International, Inc. and BRE/DP MN LLC dated September 12, 2013 (incorporated by reference to Exhibit 10.44 to the annual report on Form 10-K, filed with the SEC on March 31, 2014) 10.6 BIO-key International, Inc. 2015 Equity Incentive Plan (incorporated by reference to Appendix B to the definitive proxy statement filed with the SEC on December 15, 2015) 10.7 Software License Purchase Agreement Dated November 11, 2015 by and among BIO-key Hong Kong Limited, Shining Union Limited, WWTT Technology China, Golden Vast Macao Commercial Offshore Limited, Giant Leap International Limited (incorporated by reference to Exhibit 10.36 to the registration statement on Form S-1 File No. 333-208747 filed with the SEC on December 23, 2015) 10.8 Form Non-Plan Option Agreement between the Company and certain of its directors, officers, employees and contractors (incorporated by reference to Exhibit 10.4 to the quarterly report on Form 10-Q filed with the SEC on May 15, 2017) 10.9 Securities Purchase Agreement dated May 23, 2018 by and between the Registrant and Giant Leap International Limited (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on May 30, 2018) 10.10 Securities Purchase Agreement dated May 23, 2018 by and between the Registrant and Micron Technology Development Limited (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K, filed with the SEC on May 30, 2018) 10.11 Securities Purchase Agreement dated May 31, 2018 by and between the Registrant and Wong Kwok Fong (Kelvin) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on June 4, 2018) 10.12 GLP 2nd Amendment to Lease dated July 27, 2018 (incorporated by reference to Exhibit 10.26 to the annual report on Form 10-K, filed with the SEC on April 1, 2019) 10.13 Marlen 4th Amendment to Lease dated June 2, 2018 (incorporated by reference to Exhibit 10.27 to the annual report on Form 10-K, filed with the SEC on April 1, 2019) 70 Table of Contents 10.14 Common Stock Purchase Warrant dated July 10, 2019 (incorporated by reference to Exhibit 10.5 to the quarterly report on Form 10-Q, filed with the SEC on August 14, 2019) 10.15 Sales Incentive Agreement with Technology Transfer Institute dated March 25, 2020. (incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020) 10.16 Form of Technology Transfer Institute Warrant. (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020) 10.17 Common Stock Purchase Warrant dated May 6, 2020. (incorporated by reference to Exhibit 10.7 to the quarterly report on Form 10-Q, filed with the SEC on June 8, 2020) 10.18 Form of Restricted Stock Award Agreement under the BIO-key International, Inc. Amended & Restated 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on August 28, 2020) 71 Table of Contents 10.19 BIO-key International, Inc. 2021 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the definitive proxy statement filed with the SEC on May 4, 2021) 10.20 BIO-key International, Inc. Amended and Restated 2015 Equity Incentive Plan (incorporated by reference to Appendix B to the definitive proxy statement filed with the SEC on May 4, 2021) 10.21 Management Services Agreement dated March 8, 2022 by and among Swivel Aman-FZCO, Swivel Secure Europe, SA, and Alex Rocha (incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q filed with the SEC on May 23, 2022) 10.22 Option Agreement dated March 8, 2022 by and between the Company and Alex Rocha (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q filed with the SEC on May 23, 2022) 10.23 Distribution Agreement dated October 23, 2020 by and between Swivel Secure Europe, SA and Swivel Secure Limited (incorporated by reference to Exhibit 10.3 to the quarterly report on Form 10-Q filed with the SEC on May 23, 2022) + 10.24 Deed of Variation dated January 26, 2022 by and between Swivel Secure Europe, SA and Swivel Secure Limited (incorporated by reference to Exhibit 10.4 to the quarterly report on Form 10-Q filed with the SEC on May 23, 2022) + 10.25 Securities Purchase Agreement dated December 22, 2022 by and between the Company and AJB Capital Investments, LLC (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on December 23, 2022) 10.26 Common Stock Purchase Warrant, dated December 22, 2022 (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K filed with the SEC on December 23, 2022) 10.27 $2,200,000 Senior Secured Promissory Note, dated December 22, 2022 (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed with the SEC on December 23, 2022) 10.28 Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.39 to Amendment No. 1 to Registration Statement on Form S-1 filed with the SEC on October 26, 2023) 10.29*** BIO-key International, Inc. 2023 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on December 19, 2023) 10.30 Securities Purchase Agreement, dated as of December 20, 2023, by and between BIO-key International, Inc. and Dillon Hill Investment Company LLC (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the SEC on December 21, 2023) 21.1* List of subsidiaries of BIO-key International, Inc. 23.1* Consent of Bush and Associates CPA 23.2* Consent of Marcum LLP 31.1* Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2* Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS* Inline XBRL Instance 101.SCH* Inline XBRL Taxonomy Extension Schema 101.CAL* Inline XBRL Taxonomy Extension Calculation 101.DEF* Inline XBRL Taxonomy Extension Definition 101.LAB* Inline XBRL Taxonomy Extension Labels 101.PRE* Inline XBRL Taxonomy Extension Presentation 104 Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) * filed herewith ** Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted sections have been filed separately with the Securities and Exchange Commission. *** Management compensatory plan. + Certain portions of this exhibit (indicated by “[***]”) have been omitted as the Company has determined that such portions are (a) not material and (b) would likely cause competitive harm to the Company if publicly disclosed. 72 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIO-KEY INTERNATIONAL, INC. Date: June 5, 2024 By: /s/ MICHAEL W. DEPASQUALE Michael W. DePasquale CHIEF EXECUTIVE OFFICER (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated. Signature Title Date /s/ MICHAEL W. DEPASQUALE Chairman of the Board of Directors, Chief Executive Officer and Director (Principal Executive Officer) June 5, 2024 Michael W. DePasquale /s/ CECILIA WELCH Chief Financial Officer (Principal Financial and Accounting Officer) June 5, 2024 Cecilia Welch /s/ROBERT J. MICHEL Director June 5, 2024 Robert J. Michel /s/ WONG KWOK FONG Director June 5, 2024 Wong Kwok Fong /s/ CAMERON WILLIAMS Director June 5, 2024 Cameron Williams /s/ MANNY ALIA Director June 5, 2024 Manny Alia 73