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, 2024. 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, 2024, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Management ’ s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) 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, 2024, based upon the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2024. 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 During the fourth quarter of 2024, we implemented a number of changes to our internal control over financial reporting. We have adopted policies and procedures designed to enhance our review and procedures to thoroughly assess all accounts, including receivables, revenue, and inventory, for potential adjustments required for proper presentation of the value of the accounts. These changes consisted of allocating additional human resources to our finance and accounting functions, implementing additional testing and redundancy, and restructuring financial management personnel at Swivel Secure, including the review and approval of all accounting decisions at both the subsidiary and parent levels. ITEM 9B. OTHER INFORMATION During the three months ended December 31, 2024, none of our directors or “officers” (as defined in Rule 16a - 1 (f) under the Securities Exchange Act of 1934, as amended) adopted or terminated a “Rule 10b5 - 1 trading arrangement” or “non-Rule 10b5 - 1 trading arrangement,” as each term is defined in Item 408 of Securities and Exchange Commission Regulation S-K. 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 70 Chairman of the Board of Directors and Chief Executive Officer Cameron Williams (a)* (b) (c) 78 Director Robert J. Michel (a) (b)*(c) 68 Director Wong Kwok Fong (Kelvin) 61 Director and Vice-Chairman of the Board of Directors Emmanuel Alia (b) (c)* 60 Director Cecilia C. Welch 65 Chief Financial Officer Mira K. LaCous 63 Chief Technology Officer James D. Sullivan 57 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 Cameron Williams (Chair), Robert J. Michel, 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 Insider Trading Policy We have adopted an Insider Trading Policy governing the purchase, sale, and/or other dispositions of our securities by directors, officers and employees, among other insiders. We believe our Insider Trading Policy is reasonably designed to promote compliance with applicable insider trading laws, rules and regulations, and the Nasdaq Listing Rules. Our Insider Trading Policy is filed as Exhibit 19.1 to this Annual Report on Form 10-K. 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. 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, 2024 and 2023: SUMMARY COMPENSATION TABLE Stock All Other Name and Principal Salary Awards Compensation Total Position Year ($) ($) (1) ($) (2) ($) Michael W. DePasquale 2024 285,000 24,000 491 309,491 Chief Executive Officer 2023 271,250 19,250 1,027 291,527 Cecilia C. Welch 2024 199,500 22,500 222,000 Chief Financial Officer 2023 189,875 16,500 1,320 207,695 James D. Sullivan 2024 223,250 22,500 79,429 (3) 325,179 Chief Legal Officer 2023 212,479 16,500 6,433 (4) 235,412 (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 $78,632 of sales commissions and $797 of life insurance premiums paid by the Company. (4) Consists of $5,102 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 July 1, 2024, we restored the 2023 based compensation of Mr. DePasquale, Mr. Sullivan and Ms. Welch. 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. 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 2024 and 2023, we issued restricted stock awards to each of our named executive officers in recognition of the revenue growth of the Company in 2023 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, 2024. 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 232 282.24 3/23/2025 25,946 (2) 77,838 232 169.92 3/21/2026 - - Cecilia C. Welch 174 282.24 3/23/2025 24,166 (3) 72,498 174 169.92 3/21/2026 - - James D. Sullivan 174 282.24 3/23/2025 24,166 (4) 72,498 174 169.92 3/21/2026 - - (1) Calculated based on the closing market price of the Company’s common stock on December 31, 2024 of $1.71 per share. (2) 24,000 shares vest in three equal annual installments commencing July 31, 2025. 1,945 shares vest in two equal annual installments commencing August 29, 2025. (3) 22,500 shares vest in three equal annual installments commencing July 31, 2025. 1,667 shares vest in two equal annual installments commencing August 29, 2025. (4) 22,500 shares vest in three equal annual installments commencing July 31, 2025. 1,667 shares vest in two equal annual installments commencing August 29, 2025 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. 32 Table of Contents 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 2023 Stock Incentive Plan (the “2023 Plan”) provides for the Board or the Compensation Committee, as applicable, to accelerate the 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 2023 Plan to include (i) a sale or transfer of substantially all of the Company’s assets; (ii) 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; (iii) the incumbent directors cease to constitute at least a majority of the Board of Directors; (iv) any person becomes directly or indirectly the beneficial owner of 40% of the combined voting power of our outstanding securities; or (v) a change in control of the Company which would otherwise be reportable under Section 13 or 15(d) of the Exchange Act. 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. Action to Recover Erroneously Awarded Compensation In preparing our year-end 2023 consolidated financial statements, we determined that certain errors were made which required the restatement of our 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 of certain allowances for accounts receivable and certain reserves for inventory, and an understatement of net loss and total stockholders’ equity. This restatement is reflected in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on June 5, 2024 and amended on June 20, 2024. Our executive officers did not receive any incentive-based compensation in 2023 that was subject to recovery. Accordingly, no recovery was required or sought from any of our executive officers under our Clawback Policy, which is filed as Exhibit 97.1 to this Annual Report on Form 10-K. Policies and Practices Related to the Grant of Certain Equity Awards Close in Time to the Release of Material Nonpublic Information During 2024, we did not grant any stock options as part of our equity compensation program. If stock options are granted in the future, we intend to not grant stock options or similar awards in anticipation of the release of material nonpublic information that is likely to result in changes to the price of our common stock, such as a significant positive or negative earnings announcement, and not time the public release of such information based on stock option grant dates. 33 Table of Contents DIRECTOR COMPENSATION The following table sets forth for each director, information regarding their compensation for the year ended December 31, 2024: Stock Awards Total Name (1) ($) (2) ($) Robert J. Michel (3) 6,002 13,002 Emmanuel Alia (4) 6,002 12,002 Cameron Williams (5) 6,002 13,002 (1) Mr. DePasquale and Kelvin Wong have been omitted from the above table because they do not receive any additional compensation for serving on our Board of Directors. (2) The aggregate fair value of the common stock issued was calculated based on the closing price of our common stock on the date of issuance in accordance with FASB ASC 718. (3) At December 31, 2024, Mr. Michel held options to purchase 36 shares of common stock and held 6.365 shares of restricted common stock. (4) At December 31, 2024, Mr. Alia held options to purchase 18 shares of common stock and held 6,365 shares of restricted common stock. (5) At December 31, 2024 Mr. Williams held 6,365 shares of restricted common stock. Narrative Disclosure to Director Compensation Table During 2024, we had a policy to pay each non-employee director $3,000 per 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 first and second board meeting in 2024. 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. 34 Table of Contents ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth, as of April 21, 2025 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 April 21, 2025 upon the exercise or conversion of any options, warrants or other convertible securities. This table has been prepared based on 5,814,041. Amount and Nature Percentage of Beneficial of Name and Address of Beneficial Owner (1) Ownership Class Directors and Executive Officers Michael W. DePasquale 48,918 (2) * Cecilia C. Welch 24,483 (3) * Mira K. LaCous 10,706 (4) * James D. Sullivan 57,727 (5) 1.0 % Robert J. Michel 13,442 (6) * Emmanuel Alia 12,444 (7) * Cameron E. Williams 11,787 (8) * Wong Kwok Fong (Kelvin) 33,480 (9) * All officers and directors as a group (eight (8) persons) 212,987 3.7 % Beneficial Owner Fiber Food Systems, Inc. 530 Technology Drive, Suite 100 Irvine, CA 92618 595,000 10.2 % Streeterville Capital LLC 303 East Wacker Drive, Suite 1040 Chicago, IL 60601 340,000 (10) 5.8 % * 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 232 shares issuable on exercise of options, 9,167 shares issuable upon exercise of warrants, and 28,120 shares of restricted stock of which 25,297 remain subject to vesting. (3) Includes 174 shares issuable upon exercise of options and 26,064 shares of restricted stock of which 24,166 remain subject to vesting. (4) Includes 87 shares issuable upon exercise of options and 10,203 shares of restricted stock of which 9,371 remain subject to vesting. (5) Includes 174 shares issuable on exercise of options, 12,667 shares issuable upon exercise of warrants, and 26,064 shares of restricted stock of which 24,166 remain subject to vesting. (6) Includes 36 shares issuable on exercise of options and 6,365 shares of restricted stock of which 6,272 remain subject to vesting. (7) Includes 18 shares issuable on exercise of options and 6,365 shares of restricted stock of which 6,272 remain subject to vesting. (8) Includes 6,365 shares of restricted stock of which 6,272 remain subject to vesting. (9) Includes 232 shares issuable on exercise of options and 3,036 shares of restricted stock of which 2,435 remain subject to vesting. The address of Kelvin is Flat C, 27/F, Block 5, Grand Pacific Views, Siu Lam, Hong Kong N7. (10) Based on information contained in a Schedule 13G filed with the SEC on January 15, 2025 and other information known to the Company. Streeterville Capital LLC (“Streeterville”) is the direct holder of 340,000 shares of common stock. Streeterville Management LLC and John M. Fife indirectly beneficially own these shares. Streeterville has sole voting and dispositive power over the shares. 35 Table of Contents EQUITY COMPENSATION PLAN INFORMATION The following table sets forth, as of December 31, 2024, 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 or as determined by the Board or Compensation Committee. The 2023 Plan expires on December 13, 2033, unless terminated earlier. Awards have been granted for 185,194 shares under the 2023 Plan in 2024. 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 3,007 (1)(2) $ 197.31 190,285 (3) Equity compensation plans not approved by security holders — $ - — Total 3,007 (1)(2) $ 197.31 190,285 (3) (1) Consists of shares of common stock issuable upon the exercise of options outstanding as of December 31, 2024 under the 2015 Plan and the 2023 Plan. (2) Excludes employee stock purchase rights accruing under the ESPP. (3) Amount includes 529 shares of common stock and 155,957 shares of common stock available as of December 31, 2024 for future issuance under the 2015 Plan and the 2023 Plan, respectively, and 33,799 shares of common stock available as of December 31, 2024 for future issuance under the ESPP. 36 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. Collaboration with Fiber Food Systems, Inc . On November 27, 2024, we entered into a securities purchase agreement with Fiber Food Systems, Inc. (“Fiber Food”) pursuant to which we purchased from Fiber Food 5,000,000 shares (the “Boumarang Shares”) of common stock of Boumarang, Inc., an early-stage private technology company developing sustainable long-range drone technology for commercial applications, in exchange for 595,000 shares of the Company’s common stock. As a result of the forgoing transaction, Fiber Food become the beneficial owner of in excess of 5% of the Company’s outstanding shares of common stock. The purchase agreement with Fiber Food contemplates collaboration between the parties regarding potential strategic and commercial transactions, including acquiring assets or equity interests in other operating companies, integrating our identity access management solutions into Fiber Food’s offerings, and introducing us to its customers, affiliates and business contacts who are potential users of our solutions, in each case pursuant to future definitive agreements on terms to be negotiated by the parties. In the event that at any time during the nine-month period after the closing of the transaction we value the Boumarang Shares at less than $5,000,000 on our balance sheet, we have the right to cause Fiber Food to repurchase the Boumarang Shares from us in exchange for the return of the shares of Company common stock issued in exchange for the Boumarang Shares. As of the date of this report, we have engaged in discussions with Fiber Food and Boumarang regarding the contemplated collaboration but no definitive agreements have been executed. The purchase agreement also contains a standstill which prohibits the Company, Fiber Food, Boomerang and their respective affiliates and representatives for a period of two years, from, among other things, initiating any business combination, restructuring, tender offer, proposal to seek representation on the board of directors, or any proxy solicitation, instigating, encouraging or assisting any third party from doing any of the forgoing, or acquiring any debt or equity securities of any other party. 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 Change in Independent Registered Public Accounting Firm As previously disclosed, on April 24, 2024, the Audit Committee approved the engagement of Bush & Associates CPA (“Bush & Associates”) as the Company’s independent registered public accounting firm and on April 23, 2024, dismissed Marcum LLP (“Marcum”), as the Company’s independent registered public accounting firm. Marcum was retained to serve as the Company’s independent registered public accounting firm on July 20, 2022. The audit report of Marcum on the Company’s consolidated financial statements as of and for the fiscal year ended December 31, 2022 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles except that the report included an explanatory paragraph raising substantial doubt about the Company’s ability to continue as a going concern. Marcum did not audit the Company’s consolidated financial statements as of and for the fiscal year ended December 31, 2021. During the two most recent fiscal years ended December 31, 2023 and 2022, and the subsequent interim period through April 23, 2024, there were (i) no disagreements (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between the Company and Marcum on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Marcum, would have caused Marcum to make reference thereto in its report on the Company’s consolidated financial statements for the year ended December 31, 2022, and (ii) no “reportable events” as such term is defined in Item 304(a)(1)(v) of Regulation S-K except that: (A) as previously reported in Item 9A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, the Company reported a material weakness in its internal control over financial reporting for the fiscal year ended December 31, 2022, relating to Company’s review and control procedures over the income tax provision in the Company’s financial statement which were not operating at a level of precision to prevent or detect a potential material misstatement in the Company’s consolidated financial statements and a lack of control over the Company’s foreign subsidiaries with respect to the filing of required tax returns on a timely basis; and (B) as previously reported in the Company's Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on April 22, 2024, the Company concluded on April 16, 2023 that its previously issued consolidated financial statements for the three months ended March 31, 2023, the three and six months ended June 30, 2023, and the three and nine months ended September 30, 2023 included in the Company’s previously filed Quarterly Reports on Form 10-Q for such periods should no longer be relied upon. These reportable events were discussed among the Audit Committee and Marcum. Marcum has been authorized by the Company to respond fully to the inquiries of Bush & Associates concerning these reportable events. 37 Table of Contents The Company previously disclosed this information in its Current Report on Form 8-K filed with the SEC on April 30, 2024, provided Marcum with a copy of the disclosures, and requested that Marcum furnish it with a letter addressed to the SEC stating whether or not it agrees with the Company’s statements therein. A copy of the letter dated April 29, 2024 was filed as an exhibit to such Form 8-K. During the two most recent fiscal years ended December 31, 2023 and 2022, and the subsequent interim period through April 24, 2024, neither the Company, nor anyone on its behalf, consulted Bush & Associates regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered with respect to the consolidated financial statements of the Company, and no written report or oral advice was provided to the Company by Bush &Associates that Bush & Associates concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a “disagreement” (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a “reportable event” (as that term is defined in Item 304(a)(1)(v) of Regulation S-K). Audit and Non-Audit Fees The following table shows fees for professional services and audit fees billed to us by Bush & Associates for the audit of our annual consolidated financial statements for the years ended December 31, 2024 and 2023 and for review of our financial statements included in our quarterly reports in 2024. The following table also shows fees for professional services and audit fees billed to us by Marcum LLC for review of our financial statements included in our quarterly reports in 2023, services in connection with the audit of our financial statements for the year ended December 31, 2023, and for providing various consents in 2023 and 2024: 2024 2023 Audit Fees $ 105,000 $ 280,000 Audit-Related Fees 65,802 73,151 Tax Fees - 17,000 Other Fees - - Total Fees $ 170,802 $ 370,151 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. 38 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 2024 and 2023 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) Consolidated Balance Sheets as of December 31, 2024 and 2023 Consolidated Statements of Operations—Years ended December 31, 2024 and 2023 Consolidated Statements of Stockholders’ Equity—Years ended December 31, 2024 and 2023 Consolidated Statements of Cash Flows—Years ended December 31, 2024 and 2023 Notes to Consolidated Financial Statements—December 31, 2024 and 2023 (b) The exhibits listed in the Exhibits Index immediately preceding such exhibits are filed as part of this Report 39 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 ) 41 Consolidated Statements of Operations and Comprehensive Loss—Years ended December 31, 2024 and 2023 43 Consolidated Statements of Stockholders’ Equity —Years ended December 31, 2024 and 2023 44 Consolidated Statements of Cash Flows—Years ended December 31, 2024 and 2023 45 Supplementary Disclosures of Cash Flow Information—Years ended December 31, 2024 and 2023 46 Notes to the Consolidated Financial Statements—December 31, 2024 and 2023 47 40 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 accompanying consolidated balance sheet of BIO-key International, Inc. and Subsidiaries (the “Company”) as of December 31, 2023 and 2024, 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 2024, 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 April 23, 2025 41 Table of Contents BIO-key International, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 2024 2023 ASSETS Cash and cash equivalents $ 437,604 $ 511,400 Accounts receivable, net 718,229 1,201,526 Due from factor 74,170 99,320 Inventory, net of reserve 378,307 445,740 Prepaid expenses and other 278,648 364,171 Total current assets 1,886,958 2,622,157 Equipment and leasehold improvements, net 140,198 220,177 Capitalized contract costs, net 409,426 229,806 Deposits and other assets 7,976 - Operating lease right-of-use assets 73,372 36,905 Investments 5,000,000 - Intangible assets, net 1,097,630 1,407,990 Total non-current assets 6,728,602 1,894,878 TOTAL ASSETS $ 8,615,560 $ 4,517,035 LIABILITIES Accounts payable $ 818,187 $ 1,316,014 Accrued liabilities 1,278,732 1,305,848 Note payable 1,525,977 - Government loan – BBVA Bank, current portion 132,731 138,730 Deferred revenue - current 773,267 414,968 Operating lease liabilities, current portion 24,642 37,829 Total current liabilities 4,553,536 3,213,389 Deferred revenue, net of current portion 196,237 28,296 Deferred tax liability - 22,998 Government loan – BBVA Bank, net of current portion 44,762 188,787 Operating lease liabilities, net of current portion 48,994 - Total non-current liabilities 289,993 240,081 TOTAL LIABILITIES 4,843,529 3,453,470 Commitments (Note O) STOCKHOLDERS’ EQUITY Common stock — authorized, 170,000,000 shares; issued and outstanding; 3,715,483 and 1,032,777 of $ .0001 par value at December 31, 2024 and December 31, 2023, respectively 372 103 Additional paid-in capital 133,030,271 126,047,851 Accumulated other comprehensive loss 49,290 22,821 Accumulated deficit ( 129,307,902 ) ( 125,007,210 ) TOTAL STOCKHOLDERS’ EQUITY 3,772,031 1,063,565 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 8,615,560 $ 4,517,035 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 OPERATIONS AND COMPREHENSIVE LOSS 2024 2023 Revenues Services $ 1,108,506 $ 2,218,885 License fees 5,189,370 4,342,010 Hardware 631,695 1,194,010 Total revenues 6,929,571 7,754,905 Costs and other expenses Cost of services 396,274 861,936 Cost of license fees 589,505 1,174,919 Cost of hardware 516,611 700,231 Cost of hardware reserve ( 213,005 ) 3,586,500 Total costs and other expenses 1,289,385 6,323,586 Gross Profit 5,640,186 1,431,319 Operating expenses Selling, general and administrative 7,140,147 7,862,710 Research, development and engineering 2,511,080 2,394,926 Total operating expenses 9,651,227 10,257,636 Operating loss ( 4,011,041 ) ( 8,826,317 ) Other income (expense) Interest income 110 11,533 Gain from sale of asset 20,000 Loss on foreign currency transactions ( 13,004 ) ( 39,000 ) Loan fee amortization ( 124,000 ) - Change in fair value of convertible note 396,203 Interest expense ( 175,755 ) ( 218,270 ) Total other income (expense) ( 312,649 ) 170,466 Loss before provision for income tax benefit ( 4,323,690 ) ( 8,655,851 ) Provision for income tax benefit 22,998 134,014 Net loss $ ( 4,300,692 ) $ ( 8,521,837 ) Comprehensive loss: Net loss $ ( 4,300,692 ) $ ( 8,521,837 ) Other comprehensive loss- Foreign translation adjustment 26,469 265,423 Comprehensive loss $ ( 4,274,223 ) $ ( 8,256,414 ) Basic and Diluted Loss per Common Share $ ( 2.09 ) $ ( 15.21 ) Weighted Average Shares Outstanding: Basic and Diluted 2,059,884 560,278 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 STOCKHOLDERS ’ EQUITY Accumulated Additional Other Common Stock Paid-in Comprehensive Accumulated Shares (1) Amount Capital Income (Loss) Deficit Total 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 ) - - 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 Issuance of common stock for directors’ fees 12,048 1 18,005 - - 18,006 Issuance of restricted common stock to employees 178,963 18 ( 18 ) - - - Forfeiture of restricted stock ( 9,168 ) ( 1 ) - - - ( 1 ) Exercise of warrants 1,903,222 190 1,907,909 - - 1,908,099 Issuance of warrants - - - - - Issuance of stock for securities purchase agreements 595,000 60 4,999,940 - - 5,000,000 Issuance of common stock for employee stock purchase plan 2,641 1 3,689 - - 3,690 Share based compensation for employee stock purchase plan - - 775 - - 775 Foreign currency translation adjustment - - - 26,469 - 26,469 Share-based compensation - - 224,470 - - 224,470 Issuance costs - - ( 172,350 ) - - ( 172,350 ) Net loss - - - - ( 4,300,692 ) ( 4,300,692 ) Balance as of December 31, 2024 3,715,483 $ 372 $ 133,030,271 $ 49,290 $ ( 129,307,902 ) $ 3,772,031 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 BIO-key International, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2024 2023 CASH FLOW FROM OPERATING ACTIVITIES: Net loss $ ( 4,300,692 ) $ ( 8,521,837 ) Adjustments to reconcile net loss to cash used for operating activities: Depreciation 93,026 75,136 Amortization of intangible assets and write-off 304,983 354,558 Interest payable on Note 164,589 - Loss on foreign currency 13,004 39,000 Reserve for inventory ( 213,005 ) 3,586,500 Allowance for doubtful account ( 372,532 ) 750,000 Amortization of debt discount 124,000 - Amortization of capitalized contract costs 175,900 171,291 Share based and warrant compensation for employees and consultants 225,245 226,725 Stock based fees to directors 18,006 39,007 Bad debt expense 100,000 100,000 Change in fair value of convertible note - ( 396,203 ) Deferred income tax benefit ( 22,998 ) ( 134,014 ) Amortization of operating lease right-of-use assets 79,521 - Change in operating assets and liabilities: Accounts receivable 855,829 ( 428,742 ) Due from factor 25,150 ( 49,820 ) Capitalized contract costs ( 355,520 ) ( 118,028 ) Deposits ( 7,976 ) - Right of use asset ( 115,988 ) 160,449 Inventory 280,438 402,129 Prepaid expenses and other 85,523 ( 21,465 ) Accounts payable ( 502,987 ) 57,725 Income tax payable 15,000 ( 121,764 ) Accrued liabilities ( 42,116 ) 275,561 Deferred revenue 526,240 ( 71,288 ) Operating lease liabilities ( 66,712 ) ( 168,376 ) Net cash used for operating activities ( 2,914,072 ) ( 3,793,456 ) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 13,047 ) ( 1,000 ) Net cash used for investing activities ( 13,047 ) ( 1,000 ) 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 1,908,099 320 Costs incurred for issuance of common stock ( 172,350 ) ( 561,367 ) Proceeds from issuance of note payable 2,000,000 - Repayment of note payable ( 762,611 ) - Repayment of government loan ( 150,024 ) ( 119,251 ) Proceeds from Employee Stock Purchase Plan 3,740 17,478 Net cash (used in) provided by financing activities 2,826,854 1,433,440 Effect of exchange rate changes 26,469 236,894 NET DECREASE IN CASH AND CASH EQUIVALENTS ( 73,796 ) ( 2,124,122 ) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 511,400 2,635,522 CASH AND CASH EQUIVALENTS, END OF YEAR $ 437,604 $ 511,400 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 SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION Years ended December 31, 2024 2023 Cash paid during the year for: Taxes $ - $ - Interest $ 175,755 $ 218,270 Noncash investing and financing activities: Operating lease right-of-use asset and liability for new lease $ 79,521 $ - 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. 46 Table of Contents BIO-key International, Inc. and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS December 31, 2024 and 2023 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. In order to mitigate the losses and improve cash flow, the Company is working on the following initiatives. Our EMEA subsidiary is now only selling our BIO-key and PortalGuard solutions that does not carry the previous 50% cost of sales. We have agents actively seeking other markets to sell our inventory for the Nigerian projects. We continue to lower expenses if possible and keep our current monthly expenses at the current level of approximately $ 812,000 . We now have an investment that we can liquidate to fund operations (See Note H) and to pay the required Note Payable payments (See Note J). 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. 47 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. 48 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, 2024 and 2023 , 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 G 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, 2024 and 2023 , cash equivalents consisted of a money market account. 49 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, 2024 and 2023 consisted of the following: December 31, 2024 2023 Accounts receivable $ 1,351,482 $ 2,207,311 Allowance for doubtful accounts ( 633,253 ) ( 1,005,785 ) Accounts receivable, net of allowances for doubtful accounts $ 718,229 $ 1,201,526 Bad debt expenses (if any) are recorded in selling, general, and administrative expense. The allowance for doubtful accounts for the years ended December 31, 2024 and 2023 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, 2024 Allowance for Doubtful Accounts $ 1,005,785 $ 16,265 $ ( 388,797 ) $ 633,253 Year ended December 31, 2023 Allowance for Doubtful Accounts $ 573,785 $ 750,000 $ ( 318,000 ) $ 1,005,785 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 2024 and 2023 . 10. Advertising Expense The Company expenses the costs of advertising as incurred. Advertising expenses for 2024 and 2023 were approximately $ 353,000 and $ 340,000 , 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. 50 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, 2024 2023 Selling, general and administrative $ 201,100 $ 209,134 Research, development and engineering 42,150 56,598 $ 243,250 $ 265,732 51 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. 52 Table of Contents 16. 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, 2024 and 2023 : North December 31, America Africa EMESA* Asia 2024 License fees $ 2,410,624 $ 1,490,256 $ 1,282,176 $ 6,314 $ 5,189,370 Hardware 154,931 - 391,764 85,000 631,695 Services 898,686 162,467 47,353 1,108,506 Total revenues $ 3,464,241 $ 1,652,723 $ 1,721,293 $ 91,314 $ 6,929,571 53 Table of Contents 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 $ 3,236,097 $ 654,446 $ 3,796,524 $ 67,837 $ 7,754,905 * EMESA – Europe, Middle East, South America Revenue recognized during the year ended December 31, 2024 from amounts included in deferred revenue at the beginning of the year was approximately $ 508,000 . 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 . Total deferred revenue (contract liability) was approximately $ 970,000 and $ 443,000 at December 31, 2024 and 2023 , respectively. The contract liability is derived by an 18 % carve-out on subscription orders which is based on industry standards and our current maintenance and support charge for perpetual licenses. Services revenue decreased $ 1,110,379 from year ended December 31, 2023 to December 31, 2024 which was largely attributed to one customer with a 70 % cost the services. License fees increased $ 847,297 from year ended December 31, 2023 to December 31, 2024 which a trend that we expect to continue. 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 — 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. Warrants were valued using the Black-Scholes model. The volatility for warrants were based on the five -year term of the warrants. We also substituted the Bloomberg one year volatility resulting in approximately $10,000 less in the sensitivity analysis. NOTE D — 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, 2024 and December 31, 2023. 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, 2024 one customer accounted for 24 % of total revenue and 4 % of accounts receivable. For the year ended December 2023 , three customers accounted for 34 % of total revenue. At December 31, 2024 , two customers accounted for 36 % of the total accounts receivable. At December 31, 2023 , three customers accounted for 66 % of total accounts receivable. 54 Table of Contents NOTE E — 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 2023 and 2024 is due to slow moving inventory purchased for projects in Nigeria and other slow moving inventory. The Company is looking into other markets and opportunities to sell or return the product. The total inventory below accounts for selective product that ships quarterly to customers worldwide and through Amazon. Inventory is comprised of the following as of December 31: 2024 2023 Finished goods $ 4,098,513 $ 4,373,056 Fabricated assemblies 53,289 59,184 Reserve on finished goods ( 3,773,495 ) ( 3,986,500 ) Total inventory $ 378,307 $ 445,740 NOTE F — EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consisted of the following as of December 31: 2024 2023 Equipment $ 1,016,802 $ 1,012,958 Furniture and fixtures 225,978 225,978 Software 49,143 49,143 Leasehold improvements 44,106 34,903 1,336,029 1,322,982 Less accumulated depreciation and amortization ( 1,195,831 ) ( 1,102,805 ) Total $ 140,198 $ 220,177 Depreciation was $ 93,026 and $ 75,136 for 2024 and 2023 , respectively. Amounts are recorded in selling, general, and administrative expense as well as in cost of services. Additions for the years ending 12/31/2024 and 12/31/23 were $ 13,047 and $ 1,000 , respectively. There have been no write-offs or adjustments for the years ending 12/31/2024 and 12/31/2023. NOTE G — INTANGIBLE ASSETS AND GOODWILL Intangible assets consisted of the following as of December 31: 2024 2023 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 ( 1,510,310 ) ( 1,199,950 ) Total $ 1,097,630 $ 1,407,990 55 Table of Contents Aggregate amortization expense for 2024 and 2023 was approximately $ 310,000 and $ 355,000 , 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 2025 $ 267,000 2026 $ 224,000 2027 $ 223,000 2028 $ 141,000 2029 $ 117,000 Thereafter $ 125,630 Total $ 1,097,630 Goodwill The Company concluded the amounts in goodwill had been fully impaired and accordingly wrote-off the entire balance in full for the Swivel Secure Europe LTD acquisition, due the reversal of the earnout payable based on the 2022 revenue achievement as at December 31, 2022. NOTE H - INVESTMENTS Equity Investment in Privately Held Company On November 27, 2024, the Company purchased 5,000,000 shares (the “Boumarang Shares”) of common stock of Boumarang, Inc., an early-stage private technology company developing sustainable long-range drone technology for commercial applications. The Boumarang Shares represent approximately 7.92 % of the issued and outstanding shares of Boumarang, Inc. and the Company has no corporate governance or control rights. The Boumarang Shares were purchased from Fiber Food Systems, Inc. (“Fiber Food”), an early-stage company engaged in developing global food security solutions, in consideration of the issuance of 595,000 shares of the Company’s common stock. Fiber Food is not a principal stockholder of Boumarang and has no corporate governance or control rights. The purchase agreement between the Company and Fiber Food contemplates collaboration between the parties regarding potential strategic and commercial transactions, including acquiring assets or equity interests in other operating companies, integrating the Company’s identity access management solutions into Fiber Food’s offerings, and introducing the Company to its customers, affiliates and business contacts who are potential users of the Company’s solutions, in each case pursuant to future definitive agreements on terms to be negotiated by the parties. The Company has engaged in discussions with Fiber Food and Boumarang regarding the contemplated collaboration, but no definitive agreements have been executed. In the event that at any time during the nine -month period after the closing of the transaction the Company values the Boumarang Shares at less than $ 5,000,000 on its balance sheet, the Company has the right to cause Fiber Food to repurchase the Boumarang Shares from the Company in exchange for the return of the shares of Company common stock issued in exchange for the Boumarang Shares. The purchase agreement also contains a standstill which prohibits the Company, Fiber Food, Boomerang and their respective affiliates and representatives for a period of two years, from, among other things, initiating any business combination, restructuring, tender offer, proposal to seek representation on the board of directors, or any proxy solicitation, instigating, encouraging or assisting any third party from doing any of the forgoing, or acquiring any debt or equity securities of any other party. The Boumarang Shares constitute an investment in a privately held company for which there is no trading market and are carried at fair value. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use in pricing the asset or liability, such as inherent risk, non-performance risk and credit risk. The Company follows ASC Topic 820 – “Fair Value Measurement,” which establishes a three -level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived from observable market data by correlation or other means. Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs). The Boumarang Shares are classified as a Level 3 asset and have been valued based on a combination of recent sales of Boumarang common stock to third parties and a third party valuation applying a discounted cash flow analysis which included discounts for lack of control and lack of marketability, small company risk premium, and specific company risk premium based on Boumarang being an early-stage pre-revenue company. The lack of control and marketability discounts were based on published studies and transfer restrictions contained in Boumarang’s corporate governance documents. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Boumarang Shares may fluctuate from period to period and the fair value of the Boumarang Shares may differ significantly from the values that would have been used had a ready market existed for such shares and may differ materially from the values that the Company may ultimately realize. The early-stage pre-revenue status and unproven technology of Boumarang raise uncertainties that could impact the recoverability of the investment in the Boumarang Shares. ASC 321 - 10 - 35 requires annual impairment testing for equity securities without readily determinable fair values. 56 Table of Contents NOTE I — ACCRUED LIABILITIES Accrued liabilities consisted of the following as of December 31: 2024 2023 Compensation $ 549,217 $ 326,007 Compensated absences 299,152 327,252 Accrued legal and accounting fees 161,000 264,976 Taxes 55,986 152,986 Employee expenses reimbursement 154,209 124,209 Sales tax payable 18,147 19,282 Other 41,021 91,136 Total $ 1,278,732 $ 1,305,848 For the years ended 12/31/2024 from 12/31/2023, there were increases in compensation costs related to commission payments due of approximately, $ 223,000 and increases in employee expenses reimbursement due to timing of reimbursements of approximately $ 30,000 . These increases were offset by decreases for the years ended 12/31/2024 from 12/31/2023 of approximately $ 28,000 for a lower vacation time accrual, approximately $ 104,000 for lower legal and accounting fees, approximately $ 97,000 for taxes, approximately $ 1,135 for sales tax, and approximately $ 50,000 for miscellaneous accrued expenses. Table of Contents NOTE J — NOTE PAYABLE Securities Purchase Agreement dated June 24, 2024 On June 24, 2024, the Company entered into and closed a note purchase agreement (the “Purchase Agreement”) which provided for the issuance of a $ 2,360,000 principal amount senior secured promissory note (the “2024 Note”). The 2024 Note carries an original issue discount of $ 350,000 and the Company agreed to pay $ 10,000 to the Lender to cover its transaction costs, which were deducted from the proceeds of the 2024 Note resulting in a total of $ 2,000,000 being funded to the Company at closing. The proceeds will be used for general working capital. The principal amount of the 2024 Note is due eighteen months ( 18 ) following the date of issuance. Interest under the 2024 Note accrues at a rate of nine percent ( 9 %) per annum. All repayments of principal due under the 2024 Note will be subject to an exit fee of seven percent ( 7 %) of the principal amount being repaid (the “Exit Fee”). Commencing six months after the date of issuance of the Note (the “Redemption Start Date”), Lender shall have the right to redeem up to $ 270,000 of principal amount under the 2024 Note each month which amount plus the Exit Fee will be due and payable three ( 3 ) business days after Lender’s delivery of a redemption notice to the Company. At the end of each month following the Redemption Start Date, if the Company has not reduced the outstanding balance under the 2024 Note by at least $ 270,000 , then by the fifth ( 5th ) day of the following month, the Company must either pay to Lender the difference between $ 270,000 and the amount, if any, redeemed in such month plus the Exit Fee, or the outstanding balance due under the Note will automatically increase by one percent ( 1 %). The 2024 Note is secured by a lien on substantially all of the Company’s assets and properties and the Company’s obligations under the Note are guaranteed by Pistol Star, Inc., a wholly owned subsidiary of the Company. The 2024 Note can be prepaid in whole or in part without penalty at any time. In the event that the Company receives any proceeds in connection with any fundraising or financing transaction (including any warrant exercises), it will be required to make a mandatory prepayment equal to the lesser of (i) forty percent ( 40 %) of the amount raised in such transaction and (ii) the full amount due under the 2024 Note. The 2024 Note provides for customary events of default, including, among other things, the event of non-payment of principal, interest, fees or other amounts, a representation or warranty proving to have been incorrect when made, failure to perform or observe covenants within a specified period of time, the bankruptcy or insolvency of the Company or of all or a substantial part of its property, and monetary judgment defaults of a specified amount. Upon the occurrence of an Event of Default, Lender may ( i) cause interest on the outstanding balance to accrue at an interest rate equal to the lesser of twenty two ( 22 %) or the maximum rate permitted under applicable law, and (ii) accelerate all amounts due under the 2024 Note plus an amount equal to (a) fifteen percent ( 15 %) of the amount due under the 2024 Note for each default that is considered a major trigger event (as defined), and (b) five percent ( 5 %) of the amount due under the 2024 Note for each occurrence of any default that is considered a minor trigger event (as defined), in any case not to exceed twenty five percent ( 25 %). The Company received gross proceeds of approximately $ 1.9 million in connection with a financing transaction (see Note N Warrants). In accordance with the terms of the 2024 Note, on October 1, 2024, 40 % of the proceeds received, or approximately $ 762,600 , was used to prepay amounts due under the 2024 Note. Subsequent to the period ending December 31, 2024, the Company entered into two Exchange Agreements with the holder of the Note and agreed to partition the original Note two new Promissory Notes in the original principal amounts of $ 629,000 and $ 205,000 , respectively, reducing the outstanding principal amount of the original Note to approximately $ 738,400 . 57 Table of Contents NOTE K — 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. 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 N). 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. NOTE L — LEASES The Company’s leases office space in New Jersey, Minnesota, New Hampshire, Madrid and Hong Kong with lease termination dates in 2025 and 2027. 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, 2024 2023 Lease cost Operating lease cost $ 45,787 $ 166,161 Total lease cost $ 45,787 $ 166,161 Balance sheet information Operating right-of-use assets $ 73,372 $ 36,905 Operating lease liabilities, current portion $ 24,642 $ 37,829 Operating lease liabilities, non-current portion 48,994 - Total operating lease liabilities $ 73,636 $ 37,829 Weighted average remaining lease term (in years) – operating leases 2.67 0.67 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 $ 63,914 $ 213,783 Maturities of operating lease liabilities were as follows as of December 31, 2024: 2025 $ 28,195 2026 29,267 2027 22,477 Total future lease payments 79,939 Less: imputed interest ( 6,303 ) Total $ 73,636 58 Table of Contents NOTE M — COMMITMENTS AND CONTINGENCIES Distribution Agreement Swivel Secure had 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 and Swivel Secure Limited terminated the Distribution Agreement in the fourth quarter 2024. The Company made a business decision to that our PortalGuard and WEB-key solutions be sold versus the Swivel Secure Limited solutions to increase gross profit by close to 50%. The termination of the agreement did not result in any penalties or inventory returns. 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, 2024 , the Company was not a party to any pending lawsuits. NOTE N — 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 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 2024 and 2023 , 2.641 , and 17,478 shares respectively were issued under the ESPP to employees, which resulted in a $ 775 , and $ 4,343 non-cash compensation expense respectively for the Company On December 22, 2022, the Company issued the Commitment Shares. See Note K - Convertible Note Payable for more information. 59 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 178,963 shares of restricted common stock to certain employees of the Company and 9,168 of shares of restricted common stock were forfeited during fiscal year 2024 . 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. 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, 2024 and 2023 was $ 224,470 and $ 225,487 , respectively. Issuances to Directors, Executive Officers & Consultants During the 2024 and 2023 years, the Company issued 12,048 and 3,078 shares of common stock respectively to its directors in lieu of payment of board fees, valued at $ 18,005 and $ 39,007 respectively. Warrants Warrants Issued with a Warrant Exercise Agreement: On September 12, 2024, the Company entered into a Warrant Exercise Agreement ("inducement agreement") with an existing institutional investor for the immediate exercise of certain outstanding warrants that the Company issued on October 30, 2023. Pursuant to the warrant inducement agreement, the investor agreed to exercise outstanding warrants to purchase an aggregate of 1,030,556 shares of the Company's common stock at an amended exercise price of $ 1.85 . The gross proceeds from the exercise of the warrants was approximately $ 1.9 million, prior to deducting placement agent fees and estimated offering expenses. In consideration for the immediate exercise of the warrants, the Company also agreed to issue to the investor unregistered Series A Warrants to purchase an aggregate of 1,030,556 shares of the Company's common stock and unregistered Series B Warrants to purchase an aggregate of 1,030,556 shares of the Company's common stock, each with an exercise price of $ 1.85 per share. The Series A Warrants and Series B Warrants share substantially the same terms, are immediately exercisable and will expire five years from the date of issuance. Warrants Issued with Convertible Note: See Note K - 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, 2024 2023 Weighted average risk-free interest rate 3.34 % 4.63 % Weighted average exercise price $ 1.85 $ 3.15 Weighted average exercise period 5 5 Weighted average Volatility of stock price 577 % 817 % 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 five -year volatility is higher than the one -year rate from Bloomberg of 245 %, based on several reverse-splits of BIO-key's stock over the five -year 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, 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 $ 104.95 4.37 — Granted 2,061,112 1.85 Exercised ( 1,903,222 ) 1.00 Forfeited — — Expired ( 13,889 ) — Outstanding, as of December 31, 2024 2,770,493 $ 10.99 4.19 — 60 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 $ 1.71 , $ 3.00 , and $ 10.62 as of December 31, 2024, 2023 and 2022 , 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, 2024, 2023 and 2022 . NOTE O — STOCK OPTIONS 2023 Stock Incentive Plan 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 or as determined by the Board or Compensation Committee. The 2023 Plan expires on December 13, 2033, unless terminated earlier. In 2024 the Company issued 177,433 restricted shares to employees of which 7,817 were forfeited. The Company also issued 7,761 shares to the Board of Directors for payments of Board fees. 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, 2022 6,241 4,724 11,313 $ 299.61 2.07 $ 0 Granted — — — — Exercised — — — — Forfeited ( 151 ) — ( 151 94.44 Expired ( 1,548 ) ( 1,895 ) 256.30 Outstanding, as of December 31, 2023 4.542 4,724 9,266 $ 311.16 0.96 $ 0 Granted — — — — Exercised — — — — Forfeited ( 348 ) — ( 348 ) 93.60 Expired ( 1,187 ) ( 4,724 ) ( 5,911 ) 380.51 Outstanding, as of December 31, 2024 3,007 - 3,007 $ 197.31 1.14 $ 0 Vested or expected to vest at December 31, 2024 3,007 $ 197.31 1.14 $ 0 Exercisable at December 31, 2024 3,007 $ 197.31 1.14 $ 0 61 Table of Contents The options outstanding and exercisable at December 31, 2024 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 1,857 $ 144.71 1.67 1,857 $ 144.71 $169.93 - 504.00 1,150 282.24 0.22 1,150 282.24 $93.60 - 504.00 3,007 3,007 The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $ 1.71 , $ 3.00 , and $ 10.62 as of December 31, 2024, 2023 and 2022 , 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, 2024, 2023 and 2022 . The weighted average fair value of options granted during the years ended December 31, 2024 and 2023 was $ 0 as no options were granted in either year. The total intrinsic value of options exercised during the years ended December 31, 2024 and 2023 was $ 0 as no options were exercised in either year. The total fair value of shares vested during the years ended December 31, 2024 and 2023 was $0 ( none vested) and $ 18,310 . respectively. As of December 31, 2024, there was no future forfeiture adjusted compensation costs related to nonvested stock options. NOTE P — INCOME TAXES The components of net loss consist of the following: Year ended Year ended December 31, December 31, 2024 2023 United States $ ( 2,767,752 ) $ ( 7,279,970 ) Hong Kong ( 222,901 ) ( 627,146 ) Nigeria ( 223,426 ) ( 203,700 ) Spain ( 1,086,613 ) ( 411,021 ) Total $ ( 4,300,692 ) $ ( 8,521,837 ) 62 Table of Contents There was no provision for current federal, foreign or state taxes for both of the years ended December 31, 2024 and 2023 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, 2024 2023 Current – federal, $ - $ - state foreign Deferred- Federal 40,986 States Foreign ( 22,998 ) ( 175,000 ) Total ( 22,998 ) ( 134,014 ) Change in valuation allowance Provision for income tax expense (benefit) $ ( 22,998 ) $ ( 134,014 ) Significant components of deferred tax assets and liabilities are as follows at December 31, 2024 and 2023 : December 31, December 31, 2024 2023 Accrued compensation $ 154,457 $ 112,201 Allowance for doubtful accounts 20,513 90,405 Research and development expenses 1,216,601 1,017,551 Capital loss carry forward 114,251 114,251 Stock-based compensation 34,299 32,408 Equipment and leasehold improvements ( 6,268 ) ( 12,353 ) Intangible assets - US - - Intangible assets - Foreign - ( 145,000 ) Reserve - Foreign - 150,000 Inventory reserve 781,213 828,668 Interest expense - - Operating lease liabilities ( 16,346 ) - Other 1,000 1,000 Tax credits 1,554,541 1,748,235 Operating lease right-of-use assets 16,406 206 Net operating loss and research and credit carryforwards 11,824,622 13,277,118 Valuation allowance ( 15,740,289 ) ( 17,214,690 ) Net deferred tax liability $ - $ 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, 2024 and 2023 , the Company provided a valuation allowance on its net deferred tax assets of $ 15,740,289 and $ 17,214,690 respectively. 63 Table of Contents As of December 31, 2024 , the Company has U.S. federal net operating loss carryforwards of approximately $ 54.6 million. Approximately $ 36 million are subject to expiration between 2025 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 $ 5.9 million which expire from 2026 through 2043. 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, 2024 2023 Federal statutory income tax rate 21 % 21 % State taxes, net of federal benefit 0.82 ( 1.41 ) Permanent differences ( 1.84 ) 1.97 Expiration of net operating loss and research credit carryforwards ( 46.14 ) ( 7.84 ) Expiration and forfeiture of stock options - - foreign rate differential ( 7.23 ) ( 5.84 ) rate change ( 0.41 ) ( 1.05 ) Other 0.14 ( 9.08 ) Valuation allowance 33.98 ( 0.24 ) Effective tax rate 0.32 % ( 2.5 )% 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 2020 through 2024 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. We estimate that the potential penalties for non-filing will be minimal due to the losses. The Company is currently working on the filings and expects to be current by December 31, 2025. 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. We estimate that the potential penalties for non-filing will be minimal due to the losses. The Company will be working on the filings during 2025 and expects to be current in 2026. 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, 2024 and 2023 . NOTE Q 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, 2024 and 2023 . The plan passed its 2023 annual non-discrimination test, and expects to pass the 2024 annual non-discrimination test. 64 Table of Contents NOTE R — EARNINGS PER SHARE (EPS) Items excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares, and they were also excluded from diluted earnings per share due to anti-dilution: Years ended December 31, 2024 2023 Stock options 3,007 9,266 Warrants 2,770.493 270,672 Total 2,773,500 279,938 NOTE S — 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 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 worked to remediate in 2024. We have put newly trained management in control of our EMEA invoice processing and revenue recognition process. Additionally, we have added more inventory analysis in our quarterly closing process. 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 65 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 ) 66 Table of Contents NOTE T — SUBSEQUENT EVENTS On January 8, 2025, the Company issued 14,970 shares of common stock in repayment of $ 25,000 of the principal due on the 2024 Note. On January 10, 2025, 679 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 January 10, 2025, 5,000 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 January 15, 2025, the Company entered into a warrant exercise agreement under which the counterparty agreed to exercise outstanding warrants to purchase 2,061,112 shares of common stock at an exercise price of $ 1.85 per share resulting in gross proceeds of approximately $ 3.8 million, prior to deducting placement agent fees and estimated offering expenses. In connection with this transaction, the Company issued additional warrants to purchase an aggregate 3,091,668 shares of common stock at an exercise price of $ 2.15 per share. On January 15, 2025, the Company issued 149,635 shares of common stock in repayment of $ 205,000 of the principal due on the 2024 Note. On January 15, 2025, the Company issued 340,000 shares of common stock in repayment of $ 629,000 of the principal due on the 2024 Note. On January 17, 2025, the Company issued 431,000 shares of common stock upon the exercise of warrants. On January 23, 2025, the Company issued 427,112 shares of common stock upon the exercise of warrants. On February 14, 2025, the Company issued 241,000 shares of common stock upon the exercise of warrants. On March 13, 2025, the Company issued 491,000 shares of common stock upon the exercise of warrants. On March 20, 2025, the Company issued 8,913 shares of common stock to its directors in payment of board fees. On March 20, 2025, the Company issued 2,500 shares of restricted stock to new employees which vest over three -years. The forgoing issuances of common stock after December 31, 2024 total 2,106,130 shares representing a 56 % increase in the Company's outstanding shares of common stock since December 31, 2024, less forfeitures. On March 28, 2025, 1,893 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 Form of Series A Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to the Company’ s Current Report on Form 8-K filed September 16, 2024) 4.12 Form of Series B Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Company’ s Current Report on Form 8-K filed September 16, 2024) 4.13 Form of Series A Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to the Company’ s Current Report on Form 8-K filed January 16, 2025) 4.14 Form of Series B Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Company’ s Current Report on Form 8-K filed January 16, 2025) 4.15 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 Form 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) 10.31 Note Purchase Agreement dated June 24, 2024 by and between the Company and Streeterville Capital, LLC (incorporated by reference to Exhibit 10.1 to the Company’ s Current Report on Form 8-K filed June 28, 2024) 10.32 $2,360,000 Secured Promissory Note dated June 24, 2024 (incorporated by reference to Exhibit 10.2 to the Company’ s Current Report on Form 8-K filed June 28, 2024) 10.33 Security Agreement dated June 24, 2024 by and between the Company and Streeterville Capital, LLC (incorporated by reference to Exhibit 10.3 to the Company’ s Current Report on Form 8-K filed June 28, 2024) 10.34 Intellectual Property Security Agreement dated June 24, 2024 by and between the Company and Streeterville Capital, LLC (incorporated by reference to Exhibit 10.4 to the Company’ s Current Report on Form 8-K filed June 28, 2024) 10.35 Guaranty dated June 24, 2024 by and between Pistol Star, Inc. and Streeterville Capital, LLC (incorporated by reference to Exhibit 10.5 to the Company’ s Current Report on Form 8-K filed June 28, 2024) 10.36 Form of Warrant Exercise Agreement, dated September 12, 2024, by and between the Company and the Investor (incorporated by reference to Exhibit 10.1 to the Company’ s Current Report on Form 8-K filed September 16, 2024) 10.37 Securities Purchase Agreement dated November 27, 2024, by and among BIO-key International, Inc., Fiber Food Systems, Inc. and Boumarang Inc. (incorporated by refence to Exhibit 10.1 to the Company’ s Current Report on Form 8-K filed December 3, 2024) 72 Table of Contents 10.38 Form of Warrant Exercise Agreement, dated January 15, 2025, by and between BIO-key International, Inc. and the Investor (incorporated by reference to Exhibit 10.1 to the Company’ s Current Report on Form 8-K filed January 16, 2025) 10.39 Exchange Agreement, dated January 15, 2025, by and between BIO-key International, Inc. and Streeterville Capital, LLC (incorporated by reference to Exhibit 10.2 to the Company’ s Current Report on Form 8-K filed January 16, 2025) 10.40 Exchange Agreement, dated January 15, 2025, by and between BIO-key International, Inc. and Streeterville Capital, LLC (incorporated by reference to Exhibit 10.3 to the Company’ s Current Report on Form 8-K filed January 16, 2025) 19.1* Insider Trading Policy 21.1* List of subsidiaries of BIO-key International, Inc. 23.1* Consent of Bush and Associates CPA 24.1* Power of Attorney (included on signature page hereto) 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 Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 97.1* Clawback Policy dated October 2, 2023 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. 73 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: April 23, 2025 By: /s/ MICHAEL W. DEPASQUALE Michael W. DePasquale CHIEF EXECUTIVE OFFICER (Principal Executive Officer) Each person whose signature appears below constitutes and appoints Michael W. DePasquale and Cecilia Welch, or either of them, as such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and any documents related to this report and filed pursuant to the Securities Exchange Act of 1934, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney shall be governed by and construed with the laws of the State of Delaware and applicable federal securities laws. 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) April 23, 2025 Michael W. DePasquale /s/ CECILIA WELCH Chief Financial Officer (Principal Financial and Accounting Officer) April 23, 2025 Cecilia Welch /s/ROBERT J. MICHEL Director April 23, 2025 Robert J. Michel /s/ WONG KWOK FONG Director April 23, 2025 Wong Kwok Fong /s/ CAMERON WILLIAMS Director April 23, 2025 Cameron Williams /s/ EMMANUEL ALIA Director April 23, 2025 Emmanuel Alia 74