PART I Business BIO-key International specializes in fingerprint biometric technology for enterprise, healthcare, and government, shifting to SaaS and focusing on core operations - The company develops and markets advanced fingerprint biometric identification technologies, focusing on enterprise security, mobile payments, healthcare records, and large-scale government identity projects1920 - In 2020, BIO-key secured two major contracts in Africa and Nigeria with its partner TTI, valued at a combined $75 million, for large-scale identification projects23 - The COVID-19 pandemic has caused the company to shift to a remote business model, extending sales cycles and delaying deployments, particularly in Africa, while also spurring new opportunities for remote security solutions2482 - In the second half of 2019, the company modified its software licensing program to a Software as a Service (SaaS) model to lower the cost of entry for customers and generate more long-term revenue31 - The company decided to exit the US consumer lock business (TouchLock line) after CES 2019 to focus on its core biometric business32 2019 Business Model Focus | Area | Detail | | :--- | :--- | | OEM Customers | Continue prioritizing agreements with OEM customers like NCR and Omnicell | | Regulated Industries | Strong opportunity in Government ID projects, Healthcare, and Financial Services | | Partner Model | Launched a new Channel Alliance Partner (CAP) program, adding over 20 new partners | | Microsoft Partnership | Remain a Microsoft Partner, with scanners qualified for Windows Hello | | Hardware | Hardware products generated 40% of the company's revenue in 2019 | Risk Factors The company faces significant business and financial risks, including a "going concern" warning, market acceptance issues, and potential Nasdaq delisting - The company's independent registered public accounting firm has expressed substantial doubt about its ability to continue as a going concern due to a history of losses and limited revenue9899 - As of December 31, 2019, the company had an accumulated deficit of approximately $90 million and has historically not generated significant revenue101 - The COVID-19 outbreak has extended sales cycles, impacted access to overseas inventory, and delayed deployments, particularly in Africa, which could materially adversely affect business operations and financial condition142 - The company faces a risk of delisting from the Nasdaq Capital Market for failing to maintain the minimum bid price of $1.00 per share, with the compliance period extended to December 4, 2020, due to market impact of COVID-19160162 - Approximately 9,300,000 shares of common stock are reserved for issuance upon exercise or conversion of outstanding options, warrants, and convertible notes, which could result in substantial dilution to existing shareholders156 - The company has experienced difficulty in enforcing contract rights and collecting receivables in Asia and Africa, resulting in material write-offs, including a $1.7 million unpaid balance from a 2015 sale in Africa and a $0.5 million unpaid balance from a 2018 sale in Asia120121 Description of Property The company operates from leased facilities across multiple locations and does not own any real estate - The company does not own any real estate and operates from leased facilities in Minnesota (5,544 sq ft), New Jersey (4,517 sq ft), Hong Kong (1,098 sq ft), and China (3,267 sq ft)172 Legal Proceedings The company is not currently involved in any pending legal proceedings - The company is not currently a party to any pending lawsuits173 Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable174 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "BKYI" with 55 stockholders of record, and no cash dividends have ever been paid - The company's common stock is traded on the Nasdaq Capital Market under the symbol "BKYI"177 - As of May 11, 2020, there were 55 stockholders of record178 - The company has never paid cash dividends on its common stock and does not intend to in the foreseeable future179 Selected Financial Data This item is not applicable to the company - Not Applicable183 Management's Discussion and Analysis of Financial Condition and Results of Operations The company experienced a 44% revenue decrease and a $14.6 million net loss in 2019, facing critical liquidity issues and a "going concern" warning Results of Operations Total revenue decreased by 44% in 2019, leading to a $193,717 gross loss and a $14.6 million net loss, primarily due to a $7.0 million impairment charge Revenue and Cost of Sales Comparison (2019 vs. 2018) | Category | 2019 | 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $2,267,528 | $4,044,542 | ($1,777,014) | -44% | | Services Revenue | $925,245 | $1,012,576 | ($87,331) | -9% | | License Fees Revenue | $442,649 | $1,739,897 | ($1,297,248) | -75% | | Hardware Revenue | $899,634 | $1,292,069 | ($392,435) | -30% | | Total Costs | $2,461,245 | $4,164,190 | ($1,702,945) | -41% | - The 75% decrease in license revenue was primarily due to a large $1.1 million international order in Q4 2018 that did not have a comparable transaction in 2019221 - Selling, general and administrative (SG&A) expenses decreased by 6% to $5,036,820 in 2019, while Research, development and engineering (R&D) costs also decreased by 6% to $1,331,667225226 - A significant impairment charge of $6,957,516 was recorded in Q4 2019 related to the write-down of the FingerQ resalable software license rights to zero227228 Net Loss Summary (2019 vs. 2018) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Operating Loss | ($13,519,720) | ($6,868,955) | | Net Loss | ($14,588,700) | ($6,868,875) | Liquidity and Capital Resources The company's liquidity is critical, with cash decreasing to $79,000 and a $1.85 million net cash outflow from operations, relying on external financing to meet $525,000 monthly cash requirements - Cash and cash equivalents decreased from $324,000 at year-end 2018 to $79,000 at year-end 2019246 - The company requires approximately $525,000 per month for operations, a level it has been unable to consistently achieve through revenue generation247317 - Financing activities in 2019 provided approximately $2.15 million, primarily from the issuance of convertible notes234 - The company utilizes an accounts receivable factoring arrangement, selling a minimum of $150,000 of receivables per quarter to assist with working capital236 - In April 2020, the company received a $340,000 loan under the Paycheck Protection Program (PPP) of the CARES Act244 Critical Accounting Policies Key accounting policies include ASC 606 revenue recognition, impairment of long-lived assets, expensing R&D, maintaining a full valuation allowance for deferred tax assets, and stock-based compensation - The company adopted ASC 606 (Revenue Recognition) on January 1, 2018, recognizing software license and hardware revenue at a point in time, while support, maintenance, and professional services revenue is recognized over time255256257 - Long-lived assets are reviewed for impairment when events indicate the carrying amount may not be recoverable, which led to a significant impairment charge for the FingerQ Resalable License Rights in 2019265 - All research and development costs are expensed as incurred266 - A full valuation allowance has been established against deferred tax assets due to the company's history of losses and uncertainty of future taxable income267 Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2019 and 2018, including the auditor's "Going Concern" warning due to substantial losses and negative working capital Report of Independent Registered Public Accounting Firm The auditor's report confirms fair financial statement presentation but includes a "Going Concern" paragraph, citing substantial doubt due to losses and negative working capital - The auditor's report includes a "Going Concern" paragraph, raising substantial doubt about the company's ability to continue operations due to substantial net losses, negative working capital, and reliance on debt and equity financing292 Consolidated Financial Statements The consolidated financial statements show $2.5 million in total assets, $4.8 million in total liabilities, a $2.3 million stockholders' deficit, and a $14.6 million net loss for 2019 Consolidated Balance Sheet Highlights (as of Dec 31, 2019) | Account | Amount | | :--- | :--- | | Cash and cash equivalents | $79,013 | | Total Current Assets | $1,366,291 | | Total Assets | $2,496,698 | | Total Current Liabilities | $4,391,405 | | Total Liabilities | $4,781,871 | | Total Stockholders' Equity (Deficit) | ($2,285,173) | Consolidated Statement of Operations Highlights (Year ended Dec 31, 2019) | Account | Amount | | :--- | :--- | | Total Revenues | $2,267,528 | | Gross Profit (Loss) | ($193,717) | | Operating Loss | ($13,519,720) | | Net Loss | ($14,588,700) | | Basic and Diluted Loss per Share | ($1.03) | Notes to the Financial Statements Notes detail accounting policies, confirm the "Going Concern" issue, explain the $12 million FingerQ software impairment, and outline convertible debt, warrant changes, and subsequent financing events - The company has an accumulated deficit of approximately $90 million as of December 31, 2019, and its ability to continue as a going concern is in substantial doubt (Note A)316319 - An impairment charge of $6,957,516 was recorded in Q4 2019, writing down the carrying amount of the FingerQ resalable software license rights to zero due to the lack of expected future cash flows (Note G)386 - In July 2019, the company issued a $3,060,000 senior secured convertible note, which was later amended in 2020, reducing the conversion price to $0.65 per share (Note N)407410 - A 2018 stock issuance triggered anti-dilution provisions, increasing the number of warrants from a 2014 agreement from 996,877 to 2,392,502 and reducing the exercise price from $3.60 to $1.50; these warrants expired in November 2019 (Note Q)436437 - Subsequent to year-end, the company engaged in multiple financing activities, including issuing new convertible notes in January and February 2020, receiving a $340,000 PPP loan in April 2020, and issuing another $2,415,000 convertible note in May 2020 (Note V)465466469471 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes or disagreements with the company's accountants regarding financial disclosure - None271 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no material changes - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2019272 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019274 Other Information No other information is reported under this item - None278 PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement280 Executive Compensation Executive compensation information is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement281 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan information is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement282283 Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement284 Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement285 PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Form 10-K report - This item lists the financial statements and exhibits filed with the report286 Form 10-K Summary No summary is provided under this item - None287288
BIO-key(BKYI) - 2019 Q4 - Annual Report