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BIO-key(BKYI) - 2020 Q4 - Annual Report

Part I Business BIO-key International, Inc. is an Identity and Access Management (IAM) platform provider, offering secure, passwordless access solutions - BIO-key is an Identity and Access Management (IAM) platform provider specializing in secure, passwordless access solutions for enterprise, education, and government customers15 - On June 30, 2020, the company acquired PistolStar, Inc. for $2.5 million, adding the PortalGuard line of software and services to its portfolio25 - The company's core products include PortalGuard® (enterprise IAM), WEB-key® (large-scale biometric ID), and accessory hardware like fingerprint scanners15 - The business model focuses on organic growth and strategic acquisitions, with a sales strategy that includes direct sales, a Channel Alliance Partner (CAP) program, and OEM agreements515346 | Category | 2020 | 2019 | | :--- | :--- | :--- | | Research & Development Expenses | $1,396,436 | $1,331,667 | Risk Factors The company faces material risks, including substantial operating losses and the need for wider market acceptance of its biometric technology - The company has a history of significant operating losses, with an accumulated deficit of approximately $99 million as of December 31, 202099 - The COVID-19 pandemic poses a significant risk, having already extended sales cycles, delayed deployments, and created uncertainty that could materially affect business operations and financial condition137139 - There are risks associated with integrating the newly acquired PistolStar, including potential difficulties in managing the business, retaining customers and employees, and realizing expected synergies149150 - A substantial number of outstanding options and warrants (approximately 4,917,000 shares reserved) could lead to significant dilution for existing stockholders upon exercise160 - The company faces risks in international operations, including currency fluctuations and difficulties in enforcing contract rights and collecting receivables, particularly in Asia and Africa114117 Description of Property The company leases all its properties, with key operational sites in New Jersey, Minnesota, New Hampshire, Hong Kong, and China - The company leases all its properties, with key locations in Wall, NJ (corporate HQ); Eagan, MN and Bedford, NH (R&D); Tsuen Wan, Hong Kong (warehouse/sales); and Jiangmen, China (hardware R&D/manufacturing)174 Legal Proceedings As of the report date, BIO-key International, Inc. is not a party to any pending lawsuits - As of the report date, the company is not a party to any pending lawsuits177 Mine Safety Disclosures This item is not applicable to the company - Not applicable178 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 112 stockholders of record and no plans for cash dividends - Common stock is traded on the Nasdaq Capital Market under the symbol 'BKYI'181 - As of March 26, 2021, there were 112 stockholders of record182 - The company has never paid cash dividends and does not intend to in the foreseeable future183 Selected Financial Data This item is not applicable as the company is a smaller reporting company - Not Applicable186 Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, total revenue grew 25% to $2.84 million, driven by service and license fees, with liquidity improved by a July 2020 public offering | Metric | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $2,836,782 | $2,267,528 | $569,254 | 25% | | Service Revenue | $1,432,228 | $925,245 | $506,983 | 55% | | License Fees | $962,038 | $442,649 | $519,389 | 117% | | Hardware Revenue | $442,516 | $899,634 | ($457,118) | -51% | | Gross Profit (Loss) | $2,041,956 | ($193,717) | - | - | | Operating Loss | ($5,203,167) | ($13,519,720) | - | - | | Net Loss | ($9,673,987) | ($14,588,700) | - | - | - The increase in service and license revenue was largely due to the acquisition of PistolStar in the second half of 2020209210 - The company secured two large contracts in Africa valued at a combined $75 million, with the first purchase order received in Q4 2020, expected to ship in H1 2021 upon prepayment198 - A July 2020 underwritten public offering resulted in net proceeds of approximately $22.7 million, significantly improving the company's liquidity, with cash and cash equivalents increasing from $79,013 at year-end 2019 to $16,993,096 at year-end 2020239241 Quantitative and Qualitative Disclosures About Market Risk This item is not applicable as the company is a smaller reporting company - Not Applicable249 Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020 and 2019, including the independent auditor's report and detailed notes - The independent auditor's report identified two critical audit matters: Revenue Recognition due to significant judgment in contracts with multiple performance obligations, and the PistolStar, Inc. Acquisition due to judgment in determining the fair value of acquired intangible assets344348 | Balance Sheet Item | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $22,520,572 | $2,496,698 | | Cash and cash equivalents | $16,993,096 | $79,013 | | Goodwill | $1,262,526 | $0 | | Total Liabilities | $2,185,453 | $4,781,871 | | Total Stockholders' Equity (Deficit) | $20,335,119 | ($2,285,173) | | Cash Flow Item | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :--- | :--- | :--- | | Net cash used for operating activities | ($4,950,108) | ($1,850,347) | | Net cash used for investing activities | ($2,229,821) | ($543,310) | | Net cash provided by financing activities | $24,094,012 | $2,148,727 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes or disagreements occurred with the company's accountants regarding accounting principles or financial disclosure - None250 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - Management concluded that as of December 31, 2020, the company's disclosure controls and procedures were effective251 - Management concluded that the internal control over financial reporting was effective as of December 31, 2020253 Other Information There was no other information to report in this section - None256 Part III Directors, Executive Officers and Corporate Governance This section details the company's directors, executive officers, and Board committee composition, including the audit committee financial expert - The report lists key executive officers: Michael W. DePasquale (Chairman & CEO), Cecilia Welch (CFO), Mira K. LaCous (CTO), and James Sullivan (Chief Legal Officer)259 - The Audit Committee is comprised of independent directors Robert J. Michel (Chair), Pieter Knook, and Emmanuel Alia; Mr. Michel is qualified as an 'audit committee financial expert'273 - The company has adopted a Code of Ethics for its principal executive and financial officers to promote honest and ethical conduct and compliance277 Executive Compensation Executive compensation includes base salary, performance bonuses, and equity awards, detailing CEO, CTO, employment agreements, and non-employee director fees | Name | Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Michael W. DePasquale, CEO | 2020 | 275,000 | 50,000 | 21,450 | 348,669 | | Mira K. LaCous, CTO | 2020 | 213,000 | - | 21,450 | 236,943 | | James Sullivan, CLO | 2020 | 150,000 | 35,000 | 21,450 | 343,688 | - In 2020, due to extraordinary efforts during the pandemic and the PistolStar acquisition, CEO DePasquale and CLO Sullivan received cash bonuses of $50,000 and $35,000, respectively290 - Non-employee directors are compensated with fees per meeting attended, which are primarily paid through the issuance of common stock310 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details security ownership by major beneficial owners, directors, and officers, and securities authorized under equity compensation plans | Name of Beneficial Owner | Percentage of Class | | :--- | :--- | | Wong Kwok Fong (Kelvin) | 7.4% | | Lind Global Micro Fund, LP | 9.6% | | All officers and directors as a group (10 persons) | 9.6% | | Plan Category | Securities to be issued upon exercise (a) | Weighted-average exercise price (b) | Securities remaining for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 94,183 | $10.73 | 36,086 | | Equity compensation plans not approved by security holders | 133,091 | $22.48 | — | | Total | 227,274 | $17.61 | 36,086 | Certain Relationships and Related Transactions, and Director Independence The company discloses related party transactions, including advances from a director and CEO, a sales incentive agreement, and independent director determinations - The company received non-interest-bearing advances from director Wong Kwok Fong ($217,360) and CEO Michael DePasquale ($114,000), which were fully repaid during fiscal year 2020322323 - A sales incentive agreement exists with Technology Transfer Institute (TTI), whose CEO at the time of the agreement was director Manny Alia324 - The Board has determined that directors Robert Michel, Pieter Knook, Emmanuel Alia, Thomas Bush, III, and Thomas Gilley are independent326 Principal Accountant Fees and Services This section details fees billed by the principal accountant, RMSBG, for 2020 and 2019, categorized into Audit, Audit-Related, and Tax Fees, all pre-approved by the Audit Committee | Fee Category | 2020 | 2019 | | :--- | :--- | :--- | | Audit Fees | $124,200 | $104,743 | | Audit-Related Fees | $76,925 | $7,204 | | Tax Fees | $16,000 | $18,500 | | Total Fees | $217,125 | $130,447 | - All audit and non-audit services provided by the independent auditor were pre-approved by the Audit Committee331 Part IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K report, including financial statements, corporate governance, and executive certifications - This section provides an index of all exhibits filed with the 10-K, including corporate governance documents, material contracts, and executive certifications335535 Form 10-K Summary There is no Form 10-K summary provided in this report - None337