Exhibit
10.85


 


SECURITIES
EXCHANGE AGREEMENT


 


This Securities Exchange
Agreement (the “Agreement”) is entered into as of November 12,
2009 by and among BIO-key International, Inc., a Delaware corporation (the
“Company”), The Shaar Fund, Ltd. (“Shaar”), Thomas J. Colatosti (“TJC”
and, together with Shaar, collectively the “Holders”
and individually a “Holder”).


 


Introduction


 


At the request of the
Company, Shaar (a) has extended the due date of the Company’s Eight
Percent (8%) Promissory Note Due November 3, 2009, in the principal amount
of $1,000,000, pursuant to a Note Amendment and Extension Agreement dated as of
November 3, 2009 between the Company and Shaar, and (b) has made a
bridge loan to the Company in the principal amount of $750,000, evidenced by the
Company’s Six Percent (6%) Promissory Note dated November 12, 2009, and,
in consideration thereof, the Company has agreed to enter into this Agreement.


 


Shaar is the holder of
27,932 shares, and TJC is the holder of 2,625 shares (collectively the “Exchanged Shares”), of the Company’s Series A
Convertible Preferred Stock, $0.0001 par value per share (the “Series A Preferred Stock”).  The Company and the Holders desire to
exchange (a) all dividends accrued and unpaid on their Exchanged Shares
for the Convertible Notes (as defined below) to and including the Closing Date
(as defined below), and the Company and (b) the Exchanged Shares for the
Company’s Series D Convertible Preferred Stock, $0.0001 par value per
share (the “Series D Preferred Stock”),
and the Warrants (as defined below) on the terms and conditions set forth in
this Agreement.


 


NOW, THEREFORE, in
consideration of the foregoing and the mutual covenants contained herein, and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:


 


1.                                      Exchange
of the Exchanged Shares for the Notes, the Series D Preferred Stock and
the Warrants.


 


1.1.                            Authorization of the Notes.  The Company has authorized the
issuance of  Seven Percent (7%)
Convertible Promissory Notes in the respective 
principal amounts set forth in Section 3.5 below in the form
attached hereto as Exhibit A
(the “Convertible  Notes”) to Shaar on the terms and
conditions set forth in this Agreement. 
Each Holder hereby consents to the issuance of his or its Convertible
Note, and the indebtedness represented thereby, on the terms and  conditions set forth in this Agreement.


 


1.2                               Authorization
of the Series D Preferred Stock.   The Company has authorized, approved and adopted
the Certificate of Designation of the Series D Preferred Stock of the
Company, consisting of 100,000 shares, in the form attached hereto as Exhibit B (the “Series D  Certificate
of Designation”), and has authorized the issuance of 27,932
shares of the Series D Preferred Stock to Shaar and 2,625 shares of the Series D
Preferred Stock to TJC, in exchange for the Series A Preferred Stock owned
by the respective Holders.


 

















 


1.3                               Authorization
of the Warrant.  The Company
has authorized the issuance of Warrants to purchase up to 5,000,000 shares of
the Company’s Common Stock, $0.0001 par value per share (“Common Stock”),
in the form attached hereto as Exhibit C
(the “Warrants”), including up to 4,750,000
shares to Shaar and up to 250,000 shares to TJC on the terms and conditions set
forth in this Agreement.


 


1.4                               The
Exchange.  In exchange
for the delivery by the Holders of the Exchanged Shares, the Company agrees, in
full settlement of the Company’s obligations (as of the Closing Date) under the
Series A Certificate of Designation (as defined below) and the Exchanged
Shares, to issue and deliver to the Holders his or its Convertible Note, the Series D
Preferred Stock and the Warrants (the “Exchange”).  Other than as set
forth in this Agreement, the Exchange shall be made without any additional
consideration payable to or by the Holders or the Company.  As used herein, “Series A
Certificate of Designation” means the Certificate of Designation of
the Company filed with the Secretary of State of the State of Delaware on July 28,
2004, which provides for the designation of
the rights and preferences of the Series A Preferred Stock.


 


1.5                               Closing.  The closing of the Exchange on the terms and
conditions set forth in this Agreement (the “Closing”)
shall take place remotely via the exchange of documents and signatures at 10:00 a.m.
EST on the date that is five (5) days after the satisfaction or waiver of
all of the conditions set forth in Section 4 hereof, or on such other date
as the parties hereto may agree (the “Closing Date”).


 


1.6                               Closing
Documents and Payments.  At
the Closing, (a) the Company shall deliver to the Holders the Convertible
Notes,  the Series D Preferred Stock
and the Warrants and (b) each Holder shall deliver to the Company stock
certificate(s) representing its or his Exchanged Shares, together with a
duly executed transfer power transferring its or his Exchanged Shares to the
Company for cancellation.


 


2.                                      Representations
and Warranties of the Holder.  The Holders, severally and not jointly, each
represents and warrants to the Company as follows:


 


2.1.                            Title.  Each Holder has good title to his or its  Exchanged Shares free and clear of any and
all restrictions, encumbrances, liens, rights, title or interests of others,
other than restrictions under applicable securities laws.


 


2.2.                            Authority.  Each Holder has the requisite power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby and to deliver his or its Exchanged Shares to the Company
in accordance herewith.


 


3.                                      Representations
and Warranties of the Company.  The Company represents and warrants to the
Holder as follows:


 


3.1.                            Entity Matters.  The Company is duly
organized and validly existing in good standing under the laws of the State of
Delaware, has all requisite power and authority to conduct its business and to
own its property as the same is and shall be conducted or owned, and is
qualified to do business as a foreign corporation in all locations required
under the laws of each


 

















 


jurisdiction
in which it does business and under which the failure so to qualify and remain
in good standing would have a material adverse effect on the Company.  The execution of this Agreement, the
Convertible Notes, the Series D Preferred Stock and the Warrants (collectively,
the “Exchange Documents”) will not
violate the Company’s Certificate of Incorporation or By-Laws.


 


3.2.                            No Violation.  The performance by the Company of the Company’s
obligations hereunder or under any other Exchange Document does not constitute
a violation of any law, order, regulation, contract, or agreement to which the
Company is a party or by which the Company or the Company’s property may be
bound and does not require any filing or registration with, or any permit,
license, consent, or approval of, any governmental agency or regulatory
authority, other than the filing of the Series D Certificate of
Designation with the Secretary of State of the State of Delaware, or the
waiver, consent or approval of any other party which has not been or will not
be duly obtained as of the Closing Date.


 


3.3.                            No Litigation.  There is no litigation or arbitration pending
or, to the Company’s knowledge, threatened against the Company which, if adversely decided, could
materially impair the ability of the Company to pay and perform the Company’s
obligations under any Exchange Document.


 


3.4.                            Exchange Documents Enforceable.  The Exchange
Documents have been duly authorized, executed, and delivered by the Company and
are legal, valid, and binding instruments, enforceable against the Company in
accordance with their respective terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors’ rights and  general principles of equity that restrict the availability of
equitable or legal remedies.


 


3.5.                            Amount of
Notes.  The
principal amount of the Convertible Note to be issued to each Holder will be
equal to the aggregate amount of all accrued and unpaid dividends on such
Holder’s Exchanged Shares to and including the Closing Date.


 


4.                                      Conditions
Precedent to the Holders’ Obligations.  it shall be a condition precedent to each of
the Holders’ obligations under this Agreement that all of the following
requirements are satisfied:


 


4.1.                            Representations and Warranties.  All representations and warranties made by or
on behalf of the Company shall be true, correct and complete in all material
respects on and as of the Closing Date.


 


4.2.                            Sale of the Company’s Law Enforcement Division.  The closing of the sale of the
Company’s Law Enforcement Division to InterAct911 Mobile Systems, Inc.
(the “Buyer”) pursuant to that
certain Asset Purchase Agreement dated as of August 13, 2009 (as amended,
restated, supplemented or otherwise modified from time to time, the “Asset Purchase Agreement”) by and between
the Company and the Buyer shall have occurred.


 


4.3.                            Redemption of Series B and Series C Preferred
Stock.  All
outstanding shares of the Company’s Series B Convertible Preferred
Stock, $0.0001 par value per share (“Series B
Preferred Stock”), and Series C Convertible Preferred Stock,
$0.0001 par value per share


 

















 


(“Series C Preferred Stock”), shall have been redeemed in
accordance with the terms of Section 7(a) of the Certificate of
Designation for the Series B Preferred Stock and Section 7(a) of
the Certificate of Designation for the Series C Preferred Stock, respectively.  The parties
acknowledge and agree that in the event that any holder of Series B Preferred Stock or Series C Preferred Stock (other than
the Holders) has his or its shares redeemed on terms more favorable than those
contained in the Certificate of Designation with respect to such series, each
Holder shall be entitled to have its or his shares of Series B Preferred
Stock and/or Series C Preferred Stock, as applicable, redeemed on the most
favorable terms afforded to any other such holder.


 


4.4.                            Officer’s Certificate.  An officer of the Company
shall deliver to the Holders a certificate certifying that the conditions
specified in Sections 4.1, 4.2 and 4.3 hereof have been satisfied.


 


4.5.                            Additional Conditions Precedent.  Each Holder shall have received each of the
following, as applicable:


 


(a)                                  the Convertible
Note executed and delivered by the Company in favor of such Holder;


 


(b)                                 certificates
for their respective shares of Series D Preferred Stock executed and
delivered by the Company;


 


(c)                                  their respective Warrants executed and delivered by the Company; and


 


(d)                                 Such other and
further documents, agreements and instruments as the Holders or their counsel
may reasonably require to evidence, confirm or give effect to the undertakings
of the Company set forth herein.


 


5.                                      Miscellaneous.


 


5.1.         Governing Law. 
THIS AGREEMENT AND EACH OTHER EXCHANGE AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. 
ANY ACTION BROUGHT BY ANY PARTY AGAINST ANOTHER CONCERNING THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND EACH OTHER EXCHANGE AGREEMENT
SHALL BE BROUGHT ONLY IN THE STATE COURTS OF NEW YORK OR IN THE FEDERAL COURTS
LOCATED IN THE STATE OF NEW YORK, IN EACH CASE SITTING IN THE CITY OF NEW YORK,
BOROUGH OF MANHATTAN.  ALL PARTIES AND
THE INDIVIDUALS EXECUTING THIS AGREEMENT AND THE OTHER EXCHANGE AGREEMENTS ON
BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE JURISDICTION OF SUCH COURTS AND
WAIVE TRIAL BY JURY.  IN THE EVENT THAT
ANY PROVISION OF THIS AGREEMENT OR ANY OTHER EXCHANGE AGREEMENT DELIVERED IN
CONNECTION HEREWITH IS INVALID OR UNENFORCEABLE UNDER ANY APPLICABLE STATUTE OR
RULE OF LAW, THEN SUCH PROVISION SHALL BE DEEMED INOPERATIVE TO THE EXTENT THAT
IT MAY CONFLICT THEREWITH AND SHALL BE DEEMED MODIFIED TO
CONFORM WITH SUCH STATUTE OR RULE OF LAW. 
ANY SUCH PROVISION WHICH MAY PROVE INVALID OR


 

















 


UNENFORCEABLE UNDER ANY LAW
SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS
AGREEMENT OR ANY OTHER EXCHANGE AGREEMENT.


 


5.2.                            Termination.  This Agreement shall terminate and be of no
further force or effect if the Closing (as defined in the Asset Purchase
Agreement) shall not have been consummated by January 31, 2010; provided,
however, that in such event, the Company agrees to issue to the
Shaar a Warrant in the form of the Warrant to purchase up to 2,000,000 shares of
Common Stock at an exercise price of $0.30 per share.


 


5.3.                            Survival.  The
representations, warranties, covenants and agreements made herein shall survive
any investigation made by the Holders and for one year after the date of the
closing of the transactions contemplated hereby.  All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument, unless
otherwise specified therein.


 


5.4.                            Successors.  Except as
otherwise expressly provided herein, the provisions hereof shall inure to the
benefit of, and be binding upon, the successors, heirs, executors and
administrators of the parties hereto.  No
Holder may assign its rights hereunder to a competitor of the Company.  The Company may not assign its rights or
delegate its obligations hereunder to a third party without obtaining the
consent of the Holders, such consent not to be unreasonably withheld or
delayed.


 


5.5.                            Entire Agreement.  This
Agreement, the other Exchange Documents, the exhibits and schedules hereto and
thereto and the other documents delivered pursuant hereto constitute the full
and entire understanding and agreement between the parties with regard to the
subjects hereof and no party shall be liable or bound to any other in any
manner by any representations, warranties, covenants and agreements except as
specifically set forth herein and therein.


 


5.6.                            Omitted.


 


5.7.                            Amendments and Waivers.  This Agreement may be amended or modified
only upon the written consent of the Company and Shaar.


 


5.8.                            Delays or Omissions.  It
is agreed that no delay or omission to exercise any right, power or remedy
accruing to any party, upon any breach, default or noncompliance by another
party under this Agreement or the other Exchange Documents, shall impair any
such right, power or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of or in
any similar breach, default or noncompliance thereafter occurring.  All remedies, either under this Agreement or
the other Exchange Documents, by law or otherwise afforded to any party, shall
be cumulative and not alternative.


 


5.9.                            Notices.  All notices
and other communications given or made pursuant to this Agreement shall be in
writing and shall be deemed effectively given upon the earlier of actual
receipt or:  (a) personal delivery
to the party to be notified, (b) when sent, if sent by electronic


 

















 


mail or facsimile during
normal business hours of the recipient, and if not sent during normal business
hours, then on the recipient’s next business day, (c) five (5) days
after having been sent by registered or certified mail, return receipt
requested, postage prepaid, or (d) one (1) business day after deposit
with a nationally recognized overnight courier, freight prepaid, specifying
next business day delivery, with written verification of receipt.  All communications shall be sent to the
respective parties at the following addresses or to such other e-mail address,
facsimile number or address as subsequently modified by written notice given in
accordance with this Section:


 


	
  If
  to the Company or to TJC, to: or c/o

  	
   

  	
  BIO-key
  International, Inc.

  
	
   

  	
   

  	
  3349
  Highway 138

  
	
   

  	
   

  	
  Building
  D, Suite B

  
	
   

  	
   

  	
  Wall,
  NJ 07719

  
	
   

  	
   

  	
  Attn:
  Chief Executive Officer

  
	
   

  	
   

  	
  Facsimile:
  [                            ]

  
	
   

  	
   

  	
   

  
	
  with
  a copy (which shall not constitute notice) to:

  	
   

  	
  Choate,
  Hall & Stewart LLP

  Two International Place

  Boston, MA 02110

  Attention: Charles J. Johnson, Esq.

  Facsimile: (617) 248-4000

  
	
   

  	
   

  	
   

  
	
  If to Shaar, to:

  	
   

  	
  The Shaar Fund Ltd.

  
	
   

  	
   

  	
  c/o Maarten Robberts

  
	
   

  	
   

  	
  SS&C Fund Services
  N.V.

  
	
   

  	
   

  	
  Pareraweg 45

  
	
   

  	
   

  	
  Curacao, Netherlands
  Antilles

  
	
   

  	
   

  	
  Facsimile: (599-9)
  434-3560

  
	
   

  	
   

  	
   

  
	
  with
  a copy (which shall not constitute notice) to:

  	
   

  	
  Meltzer, Lippe,
  Goldstein & Breitstone, LLP

  190 Willis Avenue

  Mineola, NY 11501

  Attention: Ira R. Halperin, Esq.

  Facsimile: (516) 747-0653 

  



 


5.10.                     Titles and Subtitles.  The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.


 


5.11.                     Facsimile Signatures; Counterparts.  This Agreement may be executed by facsimile
signatures and in any number of counterparts, each of which shall be an
original, but all of which together shall constitute one instrument.


 


5.12.                     Broker’s Fees.  Each party
hereto represents and warrants that no agent, broker, investment banker, person
or firm acting on behalf of or under the authority of such party hereto is or
will be entitled to any broker’s or finder’s fee or any other commission
directly or indirectly in connection with the transactions contemplated
herein.  Each party hereto further agrees
to


 

















 


indemnify each other party
for any claims, losses or expenses incurred by such other party as a result of
the representation by such party in this Section 5.12 being untrue.


 


5.13.                     Construction.  Each party
acknowledges that its legal counsel participated in the preparation of this
Agreement and the other Exchange Documents and, therefore, stipulates that the rule of
construction that ambiguities are to be resolved against the drafting party
shall not be applied in the interpretation of this Agreement to favor any party
against the other.


 


[Signature pages follow]


 

















 


IN WITNESS WHEREOF, each of the parties hereto has
executed this Agreement as a sealed instrument as of the date first written
above. 


 


	
   

  	
  THE
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  BIO-KEY
  INTERNATIONAL, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Thomas J. Colatosti

  
	
   

  	
   

  	
  Name:
  Thomas J. Colatosti

  
	
   

  	
   

  	
  Title: Chairman

  



 


8

















 


	
   

  	
  THE
  HOLDERS:

  
	
   

  	
   

  
	
   

  	
  THE
  SHAAR FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  SS&C Fund Services N.V.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/
  Thomas J. Colatosti

  
	
   

  	
   

  	
  Thomas J. Colatosti

  



 


9

















 


Exhibit A


 


Form of Convertible Note


 

















 


Exhibit B


 


Form of Series D Certificate of Designation


 

















 


Exhibit C


 


Form of Warrant