Document:

Exhibit 10.87

 

EXECUTION COPY

 

THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT
AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
BIO-KEY INTERNATIONAL, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

 

Right to
Purchase up to 8,000,000 Shares of Common Stock of

BIO-key International, Inc.

(subject to adjustment as
provided herein)

 

COMMON
STOCK PURCHASE WARRANT

 

	
  No.

  	
  Issue
  Date: December     , 2009

  

 

BIO-KEY INTERNATIONAL, INC., a corporation organized
under the laws of the State of Delaware (“BIO-key”),
hereby certifies that, for value received, SILKROAD EQUITY, LLC, or assigns
(the “Holder”), is entitled, subject to the terms
set forth below, to purchase from the Company (as defined herein) from and
after the Issue Date of this Warrant and at any time or from time to time
before 5:00 p.m., New York time, through the close of business the fifth
anniversary of the date hereof (the “Expiration Date”),
up to Eight Million (8,000,000) fully paid and nonassessable shares (the “Initial Number” of Warrant Shares) of Common Stock (as
defined below) at the applicable Exercise Price per share (as defined
below).  The number and character of such
shares of Common Stock and the applicable Exercise Price per share are subject
to adjustment as provided herein.

 

As used herein the following terms, unless the
context otherwise requires, have the following respective meanings:

 

(a)                                  The term “Company”
shall include BIO-key and any corporation which shall succeed, or assume the
obligations of, BIO-key hereunder.

 

(b)                                 The term “Common Stock”
includes (i) the Company’s Common Stock, par value $0.0001 per share; and (ii) any
other securities into which or for which any of the securities described in (a) may
be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.

 

(c)                                  The term “Other
Securities” refers to any capital stock (other than Common Stock)
and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4 or otherwise.

 

 

(d)                                 The term “Exercise
Price” means the Initial Price, as adjusted from time to time as
provided herein.

 

(e)                                  The term “Initial
Price” means $0.30 per share.

 

1.                                       Exercise of Warrant.

 

1.1                                 Number of Shares Issuable
upon Exercise.  From and after the date hereof through and
including the Expiration Date, the Holder shall be entitled to receive, upon
exercise of this Warrant in whole or in part, by delivery of an original or fax
copy of an exercise notice in the form attached hereto as Exhibit A (the “Exercise Notice”), shares of Common Stock of the Company,
subject to adjustment pursuant to Section 4.

 

1.2                                 Company Acknowledgment. 
The Company will, at the time of the exercise of the Warrant, upon the
request of the holder hereof acknowledge in writing its continuing obligation
to afford to such holder any rights to which such holder shall continue to be
entitled after such exercise in accordance with the provisions of this Warrant.
If the holder shall fail to make any such request, such failure shall not
affect the continuing obligation of the Company to afford to such holder any such
rights.

 

2.                                       Procedure for Exercise.

 

2.1                                 Delivery of Stock
Certificates, Etc., on Exercise.  The Company
agrees that the shares of Common Stock purchased upon exercise of this Warrant
shall be deemed to be issued to the Holder as the record owner of such shares
as of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares in accordance herewith.  As soon as practicable after the exercise of
this Warrant in full or in part, and in any event within three (3) business
days thereafter, the Company at its expense (including the payment by it of any
applicable issue taxes) will cause to be issued in the name of and delivered to
the Holder, or as such Holder (upon payment by such Holder of any applicable
transfer taxes) may direct in compliance with applicable securities laws, a
certificate or certificates for the number of duly and validly issued, fully
paid and nonassessable shares of Common Stock (or Other Securities) to which
such Holder shall be entitled on such exercise, plus, in lieu of any fractional
share to which such holder would otherwise be entitled, cash equal to such
fraction multiplied by the then Fair Market Value (as defined below) of one
full share, together with any other stock or other securities and property
(including cash, where applicable) to which such Holder is entitled upon such
exercise pursuant to Section 1 or otherwise.  For purposes hereof, the “Fair Market Value” of a share of Common Stock as of a
particular date (the “Determination Date”)
shall mean:

 

(a)                                  If the Company’s Common Stock is traded
on the NYSE Amex Equities exchange or another national exchange or is
quoted on the Global or Capital Market of The NASDAQ Stock Market, Inc.(“Nasdaq”), then the closing or last sale price, respectively,
reported for the last business day immediately preceding the Determination
Date.

 

(b)                                 If the Company’s Common Stock is not
traded on the NYSE Amex Equities exchange or another national exchange or
on the Nasdaq, but is traded on the FINRA

 

2

 

OTC Bulletin Board, then the mean of the average of
the closing bid and asked prices reported for the last business day immediately
preceding the Determination Date.

 

(c)                                  Except as provided in clause (d) below,
if the Company’s Common Stock is not publicly traded, then as the Holder and
the Company agree or in the absence of agreement by arbitration in accordance
with the rules then in effect of the American Arbitration Association,
before a single arbitrator to be chosen from a panel of persons qualified by
education and training to pass on the matter to be decided.

 

(d)                                 If the Determination Date is the date of
a liquidation, dissolution or winding up, or any event deemed to be a
liquidation, dissolution or winding up pursuant to the Company’s certificate of
incorporation, then all amounts to be payable per share to holders of the
Common Stock pursuant to the charter in the event of such liquidation,
dissolution or winding up, plus all other amounts to be payable per share in
respect of the Common Stock in liquidation under the charter, assuming for the
purposes of this clause (d) that all of the shares of Common Stock then
issuable upon exercise of the Warrant are outstanding at the Determination
Date.

 

2.2                                 Exercise. 
Payment may be made in cash or by certified or official bank check
payable to the order of the Company or by wire transfer in an amount equal to
the applicable aggregate Exercise Price for the number of shares of Common
Stock specified in such Exercise Notice (as such exercise number shall be
adjusted to reflect any adjustment in the total number of shares of Common
Stock issuable to the Holder per the terms of this Warrant) and the Holder
shall thereupon be entitled to receive the number of duly authorized, validly
issued, fully-paid and non-assessable shares of Common Stock (or Other
Securities) determined as provided herein.

 

3.                                       Effect of Reorganization,
Etc.

 

3.1                                 Reorganization,
Consolidation, Merger, Etc.  In case at
any time or from time to time, the Company shall (a) effect a
reorganization, (b) consolidate with or merge into any other person, or (c) transfer
all or substantially all of its properties or assets to any other person under
any plan or arrangement contemplating the dissolution of the Company, then, in
each such case, as a condition to the consummation of such a transaction,
proper and adequate provision shall be made by the Company whereby the Holder
of this Warrant, on the exercise hereof as provided in Section 1 at any
time after the consummation of such reorganization, consolidation or merger or
the effective date of such dissolution, as the case may be, shall receive, in
lieu of the Common Stock (or Other Securities) issuable on such exercise prior
to such consummation or such effective date, the stock and other securities and
property (including cash) to which such Holder would have been entitled upon
such consummation or in connection with such dissolution, as the case may be,
if such Holder had so exercised this Warrant, immediately prior thereto, all
subject to further adjustment thereafter as provided in Section 4.

 

3.2                                 Dissolution. 
In the event of any dissolution of the Company following the transfer of
all or substantially all of its properties or assets, the Company, concurrently
with any distributions made to holders of its Common Stock, shall at its
expense deliver or cause to be delivered to the Holder the stock and other
securities and property (including cash, where applicable) receivable by the
Holder of the Warrant pursuant to Section 3.1, or, if the Holder

 

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shall so instruct the Company, to a bank or trust
company specified by the Holder and having its principal office in New York, NY
as trustee for the Holder of the Warrant (the “Trustee”).

 

3.3                                 Continuation of Terms. 
Upon any reorganization, consolidation, merger or transfer (and any
dissolution following any transfer) referred to in this Section 3, this
Warrant shall continue in full force and effect and the terms hereof shall be
applicable to the shares of stock and other securities and property receivable
on the exercise of this Warrant after the consummation of such reorganization,
consolidation or merger or the effective date of dissolution following any such
transfer, as the case may be, and shall be binding upon the issuer of any such
stock or other securities, including, in the case of any such transfer, the
person acquiring all or substantially all of the properties or assets of the
Company, whether or not such person shall have expressly assumed the terms of
this Warrant as provided in Section 4. 
In the event this Warrant does not continue in full force and effect
after the consummation of the transactions described in this Section 3,
then the Company’s securities and property (including cash, where applicable)
receivable by the Holders of the Warrant will be delivered to Holder or the
Trustee as contemplated by Section 3.2.

 

4.                                       Certificate as to
Adjustments.  In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on
the exercise of the Warrant, the Company at its expense will promptly cause its
Chief Financial Officer or other appropriate designee to compute such
adjustment or readjustment in accordance with the terms of the Warrant and
prepare a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based,
including a statement of (a) the consideration received or receivable by
the Company for any additional shares of Common Stock (or Other Securities)
issued or sold or deemed to have been issued or sold, (b) the number of
shares of Common Stock (or Other Securities) outstanding or deemed to be
outstanding, and (c) the Exercise Price and the number of shares of Common
Stock to be received upon exercise of this Warrant, in effect immediately prior
to such adjustment or readjustment and as adjusted or readjusted as provided in
this Warrant.  The Company will forthwith
mail a copy of each such certificate to the holder of the Warrant and any
Warrant agent of the Company (appointed pursuant to Section 9 hereof).

 

5.                                       Reservation of Stock
Issuable on Exercise of Warrant.  The Company
will at all times reserve and keep available, solely for issuance and delivery
on the exercise of the Warrant, shares of Common Stock (or Other Securities)
from time to time issuable on the exercise of the Warrant.

 

6.                                       Investment Representations. 
In connection with the Holder’s acquisition of this Warrant, the Holder
hereby represents and warrants to the Company as follows:

 

(a)                                  The Holder is acquiring this Warrant for
its own account for investment only, and not with a view to, or for sale in
connection with, any distribution of this Warrant in violation of the
Securities Act of 1933, as amended (the “Securities Act”),
any rule or regulation under the Securities Act, or any state, foreign or
other securities laws.

 

(b)                                 The Holder acknowledges that an
investment in this
Warrant involves a high degree of risk.

 

4

 

(c)                                  The Holder is able to protect its own
interest in the transactions contemplated hereby, can bear the economic risk of
this investment (including possible complete loss of such investment) for an
indefinite period of time and has such knowledge and experience in financial or
business matters such that he is capable of evaluating the merits and risks of
the investment in this
Warrant.

 

(d)                                 The Holder understands that this Warrant has not been registered
under the Securities
Act or under the securities laws of any jurisdiction, by reason of
reliance upon certain exemptions, and that the reliance of the Company on such
exemptions is predicated upon the accuracy of the representations and warranties
contained herein.

 

(e)                                  The Holder has had the opportunity to
ask questions of and receive answers from representatives of the Company and to
obtain additional information, documents and records relating to the Company,
its business and the investment contemplated hereby.

 

(f)                                    The Holder understands that this Warrant is characterized as a “restricted
security” under the federal securities laws inasmuch as it has been acquired in
a transaction not involving a public offering and that under such laws and
applicable regulations (and under other applicable securities laws) such Securities may not be transferred or
resold without registration under the Securities Act or other applicable laws or
pursuant to a valid exemption from registration under the Securities Act and
such laws.  The Holder understands that
the Company requires an opinion of counsel satisfactory to the Company that
registration is not required as a condition to any transfer where this Warrant is not being registered.

 

(g)                                 The Holder understands that the
Company will be under no obligation to register this Warrant under the Securities Act (or
any other applicable securities laws).

 

(h)                                 The Holder is familiar with Securities
and Exchange Commission Rule 144 and understands the resale limitations
imposed thereby and by the
Securities Act; and

 

(i)                                     The Holder is an “Accredited Investor”
pursuant to Rule 501 of Regulation D under the Securities Act.

 

7.                                       Assignment; Exchange of
Warrant.  This Warrant may not be transferred or
assigned unless and until the $4,000,000 Guaranteed Secured Promissory Note,
dated December     , 2009 issued by InterAct911 Mobile
Systems, Inc. to BIO-key has been paid in full and cancelled.  Subject to the foregoing sentence and
compliance with applicable securities laws, this Warrant, and the rights
evidenced hereby, may be transferred by any registered holder hereof (a “Transferor”) in whole or in part.  On the surrender for exchange of this
Warrant, with the Transferor’s endorsement in the form of Exhibit B
attached hereto (the “Transferor  Endorsement Form”) and together with evidence reasonably
satisfactory to the Company demonstrating compliance with applicable securities
laws, which shall include, without limitation, the provision of a legal opinion
from the Transferor’s counsel (at the Company’s expense) that such transfer is
exempt from the registration requirements of applicable securities laws, and
with payment by the Transferor of any applicable transfer taxes) will issue and
deliver to or on the order of the Transferor thereof a new Warrant of like
tenor, in the name of the Transferor and/or the transferee(s) specified in
such Transferor Endorsement Form (each a

 

5

 

“Transferee”),
calling in the aggregate on the face or faces thereof for the number of shares
of Common Stock called for on the face or faces of the Warrant so surrendered
by the Transferor.

 

8.                                       Replacement of Warrant. 
On receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant and, in the case of any
such loss, theft or destruction of this Warrant, on delivery of an indemnity
agreement or security reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of this
Warrant, the Company at its expense will execute and deliver, in lieu thereof,
a new Warrant of like tenor.

 

9.                                       Warrant Agent. 
The Company may, by written notice to the each Holder of the Warrant,
appoint an agent for the purpose of issuing Common Stock (or Other Securities)
on the exercise of this Warrant pursuant to Section 1, exchanging this
Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8,
or any of the foregoing, and thereafter any such issuance, exchange or
replacement, as the case may be, shall be made at such office by such agent.

 

10.                                 Transfer on the Company’s
Books.  Until this Warrant is transferred on the
books of the Company, the Company may treat the registered holder hereof as the
absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.

 

11.                                 Notices, Etc. 
All notices and other communications from the Company to the Holder of
this Warrant shall be mailed by first class registered or certified mail,
postage prepaid, at such address as may have been furnished to the Company in
writing by such Holder or, until any such Holder furnishes to the Company an
address, then to, and at the address of, the last Holder of this Warrant who
has so furnished an address to the Company.

 

12.                                 Miscellaneous. 
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought. This
Warrant shall be governed by and construed in accordance with the laws of State
of Delaware without regard to principles of conflicts of laws.  The prevailing party shall be entitled to
recover from the other party its reasonable attorney’s fees and costs.  In the event that any provision of this
Warrant 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 Warrant.  The headings in this Warrant are for purposes
of reference only, and shall not limit or otherwise affect any of the terms
hereof.  The invalidity or
unenforceability of any provision hereof shall in no way affect the validity or
enforceability of any other provision hereof.

 

6

 

IN WITNESS WHEREOF, each of the undersigned has
executed this Warrant as of the date first written above.

 

	
   

  	
  BIO-KEY
  INTERNATIONAL, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Acknowledged
  and agreed:

  	
   

  
	
   

  	
   

  
	
  SILKROAD
  EQUITY, LLC

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  

 

SIGNATURE
PAGE TO WARRANT

 

 

EXHIBIT A

 

FORM OF
SUBSCRIPTION

 

(To Be Signed
Only On Exercise Of Warrant)

 

TO:                            BIO-key International, Inc.

 

Attention:                                         Chief Financial Officer

 

The undersigned, pursuant to the provisions set forth
in the attached Warrant (No.        ),
hereby irrevocably elects to purchase (check applicable box) shares of the
Common Stock covered by such Warrant.

 

The undersigned herewith makes payment of the full
Exercise Price for such shares at the price per share provided for in such
Warrant, which is $                      
in lawful money of the United States.

 

The undersigned requests that the certificates for
such shares be issued in the name of, and delivered to                                                                                             
whose address is                                                                                                                                                       .

 

The undersigned represents and warrants that all
offers and sales by the undersigned of the securities issuable upon exercise of
the within Warrant shall be made pursuant to registration of the Common Stock
under the Securities Act of 1933, as amended (the “Securities
Act”) or pursuant to an exemption from registration under the
Securities Act.

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Signature
  must conform to name of holder as specified on the face of the Warrant)

  
	
   

  	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  

 

A-1

 

EXHIBIT B

 

FORM OF
TRANSFEROR ENDORSEMENT

 

(To Be Signed
Only On Transfer Of Warrant)

 

For value received, the undersigned hereby sells,
assigns, and transfers unto the person(s) named below under the heading “Transferees” the right represented by the within Warrant to
purchase the percentage and number of shares of Common Stock of BIO-key
International, Inc.  into which the
within Warrant relates specified under the headings “Percentage Transferred”
and “Number Transferred,” respectively,
opposite the name(s) of such person(s) and appoints each such person
Attorney to transfer its respective right on the books of BIO-key International, Inc.  with full power of substitution in the
premises.

 

	
  Transferees

  	
   

  	
  Address

  	
   

  	
  Percentage

  Transferred

  	
   

  	
  Number

  Transferred

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Signature
  must conform to name of holder as specified on the face of the Warrant)

  
	
   

  	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  SIGNED
  IN THE PRESENCE OF:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Name)

  
	
   

  	
   

  
	
  ACCEPTED AND AGREED:

  	
   

  
	
  [TRANSFEREE]

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  (Name)

  	
   

  

 

B-1Exhibit
10.88

 

THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT
AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO BIO-KEY
INTERNATIONAL, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

 

Right to
Purchase up to 4,750,000 Shares of Common Stock of

BIO-key International, Inc.

(subject to adjustment as
provided herein)

 

COMMON
STOCK PURCHASE WARRANT

 

	
  No.  W-09-1

  	
  Issue
  Date: December 28, 2009  

  

 

BIO-KEY INTERNATIONAL, INC., a corporation organized
under the laws of the State of Delaware (“BIO-key”),
hereby certifies that, for value received, THE SHAAR FUND, LTD., or assigns
(the “Holder”), is entitled, subject to the
terms set forth below, to purchase from the Company (as defined herein) from
and after the Issue Date of this Warrant and at any time or from time to time
before 5:00 p.m., New York time, through the close of business the fifth
anniversary of the date hereof (the “Expiration Date”),
up to Four Million Seven Hundred Fifty Thousand (4,750,000) fully paid and
nonassessable shares (the “Initial Number”
of Warrant Shares) of Common Stock (as defined below) at the Exercise Price per
share (as defined below).  The number and
character of such shares of Common Stock and the Exercise Price per share are
subject to adjustment as provided herein.

 

As used herein the following terms, unless the
context otherwise requires, have the following respective meanings:

 

(a)           The term “Company”
shall include BIO-key and any corporation which shall succeed, or assume the
obligations of, BIO-key hereunder.

 

(b)           The term “Common Stock”
includes (i) the Company’s Common Stock, par value $0.0001 per share; and (ii) any
other securities into which or for which any of the securities described in (a) may
be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.

 

(c)           The term “Other
Securities” refers to any capital stock (other than Common Stock)
and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4 or otherwise.

 

1

 

(d)           The term “Exercise Price”
means $0.30 per share, as adjusted from time to time as provided herein.

 

1.             Exercise of Warrant.

 

1.1           Number of Shares Issuable
upon Exercise.  From and after the date hereof through and
including the Expiration Date, the Holder shall be entitled to receive, upon
exercise of this Warrant in whole or in part, by delivery of an original or fax
copy of an exercise notice in the form attached hereto as Exhibit A
(the “Exercise Notice”), shares of Common
Stock of the Company, subject to adjustment pursuant to Section 4.

 

1.2           Company Acknowledgment. 
The Company will, at the time of the exercise of the Warrant, upon the
request of the holder hereof, acknowledge in writing its continuing obligation
to afford to such holder any rights to which such holder shall continue to be
entitled after such exercise in accordance with the provisions of this
Warrant.  If the holder shall fail to
make any such request, such failure shall not affect the continuing obligation
of the Company to afford to such holder any such rights.

 

1.3           Trustee for Warrant
Holders.  In the event that a bank or trust company
shall have been appointed as trustee for the holders of the Warrant pursuant to
Subsection 3.2, such bank or trust company shall have all the powers and duties
of a warrant agent (as hereinafter described) and shall accept, in its own name
for the account of the Company or such successor person as may be entitled
thereto, all amounts otherwise payable to the Company or such successor, as the
case may be, on exercise of this Warrant pursuant to this Section 1.

 

2.             Procedure for Exercise.

 

2.1           Delivery of Stock
Certificates, Etc., on Exercise.  The Company
agrees that the shares of Common Stock purchased upon exercise of this Warrant
shall be deemed to be issued to the Holder as the record owner of such shares
as of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares in accordance herewith.  As soon as practicable after the exercise of
this Warrant in full or in part, and in any event within three (3) business
days thereafter, the Company at its expense (including the payment by it of any
applicable issue taxes) will cause to be issued in the name of and delivered to
the Holder, or as such Holder (upon payment by such Holder of any applicable
transfer taxes) may direct in compliance with applicable securities laws, a
certificate or certificates for the number of duly and validly issued, fully
paid and nonassessable shares of Common Stock (or Other Securities) to which
such Holder shall be entitled on such exercise, plus, in lieu of any fractional
share to which such holder would otherwise be entitled, cash equal to such
fraction multiplied by the then Fair Market Value (as defined below) of one
full share, together with any other stock or other securities and property
(including cash, where applicable) to which such Holder is entitled upon such
exercise pursuant to Section 1 or otherwise.  For purposes hereof, the “Fair Market Value” of a share of Common Stock as of a particular
date (the “Determination Date”) shall mean:

 

(a)           If the Company’s Common Stock is traded
on the NYSE Amex Equities exchange or another national exchange or is
quoted on the Global or Capital Market of The 

 

2

 

NASDAQ Stock Market, Inc.(“Nasdaq”), then the closing or last sale price, respectively,
reported for the last business day immediately preceding the Determination
Date.

 

(b)           If the Company’s Common Stock is not
traded on the NYSE Amex Equities  exchange or another national exchange or on the
Nasdaq, but is traded on the FINRA OTC Bulletin Board, then the mean of the
average of the closing bid and asked prices reported for the last business day
immediately preceding the Determination Date.

 

(c)           Except as provided in clause (d) below,
if the Company’s Common Stock is not publicly traded, then as the Holder and
the Company agree or in the absence of agreement by arbitration in accordance
with the rules then in effect of the American Arbitration Association,
before a single arbitrator to be chosen from a panel of persons qualified by
education and training to pass on the matter to be decided.

 

(d)           If the Determination Date is the date of
a liquidation, dissolution or winding up, or any event deemed to be a
liquidation, dissolution or winding up pursuant to the Company’s certificate of
incorporation, then all amounts to be payable per share to holders of the
Common Stock pursuant to the charter in the event of such liquidation,
dissolution or winding up, plus all other amounts to be payable per share in
respect of the Common Stock in liquidation under the charter, assuming for the
purposes of this clause (d) that all of the shares of Common Stock then
issuable upon exercise of the Warrant are outstanding at the Determination
Date.

 

2.2           Exercise. 
Payment may be made either (i) in cash or by certified or official
bank check payable to the order of the Company equal to the applicable
aggregate Exercise Price, (ii) by delivery of the Warrant, or shares of
Common Stock and/or Common Stock receivable upon exercise of the Warrant in
accordance with the formula set forth below, (iii) by application of
amounts due to the Holder under and in accordance with the terms of the Seven
Percent (7%) Convertible Note dated the date hereof issued by the Company to
the Holder (the “Note”), or (iv) by a combination of any of the foregoing
methods, for the number of Common Shares specified in such Exercise Notice (as
such exercise number shall be adjusted to reflect any adjustment in the total
number of shares of Common Stock issuable to the Holder per the terms of this
Warrant) and the Holder shall thereupon be entitled to receive the number of
duly authorized, validly issued, fully-paid and non-assessable shares of Common
Stock (or Other Securities) determined as provided herein.  Notwithstanding any provisions herein to the
contrary, if the Fair Market Value of one share of Common Stock is greater than
the Exercise Price (at the date of calculation as set forth below), in lieu of
exercising this Warrant for cash, the Holder may elect to receive shares equal
to the value (as determined below) of this Warrant (or the portion thereof
being exercised) by surrender of this Warrant at the principal office of the
Company together with the properly endorsed Exercise Notice in which event the
Company shall issue to the Holder a number of shares of Common Stock computed
using the following formula:

 

X = Y (A-B)

A

 

	
  Where
  X =

  	
  the
  number of shares of Common Stock to be issued to the Holder

  

 

3

 

	
  Y
  =

  	
  the
  number of shares of Common Stock purchasable under the Warrant or, if only a
  portion of the Warrant is being exercised, the portion of the Warrant being
  exercised (at the date of such calculation)

  
	
   

  	
   

  
	
  A
  =

  	
  the
  Fair Market Value of one share of the Company’s Common Stock (at the date of
  such calculation)

  
	
   

  	
   

  
	
  B =

  	
  Exercise Price (as adjusted to the date of such
  calculation)

  

 

3.             Effect of Reorganization,
Etc.

 

3.1           Reorganization,
Consolidation, Merger, Etc.  In case at
any time or from time to time, the Company shall (a) effect a
reorganization, (b) consolidate with or merge into any other person, or (c) transfer
all or substantially all of its properties or assets to any other person under
any plan or arrangement contemplating the dissolution of the Company, then, in
each such case, as a condition to the consummation of such a transaction, the
Company shall have delivered to the Holder written notice thereof not less than
10 days’ prior thereto and proper and adequate provision shall be made by the
Company whereby the Holder of this Warrant, on the exercise hereof as provided
in Section 1 at any time after the consummation of such reorganization,
consolidation or merger or the effective date of such dissolution, as the case
may be, shall receive, in lieu of the Common Stock (or Other Securities)
issuable on such exercise prior to such consummation or such effective date,
the stock and other securities and property (including cash) to which such
Holder would have been entitled upon such consummation or in connection with
such dissolution, as the case may be, if such Holder had so exercised this
Warrant, immediately prior thereto, all subject to further adjustment
thereafter as provided in Section 4.

 

3.2           Dissolution. 
In the event of any dissolution of the Company following the transfer of
all or substantially all of its properties or assets, the Company, concurrently
with any distributions made to holders of its Common Stock, shall at its
expense deliver or cause to be delivered to the Holder the stock and other
securities and property (including cash, where applicable) receivable by the
Holder of the Warrant pursuant to Section 3.1, or, if the Holder shall so
instruct the Company, to a bank or trust company specified by the Holder and
having its principal office in New York, NY as trustee for the Holder of the
Warrant (the “Trustee”).

 

3.3           Continuation of Terms. 
Upon any reorganization, consolidation, merger or transfer (and any
dissolution following any transfer) referred to in this Section 3, this
Warrant shall continue in full force and effect and the terms hereof shall be
applicable to the shares of stock and other securities and property receivable
on the exercise of this Warrant after the consummation of such reorganization,
consolidation or merger or the effective date of dissolution following any such
transfer, as the case may be, and shall be binding upon the issuer of any such
stock or other securities, including, in the case of any such transfer, the
person acquiring all or substantially all of the properties or assets of the
Company, whether or not such person shall have expressly assumed the terms of
this Warrant as provided in Section 4. 
In the event this Warrant does not continue in full force and effect
after the consummation of the transactions described in this Section 3,
then the Company’s securities and property (including 

 

4

 

cash, where applicable) receivable by the
Holders of the Warrant will be delivered to Holder or the Trustee as
contemplated by Section 3.2.

 

4.             Extraordinary Events
Regarding Common Stock.  In the event
that the Company shall (a) issue additional shares of the Common Stock as
a dividend or other distribution on outstanding Common Stock, (b) subdivide
its outstanding shares of Common Stock, or (c) combine its outstanding
shares of the Common Stock into a smaller number of shares of the Common Stock,
then, in each such event, the Exercise Price shall, simultaneously with the
happening of such event, be adjusted by multiplying the then Exercise Price by
a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such event and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after
such event, and the product so obtained shall thereafter be the Exercise Price
then in effect.  The Exercise Price, as
so adjusted, shall be readjusted in the same manner upon the happening of any
successive event or events described herein in this Section 4.  The number of shares of Common Stock that the
holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1,
be entitled to receive shall be increased to a number determined by multiplying
the number of shares of Common Stock that would otherwise (but for the
provisions of this Section 4) be issuable on such exercise by a fraction
of which (a) the numerator is the Exercise Price that would otherwise (but
for the provisions of this Section 4) be in effect, and (b) the
denominator is the Exercise Price in effect on the date of such exercise.

 

5.             Certificate as to
Adjustments.  In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on
the exercise of the Warrant, the Company at its expense will promptly cause its
Chief Financial Officer or other appropriate designee to compute such
adjustment or readjustment in accordance with the terms of the Warrant and
prepare a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based,
including a statement of (a) the consideration received or receivable by
the Company for any additional shares of Common Stock (or Other Securities)
issued or sold or deemed to have been issued or sold, (b) the number of
shares of Common Stock (or Other Securities) outstanding or deemed to be
outstanding, and (c) the Exercise Price and the number of shares of Common
Stock to be received upon exercise of this Warrant, in effect immediately prior
to such adjustment or readjustment and as adjusted or readjusted as provided in
this Warrant.  The Company will forthwith
mail a copy of each such certificate to the holder of the Warrant and any
Warrant agent of the Company (appointed pursuant to Section 11 hereof).

 

6.             Reservation of Stock
Issuable on Exercise of Warrant.  The Company
will at all times reserve and keep available, solely for issuance and delivery
on the exercise of the Warrant, shares of Common Stock (or Other Securities)
from time to time issuable on the exercise of the Warrant.

 

7.             Investment Representations. 
In connection with the Holder’s acquisition of this Warrant, the Holder
hereby represents and warrants to the Company as follows:

 

(a)           The Holder is acquiring this Warrant for
its own account for investment only, and not with a view to, or for sale in
connection with, any distribution of this Warrant in 

 

5

 

violation of the Securities Act of 1933, as
amended (the “Securities Act”), any rule or
regulation under the Securities Act, or any state, foreign or other securities
laws.

 

(b)           The Holder acknowledges that an
investment in this
Warrant involves a high degree of risk.

 

(c)           The Holder is able to protect its own
interest in the transactions contemplated hereby, can bear the economic risk of
this investment (including possible complete loss of such investment) for an
indefinite period of time and has such knowledge and experience in financial or
business matters such that he is capable of evaluating the merits and risks of
the investment in this
Warrant.

 

(d)           The Holder understands that this Warrant has not been registered
under the Securities
Act or under the securities laws of any jurisdiction, by reason of
reliance upon certain exemptions, and that the reliance of the Company on such
exemptions is predicated upon the accuracy of the representations and
warranties contained herein.

 

(e)           The Holder has had the opportunity to
ask questions of and receive answers from representatives of the Company and to
obtain additional information, documents and records relating to the Company,
its business and the investment contemplated hereby.

 

(f)            The Holder understands that this Warrant is characterized as a “restricted
security” under the federal securities laws inasmuch as it has been acquired in
a transaction not involving a public offering and that under such laws and
applicable regulations (and under other applicable securities laws) such Securities may not be transferred or
resold without registration under the Securities Act or other applicable laws or
pursuant to a valid exemption from registration under the Securities Act and
such laws.  The Holder understands that
the Company requires an opinion of counsel satisfactory to the Company that
registration is not required as a condition to any transfer where this Warrant is not being registered.

 

(g)           The Holder understands that the
Company will be under no obligation to register this Warrant under the Securities Act (or
any other applicable securities laws).

 

(h)           The Holder is familiar with Securities
and Exchange Commission Rule 144 and understands the resale limitations
imposed thereby and by the
Securities Act; and

 

(i)            The Holder is an “Accredited Investor”
pursuant to Rule 501 of Regulation D under the Securities Act.

 

8.             Assignment; Exchange of
Warrant.  Subject to compliance with applicable
securities laws, this Warrant, and the rights evidenced hereby, may be
transferred by any registered holder hereof (a “Transferor”)
in whole or in part.  On the surrender
for exchange of this Warrant, with the Transferor’s endorsement in the form of Exhibit B
attached hereto (the “Transferor  Endorsement Form”) and together with evidence reasonably
satisfactory to the Company demonstrating compliance with applicable securities
laws, which shall include, without limitation, the provision of a legal opinion
from the Transferor’s counsel (at the Company’s expense) that such transfer is
exempt from the registration requirements of applicable securities laws, and
with payment by the Transferor of any applicable transfer taxes) will issue and
deliver 

 

6

 

to or on the order of the Transferor thereof a new
Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified
in such Transferor Endorsement Form (each a “Transferee”),
calling in the aggregate on the face or faces thereof for the number of shares
of Common Stock called for on the face or faces of the Warrant so surrendered
by the Transferor.

 

9.             Replacement of Warrant. 
On receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant and, in the case of any
such loss, theft or destruction of this Warrant, on delivery of an indemnity
agreement or security reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of this
Warrant, the Company at its expense will execute and deliver, in lieu thereof,
a new Warrant of like tenor.

 

10.           Maximum Exercise. 
In no event shall the Holder be entitled to exercise this Warrant with
respect to any shares of Common Stock or shall the Company have the obligation
to issue any such shares to the extent that, after such exercise and issuance,
the Holder would be deemed to be the beneficial owner of more than 4.99% of the
outstanding shares of Common Stock.  For
purposes of this Section, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934,
as amended.  Notwithstanding the
foregoing, the restriction described in this Section 10 may be revoked
upon 75 days prior notice from the Holder to the Company or immediately upon
notice upon an Event of Default under the Convertible Note.

 

11.           Warrant Agent. 
The Company may, by written notice to the each Holder of the Warrant,
appoint an agent for the purpose of issuing Common Stock (or Other Securities)
on the exercise of this Warrant pursuant to Section 1, exchanging this
Warrant pursuant to Section 8, and replacing this Warrant pursuant to Section 9,
or any of the foregoing, and thereafter any such issuance, exchange or
replacement, as the case may be, shall be made at such office by such agent.

 

12.           Transfer on the Company’s
Books.  Until this Warrant is transferred on the
books of the Company, the Company may treat the registered holder hereof as the
absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.

 

13.           Notices, Etc. 
All notices and other communications from the Company to the Holder of
this Warrant shall be mailed by first class registered or certified mail,
postage prepaid, at such address as may have been furnished to the Company in
writing by such Holder or, until any such Holder furnishes to the Company an
address, then to, and at the address of, the last Holder of this Warrant who
has so furnished an address to the Company.

 

14.           Governing Law. 
THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
ALWS 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 WARRANT 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 WARRANT 

 

7

 

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
WARRANT 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 WARRANT.

 

15.           Miscellaneous. 
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought.  The prevailing party shall be entitled to
recover from the other party its reasonable attorney’s fees and costs.  The headings in this Warrant are for purposes
of reference only, and shall not limit or otherwise affect any of the terms
hereof.  The invalidity or
unenforceability of any provision hereof shall in no way affect the validity or
enforceability of any other provision hereof. 
The Company acknowledges that legal counsel participated in the
preparation of this Warrant 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 Warrant to favor any party
against the other party.

 

8

 

IN WITNESS WHEREOF, each of the undersigned has
executed this Warrant as of the date first written above.

 

	
   

  	
   

  	
  BIO-KEY
  INTERNATIONAL, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Acknowledged
  and agreed:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  THE
  SHAAR FUND, LTD.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:
  SS&C Fund Services N.V.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  

 

9

 

EXHIBIT A

 

FORM OF
SUBSCRIPTION

 

(To Be Signed
Only On Exercise Of Warrant)

 

TO:         BIO-key International, Inc.

 

Attention:              Chief Financial Officer

 

The undersigned, pursuant to the provisions set
forth in the attached Warrant (No.    ), hereby irrevocably
elects to purchase (check applicable box):

 

	
  o

  	
                      
  shares of the Common Stock covered by such Warrant; or

  
	
   

  	
   

  
	
  o

  	
  the maximum number of
  shares of Common Stock covered by such Warrant pursuant to the cashless
  exercise procedure set forth in Section 2.

  

 

The undersigned herewith makes payment of the full
Exercise Price for such shares at the price per share provided for in such
Warrant, which is $                .  Such payment takes the form of (check
applicable box or boxes):

 

	
  o

  	
  $                    in lawful money of the United States; and/or

  
	
   

  	
   

  
	
  o

  	
  the cancellation of such
  portion of the attached Warrant as is exercisable for a total of                     
  shares of Common Stock (using a Fair Market Value of $                    per share for purposes of this calculation); and/or

  
	
   

  	
   

  
	
  o

  	
  the cancellation of such
  number of shares of Common Stock as is necessary, in accordance with the
  formula set forth in Section 2.2, to exercise this Warrant with respect
  to the maximum number of shares of Common Stock purchasable pursuant to the
  cashless exercise procedure set forth in Section 2; and/or

  
	
   

  	
   

  
	
  o

  	
  the application of $                  in respect of the annual installment of principal or accrued interest owing
  under the Convertible Note.

  

 

The undersigned requests that the certificates for
such shares be issued in the name of, and delivered to                                                      
whose address is                                                                                                  .

 

The undersigned represents and warrants that all
offers and sales by the undersigned of the securities issuable upon exercise of
the within Warrant shall be made pursuant to registration of the Common Stock
under the Securities Act of 1933, as amended (the “Securities
Act”) or pursuant to an exemption from registration under the
Securities Act.

 

A-1

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  (Signature
  must conform to name of holder as specified on the face of the Warrant)

  
	
   

  	
   

  	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

 

EXHIBIT B

 

FORM OF
TRANSFEROR ENDORSEMENT

 

(To Be Signed
Only On Transfer Of Warrant)

 

For value received, the undersigned hereby sells,
assigns, and transfers unto the person(s) named below under the heading “Transferees” the right represented by the within Warrant to
purchase the percentage and number of shares of Common Stock of BIO-key
International, Inc.  into which the
within Warrant relates specified under the headings “Percentage Transferred”
and “Number Transferred,” respectively,
opposite the name(s) of such person(s) and appoints each such person
Attorney to transfer its respective right on the books of BIO-key International, Inc.  with full power of substitution in the
premises.

 

	
  Transferees

  	
   

  	
  Address

  	
   

  	
  Percentage

  Transferred

  	
   

  	
  Number

  Transferred

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Signature
  must conform to name of holder as specified on the face of the Warrant)

  
	
   

  	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  SIGNED
  IN THE PRESENCE OF:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Name)

  
	
   

  	
   

  	
   

  
	
  ACCEPTED AND AGREED:

  	
   

  
	
  [TRANSFEREE]

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  (Name)

  	
   

  	
   

  
						

 

B-1

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