EDGAR 10-K Filing

Company CIK: 1019034
Filing Year: 2022
Filename: 1019034_10-K_2022_0001437749-22-007930.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Solely for convenience, trademarks and tradenames referred to in this Annual Report on Form 10-K appear (after the first usage) without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these trademarks and tradenames.
Overview
BIO-key International, Inc. (the “Company,” “BIO-key,” “we,” or “us”) is a leading identity and access management (IAM) platform provider enabling secure work-from-anywhere for enterprise, education, and government customers. Our vision is to enable any organization to secure streamlined and passwordless workforce, customer, citizen and student access to any online service, workstation, or mobile application, without a requirement to use tokens or phones. Our products include PortalGuard® and PortalGuard Identity-as-a-Service (IDaaS) enterprise IAM, WEB-key® biometric civil and large-scale ID infrastructure, and high-quality, low-cost accessory hardware to provide a full and complete solution for identity-innovating customers.
BIO-key PortalGuard empowers organizations to maximize the power of cloud, mobile and web technologies by securing users’ identities and connecting them with the applications they rely on, while keeping cyber-intruders and unauthorized delegates (proxy) out.
Millions of users trust BIO-key® to secure access to a variety of cloud, mobile and web applications, on-premise and cloud-based hypervisor servers from all of their devices. Employees and contractors sign into BIO-key PortalGuard to seamlessly and securely access the applications of need to do their work, and customers sign into BIO-key PortalGuard to access online services. Organizations use PortalGuard to securely collaborate and communicate with their partners and to provide their customers with flexible, resilient user experiences online and while using mobile devices.
BIO-key’s WEB-key is a scalable biometric service management platform, incorporating key functions for regulatory compliance, enrollment, authentication or identification, and integrity in a multi-tenant private or public cloud delivery platform. Government agencies use BIO-key for their large-scale civil ID projects, because WEB-key underpins a biometric identity ecosystem, is cloud-ready, and provides a scalable, high-integrity trust platform which can be operated anywhere and supports over 30 fingerprint scanners interchangeably.
We also deliver biometric software integration application programming interfaces, or APIs, allowing software developers to leverage our platform to securely and efficiently embed biometric multi-factor authentication, or MFA, into their own products. This allows software developers to focus on their core functionality while BIO-key ensures users enter the application without requiring they carry their phone or any token.
Even the most security-focused organizations are suffering breaches as a result of human error or improper conduct. As enterprises scale the number of software as a service, or SaaS applications, and multi-cloud services they rely on and the interconnections between them increase, assured identity has emerged as a critical component of an organization’s security framework, directly affecting each triad of cybersecurity - confidentiality, integrity, and availability. As access perimeters dissolve, organizations must evolve from network-based security models to Zero Trust and Continuous Authentication and Risk Trust Assessment (CARTA) security models, focusing on adaptive and context-aware controls. True server-secured biometric verification removes the human nature vulnerability at the root of many security compromises creating a more reliable means to manage user access and protect digital assets against rogue users willing to hand over their credentials to a proxy. Our global identity as a service, or IDaaS, hosting capability allows our customers to simplify and efficiently scale their security infrastructures across internal IT systems and external customer facing applications without installation overhead, security or uptime management efforts.
We designed BIO-key PortalGuard IDaaS and WEB-key to provide organizations an integrated approach to managing and securing all of their identities using the technologies they already use while providing capacity for future needs through the strategic use of biometrics to limit vulnerability and contain authentication costs. Our platform allows users to authenticate their customers, employees, contractors, and partners. It enables any user to connect to any device, cloud or application, all with a simple, customizable, intuitive and consumer-friendly user experience. We utilize server-secured biometrics to support roving users without requiring them to carry their phone or a token. As of December 31, 2021, more than 300 customers across multiple industries use BIO-key to secure and manage access for users around the world.
Development of Business
We were founded in 1993 to develop and market advanced fingerprint biometric technology and related security software solutions. First incorporated as BBG Engineering, the company was renamed SAC Technologies in 1994 and renamed BIO-key International, Inc. in 2002. Our principal executive office is located at 3349 Highway 138, Building A, Suite E, Wall, New Jersey 07719.
We were pioneers in developing automated, finger identification technology that supplements or compliments other methods of identification and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, credit card, passports, driver’s licenses, or other form of possession or knowledge-based credentialing. Our advanced technology has been, and is, used to improve both the accuracy and speed of competing fingerprint biometrics in some of the largest biometric systems in the world.
On June 30, 2020, we enhanced our product offering by acquiring PistolStar, Inc. (“PistolStar”) for $2.5 million. PistolStar provides enterprise-ready identity access management solutions to commercial, government and education customers throughout the United States and internationally. PistolStar develops and markets our PortalGuard line of software and services.
On March 8, 2022, we expanded our sales and support operation into Europe, Africa and the Middle East (“EMEA”) by acquiring Swivel Secure Europe, SA for up to $2.25 million. Swivel Secure Europe is a Madrid, Spain based provider of IAM solutions serving over 300 customers through a network of dozens of channel partners throughout EMEA. Swivel Secure Europe is the exclusive distributer of AuthControl® Sentry, AuthControl Enterprise and AuthControl MSP product line in Europe, Middle East, and Africa, excluding the United Kingdom. Swivel Secure maintains a direct sales force with offices in Madrid, Spain and Lisbon, Portugal.
Our Products
BIO-key PortalGuard and PortalGuard IDaaS
BIO-key PortalGuard is an independent, customer-controlled and neutral-by-design cloud-based identity platform that allows our customers to integrate with any cloud or on-premise SaaS application, service or cloud host, as well as Windows device authentication through a single secure, reliable and scalable IAM platform. It provides identical capabilities in both a SaaS (PortalGuard IDaaS) or on-premise (PortalGuard) delivery model. PortalGuard integrates BIO-key’s Identity Bound Biometric biometric (IBB) authentication as a first-class authentication options that are not tied to a device or “what you have” authentication, allowing relying parties to positively identify who is accessing their systems, not the device they might have handed off. Our three-way IAM neutrality consists of:
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seventeen MFA authentication factor choices, including our server-secured IBB, via fingerprint scanners, or using a palm scan, facial selfie, or voice biometric via a mobile phone.
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open user directory choices including on premise, hybrid or full-Azure Active Directory, LDAP, IBM Domino, or custom SQL user directory; and
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multiple single sign on, or SSO, federation options, including SAML, OIDC, CAS and WS-Fed.
The forgoing allows our customers to combine and authenticate legacy and future technologies and to securely connect users to the technology that they choose. We design transparent compatibility of the BIO-key PortalGuard IDaaS with on-premise infrastructures and public and hybrid clouds.
Our customers use the BIO-key PortalGuard IDaaS to secure their workforces and student populations and make their partner networks more collaborative. PortalGuard IDaaS provides more and secure experiences for their customers and end users, which enables our customers to future-proof their environments. PortalGuard IDaaS can be used as the central system for an organization’s connectivity, access, authentication and identity lifecycle management needs across all of its users, technology and applications. We enable our customers to easily deploy, manage and secure applications and devices, and offer provisioning services using open source tools.
Developers can leverage an extensive suite of API and modular SDK tools to build custom cloud, mobile and web application enrollment and authentication experiences that leverage BIO-key PortalGuard and WEB-key as the underlying identity management platform. Once deployed, PortalGuard allows administrators to enforce contextual access management decisions based on conditions such as user identity, device, geolocation, application destination identity, IP range, and time of day.
Our customers use BIO-key to (i) manage and secure work-related IT access of their employees, contractors and supply chain partners, which we call workforce identity; and (ii) manage and secure the identities of users of their web properties, which we call customer identity.
BIO-key PortalGuard and PortalGuard IDaaS for Workforce Identity. PortalGuard streamlines the way an organization’s employees, contractors and supply chain partners connect to its applications and data from any device, while increasing user efficiency, preventing unauthorized delegation, credential sharing, and keeping digital environments secure through our MFA capabilities. We enable organizations to provide their workforces with immediate and secure access to every application from any device they use, without maintaining multiple credentials. Our multi-directory support interfaces with the directories in place at an organization, while allowing SQL-based custom directories where none presently exist. BIO-key PortalGuard Desktop allows customers to extend the BIO-key PortalGuard IDaaS to their existing on-premises and remote workstation Windows sign in.
BIO-key PortalGuard and PortalGuard IDaaS for Customer Identity. BIO-key PortalGuard allows organizations to secure access to their online properties, while upgrading their customers’ user experience by delivering self-enrollment and management for customer-facing cloud, mobile or web applications. We enable an organization’s product team to layer BIO-key’s MFA, SSO and self-service password reset, or SSPR, functionality into their cloud, web and mobile applications through federation standards or using our APIs. Our customers are able to centrally manage policies, audit and log access across their properties, leading to more seamless customer experiences.
BIO-key VST and WEB-key; Products; Civil and Large-Scale ID Infrastructure
We have developed what we believe is the most discriminating and effective commercially available finger-based biometric technology. This technology is embedded in our PortalGuard product for enterprise security, providing customers with a unique capability to authenticate users without a phone or token, where appropriate, such as manufacturing, retail, call centers, and health care workers. Other markets for scalable biometric engines include government markets, large scale identity projects such as voter’s registration, driver’s license, national ID programs, and SIM card registration.
We also offer a full line of easy to use finger scanners for both enterprise and consumer markets. Our SideSwipe®, EcoID® and SidePass® finger readers can be used on any laptop, tablet or other device which contains a USB A or C port. We market and sell these fingerprint scanners through distributors and directly to end users via Amazon.
Impact of COVID-19
The COVID-19 outbreak has led us to migrate to a remote business model for our sales, marketing, administrative and executive teams. Research and development and production have adjusting to the situation to maintain production as best as possible considering the conditions and regulations. Our transition to remote work was highly successful, and our teams operated efficiently using our own IAM software to authenticate video conferencing applications and other collaboration tools. The COVID-19 pandemic has extended sales cycles and delayed deployments in most markets in which we operate, particularly in Africa. We continue to conduct business daily, some still from home, and others in office occasionally, as we are actively closing transactions throughout the continuing climate, with no changes to personnel.
Markets
Identity and Access Management, User Multi-Factor Authentication, Single Sign On, Privilege Entitlement and Access Control
Our products simplify the authentication process for enterprise users and consumers, while raising security levels. This allows our customers to meet new, stronger authentication requirements and security best practices across many industries, while delivering a superior end-user experience. Customers use our products to reduce risk of theft, fraud, loss, account takeover attacks, and unauthorized account sharing by limiting access to valuable assets, privileges, data, services, networks and places to only authorized individuals. Our products provide stronger identity binding and a superior user experience versus traditional credentialing systems, which utilize a physical or knowledge-based electronic credential to authenticate the holder but fail to authenticate the actual user in addition to the token. Both commercial enterprises and the public sector have seen a shift in the requirement for stronger authentication, and the FBI, NIST and industry thought leaders such as SalesForce and Microsoft have encouraged entities to enhance their security posture by implementing stronger 2-factor authentication (2FA) or MFA. We believe the market for advanced user MFA, including fingerprint biometrics, extends to nearly every industry segment and the market opportunity for our products is massive, global and growing.
Historically, our largest market has been identity and access management for highly regulated industries like government and healthcare. However, we are witnessing a change in the landscape as organizations within all industries and of all sizes are embracing biometric technology and MFA as a security and workflow solution. Championed by the millions of users that have been successfully introduced to biometrics by companies such as Apple and Samsung, today’s users have witnessed the security and convenience benefits of biometric technology in their phones and welcome the same user experience to access applications without passwords.
More recently, in connection with the acquisition of PistolStar we have developed a large customer base in the higher education vertical. Colleges and universities throughout the United States use our PortalGuard single sign on platform. As colleges and universities continue to operate in remote environments, we have seen additional demand for our solutions.
Upon introducing a series of compact fingerprint readers, we saw an immediate increase in inquiries from both commercial companies seeking an alternative to passwords, and from consumers recognizing that they could use SidePass, SideSwipe or EcoID to replace their Windows passwords and enable Windows Hello without replacing or upgrading laptops or tablets.
In October 2015, we established BIO-key Hong Kong for purposes of establishing relationships and conducting business is the Asia Pacific Region. Through our Hong Kong subsidiary, we support the growing demand for secure identification and authentication in the region.
We believe there is potential for significant market growth in the following key areas:
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Corporate network access control, corporate campuses, computer networks, and applications.
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Large scale identification projects, especially in Africa and the surrounding regions.
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Government funded initiatives, including the state board of elections.
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International law enforcement use case applications as prospects see us as a global leader in the biometric technology space as witnessed by our agreement with the Israeli Defense Force, and the Singapore and Dubai Police departments.
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Consumer mobile credentialing, including mobile payments, credit and payment card programs, data and application access, and commercial loyalty programs.
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Demand for BIO-key hardware products from Windows 10 users and Fortune 500 companies.
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Government services and highly regulated industries including, Medicare, Medicaid, Social Security, drivers' licenses, campus and school ID, passports/visas.
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New remote authentication challenges, including those created by the COVID-19 pandemic.
Business Model
Our business model is focused on the following key areas:
Market
Drivers
Frequent announcements of supply chain breaches, ransomware attacks, and administrative access compromises highlight the shortcomings of mainstream MFA and security approaches, which leave far too much responsibility on end-users to comply with cyber-hygiene policies. BIO-key’s biometric authentication process prevents human error and human nature from undermining secure authentication, while making the end user’s access easier than ever. The current climate of broad enterprise adoption of MFA to replace passwords presents opportunities for us to leverage our unique differentiators and exploit the gaps in existing IAM technology approaches. One of those gaps is the challenge of authenticating users that “rove” among workstations. A second gap is preventing unauthorized account sharing and delegation.
OEM
Customers
We will continue to prioritize securing agreements with OEM customers. The history of success supporting NCR, McKesson, Omnicell, and LexisNexis provides an established footprint that we intend to build upon. As OEM customers embed our solutions within their products, the customer benefits from the enhanced security and workflow, and frees them from investing in R&D to manage an IAM infrastructure of their own. OEM customers’ ordering patterns are more predictable and OEM customers generally require lower service and support resourcing.
Highly
Regulated
Industries
Government ID projects and healthcare organizations, including hospitals, clinics, and small private practices present a strong opportunity for us. Additionally, the financial services industry, including banks and credit unions has grown substantially.
Partner
Model
In 2021, we continued to grow our Channel Alliance Partner program (CAP) focused on partnering with select value added resellers, integrators, and resellers. We added Intellisys and other master agent distributors to our partners. We partner with leading application, managed service and infrastructure vendors, such as Insight, NGEN, Amazon Web Services, UCROO Campus, Software House International (SHI), Virtual Graffiti, Atlassian, and ProCirrus.
Microsoft
Partnership
We are a Microsoft Partner and our line of compact fingerprint scanners has been tested and qualified by Microsoft to support Windows Hello and Windows Hello for Business.
Hardware
Hardware products generated 25% of our revenue in 2021. EcoID has emerged as our most popular scanner for enterprise deployments. For customers that require the highest level of security, PIV-Pro is a FIPS compliant fingerprint scanner, suitable for highly regulated industries and organizations that want a best-in-class solution.
We have grown our business through a combination of organic growth and the strategic acquisitions of PistolStar and Swivel Secure Europe. We expect to continue to pursue strategic acquisitions of select businesses and assets in the IAM space. In furtherance of this strategy, we are active in the industry and regularly evaluate businesses that we believe will either provide an entry into new market verticals or be synergistic with our existing operations and in either case, be accretive to earnings. We cannot provide any assurance as to whether we will be able to complete any acquisition and if completed, successfully integrate any business we acquire into our operations. Please see the section captioned “RISK FACTORS” for additional information regarding acquisition risks.
Marketing and Distribution
We sell our products directly through our field and inside sales teams, as well as indirectly through our network of channel partners. Through our Channel Alliance Program, we have partnered with more than 40 resellers, system integrators and other distribution partners. We are committed to continue to aggressively grow this program in 2022.
We partner with leading application, managed service and infrastructure vendors, such as Insight, NGEN, Amazon Web Services, Pathify (formerly Ucroo Campus), Software House International (SHI), Virtual Graffiti, Atlassian, and ProCirrus.
We offer our software under a SaaS term license and generate annual recurring revenue (ARR) primarily by selling multi-year subscriptions to our software. We employ a customer success team, focused on customer satisfaction and early remediation.
In 2020, we announced two contracts with our partner Technology Transfer Institute for large-scale identification projects in Nigeria. We received our first purchase, related to this project, which we shipped in the first quarter of 2021. The COVID-19 pandemic has and may continue to delay the rollout of these programs.
Intellectual Property Rights
We develop and own significant intellectual property and believe that our intellectual property is fundamental to our biometric and IAM product operation:
Patents
We own patented technologies and trade secrets developed or acquired by us.
In May 2005, the U.S. Patent & Trademark Office issued patent 6,895,104 for our Vector Segment fingerprint technology (VST), our core biometric analysis and identification technology. With the payment of all maintenance fees, this patent will expire on March 4, 2023.
On October 3, 2006, we announced that our patent for a biometric authentication security framework had been granted by the U.S. Patent & Trademark Office. The patent No. 7,117,356 was issued to us for a biometric authentication security framework that enhances commercial and civil biometric use. Our authentication security framework protects privacy and security of cloud or network-based authentications while also facilitates ease of use of biometric systems. The technology that this patent is based on is the foundation for the authentication security incorporated in our WEB-key product line. WEB-key is a mature enterprise authentication solution that functions in a wide variety of application environments. The solution supports a variety of implementation alternatives including card technologies for “two-factor” authentication and also supports “single-factor” authentication. Partners and customers implementing our WEB-key software to provide convenient and secure user identity include a number of institutions including the Allscripts Healthcare Solutions, Computer Associates Site Minder, Oracle Access Manager and many other enterprise and solutions-based systems. With the payment of all maintenance fees, this patent will expire on May 20, 2023.
On December 26, 2006, we were issued US patent No. 7,155,040 covering our unique image processing technology, which is critical for enhancing information used in the extraction of biometric minutiae. The issued patent protects a critical part of an innovative four-phase image enhancement process developed by us. With the payment of all maintenance fees, this patent will expire on January 29, 2025.
On April 15, 2008, we were issued US patent No. 7,359,553 covering our image enhancement and data extraction core algorithm components. The solution protected under this patent provides the capability to quickly and accurately transform a fingerprint image into a computer image that can be analyzed to determine the critical data elements. With the payment of all maintenance fees, this patent will expire on January 3, 2025.
On August 19, 2008, we were issued US patent No. 7,415,605 for our “Biometric Identification Network Security” method. The solution protected under this patent provides a defense against hackers and system attacks, while leveraging the industry standard Trusted Platform Module (TPM) specification for encryption key management. With the payment of all maintenance fees, this patent will expire on May 20, 2023.
On November 18, 2008, we were issued US patent No. 7,454,624 for our “Match Template Protection within a Biometric Security System” method. The solution protected under this patent limits the scope of enrollment templates usage and also eliminates the need for revocation or encryption processes, which can be expensive and time consuming. With the payment of all maintenance fees, this patent will expire on May 17, 2025.
On March 10, 2009, we were issued US patent No. 7,502,938 for our “Trusted Biometric Device” which covers a simple, yet secure method of protecting a user’s biometric information. It covers the transmission of information from the point the information is collected at the biometric reader until the data reaches the computer or device that is authenticating the user’s identity. With the payment of all maintenance fees, this patent will expire on October 25, 2025.
On May 26, 2009, we were issued US patent No. 7,539,331 for our “Image Identification System” method for improving the performance and reliability of image analysis within an image identification system. With the payment of all maintenance fees, this patent will expire on March 22, 2022.
On November 8, 2011, we were issued US Patent No. 8,055,027 for our “Generation of Directional Information in the Context of Image Processing” method for image enhancement and processing. With the payment of all maintenance fees, this patent will expire on October 10, 2027.
On June 5, 2012, PistolStar was issued US Patent No. 8,196,193 for “Method For Retrofitting Password Enabled Computer Software with a Redirectional User Authentication Method”, where a device, method, and system may be used to integrate and control authentication and passwords among various applications and platforms. With the payment of all maintenance fees, this patent will expire on November 1, 2030.
On July 3, 2012, we were issued US Patent No. 8,214,652 for our “Biometric Identification Network Security”, an expanded method of network and related network authentication security systems utilizing hardware-based support for encryption and key management for authentication purposes. With the payment of all maintenance fees, this patent will expire on April 24, 2024.
On March 12, 2013, PistolStar was issued US Patent No. 8,397,077 for “Client Side Authentication Redirection”, where user specific attributes may be accessed and used to produce a generated password, using an algorithm and the user attributes. With the payment of all maintenance fees, this patent will expire on August 7, 2030.
On May 3, 2017, we were issued US Patent No. 9,646,146 for our “Utilization of Biometric Data”, a method enables existing small area sensors to capture substantially more fingerprint surface area, leading to a higher degree of accuracy when performing a match. With the payment of all maintenance fees, this patent will expire on March 6, 2035.
On June 19, 2018 we were issued U.S. Patent No. 10,002,244 for our “Utilization of Biometric Data” to allow continuous, passive user authentication on a mobile device. With the payment of all maintenance fees, this patent will expire on March 6, 2035.
On July 27, 2018 we were issued U.S. Patent No. 10,025,831 for “Adaptive Short Lists and Acceleration of Biometric Database Search”, a method to quickly and iteratively search a database of biometric data. With the payment of all maintenance fees, this patent will expire on August 10, 2036.
On September 3, 2019 we were issued U.S. Patent No. 10,400,481 for “Fingerprint Lock”, a lock design method of the shackle and spring integration to electronics. With the payment of all maintenance fees, this patent will expire on June 27, 2037.
On September 10, 2019 we were issued U.S Patent No. 10,410,040 for “Fingerprint Lock Control method and Fingerprint Lock System”, a lock design method of the control process of scanning, and server communications for user profile management. With the payment of all maintenance fees, this patent will expire on July 26, 2037.
On April 20, 2021 we were issued U.S. Patent No. 10,984,085 for “Biometric Recognition for Uncontrolled Acquisition Environments”, expected to be deployed in mobile devices, the patent provides a method of continuous capture of the users biometric data before the need of the authentication or enrollment, as well as during an active session with a user, to assure the user has not changed.
We have also been granted parallel patents to the US Patent portfolio to certain of our patents in many foreign countries offering protection of our intellectual property rights around the world.
Trademarks
We have registered our trademarks “BIO-key”, “True User Identification”, “Intelligent Image Indexing”, “WEB-key”, “SideSwipe”, “SidePass”, “EcoID”, “PistolStar®”, “PortalGuard”, “MobileAuth”, and “PASSIVEKEY®” with the U.S. Patent & Trademark Office, as well as many foreign countries, protecting our companies name and key technology offering names.
Through our subsidiary PistolStar, we own the following additional registered trademarks: “PortalGuard®”, “PASSIVEKEY®”, and “PISTOLSTAR®”. We also acquired the following unregistered trademarks: “PortalGuard NebulaTM”, “Password PowerTM” and “ScoochTM”.
Copyrights and trade secrets
We take measures to ensure copyright and license protection for our software releases prior to distribution. When possible, the software is licensed in an attempt to ensure that only licensed and activated software functions to its full potential. We also take measures to protect the confidentiality of our trade secrets.
Research and Development
Our PortalGuard IAM product line is mature, with hundreds of active customers, and we are adding additional factors and capabilities to the product, as well as enhancing the self-management for the functionally equivalent PortalGuard IDaaS offering. A significant new authentication factor set will come via our MobileAuth application for users to experience multiple biometric secure authentication via their mobile phone devices. Our VST and WEB-key biometric platforms are mature, stable, and widely-deployed. We concentrate our research and development efforts on enhancing the functionality, reliability and integration of our current products as well as acquiring and developing new and innovative products and solutions for providing broader access to the BIO-key user experience.
Although we believe that our identification technology is one of the most advanced and discriminating fingerprint technologies available today, the markets in which we compete are characterized by rapid technological change and evolving standards and use-cases. In order to maintain our position in the market, we will need to continue to upgrade and refine our existing technologies as new standards become relevant to our customers and markets.
During the years ended December 31, 2021 and 2020, we incurred expenses of $2,355,056 and $1,396,436, respectively, for research and development.
In future periods our R&D efforts will remain focused on updating and advancing our core software products including PortalGuard and PortalGuard IDaaS, MobileAuth, WEB-key and VST. These products are critical to support the anticipated growth in enterprise IAM and large-scale ID projects.
Competition
The IAM MFA and SSO market has many providers of solutions in either standalone or IAM suite delivery models. We believe that our unique differentiator in this market is the incorporation of an unparalleled server-secured biometric authentication capability among our 17 authentication factors. There are numerous companies involved in the development, manufacturing and marketing of fingerprint biometrics products to commercial, government, law enforcement and prison markets. These companies include, but are not limited to, IDEMIA, Thales, NEC, Neurotechnology, and Innovatrics.
The majority of sales for automated fingerprint identification products in the market to date have been deployed for government agencies, healthcare facilities, and law enforcement applications. The consumer and commercial markets represent areas of growth potential for biometrics, led by the use of mobile devices.
The epidemic of security and data breaches reported over the past few years is one of the driving factors for identifying new methods of protecting valuable data. After attempting to create a more sophisticated password, or more efficient token or PIN, it has become apparent that each of these methods are easily compromised, and the downside risks are significant.
We have also seen FIDO-compliant keys enter the market, led by Yubico’s YubiKey, a USB key that acts as a credential for access. Keys alone do not meet the needs of large organizations for which key sharing and lost keys are concerns. We have introduced a line of low-cost USB keys and they do not offer the security benefits of biometric technology as they can be easily lost or stolen and replacement costs / managing the product becomes a growing expense.
With respect to competing biometrics technologies, each has its strengths and weaknesses and none has emerged as a market leader:
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Fingerprint identification is generally viewed as very accurate, inexpensive and non-intrusive and is the dominant biometric in use today and will be for the foreseeable future;
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Palm Vein scanning is expensive, technique-sensitive, and offers mobility challenges;
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Iris scanning is viewed as accurate, but the hardware is significantly more expensive; and
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Facial recognition can have privacy concerns with work-from-home use, and is typically highly dependent on ambient lighting conditions, angle of view, and other factors.
Government Regulations
Various state, federal and EU privacy laws govern the collection, storage, use and any sale of biometric-related data. To the extent that BIO-key’s IDaaS offerings include the collection and storage of customer users’ personal or biometric data, we operate as a processor of such data. Our WEB-key platform includes compliance features to ensure automated compliance with these laws including collection of informed written consent during enrollment workflows and robust auditing to control and report on the retention of biometric data and removal requests. Additionally, our customers have access to these tools to maintain their own compliance, including deletion of user data when business relationships terminate.
We believe in biometric privacy rights, and that both users and their organizations benefit from a responsibly operated biometric identity infrastructure. We actively participate in industry privacy workgroups as recognized biometric subject matter experts in order to influence and keep abreast of any proposed changes to these regulations. Beyond these regulations, we are not currently subject to direct regulation by any government agency, other than regulations generally applicable to businesses or related to specific project requirements. In the event of any international sales, we would be subject to various domestic and foreign laws regulating such exports and export activities.
Environmental Regulations
As of the date of this report, we have not incurred any material expenses relating to our compliance with federal, state, or local environmental laws and do not expect to incur any material expenses in the foreseeable future.
Seasonality
Generally, our revenues do not exhibit a seasonal pattern, however, revenue is affected by customer budgeting, government fiscal year planning, and capital budgets.
Human Capital Resources
As of the date of this report, we employed fifty-one individuals on a full-time basis as follows: (i) twenty-two in engineering, customer support, and research and development; (ii) nine in finance and administration; and (iii) twenty in sales and marketing. We also have one employee who provides engineering services and one employee who provides administrative services, both on a part-time basis, and two part-time factory contractors in China. None of our employees are represented by a labor union and we believe that our relationship with our employees is good.
Available Information
We maintain a website with the address www.BIO-key.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available on our website, without charge, as soon as reasonably practicable after they are filed electronically with the SEC. The SEC also maintains a website that contains reports, proxy and information statements and other information statements and other information regarding issuers who file electronically with the SEC. The SEC’s website address is www.sec.gov.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements appearing just before the section captioned “BUSINESS” in Item 1 above. Effective November 20, 2020, we implemented a reverse stock split of our outstanding common stock at a ratio of 1-for-8. All share figures are reflected on a post-split basis.
BUSINESS AND FINANCIAL RISKS
We have historically not generated significant revenue and have sustained substantial operating losses.
In order to increase revenue, we have developed a direct sales force and anticipate the need to retain additional sales, marketing and technical support personnel and may need to incur substantial expenses. We cannot assure you that we will be able to secure these necessary resources, that a significant market for our technologies will develop, or that we will be able to achieve our targeted revenue. If we are unable to achieve revenue or raise capital sufficient to cover our ongoing operating expenses, we will be required to scale back operations, including marketing and research initiatives, or in the extreme case, discontinue operations. As of December 31, 2021, we had an accumulated deficit of approximately $105 million.
Our biometric technology has yet to gain widespread market acceptance and we do not know how large of a market will develop for our technology.
Biometric technology has received only limited market acceptance, particularly in the private sector. Our technology represents a novel security solution and we have not yet generated significant sales. Although recent security concerns relating to identification of individuals and appearance of biometric readers on popular consumer products, including the Apple iPhone, have increased interest in biometrics generally, it remains an undeveloped, evolving market. Biometric based solutions compete with more traditional security methods including keys, cards, personal identification numbers and security personnel. Acceptance of biometrics as an alternative to such traditional methods depends upon a number of factors including:
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national or international events which may affect the need for or interest in biometric solutions;
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the performance and reliability of biometric solutions;
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marketing efforts and publicity regarding these solutions;
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public perception regarding privacy concerns;
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costs involved in adopting and integrating biometric solutions;
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proposed or enacted legislation related to privacy of information; and
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competition from non-biometric technologies that provide more affordable, but less robust, authentication (such as tokens and smart cards).
For these reasons, we are uncertain whether our biometric technology will gain widespread acceptance in any commercial markets or that demand will be sufficient to create a market large enough to produce significant revenue or earnings. Our future success depends, in part, upon business customers adopting biometrics generally, and our solution specifically.
Biometric technology is a new approach to Internet security, which must be accepted in order for our WEB-key solution to generate significant revenue.
Our WEB-key authentication initiative represents a new approach to Internet security, which has been adopted on a limited basis by companies that distribute goods, content or software applications over the Internet. The implementation of our WEB-key solution requires the distribution and use of a finger scanning device and integration of database and server side software. Although we believe our solutions provide a higher level of security for information transmitted over the Internet than existing traditional methods, unless business and consumer markets embrace the use of a scanning device and believe the benefits of increased accuracy outweigh implementation costs, our solution will not gain market acceptance.
The market for our solutions is still developing and if the biometrics industry adopts standards or a platform different from our standards or platform, our competitive position would be negatively affected.
The market for identity solutions is still developing. The evolution of this market may result in the development of different technologies and industry standards that are not compatible with our current solutions, products or technologies. Several organizations set standards for biometrics to be used in identification and documentation. Although we believe that our biometric technologies comply with existing standards, these standards may change and any standards adopted could prove disadvantageous to or incompatible with our business model and current or future solutions, products and services.
Our software products may contain defects which will make it more difficult for us to establish and maintain customers.
Although we have completed the development of our core biometric technology, it has only been used by a limited number of business customers. Despite extensive testing during development, our software may contain undetected design faults and software errors, or “bugs” that are discovered only after it has been installed and used by a greater number of customers. Any such defect or error in new or existing software or applications could cause delays in delivering our technology or require design modifications. These could adversely affect our competitive position and cause us to lose potential customers or opportunities. Since our technologies are intended to be utilized to secure physical and electronic access, the effect of any such bugs or delays will likely have a detrimental impact on us. In addition, given that biometric technology generally, and our biometric technology specifically, has yet to gain widespread acceptance in the market, any delays would likely have a more detrimental impact on our business than if we were a more established company.
In order to generate revenue from our biometric products, we are dependent upon independent original equipment manufacturers, system integrators and application developers, which we do not control. As a result, it may be more difficult to generate sales.
We market our technology through licensing arrangements with:
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original equipment manufacturers (OEMs), system integrators and application developers which develop and market products and applications which can then be sold to end users; and
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companies which distribute goods, services or software applications over the Internet.
As a technology licensing company, our success will depend upon the ability of these manufacturers and developers to effectively integrate our technology into products and services which they market and sell. We have no control over these licensees and cannot assure you that they have the financial, marketing or technical resources to successfully develop and distribute products or applications acceptable to end users or generate any meaningful revenue for us. These third parties may also offer the products of our competitors to end users. While we have commenced a significant sales and marketing effort, we have only begun to develop a significant distribution channel and may not have the resources or ability to sustain these efforts or generate any meaningful sales.
We face intense competition and may not have the financial and human resources necessary to keep up with rapid technological changes, which may result in our technology becoming obsolete.
The Internet, facility access control, and information security markets are subject to rapid technological change and intense competition. We compete with both established biometric companies and a significant number of startup enterprises as well as providers of more traditional methods of access control. Most of our competitors have substantially greater financial and marketing resources than we do and may independently develop superior technologies, which may result in our technology becoming less competitive or obsolete. We may not be able to keep pace with this change. If we are unable to develop new applications or enhance our existing technology in a timely manner in response to technological changes, we will be unable to compete in our chosen markets. In addition, if one or more other biometric technologies such as voice, face, iris, hand geometry or blood vessel recognition are widely adopted, it would significantly reduce the potential market for our fingerprint identification technology.
We recognized revenues from Africa in 2021 and expect continued revenues from Africa and the European Union in future periods. Our financial performance will be subject to risks associated with changes in the value of the U.S. dollar versus local currencies.
Owing to the international scope of our operations, including our recent acquisition of Swivel Secure Europe, SA, we are exposed to foreign exchange risk. Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales and operating expenses worldwide. Weakening of foreign currencies relative to the U.S. dollar will adversely affect the U.S. dollar value of our foreign currency-denominated sales and earnings, if any, and could lead to us raising international pricing, potentially reducing the demand for our products. In addition, margins on sales of our products in foreign countries and on sales of products that include components obtained from foreign suppliers could be materially adversely affected by foreign currency exchange rate fluctuations. As a result, our business and the price of our common stock may be affected by fluctuations in foreign exchange rates, which may have a significant impact on our results of operations and cash flows from period to period. Currently, we do not have any exchange rate hedging arrangements in place.
Although we have made significant sales of our products throughout Asia and Africa in prior years, we have not been able to consistently enforce our contract rights and collect all receivables which has resulted in material write-offs.
Our ability to enforce our international contracts is contingent on our relationships with foreign resellers, and their financial viability. Although we are making efforts to better enforce our contract rights, there can be no assurance that we will be able to fully collect all receivables originating in Asia and Africa or that will not have to write-off future receivables which may be material in amount. Any such write-offs have in the past and will negatively impact our financial position and results of operation.
We depend on key employees and members of our management team, including our Chairman of the Board and Chief Executive Officer, Chief Financial Officer, and our Chief Legal Officer, in order to achieve our goals. We cannot assure you that we will be able to retain or attract such persons.
Our employment contracts with Michael W. DePasquale, our Chairman of the Board and Chief Executive Officer, Cecilia C. Welch, our Chief Financial Officer, and James D. Sullivan, our Chief Legal Officer, expire annually, and renew automatically for successive one year periods unless notice of non-renewal is provided by the Company. Although the contracts do not prevent them from resigning, they do contain confidentiality and non-compete clauses, which are intended to prevent them from working for a competitor within one year after leaving our Company. Our success depends on our ability to attract, train and retain employees with expertise in developing, marketing and selling software solutions. In order to successfully market our technology, we will need to retain additional engineering, technical support and marketing personnel. The market for such persons remains highly competitive and our limited financial resources will make it more difficult for us to recruit and retain qualified persons.
We cannot assure you that the intellectual property protection for our core technology provides a sustainable competitive advantage or barrier to entry against our competitors.
Our success and ability to compete is dependent in part upon proprietary rights to our technology. We rely primarily on a combination of patent, copyright and trademark laws, trade secrets and technical measures to protect our propriety rights. We have filed a patent application relating to both the optic technology and biometrics solution components of our technology wherein several claims have been allowed. The U.S. Patent and Trademark Office has issued us a series of patents for our Vector Segment fingerprint technology (VST), and our other core biometric analysis and identification technologies. However, we cannot assure you that we will be able to adequately protect our technology or other intellectual property from misappropriation in the U.S. and abroad. Any patent issued to us could be challenged, invalidated or circumvented or rights granted thereunder may not provide a competitive advantage to us. Furthermore, patent applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and other rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property rights on a worldwide basis in a cost-effective manner. In jurisdictions where foreign laws provide less intellectual property protection than afforded in the U.S. and abroad, our technology or other intellectual property may be compromised, and our business would be materially adversely affected. If any of our proprietary rights are misappropriated or we are forced to defend our intellectual property rights, we will have to incur substantial costs. Such litigation could result in substantial costs and diversion of our resources, including diverting the time and effort of our senior management, and could disrupt our business, as well as have a material adverse effect on our business, prospects, financial condition and results of operations. We can provide no assurance that we will have the financial resources to oppose any actual or threatened infringement by any third party. Furthermore, any patent or copyrights that we may be granted may be held by a court to infringe on the intellectual property rights of others and subject us to the payment of damage awards.
We may be subject to claims with respect to the infringement of intellectual property rights of others, which could result in substantial costs and diversion of our financial and management resources.
Third parties may claim that we are infringing on their intellectual property rights. We may violate the rights of others without our knowledge. We may expose ourselves to additional liability if we agree to indemnify our customers against third party infringement claims. While we know of no basis for any claims of this type, the existence of and ownership of intellectual property can be difficult to verify, and we have not made an exhaustive search of all patent filings. Additionally, most patent applications are kept confidential for twelve to eighteen months, or longer, and we would not be aware of potentially conflicting claims that they make. We may become subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, and we may incur licensing fees or be forced to develop alternative technology or obtain other licenses. In addition, we may incur substantial expenses in defending against these third party infringement claims and be diverted from devoting time to our business and operational issues, regardless of the merits of any such claim.
In addition, in the event that we recruit employees from other technology companies, including certain potential competitors, and these employees are engaged in the development of portions of products which are similar to the development in which they were involved at their former employers, we may become subject to claims that such employees have improperly used or disclosed trade secrets or other proprietary information. If any such claims were to arise in the future, litigation or other dispute resolution procedures might be necessary to retain our ability to offer our current and future services, which could result in substantial costs and diversion of our financial and management resources. Successful infringement or licensing claims against us may result in substantial monetary damages, which may materially disrupt the conduct of our business and have a material adverse effect on our reputation, business, financial condition and results of operations. Even if intellectual property claims brought against us are without merit, they could result in costly and time consuming litigation, and may divert our management and key personnel from operating our business.
If we are unable to effectively protect our intellectual property rights on a worldwide basis, we may not be successful in the international expansion of our business.
Access to worldwide markets depends in part on the strength of our intellectual property portfolio. There can be no assurance that, as our business expands into new areas, we will be able to independently develop the technology, software or know-how necessary to conduct our business or that we can do so without infringing the intellectual property rights of others. To the extent that we have to rely on licensed technology from others, there can be no assurance that we will be able to obtain licenses at all or on terms we consider reasonable. The lack of a necessary license could expose us to claims for damages and/or injunction from third parties, as well as claims for indemnification by our customers in instances where we have a contractual or other legal obligation to indemnify them against damages resulting from infringement claims. With regard to our own intellectual property, we actively enforce and protect our rights. However, there can be no assurance that our efforts will be adequate to prevent the misappropriation or improper use of our protected technology in international markets.
We face inherent product liability or other liability risks that could result in large claims against us.
We have inherent risk of exposure to product liability and other liability claims resulting from the use of our products, especially to the extent customers may depend on our products in public safety situations that may involve physical harm or even death to individuals, as well as exposure to potential loss or damage to property. Despite quality control systems and inspection, there remains an ever-present risk of an accident resulting from a faulty manufacture or maintenance of products, or an act of an agent outside of our or our supplier’s control. Even if our products perform properly, we may become subject to claims and costly litigation due to the catastrophic nature of the potential injury and loss. A product liability claim, or other legal claims based on theories including personal injury or wrongful death, made against us could adversely affect operations and financial condition. Although we may have insurance to cover product liability claims, the amount of coverage may not be sufficient.
We may need to obtain additional financing to execute our business plan over the long-term, which may not be available. If we are unable to raise additional capital or generate significant revenue, we may not be able to continue operations.
We have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. We currently require approximately $735,000 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation. During 2021, we generated approximately $5.1 million of revenue, which is below our average monthly requirements. If we are unable to generate sufficient revenue to cover operating expenses and fund our business plan, we will need to obtain additional third-party financing. We may, therefore, need to obtain additional financing through the issuance of debt or equity securities. We cannot assure you that we will be able to secure any such additional financing on terms acceptable to us or at all. If we cannot obtain such financing, we will not be able to execute our business plan, will be required to reduce operating expenses, and in the extreme case, discontinue operations.
We may not achieve profitability if we are unable to maintain, improve our offerings.
We believe that our future business prospects depend in part on our ability to maintain and improve our current services and to develop new ones on a timely basis. Our services will have to achieve market acceptance, maintain technological competitiveness, and meet an expanding range of customer requirements. As a result of the complexities inherent in our service offerings, major new wireless data services and service enhancements require long development and testing periods. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new services and service enhancements. Additionally, our new services and service enhancements may not achieve market acceptance. If we cannot effectively develop and improve services, we may not be able to recover our fixed costs or otherwise become profitable.
If we fail to adequately manage our resources, it could have a severe negative impact on our financial results or stock price.
We could be subject to fluctuations in technology spending by existing and potential customers. Accordingly, we will have to actively manage expenses in a rapidly changing economic environment. This could require reducing costs during economic downturns and selectively growing in periods of economic expansion. If we do not properly manage our resources in response to these conditions, our results of operations could be negatively impacted.
We are subject to risks and uncertainties associated with the continued growth of our international operations, which may harm our business.
We have international operation, recently expanded our international operations when we acquired Swivel Secure Europe SA, and plan to continue expanding abroad. Accordingly, our business is subject to risks and uncertainties associated with doing business outside of the United States and could be adversely affected by a variety of factors, including:
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multiple, conflicting and changing laws and regulations such as privacy, security, and data use regulations, tax laws, export and import restrictions, economic and trade sanctions and embargoes, employment laws, anticorruption laws, regulatory requirements, reimbursement or payer regimes and other governmental approvals, permits and licenses;
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failure by us, our collaborators or our distributors to obtain regulatory clearance, authorization or approval for the use of our product candidates in various countries;
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additional potentially relevant third-party patent rights;
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complexities and difficulties in obtaining intellectual property protection and enforcing our intellectual property;
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difficulties in staffing and managing foreign operations;
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financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our product candidates and exposure to foreign currency exchange rate fluctuations;
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natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions;
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regulatory and compliance risks that relate to maintaining accurate information and control over sales and distributors’ activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act (FCPA), its books and records provisions, or its anti-bribery provisions, or laws similar to the FCPA in other jurisdictions in which we may now or in the future operate; and
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anti-bribery requirements of several Member States in the European Union and other countries that may change and require disclosure of information to which U.S. legal privilege may not extend.
Any of these factors could significantly harm our business, operating results, financial condition or prospects.
The outbreak of COVID-19 has and may continue to have a negative impact on our business, sales, results of operations and financial condition.
The global outbreak of COVID-19 has led to severe disruptions in general economic activities, particularly retail operations and travel, as businesses and federal, state, and local governments take increasingly broad actions to mitigate this public health crisis. Individually and collectively, the consequences of the COVID-19 outbreak have and could continue to have a material adverse effect on our business, sales, results of operations and financial condition. Although our employees have been accustomed to working remotely prior to the COVID-19 pandemic, the uncertainty has extended sales cycles, extended payment terms, impacted access to inventory overseas, and delayed the start of planned deployments.
The extent to which the COVID-19 outbreak ultimately impacts our business, sales, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of new variants, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience significant impacts to our business as a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future.
We have taken measures to minimize the health risks of COVID-19 to our employees, as their safety and well-being are a top priority. Our U.S. employees are working from both the office and remotely. The extent to which COVID-19 impacts our business, sales and results of operations will depend on future developments, which are highly uncertain and cannot be predicted.
Our business could be negatively impacted by security threats, including cybersecurity threats, ransomware, and other disruptions.
As a technology company, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information. Although we utilize various procedures and controls to monitor these threats and mitigate our exposure to such threats, there can be no assurance that these procedures and controls will be sufficient in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of sensitive information, critical infrastructure, personnel or capabilities, essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations, or cash flows.
Cybersecurity attacks in particular are evolving and include but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. Although we have implemented systems and procedures that are designed to protect customer, employee, vendor and Company information, prevent data loss and other security breaches, and otherwise identify, assess, and analyze cybersecurity risks, these measures may not be effective. Development and maintenance of these systems is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures increase and become more sophisticated. We face an evolving threat landscape in which cybercriminals, among others, employ a complex array of techniques designed to access personal data and other information, including, for example, the use of fraudulent or stolen access credentials, malware, ransomware, phishing, denial of service and other types of attacks. While, to the best of our knowledge, we have not experienced any material misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a security breach or cyberattack that could materially increase financial risk to the Company or our customers, such a security breach or cyberattack could adversely affect our business and operations, including by damaging our reputation and our relationships with our customers, employees and investors, exposing us to litigation, fines, penalties or remediation costs.
Our failure to maintain appropriate environmental, social, and governance ("ESG") practices and disclosures could result in reputational harm, a loss of customer and investor confidence, and adverse business and financial results.
There is an increasing focus from certain investors, employees, customers and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance matters (“ESG”). Some investors may use these non-financial performance factors to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies and actions relating to corporate responsibility are inadequate. The growing investor demand for measurement of non-financial performance is addressed by third-party providers of sustainability assessment and ratings on companies. The criteria by which our corporate responsibility practices are assessed may change due to the constant evolution of the sustainability landscape, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. If we elect not to or are unable to satisfy such new criteria, investors may conclude that our policies and/or actions with respect to corporate social responsibility are inadequate. We may face reputational damage in the event that we do not meet the ESG standards set by various constituencies.
Furthermore, if our competitors’ corporate social responsibility performance is perceived to be better than ours, potential or current investors may elect to invest with our competitors instead. In addition, in the event that we communicate certain initiatives and goals regarding environmental, social and governance matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. If we fail to satisfy the expectations of investors, employees and other stakeholders or our initiatives are not executed as planned, our reputation and business, operating results and financial condition could be adversely impacted.
Russia’s recent military intervention in Ukraine and the international community’s response have created substantial political and economic disruption, uncertainty, and risk.
Russia’s military intervention in Ukraine in late February 2022, Ukraine’s widespread resistance, and the NATO led and United States coordinated economic, financial, communications, and other sanctions imposed by other countries have created significant political and economic world uncertainty. There is significant risk of expanded military confrontation between Russia and other countries. It is not possible to predict the broader consequences of the conflict, including related geopolitical tensions, and the measures and retaliatory actions taken by the U.S. and other countries in respect thereof, as well as any counter measures or retaliatory actions by Russia in response. At a minimum, the continuing conflict is likely to cause regional instability, geopolitical shifts and could materially adversely affect global trade, currency exchange rates, regional economies and the global economy, which could materially adversely affect our financial condition or results of operations. Current and likely additional international sanctions against Russia may contribute to higher costs, particularly for petroleum-based products. These and related actions, responses, and consequences that cannot now be predicted or controlled may contribute to world-wide economic reversals.
There is a scarcity of and competition for acquisition opportunities.
There are a limited number of operating companies available for acquisition that we deem to be desirable targets. In addition, there is a very high level of competition among companies seeking to acquire these operating companies. Many established and well-financed entities are active in acquiring interests in companies that we may find to be desirable acquisition candidates. Many of these entities have significantly greater financial resources, technical expertise and managerial capabilities than us. Consequently, we will be at a competitive disadvantage in negotiating and executing possible acquisitions of these businesses. Even if we are able to successfully compete with these entities, this competition may affect the terms of completed transactions and, as a result, we may pay more or receive less favorable terms than we expected for potential acquisitions. We may not be able to identify operating companies that complement our strategy, and even if we identify a company that complements our strategy, we may be unable to complete an acquisition of such a company for many reasons, including:
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failure to agree on the terms necessary for a transaction, such as the purchase price;
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incompatibility between our operational strategies or management philosophies with those of the potential acquiree;
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competition from other acquirers of operating companies;
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lack of sufficient capital to acquire a profitable distribution company; and
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unwillingness of a potential acquiree to work with our management.
Risks related to acquisition financing.
We have a limited amount of financial resources and our ability to make additional acquisitions without securing additional financing from outside sources is limited. In order to continue to pursue our acquisition strategy, we may be required to obtain additional financing. We may obtain such financing through a combination of traditional debt financing or the placement of debt and equity securities. We may finance some portion of our future acquisitions by either issuing equity or by using shares of our common stock for all or a portion of the purchase price for such businesses. In the event that our common stock does not attain or maintain a sufficient market value, or potential acquisition candidates are otherwise unwilling to accept our common stock as part of the purchase price for the sale of their businesses, we may be required to use more of our cash resources, if available, in order to maintain our acquisition program. If we do not have sufficient cash resources, we will not be able to complete acquisitions and our growth could be limited unless we are able to obtain additional capital through debt or equity financings.
We may experience difficulties in integrating the operations, personnel and assets of any business we acquire which may disrupt our business, dilute stockholder value, and adversely affect our operating results.
A component of our business plan is to acquire businesses and assets in the biometric and identity access management industry. There can be no assurance that we will be able to identify, acquire or profitably manage businesses or successfully integrate acquired businesses into the Company without substantial costs, delays or other operational or financial problems. Such acquisitions also involve numerous operational risks, including:
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difficulties in integrating operations, technologies, services and personnel;
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the diversion of financial and management resources from existing operations;
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the risk of entering new markets;
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difficulties in retaining the existing customers;
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the potential loss of existing or acquired strategic operating partners following an acquisition;
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the potential loss of key employees following an acquisition and the associated risk of competitive efforts from such departed personnel;
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assumed or unforeseen liabilities that arise in connection with the acquired business
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possible legal disputes with the acquired company following an acquisition; and
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the inability to generate sufficient revenue to offset acquisition or investment costs.
As a result, if we fail to properly evaluate and execute any acquisitions or investments, our business and prospects may be seriously harmed.
To the extent we make any material acquisitions, our earnings may adversely affected by non-cash charges relating to the amortization of intangible assets.
Under applicable accounting standards, purchasers are required to allocate the total consideration paid in a business combination to the identified acquired assets and liabilities based on their fair values at the time of acquisition. The excess of the consideration paid to acquire a business over the fair value of the identifiable tangible assets acquired must be allocated among identifiable intangible assets including goodwill. The amount allocated to goodwill is not subject to amortization. However, it is tested at least annually for impairment. The amount allocated to identifiable intangible assets, such as customer relationships and the like, is amortized over the life of these intangible assets. We expect that this will subject us to periodic charges against our earnings to the extent of the amortization incurred for that period. Because our business strategy focuses, in part, on growth through acquisitions, our future earnings may be subject to greater non-cash amortization charges than a company whose earnings are derived solely from organic growth. As a result, we may experience an increase in non-cash charges related to the amortization of intangible assets acquired in our acquisitions. Our financial statements will show that our intangible assets are diminishing in value, even if the acquired businesses are increasing (or not diminishing) in value.
RISKS RELATED TO OUR COMMON STOCK
We have issued a substantial number of options and warrants exercisable into shares of our common stock which could result in substantial dilution to the ownership interests of our existing stockholders.
As of the date of this report, approximately 4,902,000 shares of our common stock were reserved for issuance upon exercise or conversion of outstanding stock options and warrants. The exercise or conversion of these securities will result in a significant increase in the number of outstanding shares and substantially dilute the ownership interests of our existing stockholders.
An active trading market for our common stock may not be sustained.
Although our common stock is listed on the Nasdaq Capital Market, an active trading market for our shares may not be developed and if developed, sustained. If an active market for our common stock is not developed or sustained, it may be difficult for you to sell your shares without depressing the market price for the shares or sell your shares at all. Any inactive trading market for our common stock may also impair our ability to raise capital to continue to fund our operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.
If we fail to comply with the continued minimum closing bid requirements of the Nasdaq or other requirements for continued listing, our Common Stock may be delisted and the price of our Common Stock and our ability to access the capital markets could be negatively impacted.
Our common stock is listed for trading on Nasdaq. We must satisfy Nasdaq’s continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share and minimum stockholders’ agreement. A delisting of our common stock from Nasdaq could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our Common Stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees and fewer business development opportunities.
We may need to raise additional funds in the future through issuances of securities and such additional funding may be dilutive to stockholders or impose operational restrictions.
We may need to raise additional capital in the future to help fund our operations through sales of shares of our common stock or securities convertible into shares of our common stock, as well as issuances of debt. Such additional financing may be dilutive to our stockholders, and debt financing, if available, and may involve restrictive covenants which may limit our operating flexibility. If additional capital is raised through the issuance of shares of our common stock or securities convertible into shares of our common stock, the percentage ownership of existing stockholders will be reduced. These stockholders may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.
Because we do not expect to pay dividends for the foreseeable future, investors seeking cash dividends should not purchase our shares of common stock.
We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. Accordingly, investors seeking cash dividends should not purchase shares of our common stock.
Provisions of our certificate of incorporation, bylaws and Delaware law may make a contested takeover of our Company more difficult.
Certain provisions of our certificate of incorporation, bylaws and the General Corporation Law of the State of Delaware (“DGCL”) could deter a change in our management or render more difficult an attempt to obtain control of us, even if such a proposal is favored by a majority of our stockholders. For example, we are subject to the provisions of the DGCL that prohibit a public Delaware corporation from engaging in a broad range of business combinations with a person who, together with affiliates and associates, owns 15% or more of the corporation’s outstanding voting shares (an “interested stockholder”) for three years after the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Our certificate of incorporation also includes undesignated preferred stock, which may enable our board of directors to discourage an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise. Finally, our bylaws include an advance notice procedure for stockholders to nominate directors or submit proposals at a stockholders meeting. Delaware law and our charter may, therefore, inhibit a takeover.
The trading price of our common stock may be volatile.
The trading price of our shares has from time to time fluctuated widely and in the future may be subject to similar fluctuations. The trading price may be affected by a number of factors including the risk factors set forth in this Annual Report on Form 10-K as well as our operating results, financial condition, announcements of innovations or new products by us or our competitors, general conditions in the biometrics and access control industries, and other events or factors. We cannot assure you that any of the broker-dealers that currently make a market in our common stock will continue to serve as market makers or have the financial capability to stabilize or support our common stock. A reduction in the number of market makers or the financial capability of any of these market makers could also result in a decrease in the trading volume of and price of our shares. In recent years broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. Such broad market fluctuations may adversely affect the future-trading price of our common stock.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTY
We do not own any real estate. We conduct operations from leased premises in Eagan, Minnesota (5,544 square feet), Bedford, New Hampshire (3,364 square feet), and Wall, New Jersey (4,517 square feet). Internationally, we conduct operations from leased premises in Tsuen Wan, Hong Kong (1,098 square feet), in Jiangmen, China (3,267 square feet) and in Madrid, Spain (459 square feet). Our Eagan, Minnesota and Bedford, New Hampshire offices provide research and development, and customer support, for BIO-key software and PistolStar software, respectively. Our Wall, New Jersey location serves as our corporate headquarters. Our Hong Kong location is a small warehouse for finished goods as well as administrative and sales support. Our Jiangmen, China facility provides our hardware research and development, contract manufacturing and warehousing of raw materials, work-in-process, and finished goods. Our Madrid, Spain office serves as our sales organization for Europe, the Middle East, and parts Africa.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this report, we are not a party to any pending lawsuit.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock currently trades on the Nasdaq Capital Market under the symbol “BKYI”.
Holders
As of March 29, 2022, the number of stockholders of record of our common stock was 126.
Dividends
We have not paid any cash dividends on our common stock to-date and have no intention of paying any cash dividends on our common stock in the foreseeable future. The declaration and payment of dividends on our common stock is also subject to the discretion of our Board of Directors and certain limitations imposed under the Delaware General Corporation Law. The timing, amount, and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors.
Securities Authorized for Issuance under Equity Compensation Plans
For information on securities authorized for issuance under the Company’s equity compensation plans, see “Item 12 - Security Ownership of Certain Beneficial Owners and Related Stockholder Matters.”
Unregistered Sales of Equity Securities
There were no unregistered sales of the Company’s equity securities during 2021 that were not previously disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.
Rule 10b-18 Transactions
None.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. RESERVED
Not Applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other parts of this Report contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in the section captioned “RISK FACTORS” in Item 1A and elsewhere in this Report.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help you understand our Company. This discussion is provided as a supplement to and should be read in conjunction with our consolidated financial statements for the years ended December 31, 2021 and 2020 and the accompanying notes included elsewhere in this Report.
Effective November 20, 2020, we implemented a reverse stock split of our outstanding common stock at a ratio of 1-for-8. All share figures are reflected on a post-split basis.
Overview
We are a leading identity access management (IAM) platform provider for the enterprise and large-scale customer and civil ID solutions. Built to leverage BIO-key’s world-class biometric core platform among 16 other strong authentication factors, BIO-key PortalGuard and hosted PortalGuard IDaaS are platforms that enable our customers to securely and easily assure that only the right people can access the right systems. PortalGuard goes beyond traditional multifactor authentication (MFA) solutions by addressing sizeable gaps, such as allowing roving users to biometrically authenticate at any workstation without using their phones or tokens, eliminating unauthorized account delegation, detecting duplicate users, and accommodating in-person identification.
Millions of people use BIO-key every day to securely access a variety of cloud, mobile and web applications, on-premise and cloud-based servers from all of their devices. Employees, contractors, students and faculty sign in through PortalGuard to seamlessly and securely access the applications they need to do their important work, without relying on personal phone use or per-user tokens. Organizations use our platform to securely collaborate with their supply chain and partners, and to provide their customers with flexible, resilient user experiences online or in-person.
Large-scale customer and civil ID customers use our scalable biometric management platform and FBI-certified scanner hardware to manage enrollment, de-duplication and authentication for millions of users. One large bank has enrolled and identifies over 19 million of their customers in branches on a daily basis.
We sell our branded biometric and FIDO authentication hardware as accessories to our IAM platforms, so that customers can have a single vendor providing all components of their IAM solution. We do not mandate the use of BIO-key hardware with our software and services. Our NIST-certified fingerprint biometric platform is unique in that it supports interoperable mixing and matching combinations of different manufactures’ fingerprint scanners in a deployment, so that the right scanner can be selected for the right use case, without mandating the user of a particular scanner.
Security-conscious software developers leverage our platform APIs and federation interfaces to securely and efficiently embed biometric and MFA identity capabilities into their software. Our approach to IDaaS allows our customers to efficiently scale their security and identity infrastructures to protect both internal cloud workforce- and external customer-facing applications.
We operate a SaaS business model with customers subscribing to term use of our software for annual recurring revenue. We sell our products directly through our field and inside sales teams, as well as indirectly through our network of channel partners including resellers, system integrators, master agents and other distribution partners. Our subscription fees include a term license of hosted or on-premise product and technical support and maintenance of our platform. We base subscription fees primarily on the products used and the number of users enrolled in our platform. We generate subscription fees pursuant to noncancelable contracts with a weighted average duration of approximately one year.
PortalGuard is used by our customers to manage and secure IT access by their employees, contractors and partners, which we call workforce identity. PortalGuard is also used to manage and secure the identities of an organization’s customers through integration of APIs we have developed and industry-standard federation standards, which we call customer identity. We invoice customers in advance in annual and multi-year prepaid installments for subscriptions to our platforms.
Strategic Outlook
Historically, our largest market has been access control within highly regulated industries such as government, financial services, and healthcare. In 2019 we became the go-to biometric authentication provider for board of election offices which continue to deploy our hardware and software to secure internal access to the voter registration database. We have and expect to continue to extend this footprint in 2022 and beyond.
In 2020, we announced that we had secured two contracts with our partner Technology Transfer Institute. The contracts are for large-scale identification projects in Africa and Nigeria. Under the first contract, we will provide biometric authentication to support the infrastructure of a new e-commerce project developed with the expectation to generate more than one million jobs in Nigeria. The second contract provides for BIO-key hardware and software to be used by a leading African telecommunications company to secure internal access to customer data. Currently Africa and the surrounding regions are receiving government funding to expand the use of biometric authentication solutions to help establish trustworthy government programs and reduce fraud. We received our first purchase order related to these contracts in the fourth quarter of 2020 which we shipped in the first quarter of 2021. The COVID-19 pandemic has and may continue to delay the rollout of these programs.
We plan to have a more significant role in the IAM market which continues to expand. We plan to offer customers a suite of authentication options that complement our biometric solutions. The more well-rounded offerings of authentication options will allow customers to customize their approach to authentication all under one umbrella.
We expect to grow our business within government services and highly-regulated industries in which we have historically had a strong presence including financial services, higher education, and healthcare. We believe that continued heightened security and privacy requirements in these industries, and as colleges and universities continue operating in remote environments, we will generate increased demand for security solutions, including biometrics. In addition, we expect that the compatible, yet superior portable biometric user experience offered by our technology for Windows 10 users will accelerate the demand for our computer network log-on solutions and fingerprint readers. Through value add-offerings via direct sales, resellers, and strategic partnerships with leading higher education platform providers, we will continue to grow our installed base.
Our primary sales strategies are focused on (i) increased marketing efforts into the IAM market, (ii) dedicated pursuit of large-scale identification projects across the globe and (iii) growing our channel alliance program which we have grown to more than one hundred and fifty participants and continues to generate incremental revenues.
A second component of our growth strategy is to pursue strategic acquisitions of select businesses and assets in the IAM space. In furtherance of this strategy, we are active in the industry and regularly evaluate businesses that we believe will either provide an entry into new market verticals or be synergistic with our existing operations and in either case, be accretive to earnings. We cannot provide any assurance as to whether we will be able to complete any acquisition and if completed, successfully integrate any business we acquire into our operations.
Recent Developments
As discussed under “Item 1A. Risk Factors” given the uncertainty of the duration and severity of the current COVID-19 pandemic and the conflict between Ukraine and Russia and their effects on our business operations, sales cycles, personnel, and the geographic markets in which we operate, and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature, the related financial impact cannot be reasonably estimated at this time.
The complications caused by COVID-19 has forced organizations to quickly adapt to a work from home remote business model. This increases the risk of unauthorized users, phishing attacks, and hackers who are eager to take advantage of the challenges of securing remote workers. We believe that biometrics should continue to play a key role in remote user authentication.
On March 8, 2022, we expanded our sales and support operation into Europe, Africa and the Middle East (“EMEA”) by acquiring Swivel Secure Europe, SA for up to $2.25 million. Swivel Secure Europe is a Madrid, Spain based provider of IAM solutions serving over 300 customers through a network of channel partners throughout EMEA. Swivel Secure the exclusive distributer of AuthControl Sentry, AuthControl Enterprise and AuthControl MSP product line in Europe, Middle East, and Africa, excluding the United Kingdom. Swivel Secure maintains a direct sales force with offices in Madrid, Spain and Lisbon, Portugal. There can be no assurance that we will be able to manage Swivel Secure Europe, SA’s business or successfully integrate the business with our historic operations without substantial costs, delays or other operational or financial problems.
RESULTS OF OPERATIONS
Consolidated Results of Operations
Two Year % trend
Years ended
December 31,
Revenues
Services
%
%
License fees
%
%
Hardware
%
%
%
%
Costs and other expenses
Cost of services
%
%
Cost of license fees
%
%
Cost of hardware
%
%
%
%
Gross Profit
%
%
Operating expenses
Selling, general and administrative
%
%
Research, development and engineering
%
%
Total operating expenses
%
%
Operating loss
%
%
Other income (expense)
Total other income (expense)
%
%
Net loss
%
%
Revenues and Costs and other expenses
2021 - 2020
$ Chg
% Chg
Revenues
Services
$ 1,273,354
$ 1,432,228
$ (158,874 )
%
License fees
2,555,809
962,038
1,593,771
%
Hardware
1,285,326
442,516
842,810
%
Total Revenue
$ 5,114,489
$ 2,836,782
$ 2,277,707
%
Costs and other expenses
Services
$ 686,175
$ 502,214
$ 183,961
%
License fees
183,199
49,891
133,308
%
Hardware
803,555
242,721
560,834
%
Total Costs and other expenses
$ 1,672,929
$ 794,826
$ 878,103
%
Revenues
Revenue increased $2,277,707 or 80% to $5,114,489 in 2021 as compared to $2,836,782 in 2020 due to the factors stated below.
For the years ended December 31, 2021, and 2020, service revenues included approximately $1,100,000 and $1,383,000, respectively, of recurring maintenance and support revenue, and approximately $173,000 and $49,000, respectively, of non-recurring custom services revenue. Recurring service revenue decreased 20% from 2020 to 2021 due largely to the decreased maintenance as PistolStar acquired customer maintenance agreements expired by June 30, 2021. Non-recurring custom services increased 252% due to increased new customer installations and conversion to the cloud platform. As our customer base continues to grow, we expect the service revenue to increase in future periods.
For the years ended December 31, 2021 and 2020, license revenue increased approximately $1,594,000 or 166% to $2,555,809, due primarily to new customer orders and cloud conversion customers, in addition to existing recurring revenue contracts.
Hardware sales increased by approximately $843,000, or 190%, to $1,285,326 in 2021 from $442,516 in 2020. The increase was attributable largely to sales in Nigeria for an international government agency during the first quarter of 2021.
Costs of goods sold
For the year ended December 31, 2021, cost of service increased approximately 37% to $686,175, due to the increased revenue and the direct support for the PortalGuard installations.
License costs for the year ended December 31, 2021 increased $133,308, or approximately 267%, to $183,199 related to increased license revenue and the resale of associated third party software.
Hardware costs for the year ended December 31, 2021 increased $560,834, or approximately 231%, to $803,555. The increase was associated with the increased hardware sales and hardware mix.
Selling, general and administrative
2021 - 2020
$ Chg
% Chg
$ 6,028,360
$ 5,848,687
$ 179,673
%
Selling, general and administrative costs for year ended December 31, 2021 were $6,028,360 representing 3% increase from 2020. The increase included higher administrative personnel expenses, marketing expenses, Delaware franchise taxes, and bad debt expense related to the reserve on the note receivable of $100,000 and an allowance for doubtful accounts of $200,000. These were offset by lower factoring fees, contract and temporary labor, non-cash compensation, the absence of one-time expenses incurred in 2020 for integration costs incurred in connection the acquisition of Pistol Star, as well as accounting and legal fees.
Research, development and engineering
2021 - 2020
$ Chg
% Chg
$ 2,355,056
$ 1,396,436
$ 958,620
%
For the year ended December 31, 2021, research, development and engineering costs were $2,355,056 representing a 69% increase over 2020. Included in the increase were personnel costs associated with PistolStar, new hires and recruiting fees, increased professional fees, and increased amortization of intangible assets acquired from PistolStar. These amounts were offset by a decrease and non-cash compensation.
Other income (expense)
2021 - 2020
$ Chg
% Chg
Interest income
4,075
30,649
(26,574 )
%
Foreign currency loss
(50,000 )
-
50,000
N/A
Investment-debt security reserve
(60,000 )
-
60,000
N/A
Government grant - Paycheck Protection Program
-
340,819
(340,819 )
%
Interest expense
(18,000 )
(4,343,212 )
4,325,212
%
Loss of extinguishment of debt
-
(499,076 )
499,076
%
$ (123,925 )
$ (4,470,820 )
$ 4,346,895
%
Other expense for 2021 consisted of interest expense from the amortization of debt discounts of $18,000, a reserve on the investment-debt security as adjustment for collections of such security of $60,000, and a foreign currency adjustment to an accounts receivable invoice of $50,000, offset by interest income of $4,075. Interest expense for 2020 related to the amortization of debt discounts and debt issuance costs relating to convertible notes of approximately $3,574,000, as well as the amortization of a beneficial conversion feature of approximately $641,000. Also included in other income (expense) for 2020 was a loss on the extinguishment of a convertible note in the approximate amount of $500,000 resulting from the issuance of an amended and restated convertible note, for which the issuer did not grant a concession. These amounts were partially offset by amounts received under the Payment Protection Program (the “Program”) the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration of approximately $341,000 and interest income of approximately $31,000.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities overview
Net cash used for operations during the year ended December 31, 2021 was approximately $8,942,000. Items of note included:
●
Net positive cash flows related to non-cash expenses of approximately $1,367,000.
●
Net negative cash flows related to changes in accounts receivable, prepayments, inventory, accruals, lease liabilities, and deferred revenue in the aggregate amount of approximately $5,601,000 and our net loss for the period.
Investing activities overview
Approximately $42,000 was used for investing in capital expenditures during the year ended December 31, 2021.
Financing activities overview
Approximately $219,000 was used in financing activities during the year ended December 31, 2021 consisting of repayment of notes payable, and costs associated with the issuance of our securities, net of proceeds from common stock sold to employees under the Company's employee stock purchase plan.
Sources of Liquidity
Since our inception, our capital needs have been principally met through proceeds from the sale of equity and debt securities. We expect capital expenditures to be less than $100,000 during the next twelve months.
The following sets forth our primary sources of capital during the previous two years:
We entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to October 31, 2022 and may be discontinued at that time. Pursuant to the terms of the arrangement, from time to time, we sell to the Factor a minimum of $150,000 per quarter of certain of our accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 35% of the foreign and 75% of the domestic accounts receivable balance to us (the “Advance Amount”), with the remaining balance, less fees, forwarded to us once the Factor collects the full accounts receivable balance from the customer. In addition, from time to time, we receive over advances from the Factor. Factoring fees range from 2.75% to 15% of the face value of the invoice factored and are determined by the number of days required for collection of the invoice. We expect to continue to use this factoring arrangement periodically to assist with our general working capital requirements due to contractual requirements.
On April 20, 2020, we entered into a Paycheck Protection Program Term Note (the “SVB Note”) with Silicon Valley Bank (“SVB”) pursuant to the Program. We received total proceeds of approximately $341,000 which was used in accordance with the requirements of the CARES Act. The full amount of the SVB Note was forgiven.
On July 23, 2020, we completed an underwritten public offering of shares of common stock and warrants resulting in net proceeds of approximately $22.7 million, inclusive of the over-allotment and after deducting underwriting discounts and commissions and estimated offering expenses. We used approximately $4.2 million of the net proceeds to repay all outstanding amounts due under outstanding convertible promissory notes at that time.
Liquidity Outlook
At December 31, 2021, our total cash and cash equivalents were approximately $7,800,000, as compared to $16,993,096 at December 31, 2020. At December 31, 2021, we had working capital of approximately $12,013,000.
As discussed above, we have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. We currently require approximately $735,000 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation. During 2021, we generated approximately $5,114,000 of revenue, which is below our average monthly requirements. We expect that Swivel Secure Europe will generate positive cash flow in 2022. If we are unable to generate sufficient revenue to fund current operations and execute our business plan, we may need to obtain additional third-party financing. As of the date of this report, we do not expect that we will need to obtain additional financing during the next twelve months.
Our long-term viability and growth will depend upon the successful commercialization of our technologies and our ability to obtain adequate financing. To the extent that we require such additional financing, no assurance can be given that any form of additional financing will be available on terms acceptable to us, that adequate financing will be obtained to meet our needs, or that such financing would not be dilutive to existing stockholders. If available financing is insufficient or unavailable or we fail to continue to generate sufficient revenue, we may be required to further reduce operating expenses, delay the expansion of operations, be unable to pursue merger or acquisition candidates, or in the extreme case, not continue as a going concern.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or, are in the opinion of management reasonably likely to have, a current or future effect on our financial condition or results of operations.
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions. There have been no material changes to these estimates for the periods presented in this Annual Report on Form 10-K.
We believe that of our significant accounting policies, which are described in Note A of the notes to our consolidated financial statements included in this Annual Report on Form 10-K, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations, as listed below:
1. Revenue Recognition
2. Business Combinations
3. Goodwill and acquired intangible assets
4. Impairment or Disposal of Long Lived Assets, including Intangible Assets
5. Research and Development Expenditures
6. Income Taxes
7. Accounting for Stock-Based Compensation

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements appearing at pages 37-64 of this Annual Report on Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2021, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO and CFO, we have conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021, based upon the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2021.
As we are a smaller reporting company, this annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following sets forth certain information about each director and executive officer of the Company.
NAME
AGE
POSITIONS HELD
Michael W. DePasquale
Chairman of the Board of Directors and Chief Executive Officer
Thomas E. Bush, III (a)* (c)
Director
Robert J. Michel (a) (b)*
Director
Thomas Gilley (c)*
Director
Wong Kwok Fong (Kelvin)
Director and Vice-Chairman of the Board of Directors
Pieter Knook (b)
Director
Emmanual Alia (Manny) (b)
Director
Cecilia C. Welch
Chief Financial Officer
Mira K. LaCous
Chief Technology Officer
James D. Sullivan
Vice President of Strategy and Compliance, Chief Legal Officer
(a)
Compensation Committee Member
(b)
Audit Committee Member
(c)
Nominating Committee Member
*
Indicates chair of committee
Set forth below is a brief description of the background and business experience of our directors and executive officers for the past five years.
Directors
Michael W. DePasquale has served as our Chief Executive Officer and a Director since January 3, 2003, and Chairman of the Board since January 29, 2014. He served as Co-Chief Executive Officer of the Company from July 2005 to August 2006. Mr. DePasquale brings more than 30 years of executive management, sales and marketing experience to the Company. Prior to joining us, Mr. DePasquale served as the President and Chief Executive Officer of Prism eSolutions, Inc., a Pennsylvania-based provider of professional consulting services and online solutions for ISO-9001/14000 certification for customers in manufacturing, healthcare and government markets, since February 2001. From December 1999 through December 2000, Mr. DePasquale served as Group Vice President for WRC Media, a New York-based distributor of supplemental education products and software. From January 1996 until December 1999, Mr. DePasquale served as Senior Vice President of Jostens Learning Corp., a California-based provider of multimedia curriculum. Prior to Jostens, Mr. DePasquale held sales and marketing management positions with McGraw-Hill and Digital Equipment Corporation. Mr. DePasquale earned a Bachelor of Science degree from the New Jersey Institute of Technology. He serves as the Vice Chairman on the Board of Directors of the International Biometrics and Identification Industry Association. We believe Mr. DePasquale’s qualifications to sit on the board of directors include his extensive executive management experience in the technology sector and biometric industry expertise which strengthen the board’s collective qualifications, skills and experience.
Thomas E. Bush, III has served as a Director of the Company since January 29, 2014. Since 2009, Mr. Bush has provided business consulting services through his firm, Tom Bush Consulting. Prior to that, Mr. Bush served with the Federal Bureau of Investigation for over 33 years. Mr. Bush joined the FBI in September 1975, ultimately becoming the Director of the CJIS division, with over 2,500 employees and a budget of approximately one billion dollars. Mr. Bush is known for providing critical services in support of the criminal justice community, including two significant IT projects, Next Generation Identification and N-Dex, which were awarded by CJIS during his tenure at the FBI. Mr. Bush has received many awards during his career, most notably a Presidential Rank Award for Meritorious Service in 2007. We believe Mr. Bush’s qualifications to sit on the board of directors include his extensive experience in law enforcement, security matters, and the use of biometric technologies in the government sector, which provide the board with a unique perspective on security and public sector matters.
Robert J. Michel has served as a Director of the Company since April 10, 2017. He has over 30 years of accounting and financial management experience. Since September, 2018, he has served as the Chief Financial Officer of Daxor Corporation (Nasdaq: DXR), a medical device manufacturing company specializing in blood volume analysis. Prior to Daxor, from November, 2017 until September 2018, Mr. Michel served as the CFO of Roadway Moving, Inc., a transportation, moving and storage company located in New York City. Immediately prior to Roadway Moving, Inc., Mr. Michel served as a consultant with Feuer & Orlando, LLP, a New York City based CPA firm, from May, 2016 until November 2017. From 2009 until March, 2016, Mr. Michel was the Chief Financial Officer of Asta Funding, Inc. (Nasdaq: ASFI), a diversified financial services company where he was responsible for all financial matters and SEC reporting. From 2004 until 2009, Mr. Michel served as the Controller and the Director of Financial Reporting and Compliance for Asta Funding. Mr. Michel is a certified public accountant, earned a MBA in Taxation from St. John’s University, and a BS in Business Administration from Villanova University. Mr. Michel gained his public accounting experience at PricewaterhouseCoopers in New York. We believe Mr. Michel’s qualifications to sit on the board of directors include his substantial experience in accounting and financial management for public companies which provide the board with a deep knowledge of financial and SEC reporting and strengthen the board’s collective qualifications, skills, and experience.
Thomas Gilley has served as a Director of the Company since January 29, 2014. Mr. Gilley is an entrepreneur, investor and advisor in the connected product Internet of Things (IoT) industry with 37 patents. Since founding his Enterprise Software IoT company in 2012 and selling it in 2016, Mr. Gilley invests in technology companies, serves as growth strategy advisor, and independent board member to companies in the connected industry. Mr. Gilley was previously employed at Apple Computer, in the Advance Technology Group, Portable Products Group and Strategy Advisor. Before and after Apple, Mr. Gilley founded several successful companies including PicoStar, a Silicon Valley incubator-technology investment company, and an on-demand web media company he sold to Vignette. Mr. Gilley acted as CTO throughout the transaction until the company’s ultimate acquisition by OpenText. We believe Mr. Gilley’s qualifications to sit on the board of directors include his substantial experience in starting, operating and financing technology companies which provides the board with a deep knowledge of the sales and development cycles applicable to growth businesses in the technology industry.
Wong Kwok Fong (Kelvin) has served as a Director of the Company since December 4, 2015, as Managing Director of our Hong Kong Subsidiary since August 2016, and as Vice-Chairman of the Board of Directors since March 2019. He is the co-founder of China Goldjoy Group (previously World Wide Touch Technology Holdings Limited), a company listed on The Stock Exchange of Hong Kong. From 1997 until August, 2015, Mr. Wong served as the Chairman of China Goldjoy Group and served as its Chief Technology Officer through October 2016. During this time, Kelvin played a significant role in the substantial growth of the business. Kelvin brings over 20 years of senior management experience in manufacturing, supply chain, and marketing functions in the electronics and technology industries, including establishing manufacturing plants in Hong Kong and China, and building an extensive network in the electronics and technology industries. We believe Kelvin’s qualifications to sit on the board of directors include his substantial experience in the technology industry, including biometrics and payment systems, and serving the Asian markets, which broaden and strengthen the board’s collective qualifications, skills, and experience.
Pieter Knook, has served as a Director of the Company since May 2, 2016. Mr. Knook has over 30 years of experience in mobility and software technology in Europe, Asia and the United States. Since 2010, Mr. Knook has served on the boards of a number of private equity backed and publicly traded early stage technology companies, including Altitude Angel in Reading, the London Internet Exchange, BroadHorizon in the Netherlands and Telenor in Norway. Mr. Knook served as the Director of Internet Services at Vodafone Group in London from March 2008 through October 2010. Prior to joining Vodafone, Mr. Knook spent 18 years at Microsoft. As President of Microsoft Asia from 1997 to 2001, Mr. Knook led the company’s efforts in opening and expanding Asian markets. He subsequently served as Senior Vice President of Microsoft’s mobile communication business from 2001 through 2008. We believe Mr. Knook’s qualifications to sit on the board of directors include his extensive technology industry experience, which further broaden and strengthen the board’s collective qualifications, skills, and experience.
Emmanual Alia (Manny), was appointed Director of the Company on April 3, 2020. Since 2018 Mr. Alia has been providing management consulting services as an advisor to businesses seeking market entry strategies to emerging markets such as Africa and the Caribbean. From 2011 to 2018, Mr. Alia served as an Executive Director at the Corporate and Investment division of JPMorgan, and as a Senior Vice-President at CHASE Bank’s Consumer and Community Banking specializing in the financial and banking services industry and opportunities in Africa. During Mr. Alia’s tenure with JPMorgan, he served as head of WholeSale Operations in the Receivables Operations of the Global banking operations in the US and Canada, head of Retail Banking in the Greater Detroit area, and head of branches in the New York and New Jersey areas. For two years Mr. Alia was co-chair of the Black Organizational Leadership Development, an employee networking group in JPMorgan that works with firm’s leadership to strengthen the firm’s message, strategies and community outreach globally. Mr. Alia received a Bachelor of Arts in Accounting from SouthEastern University and a Master’s of Business Administration (MBA) from Cornell University. We believe Mr. Alia’s qualifications to sit on the board of directors include his extensive industry experience and connection and networking abilities in the African communities and markets which further broaden and strengthen the board’s collective qualifications, skills, and experience.
Non-director Executive Officers
Cecilia C. Welch has served as the Chief Financial Officer of the Company since December 21, 2009. Ms. Welch joined the Company in 2007 as Corporate Controller. Prior to joining the Company, from January 2006 to December 2006, she was the Controller for Savaje Technologies (acquired by Sun Microsystems), a developer of advanced mobile telephone software. From October 2004 to January 2006, she was Controller for Crystal Systems, a manufacturer of sapphire crystals used for industrial, semiconductor, defense, and medical applications. From December 1988 to July 2004, she was the Controller for ATN Microwave (acquired by Agilent Technologies), a manufacturer of automated test equipment. Ms. Welch has a Bachelor’s degree in Accounting from Franklin Pierce University.
Mira K. LaCous has served as Chief Technology Officer of the Company since March 13, 2014. Prior to her appointment as Chief Technology Officer, she served as Senior Vice President of Technology & Development since 2012, and as our Vice President of Technology and Development since 2000. Ms. LaCous has over 35 years of product/project management, solution architecture, software development, team leadership and customer relations experience, with a background that includes successfully bringing numerous innovative products and technologies to market, including automated voice response systems, automated building control systems, software piracy protection, internet training materials and testing, page layout and design software, image scanning software and systems, biometric security systems, automated national ID systems using biometrics, and biometric algorithms. Ms. LaCous has been a speaker at multiple events/conferences and has worked with teams around the globe bringing biometric technology deployments to life. Ms. LaCous is the author of eight (8) US patented technologies, multiple international patents and lead the engineering team in developing other patents and inventive technologies. Ms. LaCous has a Bachelor’s in Computer Science, with mathematics and physics from North Dakota State University.
James D. Sullivan has served as BIO-key’s Senior Vice President of Strategy and Compliance and BIO-key’s Chief Legal Officer since February 2020, as Senior Vice President of Strategy and Business Development from April 2012 through December 2018, and the dual role as Senior Vice President of Global Sales from August 2015 through December of 2016. Mr. Sullivan is a recognized expert in biometric authentication, cyberlaw and privacy for consumer and mobile applications. During over 18 years with the Company, Mr. Sullivan has directly worked with dozens of the Company’s customers, including AT&T, Israel Defense Forces, LexisNexis, NCR and Omnicell, as well as large-scale biometric-centered identity management projects that interface daily with millions of corporate and consumer users. Mr. Sullivan earned a Juris Doctor cum laude from Georgia State University College of Law, is a member of the Georgia Bar, and enrolled to practice before the IRS. Mr. Sullivan has an undergraduate degree in Computer Science from Brown University and has over 25 years of experience in IT projects and implementation, including directly working with security and identity management solutions at the Company, Computer Associates, Platinum Technology, and Memco Software.
Committees of the Board of Directors
Audit Committee
Our audit committee is comprised of Robert J. Michel (Chair), Pieter Knook, and Emmanual Alia, all of whom meet the independence standards for purposes of serving on an audit committee established by NASDAQ and under the Exchange Act. Our audit committee (i) assists the board of directors in its oversight of the integrity of our financial statements, compliance with legal and regulatory requirements, and corporate policies and controls, (ii) has the sole authority to retain and terminate our independent registered public accounting firm, approve all auditing services and related fees and the terms thereof, and pre-approve any non-audit services to be rendered by our independent registered public accounting firm, and (iii) is responsible for confirming the independence and objectivity of our independent registered public accounting firm. Our independent registered public accounting firm has unrestricted access to our audit committee. Our board of directors has determined that Robert J. Michel qualifies as an “audit committee financial expert,” as such term is defined in Item 407 of Regulation S-K.
Our audit committee operates under a written charter that is reviewed annually. The charter is available on our website at www.bio-key.com.
Compensation Committee
Our compensation committee is comprised of Thomas Bush, III (Chair) and Robert Michel, both of whom meet the independence standards established by NASDAQ and under the Exchange Act. The compensation committee’s duties include overseeing our overall compensation philosophy, policies and programs. This includes reviewing and analyzing the design and function of our various compensation components, establishing salaries, incentives and other forms of compensation for officers and non-employee directors, and administering our equity incentive plan. In fulfilling its responsibilities, the compensation committee has the authority to delegate any or all of its responsibilities to a subcommittee of the compensation committee.
Our compensation committee operates under a written charter that is reviewed annually. The charter is available on our website at www.bio-key.com.
Code of Ethics
We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Our Code of Ethics is designed to deter wrongdoing and promote: (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in our other public communications; (iii) compliance with applicable governmental laws, rules, and regulations; (iv) the prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and (v) accountability for adherence to the code. We intend to disclose amendments or waivers of the Code of Ethics on our website within four business days. Any person may obtain a copy of our Code of Ethics free of charge by sending a written request for such to the attention of the Chief Financial Officer of the Company, 3349 Highway 138, Building A Suite E, Wall, NJ 07719.
Term of Office
Our directors are elected at the annual meeting of stockholders and hold office until the annual meeting of the stockholders next succeeding his or her election, or until his or her prior death, resignation or removal in accordance with our bylaws. Our officers are appointed by the Board and hold office until the annual meeting of the Board next succeeding his or her election, and until his or her successor shall have been duly elected and qualified, subject to earlier termination by his or her death, resignation or removal.
Delinquent Section 16(a) Reports
Reports of all transactions in our common stock by officers, directors and ten percent (10%) stockholders are required to be filed with the SEC pursuant to Section 16(a) of the Exchange Act. Based solely on our review of copies of the reports received, or representations of such reporting persons, we believe that during the year ended December 31, 2021, all Section 16(a) filing requirements applicable to our officers, directors and ten percent (10%) stockholders were satisfied in a timely fashion, except for one late Form 4 filing by Mr. Sullivan reporting an open market purchase.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid to or accrued by our chief executive officer and the two most highly compensated executive officers other than our chief executive officer, for the fiscal years ended December 31, 2021 and 2020:
SUMMARY COMPENSATION TABLE
Name and Principal
Position
Fiscal
Year
Salary
($)
Bonus
($)
Stock
Awards
($) (1)
All Other
Compensation
($) (2)
Total
($)
Michael W. DePasquale
275,000
-
-
1,944
276,944
Chief Executive Officer
275,000
50,000
21,450
2,219
348,669
Mira K. LaCous
216,333
-
-
3,092
219,425
Chief Technology Officer
213,000
-
21,450
2,493
236,943
James Sullivan
225,000
-
-
10,241 (3)
235,241
Chief Legal Officer
150,000
35,000
21,450
137,238 (4)
343,688
(1)
The aggregate grant date fair value of the restricted shares is calculated by the multiplying the quantity of shares issued by the closing trading price of the shares on the date of issuance calculated under FASB ASC 718.
(2)
Consists of life insurance premiums paid by the Company except as otherwise noted.
(3)
(4)
Consists of $8,987 of sales commissions and $1,254 of life insurance premiums paid by the Company.
Consists of $135,383 of sales commissions and $1,855 of life insurance premiums paid by the Company.
Narrative Disclosure to Summary Compensation Table
Compensation for our executives is comprised of three main components: base salary, annual performance-based cash bonus, and long-term equity awards. We do not target a specific weighting of these three components or use a prescribed formula to establish pay levels. Rather, the board of directors and compensation committee considers changes in the business, external market factors and our financial position each year when determining pay levels and allocating between long-term and current compensation for the named executive officers.
Cash compensation is comprised of base salary and an annual performance-based cash bonus opportunity. The compensation committee generally seeks to set a named executive officer’s targeted total cash compensation opportunity within a range that is the average of the applicable peer company and/or general industry compensation survey data, adjusted as appropriate for individual performance and internal pay equity and labor market conditions.
In setting cash compensation levels, we favor a balance in which base salaries are generally targeted at slightly below the peer average and a bonus opportunity that is targeted at slightly above the average. The base salary of our CEO has not been increased since 2018. Effective January 1, 2021, we increased the base salary of Mr. Sullivan to $225,000 to compensate for the fact that in connection with his promotion to Chief Legal Officer, he would be limited to sales commissions on only three of his existing long term accounts.
Performance-based bonuses have historically been based upon the achievement of certain revenue milestones established by the compensation committee. The committee believes that this higher emphasis on performance-based cash bonuses places an appropriate linkage between a named executive officer’s pay, his or her individual performance, and the achievement of specific business goals by placing a higher proportion of annual cash compensation at risk, thereby aligning executive opportunity with the interests of stockholders.
In 2020, due to extraordinary efforts in maintaining operations during the pandemic, acquiring PistolStar, and the completing an underwritten public offering, Mr. DePasquale and Mr. Sullivan were awarded cash bonuses of $50,000 and $35,000, respectively.
We also include an equity component as part of our compensation package because we believe that equity-based compensation aligns the long-term interests of our named executive officers with those of stockholders. In August 2020, we issued 4,125 shares of restricted stock to Mr. DePasquale, Mr. Sullivan, and Ms. LaCous. These shares vest in equal annual installments over a three-year period from the date of grant. We did not issue any stock options or restricted shares to our named executive officers in 2021.
These cash and equity compensation components of pay are supplemented by various benefit plans that provide health, life, accident, disability and severance benefits, most of which are the same as the benefits provided to all of our US based employees.
Employment Agreements
On March 26, 2010, we entered into an employment agreement, effective as of March 25, 2010, with Michael W. DePasquale to serve as our Chief Executive Officer until March 24, 2011. The agreement automatically renews for subsequent one-year terms, unless the employment relationship is terminated by either party, or modified in accordance with the terms and conditions of the agreement. Since 2018, Mr. DePasquale’s annual base salary has been $275,000, subject to adjustment by the compensation committee. In addition to the base salary, a “Performance Bonus” may be awarded to Mr. DePasquale on the basis of the Company achieving certain corporate and strategic performance goals, as determined by the compensation committee in its sole discretion. The employment agreement contains standard and customary confidentiality, non-solicitation and “work made for hire” provisions as well as a covenant not to compete which prohibits Mr. DePasquale from doing business with any current or prospective customer of the Company or engaging in a business competitive with that of the Company during the term of his employment and for the one-year period thereafter. This agreement also contains a number of termination and change in control provisions as described under the captions “Termination Arrangements” and “Change in Control Arrangements” below.
On April 5, 2017, we entered into an employment agreement with James Sullivan. The agreement automatically renews for subsequent one-year terms, unless terminated by the Company upon at least two months prior written notice which is treated as termination without cause. Since 2021, Mr. Sullivan’s annual base salary has been $225,000, subject to adjustment by the compensation committee. The agreement contains standard and customary confidentiality, technical invention provisions as well as non-competition and non-solicitation covenants which prohibit Mr. Sullivan from doing business with any current or prospective customer of the Company or engaging in any business competitive with that of the Company during the term or his employment and for the one-year period thereafter. The agreement also contains a number of termination provisions as described under the caption “Termination Agreements” below.
On November 20, 2001, we entered into an employment agreement with Mira LaCous. The agreement automatically renews for subsequent one-year terms, unless terminated by the Company upon at least one-month prior written notice which is treated as termination without cause and provides for a discretionary bonus which shall not exceed 50% of base salary. The agreement contains standard and customary confidentiality, technical invention provisions as well as non-competition and non-solicitation covenants which prohibit Ms. LaCous from doing business with any current or prospective customer of the Company or engaging in any business competitive with that of the Company during the term or her employment and for the one-year period thereafter. The agreement also contains a number of termination provisions as described under the caption “Termination Agreements” below.
Stock Option Grants and Restricted Stock Awards
In the event of any change in the outstanding shares of our common stock by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the board deems to be similar circumstances, the number and kind of shares subject to outstanding options and restricted stock awards, and the exercise price of such options shall be appropriately adjusted. Restricted Furthermore, option agreements and restricted stock award agreements contain change of control provisions as described under the caption “Change in Control Provisions” below.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
DECEMBER 31, 2021
The following table sets forth for each named executive officer, information regarding outstanding equity awards as at December 31, 2021. The option awards and per share amounts for all periods reflect our 1-for-8 reverse stock split, which was effective November 20, 2020.
Option Awards
Stock Awards
Name
Number of
securities
underlying
unexercised
options
exercisable
(#)
Number of
securities
underlying
unexercised
options
unexercisable
(#)
Option
exercise
price
($)
Option
expiration
date
Number of
shares or
units
of stock that
have not
vested
(#)
Market value
of
shares of
units of
stock that
have not
vested
($)(1)
Michael W. DePasquale
2,605
17.27
8/13/2022
2,750
6,078
31,250
21.20
3/16/2024
4,167
15.68
3/23/2025
2,778
1,389 (2)
9.44
3/21/2026
Mira LaCous
1,042
17.27
8/13/2022
2,750
6,078
12,500
21.20
3/16/2024
1,563
15.68
3/23/2025
1,042
(2)
9.44
3/21/2026
James Sullivan
2,084
17.27
8/13/2022
2,750
6,078
12,500
21.20
3/16/2024
3,125
15.68
3/23/2025
2,084
1,041 (2)
9.44
3/21/2026
(1)
Calculated based on the closing market price of the Company’s common stock on December 31, 2021 of $2.21 per share.
(2)
The options vest equally in three annual installments commencing March 21, 2020.
Narrative Disclosure to Outstanding Equity Awards at Fiscal Year End Table
The following are the material terms of each agreement, contract, plan or arrangement that provide for payments to one or more of our named executive officers at, following or pursuant to their resignation, retirement or termination, or in connection with a change in control of the Company.
Termination Arrangements
We may terminate our employment agreement with Mr. DePasquale at any time with or without cause. In the event of termination by us without cause, we will continue to pay Mr. DePasquale his then current base salary for the greater of nine months from the date of such termination or the number of months remaining until the end of the term of the agreement.
We may terminate our employment agreement with Mr. Sullivan at any time with or without cause. In the event of termination by us without cause, we will continue to pay Mr. Sullivan his then current base salary, plus earned commissions, for the greater of six months from the date of such termination or the number of months remaining until the end of the term of the agreement.
We may terminate our employment agreement with Ms. LaCous at any time with or without cause. In the event of termination by us without cause, we will continue to pay Ms. LaCous her then current base salary for nine months from the date of such termination.
Change in Control Provisions
Our 2015 Equity Incentive Plan (the “Plan”) provides for the acceleration of vesting of unvested options and termination of any restriction or forfeiture provisions applicable to restricted stock awards upon a “Change in Control” of the Company. A Change in Control is defined in the Plans to include (i) a sale or transfer of substantially all of the Company’s assets; (ii) the dissolution or liquidation of the Company; (iii) a merger or consolidation to which the Company is a party and after which the prior stockholders of the Company hold less than 50% of the combined voting power of the surviving corporation’s outstanding securities; (iv) the incumbent directors cease to constitute at least a majority of the Board of Directors; or (v) a change in control of the Company which would otherwise be reportable under Section 13 or 15(d) of the Exchange Act. In the event of a “Change In Control” the Plan provides for the immediate vesting of all options issued thereunder and termination of all forfeiture provisions applicable to restricted stock award issued thereunder. Options issued to executive officers outside of the Plans contain change in control provisions substantially similar to those contained in the Plans.
Our employment agreement with Mr. DePasquale contains a change in control provision that is triggered if Mr. DePasquale is not offered continued employment with us or any successor, or within five years following such Change of Control, we or any successor terminate Mr. DePasquale’s employment without cause. If this occurs, then we will pay Mr. DePasquale his base salary and benefits earned but unpaid through the date of termination, and any prorated bonus earned during the then current bonus year, plus two times his then current base salary.
DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2021
The following table sets forth for each director, information regarding their compensation for the year ended December 31, 2021:
Name (1)
Stock Awards
($) (2)
Total
($)
Thomas E. Bush, III (3)
4,505
4,505
Thomas Gilley (3)
3,505
3,505
Pieter Knook (4)
6,009
6,009
Robert J Michel (4)
6,009
6,009
Emmanual Alia (5)
5,508
5,508
(1)
Mr. DePasquale and Kelvin Wong have been omitted from the above table because they do not receive any additional compensation for serving on our Board of Directors.
(2)
The aggregate fair value of the common stock issued was calculated based on the closing price of our common stock on the date of issuance in accordance with FASB ASC 718.
(3)
At December 31, 2021, Messrs. Bush and Gilley each held options to purchase 2,325 shares of common stock.
(4)
At December 31, 2021, Messrs. Knook and Michel each held options to purchase 2,064 shares of common stock.
(5)
At December 31, 2021, Mr. Alia held options to purchase 313 shares of common stock.
Narrative Disclosure to Director Compensation Table
During 2021, we had a policy to pay to each non-employee director $3,000 per board meeting, $1,000 per telephonic board meeting, and $500 per board committee meeting attended. Fees for attendance at regular quarterly board meetings held during the first three quarters of each fiscal year are paid through the issuance of common stock and payments for the last meeting of the year are paid in cash or, at the option of the director, in shares of common stock. All of our directors elected to receive payment in common stock for the last board meeting in 2021. We recently revised our policy regarding non-employee director fees to provide for payment of $3,000 per board meeting and $1,000 per board committee meeting attended payable in the manner described above. All directors will be indemnified by us for actions associated with being a director to the fullest extent permitted under Delaware law. We reimburse each of our non-employee directors for their reasonable expenses incurred in connection with attending meetings of the board of directors and related committees.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 29, 2022, information with respect to the securities holdings of all persons that we, pursuant to filings with the SEC and our stock transfer records, have reason to believe may be deemed the beneficial owner of more than 5% of our common stock. The following table also sets forth, as of such date, the beneficial ownership of our common stock by all of our current officers and directors, both individually and as a group.
The beneficial owners and amount of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Exchange Act and, in accordance therewith, include all shares of our common stock that may be acquired by such beneficial owners within 60 days of March 29, 2022 upon the exercise or conversion of any options, warrants or other convertible securities. This table has been prepared based on 8,405,209 shares of common stock outstanding on March 28, 2022.
Name and Address of Beneficial Owner (1)
Amount and Nature
of Beneficial
Ownership
Percentage
of
Class
Michael W. DePasquale
103,258 (2)
1.2 %
Cecilia Welch
56,626 (3)
*
Mira LaCous
30,272 (4)
*
James Sullivan
79,293 (5)
*
Thomas Gilley
13,283 (6)
*
Robert J. Michel
14,110 (7)
*
Thomas E. Bush, III
13,591 (8)
*
Pieter Knook
13,122 (9)
*
Emmanual Alia
8,793 (10)
*
Wong Kwok Fong (Kelvin)
583,659 (11)
6.9 %
All officers and directors as a group ten (10) persons
916,007
10.9 %
Lind Global Micro Fund, LP
833,125 (12)
9.9 %
*
Less than 1%
(1)
Unless otherwise indicated, the address of each person listed below is c/o BIO-key International, Inc., 3349 Highway 138, Building A, Suite E, Wall, NJ 07719.
(2)
Includes 40,800 shares issuable on exercise of options and 39,125 shares of restricted stock of which 37,750 remain subject to vesting. Does not include 1,389 shares issuable upon exercise of options subject to vesting.
(3)
Includes 22,501 of shares issuable upon exercise of options and 34,125 shares of restricted stock of which 32,750 remain subject to vesting. Does not include 1,041 shares issuable upon exercise of options subject to vesting.
(4)
Includes 16,147 of shares issuable upon exercise of options and 11,625 shares of restricted stock of which 10,250 remain subject to vesting. Does not include 521 shares issuable upon exercise of options subject to vesting.
(5)
Includes 19,793 of shares issuable on exercise of options and 34,125 shares of restricted stock of which 32,750 remain subject to vesting. Does not include 1,041 shares issuable upon exercise of options subject to vesting.
(6)
Includes 2,013 of shares issuable on exercise of options and 5,000 shares of restricted stock which remain subject to vesting. Does not include 312 shares issuable upon exercise of options subject to vesting.
(7)
Includes 1,752 of shares issuable on exercise of options and 5,000 shares of restricted stock which remain subject to vesting. Does not include 312 shares issuable upon exercise of options subject to vesting.
(8)
Includes 2,013 of shares issuable on exercise of options and 5,000 shares of restricted stock which remain subject to vesting. Does not include 312 shares issuable upon exercise of options subject to vesting.
(9)
Includes 1,752 of shares issuable on exercise of options and 5,000 shares of restricted stock which 5, remain subject to vesting. Does not include 312 shares issuable upon exercise of options subject to vesting.
(10)
Includes 105 of shares issuable on exercise of options and 5,000 shares of restricted stock which remain subject to vesting. Does not include 208 shares issuable upon exercise of options subject to vesting.
(11)
Includes 25,695 of shares issuable on exercise of options and 9,125 shares of restricted stock of which 7,750 remain subject to vesting. Does not include 1,389 shares issuable upon exercise of options subject to vesting.The address of Kelvin is Flat C, 27/F, Block 5, Grand Pacific Views, Siu Lam, Hong Kong N7.
(12)
Consists of shares issuable upon exercise of warrants. The address of Lind Global Capital Micro Fund, LP is 444 Madison Ave, Floor 41, New York, NY 10022
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth, as of December 31, 2021, information with respect to securities authorized for issuance under equity compensation plans. The shares and per share amounts reflect BIO-key’s 1-for-8 reverse stock split, which was effective November 20, 2020.
On January 27, 2016, the stockholders approved the 2015 Equity Incentive Plan, which was amended on June 13, 2019 by vote of stockholders, and amended and restated by vote of stockholders on June 18, 2021 (as amended and restated, the “2015 Plan”). The 2015 Plan reserves 789,000 shares of common stock for issuance of options, restricted stock, and other equity based awards to employees, officers, directors, and consultants of the Company. Options are issued at exercise prices which may not be below 100-110% of fair market value and have terms not to exceed ten years. Options issued under the 2015 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, certain stock awards issued under this plan may be subject to additional acceleration of vesting as may be provided in the participants’ written agreement. The 2015 Plan expires in December 2025.
In addition to options issued under the 2015 Plan, we have issued options to purchase common stock to employees, officers, directors and consultants outside of the plan. As of December 31, 2021, there were outstanding non-plan options to purchase 121,653 shares of common stock. The terms of these outstanding options are substantially similar to the provisions of the 2015 Plan and options issued thereunder. In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately.
On June 18, 2021, the stockholders approved the 2021 Employee Stock Purchase Plan (“ESPP”). Under the terms of this plan, 789,000 shares of common stock are reserved for issuance and sale to employees and officers of the Company at a purchase price equal to 85% of the lower of the closing price of our common stock as reported on the Nasdaq Capital Market on the first day or the last day of the offering period. Eligible employees are granted an option to purchase shares of common stock funded by payroll deductions. The Board may suspend or terminate the plan at any time, otherwise the plan expires June 17, 2031.
Plan Category
Number of
securities to be
issued
upon exercise
of outstanding
options,
warrants and
rights
(a)
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
(b)
Number
of securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
Equity compensation plans approved by security holders
90,808 (1)(2)
11.01
1,391,260 (3)
Equity compensation plans not approved by security holders
121,653
$ 18.44
-
Total
212,461 (1)(2)
$ 16.65
1,391,260 (3)
(1)
Consists of shares of common stock issuable upon the exercise of options outstanding as of December 31, 2021 under the 2015 Plan.
(2)
Excludes employee stock purchase rights accruing under the ESPP.
(3)
Amount includes 621,744 shares of common stock available as of December 31, 2021 for future issuance under the 2015 Plan and 769,516 shares of common stock available as of December 31, 2021 for future issuance under the ESPP.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Standstill Agreement with Principal Stockholder
Pursuant to separate securities purchase agreements dated October 29, 2015 and November 11, 2015 with each of Wong Kwok Fong (Kelvin), Micron, and Giant Leap we issued and sold shares of series A-1 stock to Kelvin and shares of series B-1 stock to Micron and Giant Leap, which were subsequently converted into shares of our common stock. The forgoing agreements contain a standstill provision (the “Standstill”) which prohibits each of these investors either alone or together with any other person, from acquiring additional shares of our common stock or any of our assets, soliciting proxies, or seeking representation on our board of directors. Kelvin is the Co-Chairman of the board of directors, and an executive officer.
Loans from Wong Kwok Fong (Kelvin)
Between March 2019 and February 2020, we received a series of non-interest-bearing advances from Mr. Wong Kwok Fong (Kelvin) in the aggregate amount of $217,360 to pay current liabilities. The amounts were repaid in their entirety during the 2020 fiscal year. Mr. Wong is the Vice-Chairman of the Board, an executive officer, and a principal stockholder of the Company.
Loans from Michael W. DePasquale
In December 2019, we received two non-interest-bearing advances from Michael DePasquale in the aggregate amount of $114,000 to pay current liabilities. The amounts were repaid in their entirety during the 2020 fiscal year. Mr. DePasquale serves as the Chairman of the Board and Chief Executive Officer of the Company.
Sales Incentive Agreement with Technology Transfer Institute (“TTI”)
On March 25, 2020, we entered into a sales incentive agreement TTI. The agreement provides that for each $5,000,000 in revenue (up to a maximum of $20,000,000), TTI generates for the Company during the first year that generate net income (calculated under U.S. generally accepted accounting principles) of at least 20%, we will pay TTI a sales incentive fee of $500,000 payable by the issuance of 62,500 shares of common stock. In the event that TTI generates revenue for the Company in excess of $20,000,000 during first year, we will issue TTI a five-year warrant to purchase 12,500 shares of Common Stock at an exercise price of $12.00 per share for each $1,000,000 of revenue in excess of $20,000,000 (up to a maximum of $25,000,000). In no event will we be obligated to issue more than 250,000 shares of common stock or warrants to purchase more than 62,500 shares of common stock pursuant to this agreement. Emmanual Alia, a member of our board of directors, served as the Chief Executive Officer of TTI until August 12, 2020.
Director Independence
As required under the NASDAQ Marketplace Rules, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the board of directors. Our board considered certain relationships between our directors and us when determining each director’s status as an “independent director” under Rule 5605(a)(2) of the NASDAQ Marketplace Rules. Based upon such definition and SEC regulations, we have determined that Robert Michel, Pieter Knook, Emmanual Alia, Thomas Bush, III, and Thomas Gilley are “independent” under NASDAQ standards.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows fees for professional services and quarterly audit fees billed to us by Rotenberg Meril Solomon Bertiger & Guttilla, P.C. (“RMSBG”) for the audit of our annual consolidated financial statements for the years ended December 31, 2021 and 2020:
Audit Fees
$ 123,900
$ 151,584
Audit-Related Fees
9,795
76,925
Tax Fees
17,000
20,053
Total Fees
$ 150,695
$ 248,562
Audit Fees consist of fees billed for professional services rendered for the audit of our financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by our auditors in connection with statutory and regulatory filings or engagements.
Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and which are not reported under audit fees. These fees relate primarily to services provided in connection with registration of securities and review of documents filed with the SEC.
Tax Fees consist of fees billed for professional services for tax compliance assistance rendered during the fiscal year.
Audit Committee Pre-Approval Procedures
The audit committee of our board of directors consists of Robert J. Michel (Chairman), Pieter Knook, and Emmanual Alia. The audit committee approves the engagement of our independent auditors to render audit and non-audit services before they are engaged. All of the fees for 2021 and 2020 shown above were pre-approved by the audit committee.
The audit committee pre-approves all audit and other permitted non-audit services provided by our independent auditors. Pre-approval is generally provided for up to one year, is detailed as to the particular category of services and is subject to a monetary limit. Our independent auditors and senior management periodically report to the audit committee the extent of services provided by the independent auditors in accordance with the pre-approval, and the fees for the services performed to date. The audit committee may also pre-approve particular services on a case-by-case basis.
Our audit committee will not approve engagements of our independent registered public accounting firm to perform non-audit services for us if doing so will cause our independent registered public accounting firm to cease to be independent within the meaning of applicable SEC rules. In addition, our audit committee considers, among other things, whether our independent registered public accounting firm is able to provide the required services in a more or less effective and efficient manner than other available service providers.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Report. Portions of Item 15 are submitted as separate sections of this Report:
(1) Financial statements filed as part of this Report:
Report of Independent Registered Public Accounting Firm (Rotenberg Meril Solomon Bertiger & Guttilla, P.C., Saddle Brook, NJ, PCAOB ID:361
Consolidated Balance Sheets as at December 31, 2021 and 2020
Consolidated Statements of Operations-Years ended December 31, 2021 and 2020
Consolidated Statements of Stockholders’ Equity (Deficit)-Years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows-Years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements-December 31, 2021 and 2020
(b) The exhibits listed in the Exhibits Index immediately preceding such exhibits are filed as part of this Report