BIO KEY INTERNATIONAL INC

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2023 and 2022

NOTE A—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

The Company, founded in1993, develops and markets proprietary fingerprint identification biometric technology and software solutions enterprise-ready identity access management solutions to commercial, government and education customers throughout the United States and internationally. The Company was a pioneer 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, PKI (public key infrastructure), credit cards, passports, driver’s licenses, OTP or other form of possession or knowledge-based credentialing. Additionally, advanced BIO-key® technology has been, and is, used to improve both the accuracy and speed of competing finger-based biometrics.

Going Concern and Basis of Presentation

The Company has historically financed operations through access to the capital markets by issuing convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. As of the date of this report, the Company doesnot have enough cash fortwelve months of operations. The history of significant losses, the negative cash flow from operations, the limited cash resources on hand and the dependence by the Company on its ability, to obtain additional financing to fund its operations after the current cash resources are exhausted raises substantial doubt about the Company's ability to continue as a going concern. The Company has lowered expenses through decreasing spending in marketing, and research and development. In addition, the Company has purchased inventory for projects in Nigeria, which have been delayed in deployment, and is, therefore looking into other markets and opportunities to sell or return the product to generate additional cash.

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which contemplate continuation of the Company as a going concern, and assumes continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has suffered substantial net losses and negative cash flows from operations in recent years and is dependent on debt and equity financing to fund its operations all of which raise substantial doubt about the Company’s ability to continue as a going concern. Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon the Company’s ability to increase its revenue and meet its financing requirements on a continuing basis and become profitable in its future operations. The accompanying consolidated financial statements donot include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Reverse Stock Split

• All references to issued and outstanding shares for all periods reflect the1*-for-18 reverse stock split, which was effective* December 21, 2023.As a result, all share numbers for all periods, including the number of shares underlying warrants, options, and other convertible securities, and all exercise prices applicable to such warrants, options and convertible securities have been adjusted retrospectively to reflect the1*-for-18 reverse stock split.

Foreign Currency

The Company accounts for foreign currency transactions pursuant to ASC830, Foreign Currency Matters ("ASC830”). The functional currency of the Company is the U.S. dollar, which is the currency of the primary economic environment in which it operates. In accordance with ASC830, monetary balances denominated in or linked to foreign currency are stated on the basis of the exchange rates prevailing at the applicable balance sheet date. For foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used. Gains or losses arising from changes in the exchange rates used in the translation of such transactions and from the remeasurement of the monetary balance sheet items are recorded as gain (loss) on foreign currency transactions.

The functional currency of Swivel Secure Europe, SA is the Euro. Under ASC830, all assets and liabilities are translated into U. S. dollars using the current exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated in Euros are reflected in the statement of operations as appropriate. Translation adjustments are included in accumulated other comprehensive loss.

Summary of Significant Accounting Policies

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

1. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of BIO-key International, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Intercompany accounts and transactions have been eliminated in consolidation.

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2. Use of Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) as set forth in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) and consider the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission (SEC). These accounting principles require us to make certain estimates, judgments and assumptions. The Company believes that the estimates, judgments and assumptions upon which it relies are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Certain significant accounting policies that contain subjective management estimates and assumptions include those related to accounts receivable, inventory, intangible assets and goodwill, fair value of convertible note payable, and income taxes.

3. Revenue Recognition

In accordance with ASC606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the followingfive steps:

All of the Company's performance obligations, and associated revenues, are generally transferred to customers at a point in time, with the exception of support and maintenance, and professional services, which are generally transferred to the customer over time.

Software licenses

Software license revenue consists of fees for perpetual and subscription licenses forone or more of the Company’s biometric fingerprint solutions or identity access management solutions. Revenue is recognized at a point in time once the software is available to the customer for download. Software license contracts are generally invoiced in full on execution of the arrangement.

Hardware

Hardware revenue consists of fees for associated equipment sold with or without a software license arrangement, such as servers, locks and fingerprint readers. Customers arenot obligated to buythird party hardware from the Company, and* may*procure these items from a number of suppliers. Revenue is recognized at a point in time once the hardware is shipped to the customer. Hardware items are generally invoiced in full on execution of the arrangement.

Support and Maintenance

Support and maintenance revenue consists of fees for unspecified upgrades, telephone assistance and bug fixes. The Company satisfies its support and maintenance performance obligation by providing “stand-ready” assistance as required over the contract period. The Company records deferred revenue (contract liability) at time of prepayment until the term of the contract begins. Revenue is recognized over time on a ratable basis over the contract term. Support and maintenance contracts areone tofive years in length and are generally invoiced in advance at the beginning of the term. Support and Maintenance revenue for subscription licenses is carved out of the total license cost at 18% and recognized on a ratable basis over the license term.

Professional Services

Professional services revenues consist primarily of fees for deployment and optimization services, as well as training. The majority of the Company’s consulting contracts are billed on a time and materials basis, and revenue is recognized based on the amount billable to the customer in accordance with practical expedient ASC606-10-55-18. For other professional services contracts, the Company utilizes an input method and recognizes revenue based on labor hours expended to date relative to the total labor hours expected to be required to satisfy its performance obligation.

Contracts with Multiple Performance Obligations

Some contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The standalone selling prices are determined based on overall pricing objectives, taking into consideration market conditions and other factors, including the value of the contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users within the contracts.

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The Company considered several factors in determining that control transfers to the customer upon shipment of hardware and availability of download of software. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership.

Accounts receivable from customers are typically due within30 days of invoicing. The Company doesnot record a reserve for product returns or warranties as amounts are deemed immaterial based on historical experience.

Costs to Obtain and Fulfill a Contract

Costs to obtain and fulfill a contract are predominantly sales commissions earned by the sales force and are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit determined to befour years. These costs are included as capitalized contract costs on the balance sheet. The period of benefit was determined by taking into consideration customer contracts, technology, and other factors based on historical evidence. Amortization expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Deferred Revenue

Deferred revenue includes customer advances and amounts that have been paid by customers for which the contractual maintenance terms havenot yet occurred. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which generally is12-60 months. Contracts greater than12 months are segregated as long term deferred revenue. Maintenance contracts include provisions for unspecified when-and-if available product updates and customer telephone support services. At* December 31, 2023and2022*, amounts in deferred revenue were approximately $443,000 and $515,000, respectively.

4. Business Combinations

In accordance with ASC805, Business Combinations (ASC805), the Company recognizes the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Determining these fair values requires management to make significant estimates and assumptions, especially with respect to intangible assets.

The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair value. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net acquisition date fair value of the assets acquired and the liabilities assumed and represents the expected future economic benefits arising from other assets acquired that arenot individually identified and separately recognized. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Assumptions* maybe incomplete or inaccurate, and unanticipated events or circumstances mayoccur, which mayaffect the accuracy or validity of such assumptions, estimates or actual results. As a result, during the measurement period, which maybe up toone* year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

5.* Goodwill and acquired intangible assets*

Goodwill isnot amortized, but is evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value* maynot* be recoverable. The Company has determined that there is a single reporting unit for the purpose of conducting this goodwill impairment assessment. For purposes of assessing potential impairment, the Company estimates the fair value of the reporting unit, based on the Company’s market capitalization, and compares this amount to the carrying value of the reporting unit. If the Company determines that the carrying value of the reporting unit exceeds its fair value, an impairment charge would be required. The annual goodwill impairment test will be performed as of* December31st* of each year. Refer Note K for more information regarding the impairment of goodwill in2022.

Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. The Company amortizes acquired definite-lived intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.

6. Cash Equivalents

Cash equivalents consist of liquid investments with original maturities ofthree months or less. At* December 31, 2023and2022*, cash equivalents consisted of a money market account.

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7. Accounts Receivable

Accounts receivable are carried at original amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful receivables by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Accounts receivable are written off when deemed uncollectible.

Accounts receivable at* December 31, 2023and2022* consisted of the following:

Bad debt expenses (if any) are recorded in selling, general, and administrative expense.

The allowance for doubtful accounts for the years ended* December 31, 2023and2022* is as follows:

8. Equipment and Leasehold Improvements, Intangible Assets and Depreciation and Amortization

Equipment and leasehold improvements are stated at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over the estimated service lives, principally using straight-line methods. Leasehold improvements are amortized over the shorter of the life of the improvement or the lease term, using the straight-line method.

The estimated useful lives used to compute depreciation and amortization for financial reporting purposes are as follows:

Intangible assets other than goodwill consist of patents, trade name, proprietary software, and customer relationships. Patent costs are capitalized until patents are awarded. Upon award, such costs are amortized using the straight-line method over their respective economic lives. If a patent is denied, all costs are charged to operations in that year. Trade names, proprietary software, and customer relationships are amortized over the economic useful life.

9. Impairment or Disposal of Long Lived Assets, including Intangible Assets

The Company reviews long-lived assets, including intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such an asset* may**not* be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is equal to the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. In assessing recoverability, the Company must make assumptions regarding estimated future cash flows and discount factors. If these estimates or related assumptions change in the future, the Company* maybe required to record impairment charges. Intangible assets with determinable lives are amortized over their estimated useful lives, based upon the pattern in which the expected benefits will be realized, or on a straight-line basis, whichever is greater. There wereno* impairments in2023 and2022.

10. Advertising Expense

The Company expenses the costs of advertising as incurred. Advertising expenses for2023 and2022 were approximately $340,000 and $842,000, respectively.

11. Research and Development Expenditures

Research and development expenses include costs directly attributable to the conduct of research and development programs primarily related to the development of our software products and improving the efficiency and capabilities of our existing software. Such costs include salaries, payroll taxes, employee benefit costs, materials, supplies, depreciation on research equipment, services provided by outside contractors, and the allocable portions of facility costs, such as rent, utilities, insurance, repairs and maintenance, depreciation and general support services. All costs associated with research and development are expensed as incurred.

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12. Earnings Per Share of Common Stock (“EPS”)

The Company’s EPS is calculated by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options and warrants, when the effect of their inclusion is dilutive. All BIO-key shares issued and outstanding for all periods reflect BIO-key’s1-for-18 reverse stock split, which was effective* December 21, 2023.*

13. Accounting for Stock-Based Compensation

The Company accounts for share based compensation in accordance with the provisions of ASC718-10, “Compensation — Stock Compensation,” which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The majority of its share-based compensation arrangements vest over athree year vesting schedule. The Company expenses its share-based compensation under the ratable method, which treats each vesting tranche as if it were an individual grant. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of certain assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of its common stock price over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized as an expense in the consolidated statements of operations. As required under the accounting rules, the Company reviews its valuation assumptions at each grant date and, as a result, the Company is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the service period, net of estimated forfeitures (the number of individuals that will ultimatelynot complete their vesting requirements). The estimation of stock awards that will ultimately vest requires significant judgment. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates,* maydiffer substantially from current estimates. Options and warrants to outsiders are accounted for under ASC718.*

The following table presents share-based compensation expenses included in the Company’s consolidated statements of operations:

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14. Income Taxes

The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. The Company evaluates, on a quarterly basis whether, based on all available evidence, if it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely thannot that the tax benefit of the deferred tax asset willnot be realized. The evaluation, as prescribed by ASC740-10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which* may*be employed to prevent an operating loss or tax credit carryforward from expiring unused. Because of the Company’s historical performance and estimated future taxable income, a full valuation allowance has been established.

The Company accounts for uncertain tax provisions in accordance with ASC740. The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

15*. Leases*

In accordance with ASC842, Leases(ASC842), the Company records a right-of-use (ROU) asset and a lease liability on the balance sheet for all leases with terms longer than12 months and classifies them as either operating or finance leases.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of the lease including whether the contract involves the use of a distinct identified asset, whether the Company obtains the right to substantially all the economic benefit from the use of the asset, and whether the Company has the right to direct the use of the asset. Leases with a term greater thanone year are recognized on the balance sheet as ROU assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has electednot to recognize on the balance sheet leases with terms ofone year or less under practical expedient in paragraph ASC842-20-25-2. For contracts with lease and non-lease components, the Company has electednot to allocate the contract consideration, and to account for the lease and non-lease components as a single lease component.

Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The implicit rate within our operating leases are generallynot determinable and, therefore, the Company uses the incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The Company determines the incremental borrowing rate for each lease using our estimated borrowing rate, adjusted for various factors including level of collateralization, term and currency to align with the terms of the lease. The operating lease ROU asset also includes any lease prepayments, offset by lease incentives.

An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option. An option to terminate is considered unless it is reasonably certain we willnot exercise the option.

16. The Fair Value Measurement Option

The Company has elected the fair value measurement option for convertible debt with embedded derivatives that require bifurcation, and record the entire hybrid financing instrument at fair value under the guidance of ASC825, Financial Instruments. As a result, the convertible promissory note was recorded at fair value upon issuance and will subsequently be remeasured at each reporting date until settled or converted. The Company recognized the note initially at fair value, which exceeded the proceeds received resulting in a dayone loss that has been recognized in net loss. The Company reports interest expense, including accrued interest, related to the convertible debt under the fair value option, separately from within the change in fair value of the convertible debt in the accompanying consolidated statement of operations.

17. Fair Value Measurements

Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. GAAP establishes athree-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level1 measurements) and the lowest priority to unobservable inputs (Level3 measurements). These tiers include:

Level1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities;

Level2: Quoted prices in markets that arenot active or inputs which are observable either directly or indirectly for substantially the full term of the asset or liability; and

Level3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little orno market activity).

The Company issued a convertible note which included an original issue discount, conversion features and a detachable warrant, as further discussed in Note M. The detachable warrant represents a freestanding, separable equity-linked financial instrument recorded at fair value. The fair value of the detachable warrant was calculated using a Black-Scholes valuation model. The Company elected the fair value option for the convertible debt which was determined based on significant unobservable inputs including the likelihood of default, the estimated date at which the default could take place, and the present value discount rate, which causes it to be classified as a Level3 measurement within the fair value hierarchy. The fair value option requires recognition at fair value upon issuance and on each balance sheet date thereafter. Changes in the estimated fair value are recognized as change in fair value of convertible note in the consolidated statements of operations. As a result of applying the fair value option, direct costs and fees related to the issuance of the convertible note were expensed andnot deferred.

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The Company estimated the fair value of the convertible note using a probability-weighted discounted cash flow model with the following assumptions and significant terms of the convertible note at* December 22, 2022:*

1. Face amount - $2,200,000

2. Nominal interest rate –10% -12%

3. Default interest rate –18%

4. Increase in principal upon a default –30%

5. Present value discount rate –15.18%

6. Likelihood of default – estimated to be 50% at the extended maturity date

The following table shows the changes in fair value measurements for the convertible note using significant unobservable inputs (Level3) during the year ended* December 31, 2023*:

18. Recent Accounting Pronouncements

In* June 2016,the FASB issued ASU2016*-13, Financial Instruments-Credit Losses (Topic326), referred to herein as ASU2016-13, which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that arenot measured at fair value through net income. ASU2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU2016-13 credit impairment is recognized as an allowance for credit losses, rather than as a direct writedown of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance providesno threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either current ornot yet due* may**not* require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU2016-13. ASU2016-13 is effective for the Company for annual periods, including interim periods within those annual periods, beginning on* January 1, 2023.*The Company has adopted the accounting standard.

NOTE B—REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers for the years ended* December 31, 2023and2022*:

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• EMESA – Europe, Middle East, South America

Revenue recognized during the year ended* December 31, 2023* from amounts included in deferred revenue at the beginning of the year was approximately $467,000. Revenue recognized during the year ended* December 31, 2022* from amounts included in deferred revenue at the beginning of the year was approximately $489,000. Total deferred revenue (contract liability) was approximately $443,000 and $515,000 at* December 31, 2023and2022*, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

ASC606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that havenot yet been satisfied. The guidance provides certain practical expedients that limit this requirement, which the Company’s contracts meet as follows:

Deferred revenue represents the Company’s remaining performance obligations related to prepaid support and maintenance, all of which is expected to be recognized fromone tofive years.

NOTE C—SWIVEL SECURE EUROPE, SA ACQUISITION

On* March 8, 2022,the Company completed the acquisition of 100% of the issued and outstanding capital stock of Swivel Secure based in Madrid, Spain, pursuant to the terms of a stock purchase agreement. The aggregate purchase price consisted of a base purchase price of $1.75 million, subject to closing adjustments based on the closing date working capital, indebtedness and unpaid transaction expenses, and an earn-out of $500,000. The earn-out was payable based on Swivel Secure generating $3,000,000 of revenue and $1,000,000 of operating profit during an earn-out period commencing on the closing date and ending on January 31, 2023,which wasnot* attained. At the closing, the Company made a cash payment of $1.27 million and issued 14,948 shares of common stock of which 4,983 shares were held back by the Company to secure certain indemnification obligations under the stock purchase agreement. The shares of Company common stock were priced at $2.23, the contractual20 day volume-weighted average price of the Company’s common stock immediately prior to the payment date as reported on the Nasdaq Capital Market.

The business combination has been accounted for as an acquisition and, in accordance with ASC805. The Company recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following table summarizes the purchase price allocation, withno earnout payment:

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The fair value of the assets acquired and liabilities assumed was less than the purchase price, resulting in the recognition of goodwill. The goodwill reflected the value of the synergies the Company expected to realize and the assembled workforce. Refer to Note K for more information regarding the impairment of goodwill.

The significant intangible asset identified in the purchase price allocation discussed above was Customer Relationships. To value the Customer Relationships, the Company utilized the Excess Earnings Method, which isolates the value of the specific intangible asset by discounting its income stream to present value.

The government loan was issued through BBVA Bank during the COVID-19 pandemic. The loan bears interest at the rate of 1.75% per annum and is payable in monthly installments of approximately $11,900 inclusive of interest from* May 2022through April 2026.*The installment payments have been paid monthly as per the schedule, as of the date of this report.

The following table presents the final fair values and useful lives of the identifiable intangible assets acquired:

As discussed above, the earnout payable wasnot achieved. As such, the Company reversed the earnout payable of $500,000 and recognized the income on the reversal of the earnout payable.

NOTE D—FAIR VALUES OF FINANCIAL INSTRUMENTS

Cash and cash equivalents, accounts receivable, due from factor, accounts payable and accrued liabilities are carried at, or approximate, fair value because of their short-term nature. The carrying value of the Company’s notes and loan payables approximated fair value as the interest rates related to the financial instruments approximated market.

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NOTE E—CONCENTRATION OF RISK

Financial instruments which potentially subject the Company to risk primarily consist of cash, and cash equivalents, investment in debt security, and accounts receivables.

The Company maintains its cash and cash equivalents with various financial institutions, which, at times* mayexceed insured limits. The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company wasnot in excess of coverage at December 31, 2023.The Company was in excess of coverage of approximately $2,000,000 * December 31, 2022.The Company hasnot incurred any losses on these accounts.

The Company extends credit to customers on an unsecured basis in the normal course of business. The Company’s policy is to perform an analysis of the recoverability of its receivables at the end of each reporting period and to establish allowances where appropriate. The Company analyzes historical bad debts and contract losses, customer concentrations, and customer credit-worthiness when evaluating the adequacy of the allowances.

For the year ended* December 31, 2023* three customers accounted for 34% of total revenue. For the year ended* December**2022*,no customer accounted for greater than10% of total revenue.

At* December 31, 2023*, three customers accounted for 66% of the total accounts receivable. At* December 31, 2022*, one customer accounted for 35% of total accounts receivable.

NOTE F—NOTE RECEIVABLE

During thethird quarter of2020, the Company loaned $295,000 as an advance to Technology Transfer Institute (“TTI”) to aid in fulfilling the African contracts. The note didnot bear any interest if paid within thenine (9) monthly installments beginning* December 31, 2020.The note bore a default rate of 5%. Due to the ongoing delays in payment, the Company reserved $186,000 of the note as an allowance. On February 17, 2022,the Company amended the note to modify the payment terms to provide for lower monthly payments, with an updated maturity date on or before December 6, 2023.On May 5, 2022,the Company amended the note to modify the payment terms toeight* biweekly installments of $1,000 beginning* February 25, 2022,nineteen consecutive monthly installments of $15,000 beginning on July 6, 2022,and $2,000 on or before February 6, 2024.The payments are behind schedule. Due to the delay in payments, the Company has increased the allowance for the remainder of the balance owed under the note in2022.* The Company is continuing to pursue payment with an outside collection agency. A member of the Company's board of directors served as Chief Executive Officer of TTI until* August 12, 2020.*

NOTE G—INVENTORY

Inventory is stated at the lower of cost, determined on afirst in,first out basis, or realizable value. The Company periodically evaluates inventory items and establishes reserves for obsolescence accordingly. The Company also reserves for excess quantities, slow moving goods, and for other impairment of value based upon assumptions of future demand and market conditions. The reserve on inventory in2022 and2023 is due to slow moving inventory purchased for projects in Nigeria. The Company is looking into other markets and opportunities to sell or return the product.

Inventory is comprised of the following as of* December 31:*

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NOTE H—RESALABLE SOFTWARE LICENSES RIGHTS

On* December 31, 2015,the Company purchasedthird*-party software licenses in the amount of $180,000 in anticipation of a large pending deployment that has yet to materialize. The Company was amortizing the total cost at the greater of the actual unit cost per license sold or straight-line amortization over 10 years. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $141,190 has been charged to cost of sales. Since the Company didnot receive any sales for the license in2021 or2022, it accelerated the amortization for the balance of the license in2022, leaving a carrying balance of $0 as of both* December 31, 2023and2022*. A total of $48,752 was charged to cost of sales during the year ended* December 31, 2022.*

NOTE I—INVESTMENT IN DEBT SECURITY

The Company purchased a 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong in* September 2020bearing interest at 5% per annum. The Bond Certificate translated to $512,821 U.S. Dollars, based on the exchange rate at the purchase date. The investment was originally recorded at amortized cost and was scheduled to mature in June 2021.The Company never received the proceeds and accrued interest from the investment and as such, wrote off the investment during2022* as the bond issuer defaulted on repayment, and the Company hadno recourse.

NOTE J—EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consisted of the following as of* December 31:*

Depreciation was $75,136 and $43,794 for2023 and2022, respectively. Amounts are recorded in selling, general, and administrative expense as well as in cost of services.

NOTE K—INTANGIBLE ASSETS AND GOODWILL

Intangible assets consisted of the following as of* December 31:*

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Aggregate amortization expense for2023 and2022 was approximately $355,000 and $298,000, respectively. Estimated minimum amortization expense based on straight line amortization of the software license rights for each of the nextfive years and thereafter approximates the following:

Goodwill

The Company concluded the amounts in goodwill had been fully impaired and accordingly wrote-off the entire balance in full as at* December 31, 2022.*

NOTE L—ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of* December 31:*

NOTE M—CONVERTIBLE NOTE PAYABLE

Securities Purchase Agreement dated* December 22, 2022*

On* December 22, 2022,*the Company entered into and closed a securities purchase agreement (the “Purchase Agreement”) which issued a $2,200,000 principal amount senior secured promissory note (the “Note”). At closing, a total of $2,002,000 was funded, with the proceeds to be used for general working capital.

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The principal amount of the Note was duesix months following the date of issuance, subject toone six-month extension by the Company. Interest under the Note accrues at a rate of 10% per annum, payable monthly through monthsix and at the rate of 12% per annum in monthsseven through twelve, payable monthly. The Note is secured by a lien on substantially all of the Company’s assets and properties can be prepaid in whole or in part without penalty at any time.

In connection with the issuance of the Note, the Company issued to the investor 38,889 shares of Common Stock (the “Commitment Shares”) valued at $18.00 per share and a warrant (the “Warrant”) to purchase 11,112 shares of common stock (the “Warrant Shares”) at an exercise price of $54.00 per share, exercisable commencing on the date of issuance with a term offive years. The warrant was valued at $94,316 (see Note P.#3).

On* October 31, 2023the Company repaid $1,400,000 of principal due under the Note, and on December 21, 2023*the Company repaid the remaining principal balance of $800,000 due under the Note.

As of* December 31, 2023*, the Note was paid in full.

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NOTE N—LEASES

The Company’s leases office space in New Jersey, Minnesota, New Hampshire, Madrid and Hong Kong with lease termination dates in2023 and2024. The property leased in China is paid monthly as used, without a formal agreement. The following tables present the components of lease expense and supplemental balance sheet information related to the operating leases were:

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NOTE O—COMMITMENTS AND CONTINGENCIES

Distribution Agreement

Swivel Secure has a distribution agreement with Swivel Secure Limited (“SSL”). Terms of the agreement include the following:

The Company expects the revenue targets to continue to be met based on historical performance and increasing distribution by Swivel Secure.

Litigation

From time to time, the Company* maybe involved in litigation relating to claims arising out of its operations in the normal course of business. As of December 31, 2023*, the Company wasnot a party to any pending lawsuits.

NOTE P—** EQUITY**

1. Preferred Stock

Within the limits and restrictions provided in the Company’s Certificate of Incorporation, the Board of Directors has the authority, without further action by the shareholders, to issue up to 5,000,000 shares of preferred stock, $.0001 par value per share, inone or more series, and to fix, as to any such series, any dividend rate, redemption price, preference on liquidation or dissolution, sinking fund terms, conversion rights, voting rights, and any other preference or special rights and qualifications.

2. Common Stock

Holders of common stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Holders of common stock haveone vote for each share held of record and donot have cumulative voting rights.

Holders of common stock are entitled, upon liquidation of the Company, to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of common stock arenot redeemable and haveno preemptive or similar rights. All outstanding shares of common stock are fully paid and nonassessable.

Issuances of Common Stock

On* December 22, 2022,*the Company issued the Commitment Shares. See Note M - Convertible Note Payable for more information.

On* March 8, 2022,the Company issued 14,948 shares of common stock of which 4,983 shares were held back by the Company to secure certain indemnification obligations under the Swivel Secure stock purchase agreement. The shares of Company common stock were issued at a total cost of $600,004, priced at $40.14, based on the contractual20*-day volume-weighted average price of the Company’s common stock immediately prior to the payment date as reported on the Nasdaq Capital Market.

On* June 18, 2021,the stockholders approved the2021* Employee Stock Purchase Plan. Under the terms of this plan,43,834 shares of common stock are reserved for issuance to employees and officers of the Company at 85% of the lower of the closing price of the common stock as reported on the Nasdaq Capital Market at thefirst day or the last day of the offering period. Eligible employees are granted an option to purchase shares under the plan funded by payroll deductions. The Board* maysuspend or terminate the plan at any time, otherwise the plan expires June 17, 2031.During2023* and2022,2,947, and 3,364 shares respectively were issued under the ESPP to employees, which resulted in a $4,343, and $18,787 non-cash compensation expense respectively for the Company.

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Issuances of Restricted Stock

Restricted stock consists of shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions. The fair value of nonvested shares is determined based on the market price of the Company's common stock on the grant date. Restricted stock is expensed ratably over the term of the restriction period.

The Company issued 16,404 shares of restricted common stock to certain employees of the Company and 3,752 of shares of restricted common stock were forfeited during fiscal year2023. The Company issued 15,444 shares of restricted common stock to certain employees of the Company and 583 of shares of restricted common stock were forfeited during fiscal year2022. These shares vest in equal annual installments over athree-year period from the date of grant.

Restricted stock compensation for the years ended* December 31, 2023and2022* was $205,517 and $218,552, respectively.

Issuances to Directors, Executive Officers & Consultants

During the2023 and2022 years, the Company issued 3,078 and 2,202 shares of common stock respectively to its directors in lieu of payment of board fees, valued at $39,007 and $76,043 respectively.

Warrants

Warrants Issued with Convertible Note:

See Note M - Convertible Note Payable for the warrant issued with a convertible note in2022.

Valuation Assumptions for Warrants:

The Company records the warrants at their fair value which is determined using the Black-Scholes valuation model on the date of the grant. The fair value of the warrants issued in2023 and2022 were estimated with the following assumptions:

The volatility for each issuance is determined based on the review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected exercise period. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the years to maturity.

A summary of warrant activity is as follows:

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The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $3.00, $10.62, and $39.78 as of* December 31, 2023,2022 and2021, respectively, which would have been received by the warrant holders had all warrant holders exercised their options as of that date. There wereno in-the-money warrants exercisable as of December 31, 2023,*2022 and2021.

NOTE Q—STOCK OPTIONS

• 2023 Stock Incentive Plan*

On* December 14, 2024,the stockholders approved the2023* Stock Incentive Plan. The2023 Plan reserves 333,334 shares of common stock for issuance of options, restricted stock, and other equity based awards to employees, officers, directors, consultants advisors and independent contractors of the Company. Options are issued at exercise prices which* may**not* be below 100% of fair market value (or 110% of the fair market value if, at the time the option is granted, the participant owns, directly or indirectly, more than10% of the total combined voting power of all classes of our stock) and have termsnot to exceedten years. Options issued under the2023 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, certain awards issued under this plan* maybe subject to additional acceleration of vesting as maybe provided in the participants’ written agreement. The2023* Plan expires on* December 13, 2033,unless terminated earlier. No awards have yet been granted under the2023* Plan.

2015 Stock Option Plan

On* January 27, 2016,the stockholders approved the2015* Equity Incentive Plan (the*“2015* Plan”). The2015 Plan initially reserved 10,417 shares of common stock for issuance of options, restricted stock, and other equity based awards to employees, officers, directors, and consultants of the Company. In2021, the stockholders approved an amendment to the2015 to increase the shares of common stock authorized for issuance under the2015 Plan from 10,417 shares to 43,834 shares together with other technical changes. The term of stock options granted under the2015 Plan,* maynot* exceedten years, exercise prices* maynot* be below 100-110% of fair market value, and vesting occurs over time periods set forth in written agreements with the recipients. In the event of a change in control, certain stock awards issued under the2015 Plan* maybe subject to additional acceleration of vesting as maybe provided in the participants’ written agreement. The2015* Plan expires in* December 2025.*

Non-Plan Stock Options

Periodically, the Company has granted options outside of the2015 Plan to various employees and consultants. In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately.

Stock Option Activity

Information summarizing option activity is as follows:

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The options outstanding and exercisable at* December 31, 2023* were in the following exercise price ranges:

The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $3.00, $10.62, and $39.78 as of* December 31, 2023,2022 and2021, respectively, which would have been received by the option holders had all option holders exercised their options as of that date. There wereno in-the-money options exercisable as of December 31, 2023,*2022 and2021.

The weighted average fair value of options granted during the years ended* December 31, 2023and2022* was $0 asno options were granted in either year. The total intrinsic value of options exercised during the years ended* December 31, 2023and2022* was $0 asno options were exercised in either year. The total fair value of shares vested during the years ended* December 31, 2023and2022* was $18,310 and $100,668, respectively.

As of* December 31, 2023*, there wasno future forfeiture adjusted compensation costs related to nonvested stock options.

NOTE R—INCOME TAXES

The components of net loss consist of the following:

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There wasno provision for current federal, foreign or state taxes for both of the years ended* December 31, 2023and2022* as a result of taxable losses incurred in these jurisdictions. The provision for income tax benefits consist of the following (in thousands):

Significant components of deferred tax assets and liabilities are as follows at* December 31, 2023and2022* (in thousands):

The Company has a valuation allowance against the full amount of its net deferred taxes due to the uncertainty of realization of the deferred tax assets due to operating loss history of the Company. The Company currently provides a valuation allowance against deferred taxes when it is more likely thannot that some portion, or all of its deferred tax assets willnot be realized. The valuation allowance could be reduced or eliminated based on future earnings and future estimates of taxable income. With a full valuation allowance, any change in the deferred tax asset or liability is fully offset by a corresponding change in the valuation allowance. At* December 31, 2023and2022*, the Company provided a valuation allowance on its net deferred tax assets of $17,239,173 and $17,188,000, respectively.

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As of* December 31, 2023*, the Company has U.S. federal net operating loss carryforwards of approximately $60.3 million. Approximately $39.7 million are subject to expiration between2024 and2037, and $18.6 million net operating loss carryforwards haveno expiration date. These net operating loss carryforwards could be subject to the limitations under Section382 of the Internal Revenue Code due to changes in the equity ownership of the Company. In addition, the Company has net operating loss carry forwards from various states of approximately $5.3 million which expire from2026 through2042.

A reconciliation of the effective income tax rate on operations reflected in the statements of operations to the US federal statutory income tax rate is presented below.

The Company hasnot been audited by the Internal Revenue Service (“IRS”) or any states in connection with income taxes. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The periods from 2019 through2022 remain open to examination by the IRS and state jurisdictions.

The Company's subsidiary in Nigeria hasnot filed its required returns since inception. Management believes that when the returns are filed,no taxes will be owed due to the losses incurred during those periods. The Company isnot subject to minimum tax during thefirst four years of operations. As a result, management couldnot calculate the amount of net operating loss carryforwards that are available to offset future taxable income.

The Company's subsidiary in Hong Kong hasnot filed its required returns in several years. Management believes that when the returns are filed,no taxes will be owed due to losses incurred during those periods. As a result, management couldnot calculate the amount of net operating loss carryforwards are available to offset future taxable income.

The Company believes it isnot subject to any tax audit risk beyond those periods. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company doesnot have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense incurred during the years ended* December 31, 2023and2022*.

NOTE S

The Company has established a savings plan under section401(k) of the Internal Revenue Code. All employees of the Company, after completingone day of service, are eligible to enroll in the401(k) plan. Participating employees* mayelect to defer a portion of their salary on a pre-tax basis up to the limits as provided by the IRS Code. The Company isnot* required to match employee contributions but* maydo so at its discretion. The Company madeno matching contributions during the years ended December 31, 2023and2022*.

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NOTE T—EARNINGS PER SHARE (EPS)

The following table summarizes the weighted average securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive.

Items excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:

NOTE U—QUARTERLY FINANCIAL DATA (UNAUDITED AND RESTATED)

The Company is providing restated quarterly unaudited consolidated financial information for interim periods occurring within the year ended* December 31, 2023.*

The need for the restatement arose out of the results of certain financial analysis the Company performed in the course of preparing its fiscal year-end2023 consolidated financial statements. In the course of the audit of the Company’s consolidated financial statements for the fiscal year ended* December 31, 2023,the Company determined that certain errors were made which require the restatement of the Company’s previously issued financial statements for the interim periods occurring within the year ended December 31, 2023.These errors resulted in the overstatement of accounts receivable and revenue, understatements in certain allowances for accounts receivable and certain reserves for inventory, and an understatement of net loss and total stockholders’ equity which errors mayalso impact other amounts included in the financial statements. The Company attributes the errors principally to a material weakness in internal controls over the recording and processing of revenues, allowances for accounts receivable and certain reserves for inventory, which the Company is working to remediate in fiscal year2024.*

The restated consolidated balance sheet line items for the first,second andthird fiscal quarters of2023 are as follows:

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The restated line items of the consolidated statements of comprehensive income for thethree-month periods ended* March 31, 2023,** June 30, 2023,and September 30, 2023*are as follow:

The restated line items of the consolidated statements of comprehensive income for thesix-month period ended* June 30, 2023andnine*-month period ended* September 30, 2023*are as follows:

NOTE V—SUBSEQUENT EVENTS

On* January 4, 2024,*the Company issued 347,000 shares of common stock upon the exercise of prefunded warrants.

On* January 5, 2024,*the Company issued 142,000 shares of common stock upon the exercise of prefunded warrants.

On* January 12, 2024,*the Company issued 158,000 shares of common stock upon the exercise of prefunded warrants.

On* February 15, 2024,*243 shares of restricted common stock were forfeited by employees who left the Company before the lapse of the restriction period applicable to such shares.

On* March 21, 2024,*73 shares of restricted common stock were forfeited by employees who left the Company before the lapse of the restriction period applicable to such shares.

On* March 27, 2024,*the Company issued 4,287 shares of common stock to its directors in payment of board fees.

On* May 6, 2024,*186 shares of restricted common stock were forfeited by an employee who left the Company before the lapse of the restriction period applicable to such shares.

EXHIBIT INDEX

• filed herewith

** Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted sections have been filed separately with the Securities and Exchange Commission.

*** Management compensatory plan.

• Certain portions of this exhibit (indicated by “[***]”) have been omitted as the Company has determined that such portions are (a) not material and (b) would likely cause competitive harm to the Company if publicly disclosed.