BIO KEY INTERNATIONAL INC

Previous wording

We identified a material weakness in our internal control over financial reporting related to the recording and processing of revenue transactions. Such material weaknesses could materially and adversely affect our operations, financial condition, reputation and stock price.

Current wording

We identified a material weakness in our internal control over financial reporting related to the recording and processing of revenue transactions which required the restatement of our quarterly financial statements for the interim periods in 2023. Such material weaknesses could materially and adversely affect our operations, financial condition, reputation and stock price.

Previous wording

As discussed in Note U of our consolidated financial statements, Management has concluded that the Company’s previously issued consolidated financial statements should be restated due to inadvertently including certain revenue from our European subsidiary, Swivel Secure Europe, Ltd., in the first quarter of 2023. In addition, certain allowances for accounts receivable and certain reserves for inventory were understated. Therefore, the Company misstated gross revenues, accounts receivable, and inventory during the Restatement Periods. The restatement related to the Company’s material weakness in internal control over financial reporting over the recording of revenue, accounts receivable, and inventory transactions. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We completed the restatement and are now evaluating and working towards the appropriate corrective actions to remediate the material weakness to strengthen our internal controls over the recording of revenue transactions.

Current wording

In connection with the audit of our financial statements for the year ended December 31,2023, management concluded that the Company’s previously issued consolidated financial statements should be restated due to inadvertently including certain revenue from our European subsidiary, Swivel Secure Europe, Ltd., in the first quarter of 2023. In addition, certain allowances for accounts receivable and certain reserves for inventory were understated. Therefore, the Company misstated gross revenues, accounts receivable, and inventory during the first three quarters of 2023. The restatement related to the Company’s material weakness in internal control over financial reporting over the recording of revenue, accounts receivable, and inventory transactions. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We completed the restatement and have now corrected and continue to monitor the applied corrective actions to remediate the material weakness and continue to strengthen our internal controls over the recording of revenue transactions.

Previous wording

Based on our limited cash resources, history of significant losses, and negative cash flow, our independent registered public accounting firm has included an explanatory paragraph in their opinion as to the substantial doubt about our ability to continue as a going concern.

Current wording

Based on our limited cash resources, history of significant losses, negative cash flow, and dependence on debt and equity financing to fund operations, our independent registered public accounting firm has included an explanatory paragraph in their opinion as to the substantial doubt about our ability to continue as a going concern.

Previous wording

Due to, among other factors, our history of significant losses, limited cash resources, and negative cash flow, our independent registered public accounting firm has included an explanatory paragraph in their opinion for the year ended December 31, 2023 as to the substantial doubt about our ability to continue as a going concern. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which contemplate that we will continue to operate as a going concern. Our financial statements do not contain any adjustments that might result if we are unable to continue as a going concern.

Current wording

Due to, among other factors, our history of significant losses, limited cash resources, negative cash flow, and dependence on debt and equity financing to fund operations, our independent registered public accounting firm has included an explanatory paragraph in their opinion for the year ended December 31, 2024 as to the substantial doubt about our ability to continue as a going concern. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which contemplate that we will continue to operate as a going concern. Our financial statements do not contain any adjustments that might result if we are unable to continue as a going concern.

Previous wording

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.

Current wording

We may need to obtain additional financing to execute our business plan, 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.

Previous wording

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 $732,000 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation. During 2023, we generated approximately $9.0 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.

Current wording

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 $812,000 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation. During 2024, we generated approximately $7.0 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.

Previous wording

The delayed filing of this annual report has made us currently ineligible to use a registration statement on Form S-3 to register the offer and sale of securities, which could adversely affect our ability to raise future capital.

Current wording

Our failure to timely our annual report on Form 10-K for the year ended December 31, 2023 and our quarterly report on Form 10-Q for the period ended March 31, 2024 has made us ineligible to use a Form S-3 to register the offer and sale of securities, which could adversely affect our ability to raise future capital.

Previous wording

As a result of the delayed filing of this annual report with the SEC, we will not be eligible to register the offer and sale of our securities using a registration statement on Form S-3 until one year from the date we regain and maintain status as a current filer. Should we wish to register the offer and sale of our securities to the public prior to the time we are eligible to use Form S-3, both our transaction costs and the amount of time required to complete the transaction could increase, making it more difficult to execute any such transaction successfully and potentially harming our financial condition.

Current wording

As a result of our failure to timely file our annual report on Form 10-K for the year ended December 31, 2023 and our Quarterly Report on SEC Form 10-Q for the period ended March 31, 2024, we are not eligible to register the offer and sale of our securities using a registration statement on Form S-3 until one year from the date we regain and maintain status as a current filer. Should we wish to register the offer and sale of our securities to the public prior to the time we are eligible to use Form S-3, both our transaction costs and the amount of time required to complete the transaction could increase, making it more difficult to execute any such transaction successfully and potentially harming our financial condition.

Previous wording

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:

Current wording

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 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:

Previous wording

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.

Current wording

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, each have one-year terms 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.

Previous wording

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.

Current wording

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.

Previous wording

In March 2024, the SEC adopted new climate disclosure rules, which require new disclosure in certain SEC filings about material climate-related risks, activities to mitigate or adapt to such risks, board oversight of climate-related risks and management’s role in managing material climate-related risks, and climate-related targets and goals. The new climate disclosure rules have been the subject of multiple legal challenges, so the extent to which the new rules will go into effect remains uncertain. We are currently assessing the impact of the new rules, but at this time, we cannot predict the costs of implementation or any potential adverse impacts resulting from the new rules. However, we may incur increased costs relating to the assessment and disclosure of climate-related risks and increased litigation risks related to disclosures made pursuant to the new rules, either of which could materially and adversely affect our future results of operations and financial condition.

Current wording

In March 2024, the SEC adopted climate disclosure rules, which would require new disclosure in certain SEC filings about material climate-related risks, activities to mitigate or adapt to such risks, board oversight of climate-related risks and management’s role in managing material climate-related risks, and climate-related targets and goals. These climate disclosure rules have been the subject of multiple legal challenges, and the SEC recently dropped its defense of the rules, so the extent to which the rules will go into effect remains uncertain. Inconsistency of regulations at the federal and state level may affect the costs of compliance with such legal or regulatory requirements. We may incur increased costs relating to the assessment and disclosure of climate-related risks and increased litigation risks related to such disclosures, either of which could materially and adversely affect our future results of operations and financial condition. Adverse publicity or climate-related litigation that impacts us could have a negative impact on our business.

Previous wording

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.

Current wording

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. 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.

Previous wording

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:

Current wording

A component of our business plan is to acquire businesses and assets in the biometric and identity access management industry and other industries which we believe would complement our current offerings. 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:

Previous wording

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:

Current wording

There can be no assurance that we will be able to identify, acquire or profitably manage any 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:

Previous wording

As of the date of this report, approximately 1,814,000 shares of our common stock (as adjusted to reflect our 1-for-18 reverse stock split, which was effective December 21, 2023) 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.

Current wording

As of the date of this report, approximately 4,275,056 shares of our common stock (as adjusted to reflect our 1-for-18 reverse stock split, which was effective December 21, 2023) 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.

Previous wording

If we fail to comply with the requirement to timely file all required periodic financial reports with the Securities and Exchange Commission, or other continued listing requirements of The Nasdaq Stock Market, 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.

Current wording

If we fail to comply with the continued listing requirements of The Nasdaq Stock Market, 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.

Previous wording

Our common stock is listed for trading on Nasdaq. We must satisfy Nasdaq’s continued listing requirements, including, among other things, to timely file all required periodic financial reports with the Securities and Exchange Commission. On April 17, 2024, we received notice from Nasdaq indicating that were not in compliance with Nasdaq continued listing rule which requires us to timely file all required periodic financial reports with the Securities and Exchange Commission due to our failure to timely file this Annual Report on Form 10-K for the fiscal year ended December 31, 2023. On May 22, 2024, we received a second notice from Nasdaq indicating that we were not in compliance with Nasdaq’s continued listing rules due to our failure to timely file our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024. We have 60 calendar days from the initial notification letter, or until June 17, 2024 to submit a plan to regain compliance with Nasdaq’s continued listing requirements. If the plan is accepted, we may be eligible for up to 180 calendar days from the original due date to file this Annual Report on Form 10-K, or until October 14, 2024, to regain compliance. The 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. Delisting could also 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.

Current wording

Our common stock is listed for trading on Nasdaq. In order to maintain our listing, we must satisfy Nasdaq’s continued listing requirements. In 2024, we received multiple notices from Nasdaq indicating that we were not in compliance with Nasdaq continued listing requirements. These notices referenced failures to timely file our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, to timely file our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024, and failure to maintain minimum stockholders' equity of at least $2.5 million. We have timely cured each of these deficiencies and are currently in compliance with Nasdaq’s continued listing standards. The value of the shares of common stock of Boumarang Inc. that we purchased from Fiber Food Systems, Inc. in connection with our collaboration with Fiber Food Systems increased our stockholders’ equity to a level which satisfied the Nasdaq minimum requirement. As a privately held pre-revenue company, Boumarang is subject to all of the risks and uncertainties inherent in an early-stage enterprise and the value of its shares are subject to fluctuation which could be material. Any material decrease in the value of these shares could cause us our stockholders’ equity to fall below the Nasdaq minimum requirement resulting in the potential delisting of our shares from the Nasdaq stock market. In addition, in recent weeks the trading price of our common stock has fallen below the $1.00 minimum bid required to maintain our listing on Nasdaq. Continued trading below $1.00 per share could subject us to delisting from the Nasdaq stock market. The 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. Delisting could also 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