10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

or

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT

For the Transition Period from              to

Commission file number 1-13463

BIO-KEY INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE	41-1741861
(State or Other Jurisdiction of Incorporation of Organization)	(IRS Employer Identification Number)

3349 HIGHWAY 138, BUILDING A, SUITE E, WALL, NJ  07719

(Address of Principal Executive Offices)

(732) 359-1100

(Issuer’s Telephone Number)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒   No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒   No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Smaller Reporting Company ☒

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by rule 12b-2 of the Exchange Act)  Yes  ☐  No  ☒

Number of shares of Common Stock, $.0001 par value per share, outstanding as of August 11, 2017 is 6,498,438.

1

BIO-KEY INTERNATIONAL, INC.

INDEX

PART I. FINANCIAL INFORMATION
Item 1	—	Condensed Consolidated Financial Statements
		Balance sheets as of June 30, 2017 (unaudited) and December 31, 2016	3
		Statements of operations for the three and six months ended June 30, 2017 and 2016 (unaudited)	4
		Statements of cash flows for the six months ended June 30, 2017 and 2016 (unaudited)	5
		Notes to condensed consolidated financial statements	7
Item 2	—	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	18
Item 4	—	Controls and Procedures	27
PART II. OTHER INFORMATION
Item 2	—	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 6	—	Exhibits	27
Signatures			28

2

PART I -- FINANCIAL INFORMATION

BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2017			December 31, 2016
	(Unaudited)
ASSETS
Cash and cash equivalents	$	988,342		$	1,061,307
Accounts receivable, net		847,889			1,563,246
Due from factor		29,462			53,638
Inventory		567,182			465,428
Software license rights		2,100,000			1,560,000
Prepaid expenses and other		203,113			206,677
Total current assets		4,735,988			4,910,296
Software license rights, net		9,253,008			10,598,411
Accounts receivable, net		1,070,000			1,570,000
Equipment and leasehold improvements, net		153,529			67,814
Deposits and other assets		8,712			8,712
Intangible assets, net		166,735			134,132
Total non-current assets		10,651,984			12,379,069
TOTAL ASSETS	$	15,387,972		$	17,289,365
LIABILITIES
Accounts payable	$	333,627		$	466,842
Accrued liabilities		421,350			335,323
Dividends payable		802,500			401,250
Deferred revenue		417,464			633,062
Total current liabilities		1,974,941			1,836,477
TOTAL LIABILITIES		1,974,941			1,836,477
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Series A-1 convertible preferred stock: authorized, 100,000 (liquidation preference of $100 per share); issued and outstanding 90,000 of $.0001 par value at June 30, 2017 and December 31, 2016		9			9
Series B-1 convertible preferred stock; authorized, 105,000 (liquidation preference of $100 per share): issued and outstanding 105,000 of $.0001 par value at June 30, 2017 and December 31, 2016		11			11
Common stock: authorized, 170,000,000 shares; issued and outstanding; 6,493,290 and 6,093,843 of $.0001 par value at June 30, 2017 and December 31, 2016, respectively		649			609
Additional paid-in capital		79,359,032			78,253,413
Accumulated deficit		(65,946,670	)		(62,801,154	)
TOTAL STOCKHOLDERS’ EQUITY		13,413,031			15,452,888
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	15,387,972		$	17,289,365

All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-12 reverse stock split, which was effective December 29, 2016.

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

3

BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Revenues
Services	$	134,061		$	220,926		$	454,648		$	505,652
License fees and other		752,820			194,888			1,850,568			340,754
		886,881			415,814			2,305,216			846,406
Costs and other expenses
Cost of services		55,660			66,597			94,480			122,379
Cost of license fees and other		740,301			69,893			1,362,415			125,959
		795,961			136,490			1,456,895			248,338
Gross Profit		90,920			279,324			848,321			598,068
Operating Expenses
Selling, general and administrative		1,431,208			1,038,904			3,051,358			2,031,429
Research, development and engineering		449,049			566,448			942,493			1,055,849
Total Operating Expenses		1,880,257			1,605,352			3,993,851			3,087,278
Operating loss		(1,789,337	)		(1,326,028	)		(3,145,530	)		(2,489,210	)
Other income (expenses)
Interest income		8			7			14			13
Loss on derivative liabilities		-			(49,468	)		-			(49,506	)
Total other income (expenses)		8			(49,461	)		14			(49,493	)
Net loss		(1,789,329	)		(1,375,489	)		(3,145,516	)		(2,538,703	)
Convertible preferred stock dividends		(200,625	)		(200,625	)		(401,250	)		(401,250	)
Net loss available to common stockholders	$	(1,989,954	)	$	(1,576,114	)	$	(3,546,766	)	$	(2,939,953	)
Basic and Diluted Loss per Common Share	$	(0.32	)	$	(0.29	)	$	(0.57	)	$	(0.53	)
Weighted Average Shares Outstanding:
Basic and diluted		6,359,974			5,523,072			6,228,197			5,516,726

All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-12 reverse stock split, which was effective December 29, 2016.

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

4

BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2017			2016
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss	$	(3,145,516	)	$	(2,538,703	)
Adjustments to reconcile net loss to cash used for operating activities:
Allowance for doubtful accounts		500,000			-
Depreciation		15,513			24,577
Amortization of intangible assets		6,833			6,803
Amortization of software license rights		729,755			-
Loss on derivative liabilities		-			49,506
Share-based and warrant compensation for employees and consultants		564,275			184,299
Stock based directors fees		10,008			39,999
Change in assets and liabilities:
Accounts receivable		715,357			1,092,661
Due from factor		24,176			35,098
Inventory		(101,754	)		(131,394	)
Software license rights		75,648			-
Prepaid expenses and other		16,556			4,348
Accounts payable		(133,215	)		(462,136	)
Accrued liabilities		86,027			(142,234	)
Deferred revenue		(215,598	)		(58,359	)
Net cash used for operating activities		(851,935	)		(1,895,535	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(140,664	)		(51,783	)
Net cash used for investing activities		(140,664	)		(51,783	)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock		1,000,000			-
Preferred dividends paid		-			(334,476	)
Costs to issue preferred and common stock		(80,366	)		(32,619	)
Net cash provided by financing activities		919,634			(367,095	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(72,965	)		(2,314,413	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		1,061,307			4,321,078
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	988,342		$	2,006,665

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

5

BIO-KEY International, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

	Six Months Ended June 30,
	2017		2016
Cash paid for:
Interest	$	—	$	—
Noncash Investing and financing activities
Accrual of dividends	$	401,250	$	200,625
Issuance of common stock for consultancy services	$	114,585

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

6

BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017 (Unaudited)

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

BIO-key International, Inc. was founded in 1993 as a fingerprint biometric technology company. Biometric technology is the science of analyzing specific human characteristics which are unique to each individual in order to identify a specific person from a broader population. We develop and market advanced fingerprint biometric identification and identity verification technologies, cryptographic authentication-transaction security technologies, as well as related identity management and credentialing software solutions. We sell our products and provide services primarily to commercial entities within highly regulated industries, like healthcare and financial services and the broader corporate enterprise.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of BIO-key International, Inc. and its wholly-owned subsidiary (collectively, the “Company”, or “BIO-key”) and are stated in conformity with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. Significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all necessary adjustments, consisting only of those of a recurring nature, and disclosures to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented. The balance sheet at December 31, 2016 was derived from the audited financial statements, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America. These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “Form 10-K”), filed with the SEC on March 31, 2017. 

Recently Issued Accounting Pronouncements

In May 2014, ASU No. 2014-09, “Revenue from Contracts with Customers” was issued. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. The guidance will also require that certain contract costs incurred to obtain or fulfill a contract, such as sales commissions, be capitalized as an asset and amortized as revenue is recognized. Adoption of the new rules could affect the timing of both revenue recognition and the incurrence of contract costs for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The new standard was scheduled to be effective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date" ("ASU 2015-14") which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017 including interim periods within that reporting period.

The Company is continuing to evaluate the standard’s impact on its consolidated results of operations and financial condition. BIO-key has conducted initial analyses, developed a project management plan relative to the process of adopting this ASU, and is currently completing detailed contract reviews to determine potential adjustments to existing accounting policies as well as to support an evaluation of the standard’s impact on the Company’s consolidated results of operations and financial condition. For the majority of BIO-key’s revenue arrangements, no significant impacts are expected. However, in addition to expanded disclosures regarding revenue, the ASU could, for example, impact the timing of revenue recognition in some arrangements for which software industry-specific guidance (which the ASU supersedes) is presently utilized. The Company currently anticipates utilizing the modified retrospective method of adoption on January 1, 2018.

In July 2015 the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory" ("ASU 2015-11"). The amendments in ASU 2015-11 clarifies the measurement of inventory to be the lower of cost or realizable value and would only apply to inventory valued using the FIFO or average costing methods. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The reporting entity should apply the amendments prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-11 did not materially impact the Company’s consolidated financial statements.

7

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The update addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments, specifically equity investments and financial instruments measured at amortized cost. ASU 2016-01 is effective for public companies for annual and interim periods beginning after December 15, 2017.  Management is currently assessing the impact ASU 2016-01 will have, if any, on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases”. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements, but expects that it will increase its assets and liabilities.

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern”. Prior to ASU 2014-15, a definition for substantial doubt did not exist. However, the new guidance says that substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are available to be issued. The FASB's definition could be perceived as a higher threshold than current practice as the term “probable” means likely to occur. Under the new standard, management should evaluate all relevant known conditions, or those that can be reasonably expected to happen as of the date the financial statements are to be issued. This evaluation should be both qualitative and quantitative in nature, and should include conditions that might give rise to substantial doubt. ASU 2014-15 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted ASU 2014-15 during the quarter ended March 31, 2017.

In March 2016, the FASB issued Accounting Standards Update 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”).  ASU 2016-09 requires, among other things, that excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement rather than as additional paid-in capital, changes the classification of excess tax benefits from a financing activity to an operating activity in the statement of cash flows, and allows forfeitures to be accounted for when they occur rather than estimated.  ASU 2016-09 is effective for public companies for interim and annual periods beginning after December 15, 2016.  The adoption did not have a material impact on the Company's consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2017-11, during the six months ended June 30, 2017, did not have any impact on the condensed consolidated financial statements, however our disclosures with respect to equity instruments with down round features have been updated.  See Note 9 for updated disclosures.

Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.

Reclassification

Reclassifications occurred to certain prior year amounts in order to conform to the current year classifications. The reclassifications have no effect on the reported net loss.

2. GOING CONCERN

The Company has incurred significant losses to date, and at June 30, 2017, it had an accumulated deficit of approximately $66 million. In addition, broad commercial acceptance of the Company’s technology is critical to the Company’s success and ability to generate future revenues. At June 30, 2017, total cash and cash equivalents were approximately $988,000, as compared to approximately $1,061,000 at December 31, 2016.

The Company has financed itself in the past through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. The Company estimates that it currently requires approximately $592,000 per month to conduct operations and pay dividend obligations, a monthly amount that it has been unable to achieve consistently through revenue generation.

If the Company is unable to generate sufficient revenue to meet its goals, it will need to obtain additional third-party financing to (i) conduct the sales, marketing and technical support necessary to execute its plan to substantially grow operations, increase revenue, and serve a significant customer base; and (ii) provide working capital. No assurance can be given that any form of additional financing will be available on terms acceptable to the Company, that adequate financing will be obtained by the Company, in order to meet its needs, or that such financing would not be dilutive to existing shareholders.

8

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 matters described in the preceding paragraphs 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 meet its financing requirements on a continuing basis, and become profitable in its future operations. The accompanying consolidated financial statements do not 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.

3. 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. During the year ended December 31, 2016, the Company reclassified a past due receivable to non-current as management concluded that collection may not occur in the near term. As a result of the payment delays, the Company had reserved $500,000 at December 31, 2016 and in the six months ended June 30, 2017, the Company reserved an additional $500,000. The total reserve represents 48% of the remaining balance owed at June 30, 2017. Recoveries of accounts receivable previously written off are recorded when received. Accounts receivable consisted of the following as of:

	June 30,			December 31,
	2017			2016
Accounts receivable - current	$	861,674		$	1,577,031
Accounts receivable - non current		2,070,000			2,070,000
		2,931,674			3,647,031
Allowance for doubtful accounts - current		(13,785	)		(13,785	)
Allowance for doubtful accounts - non current		(1,000,000	)		(500,000	)
Accounts receivable, net of allowance for doubtful accounts	$	1,917,889		$	3,133,246

4. SHARE BASED COMPENSATION

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

	Three Months Ended June 30,
	2017		2016
Selling, general and administrative	$	394,264	$	44,303
Research, development and engineering		18,930		5,632
	$	413,194	$	49,935

	Six Months Ended June 30,
	2017		2016
Selling, general and administrative	$	507,120	$	190,181
Research, development and engineering		67,163		34,117
	$	574,283	$	224,298

9

5. FACTORING

Due from factor consisted of the following as of: 

	June 30,			December 31,
	2017			2016
Original invoice value	$	117,850		$	214,556
Factored amount		(88,388	)		(160,918	)
Due from factor	$	29,462		$	53,638

As of December 2011, the Company entered into a 24 month accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to October 31, 2017. Pursuant to the terms of the arrangement, the Company, from time to time, sells to the Factor certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 35% of the foreign and 75% of the domestic accounts receivable balance to the Company (the “Advance Amount”), with the remaining balance, less fees, to be forwarded to the Company once the Factor collects the full accounts receivable balance from the customer. In addition, the Company, from time to time, receives over advances from the Factor. Factoring fees range from 2.75% to 21% of the face value of the invoice factored, and are determined by the number of days required for collection of the invoice. The cost of factoring is included in selling, general and administrative expenses. The cost of factoring was as follows: 

	Three Months ended June 30,
	2017		2016
Factoring fees	$	85,326	$	108,351

	Six Months ended June 30,
	2017		2016
Factoring fees	$	133,717	$	303,363

6. INVENTORY

Inventory is stated at the lower of cost, determined on a first in, first out basis, or market, and consists primarily of fabricated assemblies and finished goods. Inventory is comprised of the following as of: 

	June 30,		December 31,
	2017		2016
Finished goods	$	341,264	$	381,762
Fabricated assemblies		225,918		83,666
Total inventory	$	567,182	$	465,428

7. SOFTWARE LICENSE RIGHTS

On November 11, 2015, the Company entered into a license agreement for the rights to all software and documentation regarding the technology currently known as or offered under the FingerQ name. The license agreement grants the Company the exclusive right to reproduce, create derivative works and distribute copies of the FingerQ software and documentation, create new FingerQ related products, and grant sub-licenses of the licensed technology to end users. The license rights have been granted to the Company in perpetuity, with a stated number of end-user resale sub-licenses allowed under the contract for a total of $12,000,000. The cost of sub-license rights expected to be sold to customers in the following 12 months is $2,100,000 and is classified as a current asset, and the balance as non-current. 

The Company has determined the software license rights to be a finite lived intangible asset, and estimated that the software license rights shall be economically used over a 10 year period, with a weighting towards the beginning years of that time-frame. The license rights were acquired during the fourth quarter of 2015, but the usage of such rights in the Company’s products was not generally available until January 2017. Accordingly, amortization began in the first quarter of 2017.

The remaining license rights are to be amortized over the greater of the following: 1) an estimate of the economic use of such license rights, 2) straight line method over ten years, or 3) the actual usage of such rights. The Company believes categorizing the amortization expense under Cost of Sales more closely reflects the nature of the license right arrangement and the use of the technology. During the three month period ended June 30, 2017 the Company sold licenses costing $1,405 and amortized $388,595. During the six month period ended June 30, 2017 the Company sold licenses costing $48,337 and amortized $729,755. The license rights had a carrying balance of $11,221,404 as of June 30, 2017.

10

On December 31, 2015, the Company purchased third party software licenses in the amount of $180,000 in anticipation of a large pending deployment that has yet to materialize. The Company is amortizing over the same methodology described above with the greatest of the three approaches being the amortization for the periods. A total of $22,020 and $28,716 was expensed for actual sales during the three and six months ended June 30, 2017, respectively. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $48,396 has been expensed, with a carrying balance of $131,604 as of June 30, 2017. The Company has classified the balance as non-current until a larger deployment occurs. Software license rights is comprised of the following as of:

	June 30,		December 31,
	2017		2016
Current software license rights	$	2,100,000	$	1,560,000
Non-current software license rights		9,253,008		10,598,411
Total software license rights	$	11,353,008	$	12,158,411

8. EARNINGS (LOSS) PER SHARE - COMMON STOCK (“EPS”)

The Company’s basic EPS is calculated using net loss available to common shareholders and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of convertible preferred stock.

The reconciliation of the numerator of the basic and diluted EPS calculations was as follows for both of the following three and six month periods ended June 30, 2017 and 2016:

	Three Months ended June 30,						Six Months ended June 30,
	2017			2016			2017			2016
Basic Numerator:
Net loss	$	(1,789,329	)	$	(1,375,489	)	$	(3,145,516	)	$	(2,538,703	)
Convertible preferred stock dividends		(200,625	)		(200,625	)		(401,250	)		(401,250	)
Net loss available to common stockholders	$	(1,989,954	)	$	(1,576,114	)	$	(3,546,766	)	$	(2,939,953	)
Basic Denominator		6,359,974			5,523,072			6,228,197			5,516,726
Per Share Amount	$	(0.32	)	$	(0.29	)	$	(0.57	)	$	(0.53	)

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 due to the net losses for the three and six months ended June 30, 2017 and 2016:

	Three Months ended June 30,				Six Months ended June 30,
	2017		2016		2017		2016
Preferred stock		5,416,667		5,416,667		5,416,667		5,416,667
Stock options		35,706		13,040		44,580		3,495
Warrants		3,004		-		3,336		-
Total		5,455,377		5,429,707		5,464,583		5,420,162

11

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

	Three Months ended June 30,				Six Months ended June 30,
	2017		2016		2017		2016
Stock options		218,761		215,000		218,761		229,583
Warrants		1,212,163		1,704,629		1,212,163		1,704,629
Total		1,430,924		1,919,629		1,430,924		1,934,212

12

9. STOCKHOLDERS’ EQUITY

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, in one 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. As of June 30, 2017, 100,000 shares of preferred stock have been designated as Series A-1 Convertible Preferred Stock, of which 90,000 shares are issued and outstanding, and 105,000 shares of preferred stock have been designated as Series B-1 Convertible Preferred Stock, all of which are issued and outstanding.  

Series A-1 Convertible Preferred Stock

On October 22 and 29, 2015, the Company issued 84,500 shares of Series A-1 Convertible Preferred Stock at a purchase price of $100.00 per share, for aggregate gross proceeds of $8,450,000. On November 11, 2015, 5,500 additional shares of Series A-1 Convertible Preferred Stock were issued at a purchase price of $100.00 per share, for gross cash proceeds of $550,000. Shares of the Series A-1 Convertible Preferred Stock are convertible at any time at the option of the holder into shares of common stock by dividing the Series A-1 Original Issue Price by an initial conversion price of $3.60 per share, subject to adjustment for stock dividends, stock splits, combinations, and reclassifications of the Company’s capital stock, and subject to a “blocker provision” which prohibits conversion if such conversion would result in the holder being the beneficial owner of in excess of 9.99% of the Company’s common stock. The Series A-1 Shares accrue dividends at the rate of 6% per annum payable quarterly on April 1, July, 1, October 1, and January 1 of each year. Unless holders of at least a majority of the outstanding shares of Series A-1 Preferred Stock elect otherwise by written notice to the Company, until October 1, 2017, the dividends are payable in cash provided that if payment in cash would be prohibited under applicable Delaware corporation law or cause the Company to breach any agreement for borrowed money, such dividends are payable in kind through the issuance of additional shares of common stock having a value equal to the volume weighted average trading price of the Company’s common stock for the ten (10) days preceding the applicable dividend payment date. Commencing January 1, 2018, dividends are payable at the option of the Company in cash or kind through the issuance of additional shares of common valued as described above.

The holders of the Series A-1 shares are entitled to designate one person to serve on the Board of Directors of the Company. The holders of the Series A-1 Shares are entitled to vote on an as converted to common stock basis together with the holders of our common stock on all matters presented to our stockholders. Upon any liquidation or dissolution of the Company, any merger or consolidation involving the Company or any subsidiary of the Company in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation do not represent immediately following such merger or consolidation at least a majority of the voting power of the capital stock of the resulting or surviving corporation, or the sale of all or substantially all assets in a single transaction or a series of related transactions, unless the holders of at least a majority of the outstanding Series A-1 Shares elect otherwise, holders of Series A-1 Shares shall be entitled to receive prior to any payment to any holders of the Company’s common stock an amount per share equal to $100.00 per share plus any declared and unpaid dividends (pari-passu with the Series B-1 holders). As of June 30, 2017, $540,000 was accrued for the holders of the Series A-1 shares, for October 1, 2016, January 1, 2017, April 1, 2017, and July 1, 2017 dividends. As of December 31, 2016, $270,000 of dividends were accrued for the holders of the Series A-1 shares for October 1, 2016 and January 1, 2017 dividends.

The Series A-1 Preferred Stock contains options that based on an evaluation of FASB ASC 815-15, “Embedded Derivatives” and FASB ASC 815-40-15, “Contracts in Entity’s Own Equity - Scope and Scope Exceptions,” are considered embedded features:  Preferred Stock’s conversion option:  The Preferred Stock is convertible at the Holder’s option at any time at the fixed conversion price of $3.60 per share; Quarterly Dividend Conversion Option:  From issuance until December 31, 2017, the majority of Holders may elect to have the Stock’s Quarterly dividend payment made in shares of Common Stock, having a value equal to the volume weighted average trading price of the Common Stock during the ten (10) trading day period preceding the applicable dividend payment date. These features were analyzed by the Company and determined that they were not required to be bifurcated from the preferred stock and recorded as derivatives as they are clearly and closely related to an equity host.

Series B-1 Convertible Preferred Stock

On November 11, 2015, the Company issued 105,000 shares of Series B-1 Convertible Preferred Stock at a purchase price of $100.00 per share, for gross proceeds of $10,500,000.  Shares of the Series B-1 Convertible Preferred Stock are convertible at any time at the option of the holder into shares of common stock by dividing the Series B-1 Original Issue Price by an initial conversion price of $3.60 per share, subject to adjustment for stock dividends, stock splits, combinations, and reclassifications of the Company’s capital stock, and subject to a “blocker provision” which prohibits conversion if such conversion would result in the holder being the beneficial owner of in excess of 9.99% of the Company’s common stock. The Series B-1 Shares accrue dividends at the rate of 2.5% per annum payable quarterly on April 1, July, 1, October 1, and January 1 of each year payable in cash provided that if payment in cash would be prohibited under applicable Delaware corporation law or cause the Company to breach any agreement for borrowed money, or if the majority of the outstanding shares of the Series B-1 Shares elect otherwise, such dividends are payable in kind through the issuance of additional shares of common stock having a value equal to the volume weighted average trading price of the Company’s common stock for the ten (10) days preceding the applicable dividend payment date.

13

The holders of the Series B-1 shares are entitled to designate one person to serve on the Board of Directors of the Company. The holders of the Series B-1 Shares are entitled to vote on an as converted to common stock basis together with the holders of our common stock on all matters presented to our stockholders. Upon any liquidation or dissolution of the Company, any merger or consolidation involving the Company or any subsidiary of the Company in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation do not represent immediately following such merger or consolidation at least a majority of the voting power of the capital stock of the resulting or surviving corporation, or the sale of all or substantially all assets in a single transaction or a series of related transactions, unless the holders of at least a majority of the outstanding Series B-1 Shares elect otherwise, holders of Series B-1 Shares shall be entitled to receive prior to any payment to any holders of the Company’s common stock an amount per share equal to $100.00 per share plus any declared and unpaid dividends (pari-passu with the Series A-1 holders). As of June 30, 2017, $262,500 was accrued for the holders of the Series B-1 shares, for October 1, 2016, January 1, 2017, April 1, 2017, and July 1, 2017 dividends. As of December 31, 2016, $131,250 of dividends were accrued for the holders of the Series B-1 shares for October 1, 2016 and January 1, 2017 dividends.

The Series B-1 Preferred Stock contains options that based on an evaluation of FASB ASC 815-15, “Embedded Derivatives” and FASB ASC 815-40-15, “Contracts in Entity’s Own Equity - Scope and Scope Exceptions,” are considered embedded features:  Preferred Stock’s conversion option:  The Preferred Stock is convertible at the Holder’s option at any time at the fixed conversion price of $3.60 per share; Quarterly Dividend Conversion Option:  The majority of Holders may elect to have the Stock’s Quarterly dividend payment made in shares of Common Stock, having a value equal to the volume weighted average trading price of the Common Stock during the ten (10) trading day period preceding the applicable dividend payment date. These features were analyzed by the Company and determined that they were not required to be bifurcated from the preferred stock and recorded as derivatives as they are clearly and closely related to an equity host.  

Common Stock

Effective December 29, 2016, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-12. The number of authorized shares and the par value of the Company's common stock and preferred stock were not affected by the reverse stock split. Stockholders who otherwise would be entitled to receive fractional shares were rounded up to the nearest whole share. The reverse stock split became effective on the OTCQB at the opening of trading on December 29, 2016.

On April 28, 2017, the Company issued to Wong Kwok Fong, a director and executive officer of the Company, 277,778 shares of common stock at a purchase price of $3.60 per share for gross cash proceeds of $1,000,000.

On May 2, 2017, the Company entered into a committed equity facility pursuant to which it may issue and sell up to $5.0 million worth of shares of common stock, subject to certain limitations and satisfaction of certain conditions, over a 36-month term following the effectiveness of a registration statement covering the public resale of the shares of common stock issued under the facility. From time to time over the term of the facility, the Company may issue requests to the investor to purchase a specified dollar amount of shares up to a maximum of $100,000 over a five trading day period based on the daily volume weighted average price of the Company’s common stock (VWAP) to the extent the VWAP equals or exceeds the greater of a formula amount or $3.83 per share. The per share purchase price for the shares issued under the facility will be equal to 94% of the lowest VWAP that equals or exceeds $3.83 per share. Aggregate sales under the facility are limited to 19.99% of the total outstanding shares of the Company’s common stock as of May 2, 2017, unless stockholder approval is obtained, and sales under the facility are prohibited if such a sale would result in beneficial ownership by the investor of more than 9.99% of the Company’s common stock.  

On March 15, 2017, the Company issued 1,895 shares of common stock to its directors in payment of board fees, valued at $5,003. On March 8, 2016, the Company issued 8,333 shares of common stock to its directors in payment of board fees valued at $16,000.

14

On May 11, 2017, the Company issued 1,925 shares of common stock to its directors in payment of board fees, valued at $5,005. On May 11, 2016, the Company issued 41,174 shares of common stock to its directors in payment of board fees valued at $6,999. On May 11, 2016, the Company issued 100,000 shares of common stock to the Chief Executive Officer as compensation valued at $17,000.

In May 2017, the Company issued 55,000 shares of common stock in payment of a commitment fee for the equity facility valued at $198,000. The Company immediately expensed the fee as it relates to the contingent use of the equity committed equity facility.

In May 2017, the Company issued 61,667 shares of common stock to a consultancy firm in lieu of payment for services with respect to the equity facility agreement. The fair value at issuance averaged $2.54 per share, with the total amount of $156,584. The Company deferred the cost to prepaid expense and is amortizing the expense over the length of the consultancy service agreement.

Stock Issuance Costs

Additional costs of $74,420 were incurred during the three months ended June 30, 2017 in relation to the issuance of stock. For the six months ended June 30, 2017, total stock issuance costs totaled $80,366.

Derivative Liabilities

In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company accounts for derivative liability instruments under the provisions of FASB ASC 815, “Derivatives and Hedging.”

 Securities Purchase Agreements dated October 25, 2013 and November 8, 2013

Pursuant to a series of Private Investors Securities Purchase Agreements (the “PI SPA”), on October 25, 2013 and November 8, 2013, the Company issued to certain private investors an aggregate of 1,026,972 units consisting of 1,026,972 shares of common stock (the “Shares”) and warrants to purchase an additional 1,026,972 shares of common stock (the “Warrants”) for an aggregate purchase price of $3,697,100. The warrants were immediately exercisable at an exercise price of $6.00 per share, and had a term of three years which expired in 2016.

In connection with the share issuances described above, and pursuant to a placement agency letter agreement, the Company paid the placement agent cash commissions equal to 8% of the gross proceeds of the offering, reimbursed the placement agent for its reasonable out of pocket expenses, and issued to the placement agent warrants (the “Placement Agent Warrants”) to purchase an aggregate of 82,158 shares of common stock. The Placement Agent Warrants have substantially the same terms as the warrants issued to the investors, except the Placement Agent Warrants were immediately exercisable on a cashless basis.

The cashless exercise features contained in the warrants were considered to be derivatives and the Company recorded warrant liabilities on the consolidated balance sheet. The Company initially recorded the warrant liabilities equal to their estimated fair value of $325,891. Such amount was also recorded as a reduction of additional paid-in capital. The Company is required to mark-to-market the warrant liabilities at the end of each reporting period. For the three months ended June 30, 2016, the Company recorded a loss on the change in fair value of the cashless exercise features of $433. For the six months ended June 30, 2016, the Company recorded a gain on the change in the fair value of the cashless exercise feature of $1,904. As of December 31, 2016, the fair value of the cashless exercise features was $0 as the underlying warrants expired during the fourth quarter of 2016.

Securities Purchase Agreement dated November 13, 2014

Pursuant to a Securities Purchase Agreement, dated November 13, 2014, by and between the Company and a number of private and institutional investors (the “November 2014 Private Investor SPA”), the Company issued to certain private investors 664,584 shares of common stock and warrants to purchase an additional 996,877 shares of common stock for aggregate gross proceeds of $1,595,000.

The common stock has a purchase price reset feature. If at any time prior to the two year anniversary of the effective date of the registration statement covering the public resale of such shares (January 29, 2015), the Company sells or issues shares of common stock or securities that are convertible into common stock at a price lower than $2.40 per share, the Company will be required to issue additional shares of common stock for no additional consideration.

15

Based on an evaluation as discussed in FASB ASC 815-15, “Embedded Derivatives” and FASB ASC 815-40-15, “Contracts in Entity’s Own Equity - Scope and Scope Exceptions,” the Company determined that the purchase price reset feature on the common stock issued was not considered indexed to its own stock because neither the occurrence of a sale of equity securities by the issuer at market nor the issuance of another equity contract with a lower strike price is an input to the fair value of a fixed-for-fixed option or forward on equity shares. As such, the purchase price reset feature should be bifurcated from the common stock and accounted for as a derivative liability.

The Company valued the purchase price reset feature using a Monte Carlo simulation at the date of issuance, and at quarterly reporting intervals until the expiration of the feature in January 2017, and determined that the purchase price reset feature had no value as the Company issued Series A-1 and Series B-1 preferred stock in October and November of 2015, at a conversion price of $3.60, and issued common stock in November 2016 and April 2017 also at a price of $3.60.

The warrants have a term of five years and an exercise price of $3.60 per share, and have been fully exercisable since February 2015. The warrants have customary anti-dilution protections including a “full ratchet” anti-dilution adjustment provision which are triggered in the event the Company sells or grants any additional shares of common stock, options, warrants or other securities that are convertible into common stock at a price lower than $3.60 per share. The anti-dilution adjustment provision is not triggered by certain “exempt issuances” which among other issuances, includes the issuance of shares of common stock, options or other securities to officers, employees, directors, consultants or service providers.

As a result of the early adoption of ASU 2017-11 referred to in Note 1 – Recently Issued Accounting Pronouncements, the “full ratchet” anti-dilution feature is no longer a determinant for derivative liability accounting. As the “full ratchet” anti-dilution feature was determined to have no value in the past, the adoption had no effect on the balance sheets or statements of operations.

Warrants

On March 9, 2015, the Company issued a warrant to purchase 47,917 shares of common stock to a consultant which vested in equal quarterly installments over one year and is exercisable at $2.52 per share through March 8, 2020. For the six months ended June 30, 2016, the Company recorded an expense of $11,625 related to the stock warrants, which completed the service period.

On September 23, 2015, the Company issued a warrant to purchase 69,445 shares of common stock in connection with the issuance of a promissory note. The warrants are immediately exercisable at an exercise price of $3.60 per share and have a term of five years.

The warrants have customary anti-dilution protections including a "full ratchet" anti-dilution adjustment provision which are triggered in the event the Company sells or grants any additional shares of common stock, options, warrants or other securities that are convertible into common stock at a price lower than $3.60 per share. The anti-dilution adjustment provision is not triggered by certain "exempt issuances" which among other issuances, includes the issuance of shares of common stock, options or other securities to officers, employees, directors, consultants or service providers.

As a result of the early adoption of ASU 2017-11 referred to in Note 1 – Recently Issued Accounting Pronouncements, the “full ratchet” anti-dilution feature is no longer a determinant for derivative liability accounting. As the “full ratchet” anti-dilution feature was determined to have no value in the past, the adoption had no effect on the balance sheets or statements of operations. 

16

The cashless exercise features contained in the warrants were initially considered to be derivatives and the Company recorded a warrant liability of $92,199 on the consolidated balance sheet in 2015. The warrants issued by the Company were valued using an option-pricing model. The Company marked-to-market the warrant liabilities at the end of each reporting period. For the quarter ended June 30, 2016, the Company recorded a loss on the change in fair value of the cashless exercise features of $49,035. For the six months ended June 30, 2016, the Company recorded a loss on the change in the fair value of the cashless exercise features of $51,410. During 2016, the Company determined the cashless exercise features did not meet the criteria for recording a warrant liability. Accordingly, the grant date fair value of the warrant liability was transferred to additional paid-in capital and the cumulative loss due to change in the recorded fair value of the liability was reversed during 2016.

Issuances of Stock Options

On March 15, 2017, the Company issued options to purchase 40,000 shares of the Company’s common stock to four non-employee members of the Board of Directors. On March 15, 2017, the Company also issued options to purchase 4,167 shares of the Company’s common stock to an employee. The options have a three-year vesting period, seven-year term, and exercise price of $2.64.  

On March 16, 2017, the Board of Directors issued options to purchase 1,120,000 shares of the Company’s common stock to certain officers, employees, and contractors. The options have a three-year vesting period, seven-year term, and exercise price of $2.65.

On April 10, 2017, the Company issued options to purchase 10,000 shares of the Company’s common stock to the newly appointed Director. The options have a three-year vesting period, seven-year term, and exercise price of $2.64. 

The fair value of the options issued during the three months ended June 30, 2017 on April 10, 2017 was estimated on the date of grant at $20,538 using the Black-Scholes option-pricing model with the following assumptions: risk free interest rate: 1.81%, expected life of options in years: 4.5, expected dividends: 0, volatility of stock price: 138%.

10. SEGMENT INFORMATION

The Company has determined that its continuing operations are one discrete segment consisting of biometric products. Geographically, North American sales accounted for approximately 58% and 78% of the Company’s total sales for the three months ended June 30, 2017 and 2016, respectively, and were approximately 73% and 80% of the Company’s total sales for the six months ended June 30, 2017 and 2016, respectively.

11. FAIR VALUES OF FINANCIAL INSTRUMENTS

Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and due from factor, are carried at, or approximate, fair value because of their short-term nature.

12. MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLE

For the three months ended June 30, 2017 and 2016, three customers accounted for 52% and three customers accounted for 48% of revenue, respectively. For the six months ended June 30, 2017 and 2016, three customers accounted for 44% and three customers accounted for 48% of revenue, respectively.

Three customers accounted for 57% of current accounts receivable as of June 30, 2017. One customer accounted for 100% of non-current accounts receivable as of June 30, 2017 and December 31, 2016. Based on prior history with this customer, the Company believes the amount is fully collectable, however, the Company has reserved $1,000,000 which represents 48% of the remaining balance owed under the contract, due to the length of time the receivable has been outstanding.  At December 31, 2016, one customer accounted for 81% of current accounts receivable.

13. SUBSEQUENT EVENTS

On July 25, 2017, the Company was approved for listing on the Nasdaq Capital Market.

On August 9, 2017, the Company issued 5,148 shares of common stock to its directors in payment of board fees.

17

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The information contained in this Report on Form 10-Q and in other public statements by the Company and Company officers include or may contain certain forward-looking statements. All statements other than statements of historical facts contained in this Report on Form 10-Q, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “will,” “may,” “future,” “plan,” “intend” and “expect” and similar expressions generally identify forward-looking statements. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Although we believe that our plans, intentions and expectations reflected in the forward-looking statements are reasonable, we cannot be sure that they will be achieved. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: our history of losses and limited revenue; our ability to raise additional capital; our ability to protect our intellectual property; changes in business conditions; changes in our sales strategy and product development plans; changes in the marketplace; continued services of our executive management team; security breaches; competition between us and other companies in the biometric technology industry; market acceptance of biometric products generally and our products under development; our ability to expand into the Asian market; delays in the development of products and statements of assumption underlying any of the foregoing, as well as other factors set forth under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

OVERVIEW

We develop and market advanced fingerprint biometric identification and identity verification technologies, cryptographic authentication-transaction security technologies, as well as related identity management and credentialing software solutions. We were pioneers in developing automated, finger identification technology that supplements or compliments other methods of identification and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, PKI, credit card, passports, driver’s licenses, OTP or other form of possession or knowledge-based credentialing.  Advanced BIO-key® technology has been and is used to improve both the accuracy and speed of competing finger-based biometrics. Our solutions are used by many customers in numerous sectors of our economy, including government, retail, healthcare and financial services.

In 2016, we began to distribute directly to consumers and commercial users our SideSwipe™, SideTouch^TM , and EcoID™ products. SideSwipe, SideTouch, and EcoID are stand-alone fingerprint readers that can be used on any laptop, tablet or other device with a USB port.

At Consumer Electronics Show 2017, we introduced a number of new products. These included TouchLock, fingerprint biometric and bluetooth enabled padlocks, FreePass, a wearable, mobile USB fingerprint reader, Q-180 Touch, a Micro USB compatible fingerprint reader for Android devices, and SidePass, a compact, square, touch reader for Windows devices. We started distribution of the TouchLock padlock in the Asia Pacific market in June of 2017.

We have developed what we believe is the most discriminating and effective commercially available finger-based biometric technology. Our primary focus is in marketing and selling this technology into commercial logical and physical privilege entitlement & access control markets.  Our primary market focus includes, among others, mobile payments & credentialing, online payments and credentialing, and healthcare record and payment data security.  Our secondary focus includes government and educational markets.

We continue to develop advancements in our capabilities, as well as explore potential strategic relationships, including business combinations and acquisitions, which could help us leverage our capability to deliver our solutions. We have built a direct sales force, and also utilize distributors, resellers, integrators and partners with substantial experience in selling technology solutions to government and corporate customers in their respective markets.

18

STRATEGIC OUTLOOK AND RECENT DEVELOPMENTS

Historically, our largest market has been access control within highly regulated industries such as healthcare.  However, we believe the mass adoption of advanced smart-phone and hand-held wireless devices have caused commercial demand for advanced user authentication to emerge as viable.  The introduction of smart-phone capabilities, like mobile payments and credentialing, could effectively require biometric user authentication on mobile devices to reduce risks of identity theft, payment fraud and other forms of fraud in the mobile or cellular based world wide web. As more services and payment functionalities, such as mobile wallets and near field communication (NFC), migrate to smart-phones, the value and potential risk associated with such systems should grow and drive demand and adoption of advanced user authentication technologies, including fingerprint biometrics and BIO-key solutions.

As devices with onboard fingerprint sensors continue to deploy to consumers, we expect that third party application developers will demand the ability to authenticate users of their respective applications (app’s) with the onboard fingerprint biometric. We further believe that authentication will occur on the device itself for potentially low-value, and therefore low-risk, use-transactions and that user authentication for high-value transactions will migrate to the application provider’s authentication server, typically located within their supporting technology infrastructure, or cloud. We have developed our technology to enable on-device authentication as well as network or cloud-based authentication and believe we may be the only technology vendor capable of providing this flexibility and capability. Our core technology works on over 40 commercially available fingerprint readers, across both Windows and Linux platforms, and Apple iOS and Android mobile operating systems. This interoperability, coupled with the ability to authenticate users via the device or cloud, is unique in the industry, provides a key differentiator for us, and in our opinion, makes our technology more viable than competing technologies and expands the size of the overall market for our products.

The introduction of the TouchLock, fingerprint biometric and bluetooth (cell phone) enabled padlocks, opens up an additional consumer market for us. As a security solution, we also have a version of the lock that is TSA compatible, to allow travelers to lock their luggage which TSA can open and relock.

We believe there is potential for significant market growth in six key areas:

● Corporate network access control, including corporate campuses, computer networks and applications;

● Consumer mobile credentialing, including mobile payments, credit and payment card programs, data and application access, and commercial loyalty programs;

● Government services and highly regulated industries including, Medicare, Medicaid, Social Security, drivers licenses, campus and school ID, passports/visas;

● Direct sales of fingerprint readers to consumers and commercial customers;

● Direct sales of biometric locks to consumers and commercial customers; and

● Growth in the Asia Pacific region.

In the near-term, we expect to grow our business within government services and highly-regulated industries in which we have historically had a strong presence, such as the healthcare industry.  We believe that continued heightened security and privacy requirements in these industries will generate increased demand for security solutions, including biometrics. In addition, we expect that the integration of our technology into Windows 10, will accelerate the demand for our computer network log-on solutions and fingerprint readers. We are also experiencing increased demand and interest in our hardware offerings as we continue to develop our products business. Finally, our entry into the Asian market and licensing arrangement with China Goldjoy Group is expected to further expand our business by opening new markets.

Over the longer term, we intend to expand our business into the cloud and mobile computing industries. The emergence of cloud computing and mobile computing are primary drivers of commercial and consumer adoption of advanced authentication applications, including biometric and BIO-key authentication capabilities.  As the value of assets, services and transactions increases on such networks, we expect that security and user authentication demand should rise proportionately. Our integration partners include major web and network technology providers, who we believe will deliver our cloud-applicable solutions to interested service-providers. These service-providers could include, but are not limited to, financial institutions, web-service providers, consumer payment service providers, credit reporting services, consumer data service providers, healthcare providers and others. Additionally, our integration partners include major technology component providers and OEM manufacturers, who we believe will deliver our device-applicable solutions to interested hardware manufacturers. Such manufacturers could include cellular handset and smartphone manufacturers, tablet manufacturers, laptop and PC manufacturers, among other hardware manufacturers. 

19

CRITICAL ACCOUNTING POLICIES

For detailed information regarding our critical accounting policies and estimates, see our financial statements and notes thereto included in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2016.  There have been no material changes to our critical accounting policies and estimates from those disclosed in our most recent Annual Report on Form 10-K.

RECENT ACCOUNTING PRONOUNCEMENTS

For detailed information regarding recent account pronouncements, see Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2017 AS COMPARED TO JUNE 30, 2016

Consolidated Results of Operations - Percent Trend

	Three Months Ended June 30,
	2017			2016
Revenues
Services		15	%		53	%
License fees and other		85	%		47	%
Total Revenues		100	%		100	%
Costs and other expenses
Cost of services		6	%		16	%
Cost of license fees and other		84	%		17	%
Total Cost of Goods Sold		90	%		33	%
Gross profit		10	%		67	%
Operating expenses
Selling, general and administrative		161	%		250	%
Research, development and engineering		51	%		136	%
Total Operating Expenses		212	%		386	%
Operating loss		-202	%		-319	%
Other income (expenses)		0	%		-12	%
Net loss		-202	%		-331	%

Revenues and cost of goods sold

	Three months ended June 30,
	2017		2016		$ Change			% Change
Revenues
Service	$	134,061	$	220,926	$	(86,865	)		-39	%
License & other		752,820		194,888		557,932			286	%
Total Revenue	$	886,881	$	415,814	$	471,067			113	%

20

	Three months ended June 30,
	2017		2016		$ Change			% Change
Cost of Goods Sold
Service	$	55,660	$	66,597	$	(10,937	)		-16	%
License & other		740,301		69,893		670,408			959	%
Total COGS	$	795,961	$	136,490	$	659,471			483	%

Revenues

For the three months ended June 30, 2017 and 2016, service revenues included approximately $124,000 and $221,000, respectively, of recurring maintenance and support revenue, and approximately $10,000 and zero respectively, of non-recurring custom services revenue.  Recurring service revenue decreased 44% in 2017 due to the non-renewal of two large maintenance contracts. Non-recurring custom services increased 100% for custom services in connection with a special software requirement from a new customer.

For the three months ended June 30, 2017, license and other revenue (comprised of hardware and royalties) increased 286% from the corresponding period in 2016. The higher revenue included an approximate $55,000 (76%) increase in license revenue from both new and existing customers.  Hardware sales increased by approximately $345,000 (281%), as a result of an increase in existing and new customer deployments.  Additionally, during the three months ended June 30, 2017, we shipped the first orders for our new line of biometric locks in the amount of approximately $158,000.

Costs of goods sold

For the three months ended June 30, 2017, cost of service decreased 16%, due to a decrease in support services related to decreased service revenue.  License and other costs for the three months ended June 30, 2017 increased approximately 959%. The increase was directly associated with the costs of the hardware mix, and $388,595 was directly associated with the amortization of the software rights.

Selling, general and administrative

	Three months ended June 30,
	2017		2016		$ Change		% Change
Selling, general and administrative	$	1,431,208	$	1,038,904	$	392,304		38	%

Selling, general and administrative costs for the three months ended June 30, 2017 increased 31% from the corresponding period in 2016. The increase is attributable to additional expenses related to our Hong Kong subsidiary, commitment fees, non- cash compensation, and commissions, offset by lower factoring and legal fees.

Research, development and engineering

	Three months ended June 30,
	2017		2016		$ Change			% Change
Research, development and engineering	$	449,049	$	566,448	$	(117,399	)		-21	%

For the three months ended June 30, 2017, research, development and engineering costs decreased 21% as compared to the corresponding period in 2016, as a result of decreased temporary outside services, and recruiting expenses, offset by an increase in personnel and related costs.

21

Other income and expense

	Three months ended June 30,
	2017		2016			$ Change		% Change
Interest income	$	8	$	7		$	1		14	%
Gain (loss) on derivatives		-		(49,468	)		49,468		-100	%
Total	$	8	$	(49,461	)	$	49,469		-100	%

Interest income for the three months ended June 30, 2017 and June 30, 2016 consisted of bank interest.

During the fourth quarters of 2013 and 2014, and third quarter of 2015, we issued various warrants that contained derivative liabilities. Such derivative liabilities are required to be marked-to-market each reporting period. In 2016, we determined the warrant liability recorded during the third quarter of 2015 did not meet the criteria to record a derivative liability and, therefore, the related cumulative loss on the derivative was reversed.

22

SIX MONTHS ENDED JUNE 30, 2017 AS COMPARED TO JUNE 30, 2016

Consolidated Results of Operations - Percent Trend

	Six Months Ended June 30,
	2017			2016
Revenues
Services		20	%		60	%
License fees and other		80	%		40	%
Total Revenues		100	%		100	%
Costs and other expenses
Cost of services		4	%		14	%
Cost of license fees and other		59	%		15	%
Total Cost of Goods Sold		63	%		29	%
Gross profit		37	%		71	%
Operating expenses
Selling, general and administrative		132	%		240	%
Research, development and engineering		41	%		125	%
Total Operating Expenses		173	%		365	%
Operating loss		-136	%		-294	%
Other income (expenses)		0	%		-6	%
Net loss		-136	%		-300	%

Revenues and cost of goods sold

	Six months ended June 30,
	2017		2016		$ Change			% Change
Revenues
Service		454,648		505,652		(51,004	)		-10	%
License & other		1,850,568		340,754		1,509,814			443	%
Total Revenue	$	2,305,216	$	846,406	$	1,458,810			172	%
Cost of Goods Sold
Service		94,480		122,379		(27,899	)		-23	%
License & other		1,362,415		125,959		1,236,456			982	%
Total COGS	$	1,456,895	$	248,338	$	1,208,557			487	%

Revenues

For the six months ended June 30, 2017 and 2016, service revenues included approximately $264,000 and $412,000, respectively, of recurring maintenance and support revenue, and approximately $191,000 and $94,000, respectively, of non-recurring custom services revenue.  Recurring service revenue decreased 36% from 2016 due to the non-renewal of two large maintenance contracts. Non-recurring custom services increased 103% due to multiple custom software requirements in the first half of 2017, compared to one customer requirement in the first half of 2016.

For the six months ended June 30, 2017, license and other revenue (comprised of hardware and royalties) increased as a result of several contributing factors.  The higher revenue included an approximate $528,000 (546%) increase in license revenue from both new and existing customers.  Hardware sales increased by approximately $845,000 (378%), as a result of increases in existing and new customer deployments.  Additionally, during the six months ended June 30, 2017, we shipped the first orders for our new line of biometric locks in the amount of approximately $158,000. Royalty income decreased 100% from $20,584 to zero for the six months ended June 30, 2017 due primarily to the expiration of an OEM agreement.

23

Costs of goods sold

For the six months ended June 30, 2017, cost of service decreased approximately $28,000 from the corresponding period in 2016 due to decreased costs associated with non-recurring custom services revenue. License and other costs for the six months ended June 30, 2017 increased from the corresponding period in 2016 by approximately $1,240,000. The increase was directly associated with the increase in hardware revenue, and $729,755 was directly associated with the amortization of the software rights.

Selling, general and administrative

	Six months ended June 30,
	2017		2016		$ Change		% Change
Selling, general and administrative	$	3,051,358	$	2,031,429	$	1,019,929		50	%

Selling, general and administrative costs for the six months ended June 30, 2017 increased 47% from the corresponding period in 2016. The increase was largely due to a bad debt expense related to a contract whose payments are behind schedule.  As a result of the payment delays, we reserved $500,000 which represents 24% of the remaining balance owed under the contract, for a total reserve of $1,000,000. Other increases resulted from additional expenses related to our Hong Kong subsidiary, non-cash, share-based compensation expenses, commitment fees and increased commission expense related to higher revenue. These amounts were offset by a decrease in factoring and legal fees.

Research, development and engineering

	Six months ended June 30,
	2017		2016		$ Change			% Change
Research, development and engineering	$	942,493	$	1,055,849	$	(113,356	)		-11	%

For the six months ended June 30, 2017, research, development and engineering costs decreased 11% compared to the corresponding period in 2016, as a result of decreased temporary outside services, and recruiting expenses, offset by an increase in personnel and related costs, and non-cash compensation costs.

Other income and expense

	Six months ended June 30,
	2017		2016			$ Change		% Change
Interest income (expenses)	$	14	$	13		$	1		8	%
Gain (loss) on derivatives		-		(49,506	)		49,506		-100	%
Total	$	14	$	(49,493	)	$	49,507		-100	%

Interest income for the three months ended June 30, 2017 and June 30, 2016 consisted of bank interest.

During the fourth quarters of 2013 and 2014, and third quarter of 2015, we issued various warrants that contained derivative liabilities. Such derivative liabilities are required to be marked-to-market each reporting period. In 2016, we determined the warrant liability recorded during the third quarter of 2015 did not meet the criteria to record a derivative liability and, therefore, the related cumulative loss on the derivative was reversed.

24

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Net cash used for operations during the six months ended June 30, 2017 was approximately $852,000. The cash used in operating activities was primarily attributable to the following items:

● Net positive cash flows related to adjustments for non-cash expenses for allowances for doubtful accounts, depreciation, amortization, share-based compensation, and issuance of common stock to our non-employee directors of approximately $1,830,000, a decrease in accounts receivable of approximately $715,000, and a decrease in due from factor of approximately $24,000.

● Net negative cash flows related to payments for liabilities, inventory, and reductions of deferred revenue of approximately $450,000.

Approximately $141,000 was used for investing activities during the six months ended June 30, 2017 related to capital expenditures.

Approximately $920,000 was provided by financing activities during the six months ended June 30, 2017 consisting of approximately $1,000,000 from the issuance of common stock net of approximately $80,000 of stock issuance costs. 

We had a net working capital at June 30, 2017 of approximately $2,761,000 as compared to net working capital of approximately $3,074,000 at December 31, 2016.

Liquidity and Capital Resources

Since our inception, our capital needs have been principally met through proceeds from the sale of equity and debt securities.  We expect capital expenditures to be less than $200,000 during the next twelve months.  

The following sets forth our primary sources of capital during the previous two years:

As of December 2011, we entered into a 24-month accounts receivable factoring arrangement with a financial institution (the “Factor”) which has since been extended through October 31, 2017. Pursuant to the terms of the arrangement, from time to time, we sell to the Factor certain of our accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 35% of the foreign and 75% of the domestic accounts receivable balance to us (the “Advance Amount”), with the remaining balance, less fees, to be forwarded to us once the Factor collects the full accounts receivable balance from the customer. In addition, from time to time, we receive over advances from the Factor. Factoring fees range from 2.75% to 21% of the face value of the invoice factored, and are determined by the number of days required for collection of the invoice. We expect to continue to use this factoring arrangement periodically to assist with our general working capital requirements due to contractual requirements.   

On September 23, 2015, we issued a promissory note and a warrant to purchase 69,445 shares of common stock for an aggregate principal sum of $250,000. The warrants have a term of five years and an exercise price of $3.60 per share. The note was repaid in full in October 2015.

Between October 22 and November 11, 2015, we issued 90,000 shares (the “Series A-1 Shares”) of Series A-1 Convertible Preferred Stock at a purchase price of $100.00 per share, for aggregate gross proceeds of $9,000,000. The Series A-1 Shares are convertible at any time at the option of the holder into shares of common stock at a conversion price of $3.60 per share, subject to adjustment for stock dividends, stock splits, combinations, and reclassifications of our capital stock, and subject to a “blocker provision” which prohibits conversion if such conversion would result in the holder being the beneficial owner of in excess of 9.99% of our common stock. The Series A-1 Shares accrue dividends at the rate of 6% per annum payable quarterly on April 1, July, 1, October 1, and January 1 of each year payable in cash through October 1, 2017 and thereafter, in cash or kind through the issuance of additional shares of common stock having a value equal to the volume weighted average trading price of the Company’s common stock for the ten (10) days preceding the applicable dividend payment date.

On November 11, 2015, we issued 105,000 shares (the “Series B-1 Shares”) of Series B-1 Convertible Preferred Stock at a purchase price of $100.00 per share, for gross proceeds of $10,500,000. The Series B-1 Shares are convertible at any time at the option of the holder into shares of common stock at a conversion price of $3.60 per share, subject to adjustment for stock dividends, stock splits, combinations, and reclassifications of our capital stock, and subject to a “blocker provision” which prohibits conversion if such conversion would result in the holder being the beneficial owner of in excess of 9.99% of our common stock. The Series B-1 Shares accrue dividends at the rate of 2.5% per annum payable quarterly on April 1, July, 1, October 1, and January 1 of each year payable in cash.

25

On November 18, 2016, we issued to Wong Kwok Fong (Kelvin), a director and executive officer of the Company, 516,667 shares of common stock at a purchase price of $3.60 per share for gross cash proceeds of $1,860,000.

On April 28, 2017, we issued to Wong Kwok Fong (Kelvin), a director and executive officer of the Company, 277,778 shares of common stock at a purchase price $3.60 per share for gross cash proceeds of $1,000,000.

On May 2, 2017, we entered into a committed equity facility pursuant to which we may issue and sell up to $5.0 million worth of shares of common stock, subject to certain limitations and satisfaction of certain conditions, over a 36-month term following the effectiveness of a registration statement covering the public resale of the shares of common stock issued under the facility. From time to time over the term of the facility, we may in our sole discretion, issue requests to the investor to purchase a specified dollar amount of shares up to a maximum of $100,000 over a five trading day period based on the daily volume weighted average price of our common stock (VWAP) to the extent the VWAP equals or exceeds the greater of a formula amount or $3.83 per share. The per share purchase price for the shares issued under the facility will be equal to 94% of the lowest VWAP that equals or exceeds $3.83 per share. Aggregate sales under the facility are limited to 19.99% of the total outstanding shares of the Company’s common stock as of May 2, 2017, unless we obtain stockholder approval, and we are prohibited from making requests if the sale of shares pursuant to a request would result in beneficial ownership by the investor of more than 9.99% of our common stock. 

Liquidity outlook

At June 30, 2017, our total cash and cash equivalents were approximately $988,000, as compared to approximately $1,061,000 at December 31, 2016.

As discussed above, we have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. We estimate that we currently require approximately $592,000 per month to conduct our operations and pay dividend obligations, a monthly amount that we have been unable to consistently achieve through revenue generation. During the first half of 2017, we generated approximately $2,305,000 of revenue, which is below our average monthly requirements.

If we are unable to continue to generate sufficient revenue to meet our goals, we will need to obtain additional third-party financing to (i) conduct the sales, marketing and technical support necessary to execute our plan to substantially grow operations, increase revenue and serve a significant customer base; and (ii) provide working capital. We may, therefore, need to obtain additional financing through the issuance of debt or equity securities. 

Due to several factors, including our history of losses and limited revenue, our independent auditors have included an explanatory paragraph in their opinion related to our annual financial statements as to the substantial doubt about our ability to continue as a going concern. Our long-term viability and growth will depend upon the successful commercialization of our technologies and our ability to obtain adequate financing. To the extent that we require such additional financing, no assurance can be given that any form of additional financing will be available on terms acceptable to us, that adequate financing will be obtained to meet our needs, or that such financing would not be dilutive to existing stockholders. If available financing is insufficient or unavailable or we fail to continue to generate sufficient revenue, we may be required to further reduce operating expenses, delay the expansion of operations, be unable to pursue merger or acquisition candidates, or in the extreme case, not continue as a going concern.

26

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2017. Based on the evaluation of our disclosure controls and procedures as of June 30, 2017, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. 

Changes in Internal Control Over Financial Reporting

No change in our internal control over financial reporting occurred during the fiscal quarter ended June 30, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On May 2, 2017, we issued 20,000 shares of common stock to the Maxim Group LLC in payment of consulting services. The foregoing securities were issued in a private placement transaction pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, without general solicitation or advertising of any kind and without payment of placement agent or brokerage fees to any person.

On May15, 2017, we Company issued 41,667 shares of common stock to a consultancy firm in payment of consulting services. The foregoing securities were issued in a private placement transaction pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, without general solicitation or advertising of any kind and without payment of placement agent or brokerage fees to any person.

 ITEM 6. EXHIBITS

The exhibits listed in the Exhibits Index immediately preceding such exhibits are filed as part of this Report.

27

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	BIO-Key International, Inc.
Dated: August 14, 2017	/s/ Michael W. DePasquale
	Michael W. DePasquale
	Chief Executive Officer
	(Principal Executive Officer)
Dated: August 14, 2017	/s/ Cecilia C. Welch
	Cecilia C. Welch
	Chief Financial Officer
	(Principal Financial Officer)

28

EXHIBIT INDEX

Exhibit No.	Description
31.1	Certificate of CEO of Registrant required under Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended
31.2	Certificate of CFO of Registrant required under Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended
32.1	Certificate of CEO of Registrant required under 18 U.S.C. Section 1350
32.2	Certificate of CFO of Registrant required under 18 U.S.C. Section 1350
101.INS	XBRL Instance
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation
101.DEF	XBRL Taxonomy Extension Definition
101.LAB	XBRL Taxonomy Extension Labels
101.PRE	XBRL Taxonomy Extension Presentation

29

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Michael W. DePasquale, certify that: 

1. I have reviewed this quarterly report on Form 10-Q of BIO-key International, Inc. (the “Company”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; 

5. The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions): 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated: August 14, 2017
	/s/ Michael W. DePasquale
	Michael W. DePasquale
	Chairman of the Board of Directors and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Cecilia C. Welch, certify that: 

1. I have reviewed this quarterly report on Form 10-Q of BIO-key International, Inc. (the “Company”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; 

5. The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions): 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated: August 14, 2017
	/s/ CECILIA C. WELCH
	Cecilia C. Welch
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of BIO-key International, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael W. DePasquale, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

---	BIO-KEY INTERNATIONAL, INC.
	By:	/s/ Michael W. DePasquale
		Michael W. DePasquale
		Chief Executive Officer
	Dated: August 14, 2017

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of BIO-key International, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Cecilia Welch, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)            The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)            The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

BIO-KEY INTERNATIONAL, INC.
By:	/s/ CECILIA C. WELCH
	Cecilia C. Welch
	Chief Financial Officer
Dated: August 14, 2017

XML

Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2017	Aug. 11, 2017
Document Information [Line Items]
Entity Registrant Name	BIO KEY INTERNATIONAL INC
Entity Central Index Key	0001019034
Trading Symbol	bkyi
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		6,498,438
Document Type	10-Q
Document Period End Date	Jun. 30, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q2
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($)	Jun. 30, 2017	Dec. 31, 2016
ASSETS
Cash and cash equivalents	$ 988,342	$ 1,061,307
Accounts receivable, net	847,889	1,563,246
Due from factor	29,462	53,638
Inventory	567,182	465,428
Software license rights	2,100,000	1,560,000
Prepaid expenses and other	203,113	206,677
Total current assets	4,735,988	4,910,296
Software license rights, net	9,253,008	10,598,411
Accounts receivable, net	1,070,000	1,570,000
Equipment and leasehold improvements, net	153,529	67,814
Deposits and other assets	8,712	8,712
Intangible assets, net	166,735	134,132
Total non-current assets	10,651,984	12,379,069
TOTAL ASSETS	15,387,972	17,289,365
LIABILITIES
Accounts payable	333,627	466,842
Accrued liabilities	421,350	335,323
Dividends payable	802,500	401,250
Deferred revenue	417,464	633,062
Total current liabilities	1,974,941	1,836,477
TOTAL LIABILITIES	1,974,941	1,836,477
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Common stock: authorized, 170,000,000 shares; issued and outstanding; 6,493,290 and 6,093,843 of $.0001 par value at June 30, 2017 and December 31, 2016, respectively	649	609
Additional paid-in capital	79,359,032	78,253,413
Accumulated deficit	(65,946,670)	(62,801,154)
TOTAL STOCKHOLDERS’ EQUITY	13,413,031	15,452,888
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	15,387,972	17,289,365
Series A-1 Convertible Preferred Stock [Member]
STOCKHOLDERS’ EQUITY
Preferred stock	9	9
Series B-1 Convertible Preferred Stock [Member]
STOCKHOLDERS’ EQUITY
Preferred stock	$ 11	$ 11

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals)	Jun. 30, 2017 USD ($) $ / shares shares	Dec. 31, 2016 USD ($) $ / shares shares
Preferred stock, par value (in dollars per share) | $ / shares	$ 0.0001
Preferred stock, shares authorized (in shares)	5,000,000
Common stock, par value (in dollars per share) | $ / shares	$ 0.0001	$ 0.0001
Common stock, shares authorized (in shares)	170,000,000	170,000,000
Common stock, shares issued (in shares)	6,493,290	6,093,843
Common stock, shares outstanding (in shares)	6,493,290	6,093,843
Reverse Stock Split [Member]
Common stock, reverse stock split, shares	12	12
Series A-1 Convertible Preferred Stock [Member]
Preferred stock, liquidation value | $	$ 100	$ 100
Preferred stock, shares issued (in shares)	90,000	90,000
Preferred stock, shares outstanding (in shares)	90,000	90,000
Preferred stock, par value (in dollars per share) | $ / shares	$ 0.0001	$ 0.0001
Preferred stock, shares authorized (in shares)	100,000	100,000
Series B-1 Convertible Preferred Stock [Member]
Preferred stock, liquidation value | $	$ 100	$ 100
Preferred stock, shares issued (in shares)	105,000	105,000
Preferred stock, shares outstanding (in shares)	105,000	105,000
Preferred stock, par value (in dollars per share) | $ / shares	$ 0.0001	$ 0.0001
Preferred stock, shares authorized (in shares)	105,000	105,000

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Revenues
Services	$ 134,061	$ 220,926	$ 454,648	$ 505,652
License fees and other	752,820	194,888	1,850,568	340,754
	886,881	415,814	2,305,216	846,406
Costs and other expenses
Cost of services	55,660	66,597	94,480	122,379
Cost of license fees and other	740,301	69,893	1,362,415	125,959
	795,961	136,490	1,456,895	248,338
Gross Profit	90,920	279,324	848,321	598,068
Operating Expenses
Selling, general and administrative	1,431,208	1,038,904	3,051,358	2,031,429
Research, development and engineering	449,049	566,448	942,493	1,055,849
Total Operating Expenses	1,880,257	1,605,352	3,993,851	3,087,278
Operating loss	(1,789,337)	(1,326,028)	(3,145,530)	(2,489,210)
Other income (expenses)
Interest income	8	7	14	13
Loss on derivative liabilities		(49,468)		(49,506)
Total other income (expenses)	8	(49,461)	14	(49,493)
Net loss	(1,789,329)	(1,375,489)	(3,145,516)	(2,538,703)
Convertible preferred stock dividends	(200,625)	(200,625)	(401,250)	(401,250)
Net loss available to common stockholders	$ (1,989,954)	$ (1,576,114)	$ (3,546,766)	$ (2,939,953)
Basic and Diluted Loss per Common Share (in dollars per share)	$ (0.32)	$ (0.29)	$ (0.57)	$ (0.53)
Weighted Average Shares Outstanding:
Basic and diluted (in shares)	6,359,974	5,523,072	6,228,197	5,516,726

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss	$ (3,145,516)	$ (2,538,703)
Adjustments to reconcile net loss to cash used for operating activities:
Allowance for doubtful accounts	500,000
Depreciation	15,513	24,577
Amortization of intangible assets	6,833	6,803
Amortization of software license rights	729,755
Loss on derivative liabilities		49,506
Share-based and warrant compensation for employees and consultants	564,275	184,299
Stock based directors fees	10,008	39,999
Change in assets and liabilities:
Accounts receivable	715,357	1,092,661
Due from factor	24,176	35,098
Inventory	(101,754)	(131,394)
Software license rights	75,648
Prepaid expenses and other	16,556	4,348
Accounts payable	(133,215)	(462,136)
Accrued liabilities	86,027	(142,234)
Deferred revenue	(215,598)	(58,359)
Net cash used for operating activities	(851,935)	(1,895,535)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(140,664)	(51,783)
Net cash used for investing activities	(140,664)	(51,783)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock	1,000,000
Preferred dividends paid		(334,476)
Costs to issue preferred and common stock	(80,366)	(32,619)
Net cash provided by financing activities	919,634	(367,095)
NET DECREASE IN CASH AND CASH EQUIVALENTS	(72,965)	(2,314,413)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	1,061,307	4,321,078
CASH AND CASH EQUIVALENTS, END OF PERIOD	988,342	2,006,665
Cash paid for:
Interest
Noncash Investing and financing activities
Accrual of dividends	401,250	200,625
Issuance of common stock for consultancy services	$ 114,585

XML

Note 1 - Nature of Business and Basis of Presentation

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Business Description and Accounting Policies [Text Block]

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

BIO-key International, Inc. was founded in

1993

as a fingerprint biometric technology company. Biometric technology is the science of analyzing specific human characteristics which are unique to each individual in order to identify a specific person from a broader population. We develop and market advanced fingerprint biometric identification and identity verification technologies, cryptographic authentication-transaction security technologies, as well as related identity management and credentialing software solutions. We sell our products and provide services primarily to commercial entities within highly regulated industries, like healthcare and financial services and the broader corporate enterprise.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of BIO-key International, Inc. and its wholly-owned subsidiary (collectively, the “Company”, or “BIO-key”) and are stated in conformity with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The operating results for interim periods are

not

necessarily indicative of results that

may

be expected for any other interim period or for the full year. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. Significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all necessary adjustments, consisting only of those of a recurring nature, and disclosures to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented. The balance sheet at

December 31, 2016

was derived from the audited financial statements, but does

not

include all of the disclosures required by accounting principles generally accepted in the United States of America. These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and the related notes thereto included in the Company’s Annual Report on Form

10

-K for the fiscal year ended

December 31, 2016 (

the “Form

10

-K”), filed with the SEC on

March 31, 2017. 

Recently Issued Accounting Pronouncements

In

May 2014,

ASU

No.

 

2014

-

09,

“Revenue from Contracts with Customers” was issued. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. The guidance will also require that certain contract costs incurred to obtain or fulfill a contract, such as sales commissions, be capitalized as an asset and amortized as revenue is recognized. Adoption of the new rules could affect the timing of both revenue recognition and the incurrence of contract costs for certain transactions. The guidance permits

two

implementation approaches,

one

requiring retrospective application of the new standard with restatement of prior years and

one

requiring prospective application of the new standard with disclosure of results under old standards. The new standard was scheduled to be effective for reporting periods beginning after

December 

15,

2016

and early adoption is

not

permitted. In

August 2015,

the FASB issued ASU

2015

-

14,

"Revenue from Contracts with Customers (Topic

606

): Deferral of Effective Date" ("ASU

2015

-

14"

) which defers the effective date of ASU

2014

-

09

by

one

year. ASU

2014

-

09

is now effective for annual reporting periods beginning after

December 15, 2017

including interim periods within that reporting period.

The Company is continuing to evaluate the standard’s impact on its consolidated results of operations and financial condition. BIO-key has conducted initial analyses, developed a project management plan relative to the process of adopting this ASU, and is currently completing detailed contract reviews to determine potential adjustments to existing accounting policies as well as to support an evaluation of the standard’s impact on the Company’s consolidated results of operations and financial condition. For the majority of BIO-key’s revenue arrangements,

no

significant impacts are expected. However, in addition to expanded disclosures regarding revenue, the ASU could, for example, impact the timing of revenue recognition in some arrangements for which software industry-specific guidance (which the ASU supersedes) is presently utilized. The Company currently anticipates utilizing the modified retrospective method of adoption on

January 1, 2018.

In

July 2015

the FASB issued ASU

No.

2015

-

11,

"Inventory (Topic

330

): Simplifying the Measurement of Inventory" ("ASU

2015

-

11"

). The amendments in ASU

2015

-

11

clarifies the measurement of inventory to be the lower of cost or realizable value and would only apply to inventory valued using the FIFO or average costing methods. ASU

2015

-

11

is effective for fiscal years beginning after

December 15, 2016,

including interim periods within those fiscal years. The reporting entity should apply the amendments prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU

2015

-

11

did

not

materially impact the Company’s consolidated financial statements.

In

January 2016,

the FASB issued ASU

2016

-

01,

“Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU

2016

-

01”

). The update addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments, specifically equity investments and financial instruments measured at amortized cost. ASU

2016

-

01

is effective for public companies for annual and interim periods beginning after

December 15, 2017. 

Management is currently assessing the impact ASU

2016

-

01

will have, if any, on the Company’s consolidated financial statements.

In

February 2016,

the FASB issued ASU

2016

-

02,

“Leases”. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than

12

months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements, but expects that it will increase its assets and liabilities.

In

August 2014,

the FASB issued ASU

No.

2014

-

15,

“Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern”. Prior to ASU

2014

-

15,

a definition for substantial doubt did

not

exist. However, the new guidance says that substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within

one

year after the date that the financial statements are available to be issued. The FASB's definition could be perceived as a higher threshold than current practice as the term “probable” means likely to occur. Under the new standard, management should evaluate all relevant known conditions, or those that can be reasonably expected to happen as of the date the financial statements are to be issued. This evaluation should be both qualitative and quantitative in nature, and should include conditions that might give rise to substantial doubt. ASU

2014

-

15

is effective for fiscal years beginning after

December 15, 2016,

including interim periods within those fiscal years. The Company adopted ASU

2014

-

15

during the quarter ended

March 31, 2017.

In

March 2016,

the FASB issued Accounting Standards Update

2016

-

09,

“Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (“ASU

2016

-

09”

).  ASU

2016

-

09

requires, among other things, that excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement rather than as additional paid-in capital, changes the classification of excess tax benefits from a financing activity to an operating activity in the statement of cash flows, and allows forfeitures to be accounted for when they occur rather than estimated.  ASU

2016

-

09

is effective for public companies for interim and annual periods beginning after

December 15, 2016. 

The adoption did

not

have a material impact on the Company's consolidated financial statements.

In

July 2017,

the FASB issued ASU

2017

-

11,

Earnings Per Share (Topic

260

), Distinguishing Liabilities from Equity (Topic

480

) and Derivatives and Hedging (Topic

815

): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic

480,

Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do

not

have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after

December 15, 2018,

with early adoption permitted. The adoption of ASU

2017

-

11,

during the

six

months ended

June 30, 2017,

did

not

have any impact on the condensed consolidated financial statements, however our disclosures with respect to equity instruments with down round features have been updated.  See Note

9

for updated disclosures.

Management does

not

believe that any other recently issued, but

not

yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.

Reclassification

Reclassifications occurred to certain prior year amounts in order to conform to the current year classifications. The reclassifications have

no

effect on the reported net loss.

XML

Note 2 - Going Concern

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Going Concern [Text Block]

2. GOING CONCERN

The Company has incurred significant losses to date, and at

June 30, 2017,

it had an accumulated deficit of approximately

$66

million. In addition, broad commercial acceptance of the Company’s technology is critical to the Company’s success and ability to generate future revenues. At

June 30, 2017,

total cash and cash equivalents were approximately

$988,000,

as compared to approximately

$1,061,000

at

December 31, 2016.

The Company has financed itself in the past through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. The Company estimates that it currently requires approximately

$592,000

per month to conduct operations and pay dividend obligations, a monthly amount that it has been unable to achieve consistently through revenue generation.

If the Company is unable to generate sufficient revenue to meet its goals, it will need to obtain additional

third

-party financing to (i) conduct the sales, marketing and technical support necessary to execute its plan to substantially grow operations, increase revenue, and serve a significant customer base; and (ii) provide working capital.

No

assurance can be given that any form of additional financing will be available on terms acceptable to the Company, that adequate financing will be obtained by the Company, in order to meet its needs, or that such financing would

not

be dilutive to existing shareholders.

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 matters described in the preceding paragraphs 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 meet its financing requirements on a continuing basis, and become profitable in its future operations. The accompanying consolidated financial statements do

not

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.

XML

Note 3 - Accounts Receivable

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

3. 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. During the year ended

December 31, 2016,

the Company reclassified a past due receivable to non-current as management concluded that collection

may

not

occur in the near term. As a result of the payment delays, the Company had reserved

$500,000

at

December 31, 2016

and in the

six

months ended

June 30, 2017, 

the Company reserved an additional

$500,000.

The total reserve represents

48%

of the remaining balance owed at

June 30, 2017.

Recoveries of accounts receivable previously written off are recorded when received. Accounts receivable consisted of the following as of:

	June 30,			December 31,
	2017			2016
Accounts receivable - current	$	861,674		$	1,577,031
Accounts receivable - non current		2,070,000			2,070,000
		2,931,674			3,647,031
Allowance for doubtful accounts - current		(13,785	)		(13,785	)
Allowance for doubtful accounts - non current		(1,000,000	)		(500,000	)
Accounts receivable, net of allowance for doubtful accounts	$	1,917,889		$	3,133,246

XML

Note 4 - Share Based Compensation

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

4. SHARE BASED COMPENSATION

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

	Three Months Ended June 30,
	2017		2016
Selling, general and administrative	$	394,264	$	44,303
Research, development and engineering		18,930		5,632
	$	413,194	$	49,935

	Six Months Ended June 30,
	2017		2016
Selling, general and administrative	$	507,120	$	190,181
Research, development and engineering		67,163		34,117
	$	574,283	$	224,298

XML

Note 5 - Factoring

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Factoring [Text Block]

5. FACTORING

Due from factor consisted of the following as of: 

	June 30,			December 31,
	2017			2016
Original invoice value	$	117,850		$	214,556
Factored amount		(88,388	)		(160,918	)
Due from factor	$	29,462		$	53,638

As of

December 2011,

the Company entered into a

24

month accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to

October 31, 2017.

Pursuant to the terms of the arrangement, the Company, from time to time, sells to the Factor certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits

35%

of the foreign and

75%

of the domestic accounts receivable balance to the Company (the “Advance Amount”), with the remaining balance, less fees, to be forwarded to the Company once the Factor collects the full accounts receivable balance from the customer. In addition, the Company, from time to time, receives over advances from the Factor. Factoring fees range from

2.75%

to

21%

of the face value of the invoice factored, and are determined by the number of days required for collection of the invoice. The cost of factoring is included in selling, general and administrative expenses. The cost of factoring was as follows: 

	Three Months ended June 30,
	2017		2016
Factoring fees	$	85,326	$	108,351

	Six Months ended June 30,
	2017		2016
Factoring fees	$	133,717	$	303,363

XML

Note 6 - Inventory

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Inventory Disclosure [Text Block]

6. INVENTORY

Inventory is stated at the lower of cost, determined on a

first

in,

first

out basis, or market, and consists primarily of fabricated assemblies and finished goods. Inventory is comprised of the following as of: 

	June 30,		December 31,
	2017		2016
Finished goods	$	341,264	$	381,762
Fabricated assemblies		225,918		83,666
Total inventory	$	567,182	$	465,428

XML

Note 7 - Software Licenses and Rights

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Research, Development, and Computer Software Disclosure [Text Block]

7. SOFTWARE LICENSE RIGHTS

On

November 11, 2015,

the Company entered into a license agreement for the rights to all software and documentation regarding the technology currently known as or offered under the FingerQ name. The license agreement grants the Company the exclusive right to reproduce, create derivative works and distribute copies of the FingerQ software and documentation, create new FingerQ related products, and grant sub-licenses of the licensed technology to end users. The license rights have been granted to the Company in perpetuity, with a stated number of end-user resale sub-licenses allowed under the contract for a total of

$12,000,000.

The cost of sub-license rights expected to be sold to customers in the following

12

months is

$2,100,000

and is classified as a current asset, and the balance as non-current. 

The Company has determined the software license rights to be a finite lived intangible asset, and estimated that the software license rights shall be economically used over a

10

year period, with a weighting towards the beginning years of that time-frame. The license rights were acquired during the

fourth

quarter of

2015,

but the usage of such rights in the Company’s products was

not

generally available until

January 2017.

Accordingly, amortization began in the

first

quarter of

2017.

The remaining license rights are to be amortized over the greater of the following:

1

) an estimate of the economic use of such license rights,

2

) straight line method over

ten

years, or

3

) the actual usage of such rights. The Company believes categorizing the amortization expense under Cost of Sales more closely reflects the nature of the license right arrangement and the use of the technology. During the

three

month period ended

June 30, 2017

the Company sold licenses costing

$1,405

and amortized

$388,595.

During the

six

month period ended

June 30, 2017

the Company sold licenses costing

$48,337

and amortized

$729,755.

The license rights had a carrying balance of

$11,221,404

as of

June 30, 2017.

On

December 31, 2015,

the Company purchased

third

party software licenses in the amount of

$180,000

 in anticipation of a large pending deployment that has yet to materialize. The Company is amortizing over the same methodology described above with the greatest of the

three

approaches being the amortization for the periods. A total of

$22,020

and

$28,716

was expensed for actual sales during the

three

and

six

months ended

June 30, 2017,

respectively. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of

$48,396

has been expensed, with a carrying balance of

$131,604

as of

June 30, 2017. 

The Company has classified the balance as non-current until a larger deployment occurs. Software license rights is comprised of the following as of:

	June 30,		December 31,
	2017		2016
Current software license rights	$	2,100,000	$	1,560,000
Non-current software license rights		9,253,008		10,598,411
Total software license rights	$	11,353,008	$	12,158,411

XML

Note 8 - Earnings Per Share (EPS)

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Earnings Per Share [Text Block]

8. EARNINGS (LOSS) PER SHARE - COMMON STOCK (“EPS”)

The Company’s basic EPS is calculated using net loss available to common shareholders and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of convertible preferred stock.

The reconciliation of the numerator of the basic and diluted EPS calculations was as follows for both of the following

three

and

six

month periods ended

June 30, 2017

and

2016:

	Three Months ended June 30,						Six Months ended June 30,
	2017			2016			2017			2016
Basic Numerator:
Net loss	$	(1,789,329	)	$	(1,375,489	)	$	(3,145,516	)	$	(2,538,703	)
Convertible preferred stock dividends		(200,625	)		(200,625	)		(401,250	)		(401,250	)
Net loss available to common stockholders	$	(1,989,954	)	$	(1,576,114	)	$	(3,546,766	)	$	(2,939,953	)
Basic Denominator		6,359,974			5,523,072			6,228,197			5,516,726
Per Share Amount	$	(0.32	)	$	(0.29	)	$	(0.57	)	$	(0.53	)

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 due to the net losses for the

three

and

six

months ended

June 30, 2017

and

2016:

	Three Months ended June 30,				Six Months ended June 30,
	2017		2016		2017		2016
Preferred stock		5,416,667		5,416,667		5,416,667		5,416,667
Stock options		35,706		13,040		44,580		3,495
Warrants		3,004		-		3,336		-
Total		5,455,377		5,429,707		5,464,583		5,420,162

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

	Three Months ended June 30,				Six Months ended June 30,
	2017		2016		2017		2016
Stock options		218,761		215,000		218,761		229,583
Warrants		1,212,163		1,704,629		1,212,163		1,704,629
Total		1,430,924		1,919,629		1,430,924		1,934,212

XML

Note 9 - Stockholders' Equity

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

9. STOCKHOLDERS’ EQUITY

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, in

one

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. As of

June 30, 2017,

100,000

shares of preferred stock have been designated as Series A-

1

Convertible Preferred Stock, of which

90,000

shares are issued and outstanding, and

105,000

shares of preferred stock have been designated as Series B-

1

Convertible Preferred Stock, all of which are issued and outstanding.  

Series A-

1

Convertible Preferred Stock

On

October 22

and

29,

2015,

the Company issued

84,500

shares of Series A-

1

Convertible Preferred Stock at a purchase price of

$100.00

per share, for aggregate gross proceeds of

$8,450,000.

On

November 11, 2015,

5,500

additional shares of Series A-

1

Convertible Preferred Stock were issued at a purchase price of

$100.00

per share, for gross cash proceeds of

$550,000.

Shares of the Series A-

1

Convertible Preferred Stock are convertible at any time at the option of the holder into shares of common stock by dividing the Series A-

1

Original Issue Price by an initial conversion price of

$3.60

per share, subject to adjustment for stock dividends, stock splits, combinations, and reclassifications of the Company’s capital stock, and subject to a “blocker provision” which prohibits conversion if such conversion would result in the holder being the beneficial owner of in excess of

9.99%

of the Company’s common stock. The Series A-

1

Shares accrue dividends at the rate of

6%

per annum payable quarterly on

April 1,

July, 1,

October 1,

and

January 1

of each year. Unless holders of at least a majority of the outstanding shares of Series A-

1

Preferred Stock elect otherwise by written notice to the Company, until

October 1, 2017,

the dividends are payable in cash provided that if payment in cash would be prohibited under applicable Delaware corporation law or cause the Company to breach any agreement for borrowed money, such dividends are payable in kind through the issuance of additional shares of common stock having a value equal to the volume weighted average trading price of the Company’s common stock for the

ten

(

10

) days preceding the applicable dividend payment date. Commencing

January 1, 2018,

dividends are payable at the option of the Company in cash or kind through the issuance of additional shares of common valued as described above.

The holders of the Series A-

1

shares are entitled to designate

one

person to serve on the Board of Directors of the Company. The holders of the Series A-

1

Shares are entitled to vote on an as converted to common stock basis together with the holders of our common stock on all matters presented to our stockholders. Upon any liquidation or dissolution of the Company, any merger or consolidation involving the Company or any subsidiary of the Company in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation do

not

represent immediately following such merger or consolidation at least a majority of the voting power of the capital stock of the resulting or surviving corporation, or the sale of all or substantially all assets in a single transaction or a series of related transactions, unless the holders of at least a majority of the outstanding Series A-

1

Shares elect otherwise, holders of Series A-

1

Shares shall be entitled to receive prior to any payment to any holders of the Company’s common stock an amount per share equal to

$100.00

per share plus any declared and unpaid dividends (pari-passu with the Series B-

1

holders). As of

June 30, 2017,

$540,000

was accrued for the holders of the Series A-

1

shares, for

October 1, 2016,

January 1, 2017,

April 1, 2017,

and

July 1, 2017

dividends. As of

December 31, 2016,

$270,000

of dividends were accrued for the holders of the Series A-

1

shares for

October 1, 2016

and

January 1, 2017

dividends.

The Series A-

1

Preferred Stock contains options that based on an evaluation of FASB ASC

815

-

15,

“Embedded Derivatives” and FASB ASC

815

-

40

-

15,

“Contracts in Entity’s Own Equity - Scope and Scope Exceptions,” are considered embedded features:  Preferred Stock’s conversion option:  The Preferred Stock is convertible at the Holder’s option at any time at the fixed conversion price of

$3.60

per share; Quarterly Dividend Conversion Option:  From issuance until

December 31, 2017,

the majority of Holders

may

elect to have the Stock’s Quarterly dividend payment made in shares of Common Stock, having a value equal to the volume weighted average trading price of the Common Stock during the

ten

(

10

) trading day period preceding the applicable dividend payment date. These features were analyzed by the Company and determined that they were

not

required to be bifurcated from the preferred stock and recorded as derivatives as they are clearly and closely related to an equity host.

Series B-

1

Convertible Preferred Stock

On

November 11, 2015,

the Company issued

105,000

shares of Series B-

1

Convertible Preferred Stock at a purchase price of

$100.00

per share, for gross proceeds of

$10,500,000.

  Shares of the Series B-

1

Convertible Preferred Stock are convertible at any time at the option of the holder into shares of common stock by dividing the Series B-

1

Original Issue Price by an initial conversion price of

$3.60

per share, subject to adjustment for stock dividends, stock splits, combinations, and reclassifications of the Company’s capital stock, and subject to a “blocker provision” which prohibits conversion if such conversion would result in the holder being the beneficial owner of in excess of

9.99%

of the Company’s common stock. The Series B-

1

Shares accrue dividends at the rate of

2.5%

per annum payable quarterly on

April 1,

July, 1,

October 1,

and

January 1

of each year payable in cash provided that if payment in cash would be prohibited under applicable Delaware corporation law or cause the Company to breach any agreement for borrowed money, or if the majority of the outstanding shares of the Series B-

1

Shares elect otherwise, such dividends are payable in kind through the issuance of additional shares of common stock having a value equal to the volume weighted average trading price of the Company’s common stock for the

ten

(

10

) days preceding the applicable dividend payment date.

The holders of the Series B-

1

shares are entitled to designate

one

person to serve on the Board of Directors of the Company. The holders of the Series B-

1

Shares are entitled to vote on an as converted to common stock basis together with the holders of our common stock on all matters presented to our stockholders. Upon any liquidation or dissolution of the Company, any merger or consolidation involving the Company or any subsidiary of the Company in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation do

not

represent immediately following such merger or consolidation at least a majority of the voting power of the capital stock of the resulting or surviving corporation, or the sale of all or substantially all assets in a single transaction or a series of related transactions, unless the holders of at least a majority of the outstanding Series B-

1

Shares elect otherwise, holders of Series B-

1

Shares shall be entitled to receive prior to any payment to any holders of the Company’s common stock an amount per share equal to

$100.00

per share plus any declared and unpaid dividends (pari-passu with the Series A-

1

holders). As of

June 30, 2017,

$262,500

was accrued for the holders of the Series B-

1

shares, for

October 1, 2016,

January 1, 2017,

April 1, 2017,

and

July 1, 2017

dividends. As of

December 31, 2016,

$131,250

of dividends were accrued for the holders of the Series B-

1

shares for

October 1, 2016

and

January 1, 2017

dividends.

The Series B-

1

Preferred Stock contains options that based on an evaluation of FASB ASC

815

-

15,

“Embedded Derivatives” and FASB ASC

815

-

40

-

15,

“Contracts in Entity’s Own Equity - Scope and Scope Exceptions,” are considered embedded features:  Preferred Stock’s conversion option:  The Preferred Stock is convertible at the Holder’s option at any time at the fixed conversion price of

$3.60

per share; Quarterly Dividend Conversion Option:  The majority of Holders

may

elect to have the Stock’s Quarterly dividend payment made in shares of Common Stock, having a value equal to the volume weighted average trading price of the Common Stock during the

ten

(

10

) trading day period preceding the applicable dividend payment date. These features were analyzed by the Company and determined that they were

not

required to be bifurcated from the preferred stock and recorded as derivatives as they are clearly and closely related to an equity host.  

Common Stock

Effective

December 29, 2016,

the Company implemented a reverse stock split of its outstanding common stock at a ratio of

1

-for-

12.

 The number of authorized shares and the par value of the Company's common stock and preferred stock were

not

affected by the reverse stock split. Stockholders who otherwise would be entitled to receive fractional shares were rounded up to the nearest whole share. The reverse stock split became effective on the OTCQB at the opening of trading on

December 29, 2016.

On

April 28, 2017,

the Company issued to Wong Kwok Fong, a director and executive officer of the Company,

277,778

shares of common stock at a purchase price of

$3.60

per share for gross cash proceeds of

$1,000,000.

On

May 2, 2017,

the Company entered into a committed equity facility pursuant to which it

may

issue and sell up to

$5.0

million worth of shares of common stock, subject to certain limitations and satisfaction of certain conditions, over a

36

-month term following the effectiveness of a registration statement covering the public resale of the shares of common stock issued under the facility. From time to time over the term of the facility, the Company

may

issue requests to the investor to purchase a specified dollar amount of shares up to a maximum of

$100,000

over a

five

trading day period based on the daily volume weighted average price of the Company’s common stock (VWAP) to the extent the VWAP equals or exceeds the greater of a formula amount or

$3.83

per share. The per share purchase price for the shares issued under the facility will be equal to

94%

of the lowest VWAP that equals or exceeds

$3.83

per share. Aggregate sales under the facility are limited to

19.99%

of the total outstanding shares of the Company’s common stock as of

May 2, 2017,

unless stockholder approval is obtained, and sales under the facility are prohibited if such a sale would result in beneficial ownership by the investor of more than

9.99%

of the Company’s common stock.  

On

March 15, 2017,

the Company issued

1,895

shares of common stock to its directors in payment of board fees, valued at

$5,003.

On

March 8, 2016,

the Company issued

8,333

shares of common stock to its directors in payment of board fees valued at

$16,000.

On

May 11, 2017,

the Company issued

1,925

 shares of common stock to its directors in payment of board fees, valued at

$5,005.

On

May 11, 2016,

the Company issued

41,174

shares of common stock to its directors in payment of board fees valued at

$6,999.

On

May 11, 2016,

the Company issued

100,000

shares of common stock to the Chief Executive Officer as compensation valued at

$17,000.

In

May 2017,

the Company issued

55,000

shares of common stock in payment of a commitment fee for the equity facility valued at

$198,000.

The Company immediately expensed the fee as it relates to the contingent use of the equity committed equity facility.

In

May 2017,

the Company issued

61,667

shares of common stock to a consultancy firm in lieu of payment for services with respect to the equity facility agreement. The fair value at issuance averaged

$2.54

per share, with the total amount of

$156,584.

The Company deferred the cost to prepaid expense and is amortizing the expense over the length of the consultancy service agreement.

Stock Issuance Costs

Additional costs of

$74,420

were incurred during the

three

months ended

June 30, 2017

in relation to the issuance of stock. For the

six

months ended

June 30, 2017,

total stock issuance costs totaled

$80,366.

Derivative Liabilities

In connection with the issuances of equity instruments or debt, the Company

may

issue options or warrants to purchase common stock. In certain circumstances, these options or warrants

may

be classified as liabilities, rather than as equity. In addition, the equity instrument or debt

may

contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances

may

be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company accounts for derivative liability instruments under the provisions of FASB ASC

815,

“Derivatives and Hedging.”

 

Securities Purchase Agreements dated

October 25, 2013

and

November 8, 2013

Pursuant to a series of Private Investors Securities Purchase Agreements (the “PI SPA”), on

October 25, 2013

and

November 8, 2013,

the Company issued to certain private investors an aggregate of

1,026,972

units consisting of

1,026,972

shares of common stock (the “Shares”) and warrants to purchase an additional

1,026,972

shares of common stock (the “Warrants”) for an aggregate purchase price of

$3,697,100.

The warrants were immediately exercisable at an exercise price of

$6.00

per share, and had a term of

three

years which expired in

2016.

In connection with the share issuances described above, and pursuant to a placement agency letter agreement, the Company paid the placement agent cash commissions equal to

8%

of the gross proceeds of the offering, reimbursed the placement agent for its reasonable out of pocket expenses, and issued to the placement agent warrants (the “Placement Agent Warrants”) to purchase an aggregate of

82,158

shares of common stock. The Placement Agent Warrants have substantially the same terms as the warrants issued to the investors, except the Placement Agent Warrants were immediately exercisable on a cashless basis.

The cashless exercise features contained in the warrants were considered to be derivatives and the Company recorded warrant liabilities on the consolidated balance sheet. The Company initially recorded the warrant liabilities equal to their estimated fair value of

$325,891.

Such amount was also recorded as a reduction of additional paid-in capital. The Company is required to mark-to-market the warrant liabilities at the end of each reporting period. For the

three

months ended

June 30, 2016,

the Company recorded a loss on the change in fair value of the cashless exercise features of

$433.

For the

six

months ended

June 30, 2016,

the Company recorded a gain on the change in the fair value of the cashless exercise feature of

$1,904.

As of

December 31, 2016,

the fair value of the cashless exercise features was

$0

as the underlying warrants expired during the

fourth

quarter of

2016.

Securities Purchase Agreement dated

November 13, 2014

Pursuant to a Securities Purchase Agreement, dated

November 13, 2014,

by and between the Company and a number of private and institutional investors (the

“November 2014

Private Investor SPA”), the Company issued to certain private investors

664,584

shares of common stock and warrants to purchase an additional

996,877

shares of common stock for aggregate gross proceeds of

$1,595,000.

The common stock has a purchase price reset feature. If at any time prior to the

two

year anniversary of the effective date of the registration statement covering the public resale of such shares (

January 29, 2015),

the Company sells or issues shares of common stock or securities that are convertible into common stock at a price lower than

$2.40

per share, the Company will be required to issue additional shares of common stock for

no

additional consideration.

Based on an evaluation as discussed in FASB ASC

815

-

15,

“Embedded Derivatives” and FASB ASC

815

-

40

-

15,

“Contracts in Entity’s Own Equity - Scope and Scope Exceptions,” the Company determined that the purchase price reset feature on the common stock issued was

not

considered indexed to its own stock because neither the occurrence of a sale of equity securities by the issuer at market nor the issuance of another equity contract with a lower strike price is an input to the fair value of a fixed-for-fixed option or forward on equity shares. As such, the purchase price reset feature should be bifurcated from the common stock and accounted for as a derivative liability.

The Company valued the purchase price reset feature using a Monte Carlo simulation at the date of issuance, and at quarterly reporting intervals until the expiration of the feature in

January 2017,

and determined that the purchase price reset feature had

no

value as the Company issued Series A-

1

and Series B-

1

preferred stock in

October

and

November

of

2015,

at a conversion price of

$3.60,

and issued common stock in

November 2016

and

April 2017

also at a price of

$3.60.

The warrants have a term of

five

years and an exercise price of

$3.60

per share, and have been fully exercisable since

February 2015.

The warrants have customary anti-dilution protections including a “full ratchet” anti-dilution adjustment provision which are triggered in the event the Company sells or grants any additional shares of common stock, options, warrants or other securities that are convertible into common stock at a price lower than

$3.60

per share. The anti-dilution adjustment provision is

not

triggered by certain “exempt issuances” which among other issuances, includes the issuance of shares of common stock, options or other securities to officers, employees, directors, consultants or service providers.

As a result of the early adoption of ASU

2017

-

11

referred to in Note

1

– Recently Issued Accounting Pronouncements, the “full ratchet” anti-dilution feature is

no

longer a determinant for derivative liability accounting. As the “full ratchet” anti-dilution feature was determined to have

no

value in the past, the adoption had

no

effect on the balance sheets or statements of operations.

Warrants

On

March 9, 2015,

the Company issued a warrant to purchase

47,917

shares of common stock to a consultant which vested in equal quarterly installments over

one

year and is exercisable at

$2.52

per share through

March 8, 2020.

For the

six

months ended

June 30, 2016,

the Company recorded an expense of

$11,625

related to the stock warrants, which completed the service period.

On

September 23, 2015,

the Company issued a warrant to purchase

69,445

shares of common stock in connection with the issuance of a promissory note. The warrants are immediately exercisable at an exercise price of

$3.60

per share and have a term of

five

years.

The warrants have customary anti-dilution protections including a "full ratchet" anti-dilution adjustment provision which are triggered in the event the Company sells or grants any additional shares of common stock, options, warrants or other securities that are convertible into common stock at a price lower than

$3.60

per share. The anti-dilution adjustment provision is

not

triggered by certain "exempt issuances" which among other issuances, includes the issuance of shares of common stock, options or other securities to officers, employees, directors, consultants or service providers.

As a result of the early adoption of ASU

2017

-

11

referred to in Note

1

– Recently Issued Accounting Pronouncements, the “full ratchet” anti-dilution feature is

no

longer a determinant for derivative liability accounting. As the “full ratchet” anti-dilution feature was determined to have

no

value in the past, the adoption had

no

effect on the balance sheets or statements of operations.

 

The cashless exercise features contained in the warrants were initially considered to be derivatives and the Company recorded a warrant liability of

$92,199

on the consolidated balance sheet in

2015.

The warrants issued by the Company were valued using an option-pricing model. The Company marked-to-market the warrant liabilities at the end of each reporting period. For the quarter ended

June 30, 2016,

the Company recorded a loss on the change in fair value of the cashless exercise features of

$49,035.

For the

six

months ended

June 30, 2016,

the Company recorded a loss on the change in the fair value of the cashless exercise features of

$51,410.

During

2016,

the Company determined the cashless exercise features did

not

meet the criteria for recording a warrant liability. Accordingly, the grant date fair value of the warrant liability was transferred to additional paid-in capital and the cumulative loss due to change in the recorded fair value of the liability was reversed during

2016.

Issuances of Stock Options

On

March 15, 2017,

the Company issued options to purchase

40,000

shares of the Company’s common stock to

four

non-employee members of the Board of Directors. On

March 15, 2017,

the Company also issued options to purchase

4,167

shares of the Company’s common stock to an employee. The options have a

three

-year vesting period,

seven

-year term, and exercise price of

$2.64.

 

On

March 16, 2017,

the Board of Directors issued options to purchase

1,120,000

shares of the Company’s common stock to certain officers, employees, and contractors. The options have a

three

-year vesting period,

seven

-year term, and exercise price of

$2.65.

On

April 10, 2017,

the Company issued options to purchase

10,000

shares of the Company’s common stock to the newly appointed Director. The options have a

three

-year vesting period,

seven

-year term, and exercise price of

$2.64.

 

The fair value of the options issued during the

three

months ended

June 30, 2017

on

April 10, 2017 

was estimated on the date of grant at

$20,538

 using the Black-Scholes option-pricing model with the following assumptions: risk free interest rate:

1.81%,

expected life of options in years:

4.5,

expected dividends:

0,

volatility of stock price:

138%.

XML

Note 10 - Segment Information

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

10. SEGMENT INFORMATION

The Company has determined that its continuing operations are

one

discrete segment consisting of biometric products. Geographically, North American sales accounted for approximately

58%

and

78%

of the Company’s total sales for the

three

months ended

June 30, 2017

and

2016,

respectively, and were approximately

73%

and

80%

of the Company’s total sales for the

six

months ended

June 30, 2017

and

2016,

respectively.

XML

Note 11 - Fair Values of Financial Instruments

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Fair Value Disclosures [Text Block]

11. FAIR VALUES OF FINANCIAL INSTRUMENTS

Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and due from factor, are carried at, or approximate, fair value because of their short-term nature.

XML

Note 12 - Major Customers and Accounts Receivable

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

12. MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLE

For the

three

months ended

June 30, 2017

and

2016,

three

customers accounted for

52%

and

three

customers accounted for

48%

of revenue, respectively. For the

six

months ended

June 30, 2017

and

2016,

three

customers accounted for

44%

and

three

customers accounted for

48%

of revenue, respectively.

Three customers accounted for

57%

of current accounts receivable as of

June 30, 2017.

One customer accounted for

100%

of non-current accounts receivable as of

June 30, 2017

and

December 31, 2016.

Based on prior history with this customer, the Company believes the amount is fully collectable, however, the Company has reserved

$1,000,000

which represents

48%

of the remaining balance owed under the contract, due to the length of time the receivable has been outstanding.  At

December 31, 2016,

one

customer accounted for

81%

of current accounts receivable.

XML

Note 13 - Subsequent Events

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Subsequent Events [Text Block]

13. SUBSEQUENT EVENTS

On

July 25, 2017,

the Company was approved for listing on the Nasdaq Capital Market.

On

August 9, 2017,

the Company issued

5,148

 shares of common stock to its directors in payment of board fees.

XML

Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2017

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of BIO-key International, Inc. and its wholly-owned subsidiary (collectively, the “Company”, or “BIO-key”) and are stated in conformity with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The operating results for interim periods are

not

necessarily indicative of results that

may

be expected for any other interim period or for the full year. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. Significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all necessary adjustments, consisting only of those of a recurring nature, and disclosures to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented. The balance sheet at

December 31, 2016

was derived from the audited financial statements, but does

not

include all of the disclosures required by accounting principles generally accepted in the United States of America. These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and the related notes thereto included in the Company’s Annual Report on Form

10

-K for the fiscal year ended

December 31, 2016 (

the “Form

10

-K”), filed with the SEC on

March 31, 2017. 

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Issued Accounting Pronouncements

In

May 2014,

ASU

No.

 

2014

-

09,

“Revenue from Contracts with Customers” was issued. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. The guidance will also require that certain contract costs incurred to obtain or fulfill a contract, such as sales commissions, be capitalized as an asset and amortized as revenue is recognized. Adoption of the new rules could affect the timing of both revenue recognition and the incurrence of contract costs for certain transactions. The guidance permits

two

implementation approaches,

one

requiring retrospective application of the new standard with restatement of prior years and

one

requiring prospective application of the new standard with disclosure of results under old standards. The new standard was scheduled to be effective for reporting periods beginning after

December 

15,

2016

and early adoption is

not

permitted. In

August 2015,

the FASB issued ASU

2015

-

14,

"Revenue from Contracts with Customers (Topic

606

): Deferral of Effective Date" ("ASU

2015

-

14"

) which defers the effective date of ASU

2014

-

09

by

one

year. ASU

2014

-

09

is now effective for annual reporting periods beginning after

December 15, 2017

including interim periods within that reporting period.

The Company is continuing to evaluate the standard’s impact on its consolidated results of operations and financial condition. BIO-key has conducted initial analyses, developed a project management plan relative to the process of adopting this ASU, and is currently completing detailed contract reviews to determine potential adjustments to existing accounting policies as well as to support an evaluation of the standard’s impact on the Company’s consolidated results of operations and financial condition. For the majority of BIO-key’s revenue arrangements,

no

significant impacts are expected. However, in addition to expanded disclosures regarding revenue, the ASU could, for example, impact the timing of revenue recognition in some arrangements for which software industry-specific guidance (which the ASU supersedes) is presently utilized. The Company currently anticipates utilizing the modified retrospective method of adoption on

January 1, 2018.

In

July 2015

the FASB issued ASU

No.

2015

-

11,

"Inventory (Topic

330

): Simplifying the Measurement of Inventory" ("ASU

2015

-

11"

). The amendments in ASU

2015

-

11

clarifies the measurement of inventory to be the lower of cost or realizable value and would only apply to inventory valued using the FIFO or average costing methods. ASU

2015

-

11

is effective for fiscal years beginning after

December 15, 2016,

including interim periods within those fiscal years. The reporting entity should apply the amendments prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU

2015

-

11

did

not

materially impact the Company’s consolidated financial statements.

In

January 2016,

the FASB issued ASU

2016

-

01,

“Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU

2016

-

01”

). The update addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments, specifically equity investments and financial instruments measured at amortized cost. ASU

2016

-

01

is effective for public companies for annual and interim periods beginning after

December 15, 2017. 

Management is currently assessing the impact ASU

2016

-

01

will have, if any, on the Company’s consolidated financial statements.

In

February 2016,

the FASB issued ASU

2016

-

02,

“Leases”. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than

12

months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements, but expects that it will increase its assets and liabilities.

In

August 2014,

the FASB issued ASU

No.

2014

-

15,

“Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern”. Prior to ASU

2014

-

15,

a definition for substantial doubt did

not

exist. However, the new guidance says that substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within

one

year after the date that the financial statements are available to be issued. The FASB's definition could be perceived as a higher threshold than current practice as the term “probable” means likely to occur. Under the new standard, management should evaluate all relevant known conditions, or those that can be reasonably expected to happen as of the date the financial statements are to be issued. This evaluation should be both qualitative and quantitative in nature, and should include conditions that might give rise to substantial doubt. ASU

2014

-

15

is effective for fiscal years beginning after

December 15, 2016,

including interim periods within those fiscal years. The Company adopted ASU

2014

-

15

during the quarter ended

March 31, 2017.

In

March 2016,

the FASB issued Accounting Standards Update

2016

-

09,

“Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (“ASU

2016

-

09”

).  ASU

2016

-

09

requires, among other things, that excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement rather than as additional paid-in capital, changes the classification of excess tax benefits from a financing activity to an operating activity in the statement of cash flows, and allows forfeitures to be accounted for when they occur rather than estimated.  ASU

2016

-

09

is effective for public companies for interim and annual periods beginning after

December 15, 2016. 

The adoption did

not

have a material impact on the Company's consolidated financial statements.

In

July 2017,

the FASB issued ASU

2017

-

11,

Earnings Per Share (Topic

260

), Distinguishing Liabilities from Equity (Topic

480

) and Derivatives and Hedging (Topic

815

): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic

480,

Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do

not

have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after

December 15, 2018,

with early adoption permitted. The adoption of ASU

2017

-

11,

during the

six

months ended

June 30, 2017,

did

not

have any impact on the condensed consolidated financial statements, however our disclosures with respect to equity instruments with down round features have been updated.  See Note

9

for updated disclosures.

Management does

not

believe that any other recently issued, but

not

yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.

Reclassification, Policy [Policy Text Block]

Reclassification

Reclassifications occurred to certain prior year amounts in order to conform to the current year classifications. The reclassifications have

no

effect on the reported net loss.

XML

Note 3 - Accounts Receivable (Tables)

6 Months Ended

Jun. 30, 2017

Notes Tables

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

	June 30,			December 31,
	2017			2016
Accounts receivable - current	$	861,674		$	1,577,031
Accounts receivable - non current		2,070,000			2,070,000
		2,931,674			3,647,031
Allowance for doubtful accounts - current		(13,785	)		(13,785	)
Allowance for doubtful accounts - non current		(1,000,000	)		(500,000	)
Accounts receivable, net of allowance for doubtful accounts	$	1,917,889		$	3,133,246

XML

Note 4 - Share Based Compensation (Tables)

6 Months Ended

Jun. 30, 2017

Notes Tables

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Table Text Block]

	Three Months Ended June 30,
	2017		2016
Selling, general and administrative	$	394,264	$	44,303
Research, development and engineering		18,930		5,632
	$	413,194	$	49,935

	Six Months Ended June 30,
	2017		2016
Selling, general and administrative	$	507,120	$	190,181
Research, development and engineering		67,163		34,117
	$	574,283	$	224,298

XML

Note 5 - Factoring (Tables)

6 Months Ended

Jun. 30, 2017

Notes Tables

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

	June 30,			December 31,
	2017			2016
Accounts receivable - current	$	861,674		$	1,577,031
Accounts receivable - non current		2,070,000			2,070,000
		2,931,674			3,647,031
Allowance for doubtful accounts - current		(13,785	)		(13,785	)
Allowance for doubtful accounts - non current		(1,000,000	)		(500,000	)
Accounts receivable, net of allowance for doubtful accounts	$	1,917,889		$	3,133,246

Factoring Fees [Table Text Block]

	Three Months ended June 30,
	2017		2016
Factoring fees	$	85,326	$	108,351

	Six Months ended June 30,
	2017		2016
Factoring fees	$	133,717	$	303,363

Factored Accounts Receivable [Member]

Notes Tables

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

	June 30,			December 31,
	2017			2016
Original invoice value	$	117,850		$	214,556
Factored amount		(88,388	)		(160,918	)
Due from factor	$	29,462		$	53,638

XML

Note 6 - Inventory (Tables)

6 Months Ended

Jun. 30, 2017

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	June 30,		December 31,
	2017		2016
Finished goods	$	341,264	$	381,762
Fabricated assemblies		225,918		83,666
Total inventory	$	567,182	$	465,428

XML

Note 7 - Software Licenses and Rights (Tables)

6 Months Ended

Jun. 30, 2017

Notes Tables

Software License Rights [Table Text Block]

	June 30,		December 31,
	2017		2016
Current software license rights	$	2,100,000	$	1,560,000
Non-current software license rights		9,253,008		10,598,411
Total software license rights	$	11,353,008	$	12,158,411

XML

Note 8 - Earnings Per Share (EPS) (Tables)

6 Months Ended

Jun. 30, 2017

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months ended June 30,						Six Months ended June 30,
	2017			2016			2017			2016
Basic Numerator:
Net loss	$	(1,789,329	)	$	(1,375,489	)	$	(3,145,516	)	$	(2,538,703	)
Convertible preferred stock dividends		(200,625	)		(200,625	)		(401,250	)		(401,250	)
Net loss available to common stockholders	$	(1,989,954	)	$	(1,576,114	)	$	(3,546,766	)	$	(2,939,953	)
Basic Denominator		6,359,974			5,523,072			6,228,197			5,516,726
Per Share Amount	$	(0.32	)	$	(0.29	)	$	(0.57	)	$	(0.53	)

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

	Three Months ended June 30,				Six Months ended June 30,
	2017		2016		2017		2016
Preferred stock		5,416,667		5,416,667		5,416,667		5,416,667
Stock options		35,706		13,040		44,580		3,495
Warrants		3,004		-		3,336		-
Total		5,455,377		5,429,707		5,464,583		5,420,162

	Three Months ended June 30,				Six Months ended June 30,
	2017		2016		2017		2016
Stock options		218,761		215,000		218,761		229,583
Warrants		1,212,163		1,704,629		1,212,163		1,704,629
Total		1,430,924		1,919,629		1,430,924		1,934,212

XML

Note 2 - Going Concern (Details Textual) - USD ($)	6 Months Ended
	Jun. 30, 2017	Dec. 31, 2016	Jun. 30, 2016	Dec. 31, 2015
Retained Earnings (Accumulated Deficit)	$ (65,946,670)	$ (62,801,154)
Cash and Cash Equivalents, at Carrying Value	988,342	$ 1,061,307	$ 2,006,665	$ 4,321,078
Expected Operational Costs Per Month	$ 592,000

XML

Note 3 - Accounts Receivable (Details Textual) - USD ($)	6 Months Ended
	Jun. 30, 2017	Dec. 31, 2016
Allowance for Doubtful Accounts Receivable, Noncurrent	$ 1,000,000	$ 500,000
Percentage of Remaining Balance Owned Reserved	48.00%

XML

Note 3 - Accounts Receivable - Summary of Accounts Receivable (Details) - USD ($)	Jun. 30, 2017	Dec. 31, 2016
Accounts receivable - current	$ 861,674	$ 1,577,031
Accounts receivable - non current	2,070,000	2,070,000
	2,931,674	3,647,031
Allowance for doubtful accounts - current	(13,785)	(13,785)
Allowance for doubtful accounts - non current	(1,000,000)	(500,000)
Accounts receivable, net of allowance for doubtful accounts	$ 1,917,889	$ 3,133,246

XML

Note 4 - Share Based Compensation - Expenses for Continuing Operations (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Share-based compensation expense	$ 413,194	$ 49,935	$ 574,283	$ 224,298
Selling, General and Administrative Expenses [Member]
Share-based compensation expense	394,264	44,303	507,120	190,181
Research and Development Expense [Member]
Share-based compensation expense	$ 18,930	$ 5,632	$ 67,163	$ 34,117

XML

Note 5 - Factoring (Details Textual)	1 Months Ended
	Dec. 31, 2011
Factoring Arrangement Term	2 years
Minimum [Member]
Factoring Fees Percent	2.75%
Maximum [Member]
Factoring Fees Percent	21.00%
Geographic Distribution, Foreign [Member]
Percentage Of Accounts Receivable Remitted By Factor	35.00%
Geographic Distribution, Domestic [Member]
Percentage Of Accounts Receivable Remitted By Factor	75.00%

XML

Note 5 - Factoring - Due From Factor (Details) - USD ($)	Jun. 30, 2017	Dec. 31, 2016
Original invoice value	$ 117,850	$ 214,556
Factored amount	(88,388)	(160,918)
Due from factor	$ 29,462	$ 53,638

XML

Note 5 - Factoring - Fees (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Factoring fees	$ 85,326	$ 108,351	$ 133,717	$ 303,363

XML

Note 6 - Inventory - Components of Inventory (Details) - USD ($)	Jun. 30, 2017	Dec. 31, 2016
Finished goods	$ 341,264	$ 381,762
Fabricated assemblies	225,918	83,666
Total inventory	$ 567,182	$ 465,428

XML

Note 7 - Software Licenses and Rights (Details Textual) - USD ($)			3 Months Ended		6 Months Ended		18 Months Ended
	Dec. 31, 2015	Nov. 11, 2015	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Dec. 31, 2016
Software License Rights, Current			$ 2,100,000		$ 2,100,000		$ 2,100,000	$ 1,560,000
Amortization of Intangible Assets					6,833	$ 6,803
Software License Rights			11,353,008		11,353,008		11,353,008	12,158,411
Payments to Acquire Software	$ 180,000
License Costs			740,301	$ 69,893	1,362,415	$ 125,959
Software License Rights, Noncurrent			9,253,008		$ 9,253,008		9,253,008	$ 10,598,411
Licensing Agreements [Member]
Payments to Acquire Intangible Assets		$ 12,000,000
Finite-Lived Intangible Asset, Useful Life					10 years
Amortization of Intangible Assets			388,595		$ 729,755
Software License Rights			11,221,404		11,221,404		11,221,404
License Costs			1,405		48,337
Software License Rights [Member]
License Costs			22,020		28,716		48,396
Software License Rights, Noncurrent			$ 131,604		$ 131,604		$ 131,604

XML

Note 7 - Software Licenses and Rights - Summary of Software License Rights (Details) - USD ($)	Jun. 30, 2017	Dec. 31, 2016
Software license rights	$ 2,100,000	$ 1,560,000
Software license rights, net	9,253,008	10,598,411
Total software license rights	$ 11,353,008	$ 12,158,411

XML

Note 8 - Earnings Per Share (EPS) - Reconciliation of Numerator of Basic and Diluted EPS Calculations (Details) - USD ($)		3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Basic Numerator:
Net loss	$ (2,538,703)	$ (1,789,329)	$ (1,375,489)	$ (3,145,516)	$ (2,538,703)
Convertible preferred stock dividends	(401,250)	(200,625)	(200,625)	(401,250)	(401,250)
Net loss available to common stockholders	$ (2,939,953)	$ (1,989,954)	$ (1,576,114)	$ (3,546,766)	$ (2,939,953)
Basic Denominator (in shares)	5,516,726	6,359,974	5,523,072	6,228,197	5,516,726
Per Share Amount (in dollars per share)	$ (0.53)	$ (0.32)	$ (0.29)	$ (0.57)	$ (0.53)

XML

Note 8 - Earnings Per Share (EPS) - Securities Excluded From the Diluted Per Share Calculation (Details) - shares	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Exercise Price Less Than Average Market Price Of Common Shares [Member]
Antidilutive securities (in shares)	5,455,377	5,429,707	5,464,583	5,420,162
Exercise Price Less Than Average Market Price Of Common Shares [Member] | Preferred Stock [Member]
Antidilutive securities (in shares)	5,416,667	5,416,667	5,416,667	5,416,667
Exercise Price Less Than Average Market Price Of Common Shares [Member] | Employee Stock Option [Member]
Antidilutive securities (in shares)	35,706	13,040	44,580	3,495
Exercise Price Less Than Average Market Price Of Common Shares [Member] | Warrant [Member]
Antidilutive securities (in shares)	3,004		3,336
Exercise Price Greater Than Average Market Price Of Common Shares [Member]
Antidilutive securities (in shares)	1,430,924	1,919,629	1,430,924	1,934,212
Exercise Price Greater Than Average Market Price Of Common Shares [Member] | Employee Stock Option [Member]
Antidilutive securities (in shares)	218,761	215,000	218,761	229,583
Exercise Price Greater Than Average Market Price Of Common Shares [Member] | Warrant [Member]
Antidilutive securities (in shares)	1,212,163	1,704,629	1,212,163	1,704,629

XML

Note 9 - Stockholders' Equity (Details Textual)																			1 Months Ended	3 Months Ended		6 Months Ended
	Jun. 30, 2017 USD ($) $ / shares shares	May 11, 2017 USD ($) shares	May 02, 2017 USD ($) $ / shares	Apr. 28, 2017 USD ($) $ / shares shares	Apr. 10, 2017 $ / shares shares	Mar. 16, 2017 $ / shares shares	Mar. 15, 2017 USD ($) $ / shares shares	Dec. 31, 2016 USD ($) $ / shares shares	Dec. 29, 2016	May 11, 2016 USD ($) shares	Mar. 08, 2016 USD ($) shares	Nov. 11, 2015 USD ($) $ / shares shares	Oct. 29, 2015 USD ($) $ / shares shares	Sep. 23, 2015 USD ($) $ / shares shares	Mar. 09, 2015 $ / shares shares	Nov. 13, 2014 USD ($) $ / shares shares	Nov. 08, 2013 USD ($) shares	Oct. 25, 2013 $ / shares shares	May 31, 2017 USD ($) $ / shares shares	Jun. 30, 2017 USD ($) $ / shares shares	Jun. 30, 2016 USD ($)	Jun. 30, 2017 USD ($) $ / shares shares	Jun. 30, 2016 USD ($)	Nov. 30, 2016 $ / shares
Preferred Stock, Par or Stated Value Per Share | $ / shares	$ 0.0001																			$ 0.0001		$ 0.0001
Preferred Stock, Shares Authorized | shares	5,000,000																			5,000,000		5,000,000
Stock Issued During Period As a Commitment Fee, Shares | shares																			55,000
Stock Issued During Period As a Commitment Fee, Value | $																			$ 198,000
Proceeds from Issuance of Common Stock | $																						$ 1,000,000
Committed Equity Facility Amount | $			$ 5
Committed Equity Facility, Term			3 years
Maximum Dollar Amount of Shares to Purchase Based on Daily Volume Weighted Average Price of the Company’s Common Stock | $			$ 100,000
Period for Maximum Dollar Amount of Shares to Purchase			5 days
Percentage of Lowest VWAP That Equals or Exceeds Specified per Share Price under Committed Equity Facility			94.00%
Per Share Price That Is Used in Calculation for Purchase Price under Committed Equity Facility | $ / shares			$ 3.83
Equity Facility, Aggregate Sales Limitation, Percentage of Total Outstanding Share			19.99%
Maximum Ownership of Company’s Common Stock Requirement under Committed Equity Facility Sale, Percentage			9.99%
Stock Issued During Period, Shares, Issued for Services | shares																			61,667
Stock Issued During Period, Issued for Services, Weighted Average Share Price | $ / shares																			$ 2.54
Stock Issued During Period, Value, Issued for Services | $																			$ 156,584
Payments of Stock Issuance Costs | $																				$ 74,420		80,366	32,619
Dividends Payable | $	$ 401,250																			$ 401,250	$ 200,625	401,250	200,625
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares															$ 2.52
Class of Warrant or Right, Nonemployee Compensation Expense | $																							11,625
Class of Warrant or Right, Number of Securities Called by Warrants or Rights | shares															47,917
Term Of Warrant															1 year
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Fair Value Amount | $																						$ 20,538
Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Risk Free Interest Rate																						1.81%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Term																						4 years 182 days
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Dividend Rate																						0.00%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Volatility Rate																						138.00%
September 2015 Warrants [Member]
Debt Instrument, Unamortized Discount | $														$ 92,199
Fair Value Adjustment of Warrants | $																					49,035		51,410
Promissory Note [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights | shares														69,445
Warrants Issued Under PISPA [Member]
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Liability, Gain (Loss) Included in Earnings | $																					$ (433)		$ 1,904
Fair Value, Measurement with Unobservable Inputs Reconciliations, Recurring Basis, Liability Value | $								$ 0
Fair Value, Inputs, Level 3 [Member] | Warrants Issued Under PISPA [Member]
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Liability, Issuances | $																	$ 325,891
Private Investor SPA [Member]
Stock Issued During Period, Value, New Issues | $																	$ 3,697,100
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares																		$ 6
Term Of Warrant																	3 years
Placement Agent Warrants [Member]
Commissions and Fees, Percent of Gross Proceeds																	8.00%
Class of Warrant or Right, Number of Securities Called by Warrants or Rights | shares																	82,158
Private Investor SPA [Member]
Stock Issued During Period, Shares, New Issues | shares																664,584		1,026,972
Proceeds from Issuance of Private Placement | $																$ 1,595,000
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares																$ 3.60								$ 3.60
Class of Warrant or Right, Number of Securities Called by Warrants or Rights | shares																996,877
Term Of Warrant																5 years
Private Investor SPA [Member] | Common Stock [Member]
Stock Issued During Period, Shares, New Issues | shares																		1,026,972
Private Investor SPA [Member] | Warrant [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights | shares																		1,026,972
Director and Executive Officer [member]
Proceeds from Issuance of Common Stock | $				$ 1,000,000
Stock Issued During Period, Shares, New Issues | shares				277,778
Share Price | $ / shares				$ 3.60
Director [Member]
Stock Issued During Period, Shares, Share-based Compensation, Net of Forfeitures | shares							1,895				8,333
Stock Granted, Value, Share-based Compensation, Net of Forfeitures | $							$ 5,003				$ 16,000
Stock Issued During Period, Shares, Issued for Services | shares		1,925								41,174
Stock Issued During Period, Value, Issued for Services | $		$ 5,005								$ 6,999
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price | $ / shares					$ 2.64
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures | shares					10,000
Director [Member] | Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period					3 years
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period					7 years
Chief Executive Officer [Member]
Stock Issued During Period, Shares, Issued for Services | shares										100,000
Stock Issued During Period, Value, Issued for Services | $										$ 17,000
Four Members of the Board of Directors [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures | shares							40,000
Employee [Member]
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price | $ / shares							$ 2.64
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures | shares							4,167
Employee [Member] | Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period							3 years
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period							7 years
Certain Officers, Employees, and Contractors [Member]
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price | $ / shares						$ 2.65
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures | shares						1,120,000
Certain Officers, Employees, and Contractors [Member] | Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period						3 years
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period						7 years
Reverse Stock Split [Member]
Stockholders' Equity Note, Stock Split, Conversion Ratio	12							12	12
Series A-1 Convertible Preferred Stock [Member]
Preferred Stock, Par or Stated Value Per Share | $ / shares	$ 0.0001							$ 0.0001												$ 0.0001		$ 0.0001
Preferred Stock, Shares Authorized | shares	100,000							100,000												100,000		100,000
Preferred Stock, Shares Outstanding | shares	90,000							90,000												90,000		90,000
Preferred Stock, Dividend Rate, Percentage												6.00%
Period Preceding the Dividend Payment Date												10 days
Liquidation Value Per Share | $ / shares												$ 100
Dividends Payable | $	$ 540,000							$ 270,000												$ 540,000		$ 540,000
Stock Issued During Period, Shares, New Issues | shares												5,500	84,500
Share Price | $ / shares												$ 100	$ 100
Proceeds from Issuance of Convertible Preferred Stock | $												$ 550,000	$ 8,450,000
Initial Conversion Price | $ / shares												$ 3.60	$ 3.60
Series A-1 Convertible Preferred Stock [Member] | Maximum [Member]
Maximum Ownership as a Result of Conversion												9.99%
Series B-1 Convertible Preferred Stock [Member]
Preferred Stock, Par or Stated Value Per Share | $ / shares	$ 0.0001							$ 0.0001												$ 0.0001		$ 0.0001
Preferred Stock, Shares Authorized | shares	105,000							105,000												105,000		105,000
Preferred Stock, Shares Outstanding | shares	105,000							105,000												105,000		105,000
Preferred Stock, Dividend Rate, Percentage												2.50%
Period Preceding the Dividend Payment Date												10 days
Liquidation Value Per Share | $ / shares												$ 100
Dividends Payable | $	$ 262,500							$ 131,250												$ 262,500		$ 262,500
Stock Issued During Period, Shares, New Issues | shares												105,000
Share Price | $ / shares												$ 100
Proceeds from Issuance of Convertible Preferred Stock | $												$ 10,500,000
Series B-1 Convertible Preferred Stock [Member] | Maximum [Member]
Maximum Ownership as a Result of Conversion												9.99%
September 2015 Warrants [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares														$ 3.60
Term Of Warrant														5 years

XML

Note 10 - Segment Information (Details Textual)	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Number of Reportable Segments			1
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member] | North America [Member]
Concentration Risk, Percentage	58.00%	78.00%	73.00%	80.00%

XML

Note 12 - Major Customers and Accounts Receivable (Details Textual)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2017 USD ($)	Jun. 30, 2016	Jun. 30, 2017 USD ($)	Jun. 30, 2016	Dec. 31, 2016 USD ($)
Percentage of Remaining Balance Owned Reserved			48.00%
Allowance for Doubtful Accounts Receivable, Noncurrent	$ 1,000,000		$ 1,000,000		$ 500,000
Customer Concentration Risk [Member] | Sales Revenue, Net [Member]
Concentration Risk, Number of Major Customers	3	3	3	3
Customer Concentration Risk [Member] | Sales Revenue, Net [Member] | Three Customers Member
Concentration Risk, Percentage	52.00%	48.00%	44.00%	48.00%
Customer Concentration Risk [Member] | Current Accounts Receivable [Member] | Three Customers Member
Concentration Risk, Percentage			57.00%
Customer Concentration Risk [Member] | Current Accounts Receivable [Member] | One Customer [Member]
Concentration Risk, Number of Major Customers					1
Concentration Risk, Percentage					81.00%
Customer Concentration Risk [Member] | Non-current Accounts Receivable [Member] | One Customer [Member]
Concentration Risk, Percentage			100.00%		100.00%

XML

Note 13 - Subsequent Events (Details Textual) - shares				1 Months Ended
	Aug. 09, 2017	May 11, 2017	May 11, 2016	May 31, 2017
Stock Issued During Period, Shares, Issued for Services				61,667
Director [Member]
Stock Issued During Period, Shares, Issued for Services		1,925	41,174
Director [Member] | Subsequent Event [Member]
Stock Issued During Period, Shares, Issued for Services	5,148