10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year Ended December 31, 2017

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 or organization)	(IRS Employer Identification Number)

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

(Address of principal executive offices) (Zip Code)

(732) 359-1100

Registrant’s telephone number, including area code.

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of exchange on which registered
Common Stock, $0.0001 par value per share	Nasdaq Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  ☐    No  ☒

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 (§232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

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

Large accelerated filer  ☐	Accelerated filer  ☐
	(Do not check if a smaller reporting company)
Non-accelerated filer  ☐	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 in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of June 30, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $15.3 million based upon the closing price for shares of the registrant’s common stock of $3.01 as reported by the Nasdaq Stock Market on that date.

As of March 27, 2018, the registrant had 9,493,174 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain sections of the registrant’s Proxy Statement for its 2018 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Form 10-K. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2017.

TABLE OF CONTENTS

	PART I
Item 1.	Business	1
Item 1A	Risk Factors	7
Item 2	Properties	13
Item 3	Legal Proceedings	13
Item 4	Mine Safety Disclosures	13
	PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6	Selected Financial Data	14
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 8	Financial Statements and Supplementary Data	22
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	22
Item 9A	Controls and Procedures	22
Item 9B	Other Information	23
	PART III
Item 10	Directors, Executive Officers and Corporate Governance	23
Item 11	Executive Compensation	23
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	23
Item 13	Certain Relationships and Related Transactions, and Director Independence	23
Item 14	Principal Accountant Fees and Services	23
Item 15	Exhibits and Financial Statement Schedules	23
Item 16	Form 10-K Summary	23
	Signatures	51

PRIVATE SECURITIES LITIGATION REFORM ACT

All statements other than statements of historical facts contained in this Annual Report on Form 10-K, 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. Although we believe our plans, intentions, assumptions and expectations reflected in the forward-looking statements are reasonable, we cannot be sure they will be achieved. We caution that it is very difficult to predict the impact of known factors, it is impossible for us to anticipate all factors that could affect our actual results, and that actual results may differ materially and adversely from the forward-looking statements contained herein due to a number of factors, including but not limited to those factors set forth under the caption “Risk Factors” in Item 1A of this Annual Report and other filings with the Securities and Exchange Commission. These factors are not intended to represent a complete list of the general or specific factors that may affect us. It should be recognized that other factors, including general economic factors and business strategies, may be significant, presently or in the future. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

PART I

ITEM 1. BUSINESS

BIO-key International, Inc., a Delaware corporation (the “Company,” “BIO-key,” “we,” or “us), was founded in 1993 to develop and market advanced fingerprint biometric technology and related security software solutions. First incorporated as BBG Engineering, the company was renamed SAC Technologies in 1994 and renamed BIO-key International, Inc. in 2002.

We develop and market advanced fingerprint biometric identification and identity verification technologies, as well as related identity management and credentialing hardware and 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. Additionally, advanced BIO-key® technology has been, and is, used to improve both the accuracy and speed of competing finger-based biometrics.

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 and access control markets. Our primary market focus includes enterprise security, mobile payments and credentialing, healthcare records and data security, among other things. Our secondary focus includes government markets, large scale identity projects such as voter’s registration, driver’s license, national ID programs, and SIM card registration.

In 2015, we entered into the fingerprint hardware device business through a strategic relationship with China Goldjoy Group (“CGG”), an entity that is affiliated with one of our directors. We market and sell through distributors and directly to end users via Amazon, our SideSwipe™, EcoID™ and SideTouch™ finger readers which can be used on any laptop, tablet or other device which contains a USB port. We also market and sell a variety of biometric and Bluetooth enabled padlocks, luggage locks, and bicycle locks.

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.

Products

Finger-based Biometric Identification and Personal Identity Verification

We are a leader in finger-based biometric identification and personal identity verification, as well as authentication-transaction security. Stand-alone, or in partnerships with OEMs, integrators, and solution providers, we provide biometric security solutions to private and public sector customers. We help customers reduce risk by providing the ability to control access to facilities and services, in either the logical or physical domain. Our solutions positively identify individuals and verify, or confirm, their identity before granting access to, among other things, corporate resources, subscribed data and services, web portals, applications, physical locations or assets.

We also develop and distribute hardware components that are used in conjunction with our software, and sell third-party hardware components with our software in various configurations required by our customers. Our products are interoperable with all major fingerprint reader and hardware manufacturers, enabling application developers, value added resellers (“VARs”), and channel partners to integrate our fingerprint biometrics into their applications, while dramatically reducing maintenance, upgrade and life-cycle costs. Our core technology supports interoperability on over 40 different commercially available fingerprint readers and is interoperable across Windows, Linux, and the Android mobile operating systems. This interoperability is unique in the industry, is a key differentiator for our products in the biometric market and, in our opinion, makes our technology more viable than competing technologies and expands the size of the overall market for our products.

In November 2015, we entered into a license agreement with CGG pursuant to which we obtained a license to certain software from CGG, known as FingerQ, which has been integrated into our core WEB-key® platform and can be used in a number of application areas, including mobile payments and personal identity devices for the Asia Pacific markets. In 2016, the software has been integrated into our line of finger scanners that are marketed to consumers and enterprise users worldwide.

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Our biometric identification technology improves both the accuracy and speed of screening individuals, for identification purposes or for personal identity verification, by extracting unique data from a fingerprint and comparing it to existing similar fingerprint data. The technology has been built to be scalable and to handle databases containing millions of fingerprints. We achieve the highest levels of discrimination without requiring any other identifying data (multi-factor) such as a user ID, smart ID cards, or tokens, although our technology can be used in conjunction with such additional factors. Users of our technology have the option of on device or cloud authentication. This flexible authentication option in conjunction with our interoperable capabilities, is another key differentiator of our biometric identification solutions.

We support industry standards, such as FIDO, BioAPI, and have received National Institute of Standards and Technology independent laboratory certification of our ability to support Homeland Security Presidential Directive #12 (HSPD-12) and ANSI/INCITS-378 templates, as well as validation of our fingerprint match speed and accuracy in large database environments.

Our finger identification algorithm, Vector Segment Technology (VST™), is the core intellectual property behind our full suite of biometric products that include:

● Vector Segment Technology SDK (VST)—Our biometric software development kit (“SDK”) provides developers with the ability to incorporate our biometric capabilities into their respective product offerings or infrastructure. VST is available as a low level SDK for incorporation into any application architecture to increase security while not sacrificing convenience. VST runs on Windows and Linux as well as within WEB-key® on iOS and Android systems.

● Intelligent Image Indexing®—Our biometric identification solution offers both large-scale one-to-many and one-to-one user identification. This solution enables customers to perform false alias and fast entry checks, including preventing fraudulent access to systems and privileges. Intelligent image indexing scales identification capabilities from thousands to millions of users. The solution runs on commercially available hardware making it scalable for any size system.

● Biometric Service Provider—We provide support for the BioAPI (a standards-based solution meeting worldwide needs) for a compliant interface to applications using biometrics for verification and identification. We enhance the traditional use of BioAPI by adding 64-bit support and other advanced features, supporting identification calls and also providing a single user interface for multiple fingerprint readers.

● ID Director™—Our Single Sign On (SSO) is a suite of solutions for integration with CA Technologies SiteMinder, Oracle’s Fusion Middleware SSO, IBM Tivoli Access Manager as well as ISAM and other solutions, utilizing the power and security of WEB-key. This solution provides a simple to implement, custom authentication scheme for companies looking to enhance authentication. ID Director is designed to add a level of security and convenience to the transaction level of any application. Versions of ID Director include ID Director for Windows that provides enterprise customers the ability to integrate our biometric solutions into their MS Active Directory platform, and ID Director for Epic and Allscripts that allows healthcare customers to utilize our biometrics with the leading EMR EHR platforms.

In 2015, Microsoft announced native support for biometrics in the Windows 8.1 and Windows 10 Operating platforms as well as Office 2016. With Microsoft Hello, any user can replace their PIN or password to access their device without any special software downloads by using our finger scanners, SideSwipe, SideTouch and EcoID, which are plug and play compatible with the Microsoft platforms. We have been the exclusive partner, in particular at the Microsoft “Ignite your Business” Windows 10 and Office 2016 launch events, which has generated a number opportunities for both our hardware and software offerings. In 2016, our finger scanners were introduced and are currently sold in the Microsoft stores nationwide, as well as through their on-line channel.

At the 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 are currently distributing these products in both the Asia Pacific and domestic markets.

In 2018, we introduced OmniPass Consumer, a secure biometric-enabled application to manage multiple passwords for online apps, services or accounts.

Authentication Transaction Security

Our authentication-transaction security technology, WEB-key®, provides the ability to conduct identification and identity verification transactions in potentially insecure environments, including the World Wide Web or in off-site cloud environments.

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WEB-key makes cloud-based biometric user-authentication viable and eliminates technology constraints on online service providers, who are otherwise dependent on handset provider hardware and software platform decisions. It extends all features and functionalities of the VST algorithm to customers looking to add an enhanced level of security to their thin client and client/server applications. WEB-key is currently supported by both Windows and Linux operating systems. Clients are available on Windows and Android operating systems.

Intellectual Property Rights

We develop and own significant intellectual property and believe that our intellectual property is fundamental to our biometric operation:

Patents

We own patented technologies and trade secrets developed or acquired by us.

In May 2005, the U.S. Patent & Trademark Office issued patent 6,895,104 for our Vector Segment fingerprint technology (VST), our core biometric analysis and identification technology. With the payment of all maintenance fees, this patent will expire on March 4, 2023.

On October 3, 2006, we announced that our patent for a biometric authentication security framework had been granted by the U.S. Patent & Trademark Office. The patent No. 7,117,356 was issued to us for a biometric authentication security framework that enhances commercial and civil biometric use. Our authentication security framework protects privacy and security of cloud or network based authentications while also facilitates ease of use of biometric systems. The technology that this patent is based on is the foundation for the authentication security incorporated in our WEB-key product line. WEB-key is a mature enterprise authentication solution that functions in a wide variety of application environments. The solution supports a variety of implementation alternatives including card technologies for “two-factor” authentication and also supports “single-factor” authentication. Partners and customers implementing our WEB-key software to provide convenient and secure user identity include a number of institutions including the Allscripts Healthcare Solutions, Computer Associates Site Minder, Oracle Access Manager and many other enterprise and solutions based systems. With the payment of all maintenance fees, this patent will expire on May 20, 2023.

On December 26, 2006, we were issued US patent No. 7,155,040 covering our unique image processing technology, which is critical for enhancing information used in the extraction of biometric minutiae. The issued patent protects a critical part of an innovative four-phase image enhancement process developed by us. With the payment of all maintenance fees, this patent will expire on January 29, 2025.

On April 15, 2008, we were issued US patent No. 7,359,553 covering our image enhancement and data extraction core algorithm components. The solution protected under this patent provides the capability to quickly and accurately transform a fingerprint image into a computer image that can be analyzed to determine the critical data elements. With the payment of all maintenance fees, this patent will expire on January 3, 2025.

On August 19, 2008, we were issued US patent No. 7,415,605 for our “Biometric Identification Network Security” method. The solution protected under this patent provides a defense against hackers and system attacks, while leveraging the industry standard Trusted Platform Module (TPM) specification for encryption key management. With the payment of all maintenance fees, this patent will expire on May 20, 2023.

On November 18, 2008, we were issued US patent No. 7,454,624 for our “Match Template Protection within a Biometric Security System” method. The solution protected under this patent limits the scope of enrollment templates usage and also eliminates the need for revocation or encryption processes, which can be expensive and time consuming. With the payment of all maintenance fees, this patent will expire on May 17, 2025.

On March 10, 2009, we were issued US patent No. 7,502,938 for our “Trusted Biometric Device” which covers a simple, yet secure method of protecting a user’s biometric information. It covers the transmission of information from the point the information is collected at the biometric reader until the data reaches the computer or device that is authenticating the user’s identity. With the payment of all maintenance fees, this patent will expire on October 25, 2025.

On May 26, 2009, we were issued US patent No. 7,539,331 for our “Image Identification System” method for improving the performance and reliability of image analysis within an image identification system. With the payment of all maintenance fees, this patent will expire on March 22, 2022.

On November 8, 2011, we were issued US Patent No. 8,055,027 for our “Generation of Directional Information in the Context of Image Processing” method for image enhancement and processing. With the payment of all maintenance fees, this patent will expire on October 10, 2027.

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On July 3, 2012, we were issued US Patent No. 8,214,652 for our “Biometric Identification Network Security”, an expanded method of network and related network authentication security systems utilizing hardware based support for encryption and key management for authentication purposes. With the payment of all maintenance fees, this patent will expire on April 24, 2024.

On May 3, 2017, we were issued US Patent No. 9,646,146 for our “Utilization of Biometric Data”, a method enables existing small area sensors to capture substantially more fingerprint surface area, leading to a higher degree of accuracy when performing a match. With the payment of all maintenance fees, this patent will expire on March 6, 2035.    

We have also been granted parallel patents to the US Patent portfolio to certain of our patents in many foreign countries offering protection of our intellectual property rights around the world.

Licensed Technology

In the fourth quarter of 2015, we entered into a license agreement with affiliates of CGG. The license agreement provides for the grant to our subsidiary, BIO-key Hong Kong Limited (“Bio-key Hong Kong”), of a perpetual, irrevocable, exclusive, worldwide, fully-paid license to all software and documentation regarding the software code, toolkit, electronic libraries and related technology currently known as or offered under the Finger Q name, together with perpetual license under all related patents held by the licensors and any other intellectual property rights owned by the licensors related to the forgoing software.  This portfolio includes 16 patents focused on, among other things, mobile payment systems and mobile payment methods based on biometric authentication as well finger print authentication systems and a finger print authentication method based on near field communication (“NFC”). The license agreement grants us the exclusive right to reproduce, create derivative works and distribute copies of the FingerQ software and documentation, create new FingerQ related products, and grant sublicenses of the licensed technology to end users. In addition, in the event the licensors make any derivatives or improvement in the FingerQ software or make any product or service that may compete with or which includes functionality similar to the FingerQ technology, they are required to license such derivative, improvement, product or service to us on the terms set forth in the license agreement at no additional charge. The license arrangement also allows us to create new, innovative solutions to address the growing demand for secure mobile transactions.

Trademarks

We have registered our trademarks “BIO-key”, “True User Identification”, “Intelligent Image Indexing”, “WEB-key”, “SideSwipe” and “EcoID” with the U.S. Patent & Trademark Office, as well as many foreign countries, protecting our companies name and key technology offering names.

Copyrights and trade secrets

We take measures to ensure copyright and license protection for our software releases prior to distribution. When possible, the software is licensed in an attempt to ensure that only licensed and activated software functions to its full potential. We also take measures to protect the confidentiality of our trade secrets.

Markets

Identity Management, User Authentication, Privilege Entitlement and Access Control

Our products reduce risk of theft, fraud, loss and attack by limiting access to valuable assets, privileges, data, services, networks and places, to only authorized individuals. Conversely, our products enhance the monetary value and/or viability of privileged assets, places and services by ensuring only subscribers and otherwise entitled holders can enjoy full access to their privileges. In effect, our products replace traditional credentialing systems, which utilize a physical or electronic credential document to represent the holder’s privilege entitlement, and access control systems that guard access to such privileges. Examples of such privileges include, but are not limited to: international travel and immigration privileges; employment ID, campus ID and corporate ID privileges; healthcare service privileges; citizen entitlement privileges such as Medicare, Medicaid and Social Security; and bank, credit account and financial transaction privileges such as checking accounts, debit and credit cards, payments, online services and subscription privileges. Examples of access points include doorways, gates, computers, point-of-sale terminals, smart-phones or web-portals and automobiles. In our opinion, the market for advanced user authentication, including fingerprint biometrics, is conceptually enormous, represented by virtually any doorway, gate, computer network or internet end-point like smart-phones, desktops, laptops PCs and tablets, and compounded by the number of individuals privileged to access something guarded by those access points. We believe the market opportunity for our products is massive, global and growing encompassing nearly all privilege entitlement and access control systems.

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Historically, our largest market has been access control within highly regulated industries like 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, like mobile wallets and NFC, migrate to smart-phones, the value and potential risk associated with such systems should grow substantially and drive demand and mass adoption of advanced user authentication technologies, including fingerprint biometrics and our solutions.

Upon introducing a series of compact fingerprint readers, we saw an immediate increase in inquiries from both large commercial companies seeking an alternative to passwords, and from consumers recognizing that they could use SideSwipe or EcoID to replace their Windows password.

In October 2015, we established BIO-key Hong Kong for purposes of establishing relationships and conducting business is the Asia Pacific Region. Through our Hong Kong subsidiary, we support the growing demand for secure identification and authentication in the region.

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

● Corporate network access control, 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. 

● Demand for BIO-key hardware products from Windows 10 users and Fortune 500 companies.

● Government services and highly regulated industries including, Medicare, Medicaid, Social Security, Drivers Licenses, Campus and School ID, Passports/Visas.

● Growth in the Asia Pacific region.

● Biometric based consumer products.

Business Model

Our business model for 2018 and beyond is focused on the following key areas:

Market Drivers The primary drivers for fingerprint authentication are identity theft, data breaches, and compliance in highly regulated industries such as government, financial services, and healthcare. However, the number one driver might be the world’s dissatisfaction with passwords. Introduced as a way to offer a personal layer of security when the Internet was first launched, and long before the term “hacker” was coined, the password was a great solution to protect access to email accounts and basic internet activities. Yet, none of us could envision that the internet and smart mobile devices would expose us to a new boundary-less world, one that would require a much better understanding of cybersecurity.

Education has been an important factor in the growth of the biometric industry. Expanded utilization provides use cases and helps increase awareness. Even as myths about the technology are discussed, eventually, industry leaders educate the public about the facts versus fiction. BIO-key has taken a keen focus on championing biometric technology across all verticals and is viewed as a thought leader in the space. We have been featured in the national media and participate in national and international trade conferences commenting on key topics and issues within the industry

OEM Customers We will continue to prioritize securing agreements with OEM customers. The history of success supporting NCR, McKesson and LexisNexis provides an established footprint that we intend to build upon. As OEM customers embed BIO-key solutions within their products, the customer benefits from the enhanced security and workflow. OEM customers ordering patterns are more predictable and OEM customers generally require lower service and support resourcing.

Highly Regulated Industries Government projects and healthcare, including hospitals, clinics, private practices and blood centers provide a significant opportunity for BIO-key. In healthcare, we anticipate that patient identification will emerge as a highly regulated requirement for all healthcare organizations and we are developing our software to accommodate this need. The financial services industry in the U.S. has been slow to adopt biometric authentication while Asia and Europe have been more receptive to incorporating biometrics. We anticipate that the U.S. market will grow rapidly once the first major institution adopts a biometric solution.

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Partner Model We remain committed to a partner sales model. In the Identity and Access Management (IAM) space, we have adjusted our targets to include working with resellers, and are developing a security assertion markup language (SAML) solution for ease of installation purposes. In healthcare, HealthCast and other partners, such as Caradigm and Aventura, identified and sold our solutions to a number of new customers in 2016.

Consumer Market We are working with Amazon and developing packaging so that our compact fingerprint readers can be featured and sold through retail outlets directly to consumers. This channel has been very successful and continues to grow for us.

Microsoft Partnership In November of 2015, we established a partnership with Microsoft initiated by our participation at the “Ignite your Business” Windows 10 – Hello twelve city launch tour. BIO-key was featured as the exclusive biometric technology vendor during the launch and we continue to leverage this unique status.

Hardware Almost immediately after launching SideSwipe, we witnessed an increase in inquiries inspiring us to develop a series of compact readers with different features and form factors. Hardware has played a significant role in increasing the visibility of our company and has become a catalyst for our software. By offering hardware to customers, we offer a more full and complete solution and eliminate the need for us to engage a hardware vendor on certain projects, which can sometimes inhibit the process and margins. In 2017, we expanded our offerings to include Bluetooth and biometric enabled padlocks, TSA approved luggage locks, and bicycle locks. These products have been well received by consumers and are currently selling in both Asia Pacific and U.S. markets. We are continuing to develop new products and grow our base of distributors and retail outlets for our products.

Customer Concentration

During 2017, a nationally recognized telecommunications company accounted for 54% and 34% of our revenue in 2017 and 2016, respectively.

Research and Development

We concentrate our research and development efforts on enhancing the functionality, reliability and integration of our current products as well as developing new and innovative products and solutions. Although we believe that our identification technology is one of the most advanced and discriminating fingerprint technologies available today, the markets in which we compete are characterized by rapid technological change and evolving standards. In order to maintain our position in the market, we will continue to upgrade and refine our existing technologies. We have also licensed mobile platform software from CGG which we have integrated with our core WEB-key offerings and introduced to the Asian markets in 2016. This presents a significant opportunity for us going forward. During the years ended December 31, 2017 and 2016, we spent $1,659,875 and $2,008,942, respectively, on research and development.

Products On Demand (POD)

Our technology and development team welcomes the opportunity to develop customer specific solutions if they are funded. Our strategy to support POD is to utilize internal resources, outsource support services and strategic partners to satisfy unique customer requirements. Our flexible, nimble business model and interoperable capabilities are key differentiators.

Competition

In addition to companies that provide existing commonplace methods of restricting access to facilities and logical access points such as pass cards, PIN numbers, passwords, locks and keys, there are numerous companies involved in the development, manufacturing and marketing of fingerprint biometrics products to commercial, government, law enforcement and prison markets. These companies include, but are not limited to, 3M (Cogent), NEC, and MorphoTrak.

The majority of sales for automated fingerprint identification products in the market to date have been deployed for government agencies, healthcare facilities, and law enforcement applications. The consumer and commercial markets represent areas of significant growth potential for biometrics, led by the use of mobile devices.

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The epidemic of security and data breaches reported over the past few years is one of the driving factors for identifying new methods of protecting valuable data. After attempting to create a more sophisticated password or more efficient token or PIN, it has become apparent that each of these methods are easily compromised, and the downside risks are significant.

With respect to competing biometrics technologies, each has its strengths and weaknesses and none has emerged as a market leader:

● Fingerprint identification is generally viewed as very accurate, inexpensive and non-intrusive and is the dominant biometric in use today and will be for the foreseeable future;

● Palm Vein scanning is expensive, technique-sensitive, and offers mobility challenges;

● Iris scanning is viewed as accurate, but the hardware is significantly more expensive; and

● Facial recognition can have accuracy limitations and is typically highly dependent on ambient lighting conditions, angle of view, and other factors.

Government Regulations

We are not currently subject to direct regulation by any government agency, other than regulations generally applicable to businesses or related to specific project requirements. In the event of any international sales, we would be subject to various domestic and foreign laws regulating such exports and export activities.

Environmental Regulations

As of the date of this report, we have not incurred any material expenses relating to our compliance with federal, state, or local environmental laws and do not expect to incur any material expenses in the foreseeable future.

Employees, Contractors, and Consultants

As of March 28, 2018, we employed nineteen individuals on a full-time basis as follows: (i) nine in engineering, customer support, research and development; (ii) four in finance and administration; and (iii) six in sales and marketing. We also use the services of two consultants (part-time) who provide engineering and technical services. Additionally, our Hong Kong subsidiary employs six individuals on a full-time basis as follows: (i) one in research and development, (ii) one in finance and administration, (iii) one in logistics and supply chain management; and (iv) three in sales and marketing. We also use the services of sixteen factory contractors (full-time) in China.

ITEM 1A. RISK FACTORS

Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements appearing just before the section captioned "Business" in Item 1. above. Effective December 29, 2016, we implemented a reverse stock split of our outstanding common stock at a ratio of 1-for-12 shares. All share figures are reflected on a post-split basis.

Business and Financial Risks

Based on our lack of sufficient revenue since inception and recurring losses from operations, our independent registered public accounting firm has included an explanatory paragraph in their opinion as to the substantial doubt about our ability to continue as a going concern.

Due to, among other factors, our history of losses and limited revenue, our independent registered public accounting firm has included an explanatory paragraph in their opinion for the year ended December 31, 2017 as to the substantial doubt about our ability to continue as a going concern. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which contemplate that we will continue to operate as a going concern. Our financial statements do not contain any adjustments that might result if we are unable to continue as a going concern.

Since our formation, we have historically not generated significant revenue and have sustained substantial operating losses.

As of December 31, 2017, we had an accumulated deficit of approximately $67.1 million. In order to increase revenue, we have developed a direct sales force and anticipate the need to retain additional sales, marketing and technical support personnel and may need to incur substantial expenses. We cannot assure you that we will be able to secure these necessary resources, that a significant market for our technologies will develop, or that we will be able to achieve our targeted revenue. If we are unable to achieve revenue or raise capital sufficient to cover our ongoing operating expenses, we will be required to scale back operations, including marketing and research initiatives, or in the extreme case, discontinue operations.

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Our biometric technology has yet to gain widespread market acceptance and we do not know how large of a market will develop for our technology.

Biometric technology has received only limited market acceptance, particularly in the private sector. Our technology represents a novel security solution and we have not yet generated significant sales. Although recent security concerns relating to identification of individuals and appearance of biometric readers on popular consumer products, including the Apple iPhone, have increased interest in biometrics generally, it remains an undeveloped, evolving market. Biometric based solutions compete with more traditional security methods including keys, cards, personal identification numbers and security personnel. Acceptance of biometrics as an alternative to such traditional methods depends upon a number of factors including:

●  national or international events which may affect the need for or interest in biometric solutions;

● the performance and reliability of biometric solutions;

● marketing efforts and publicity regarding these solutions;

● public perception regarding privacy concerns;

● costs involved in adopting and integrating biometric solutions;

● proposed or enacted legislation related to privacy of information; and

● competition from non-biometric technologies that provide more affordable, but less robust, authentication (such as tokens and smart cards).

For these reasons, we are uncertain whether our biometric technology will gain widespread acceptance in any commercial markets or that demand will be sufficient to create a market large enough to produce significant revenue or earnings. Our future success depends, in part, upon business customers adopting biometrics generally, and our solution specifically.

Biometric technology is a new approach to Internet security, which must be accepted in order for our WEB-key ® solution to generate significant revenue.

Our WEB-key authentication initiative represents a new approach to Internet security, which has been adopted on a limited basis by companies that distribute goods, content or software applications over the Internet. The implementation of our WEB-key solution requires the distribution and use of a finger scanning device and integration of database and server side software. Although we believe our solutions provide a higher level of security for information transmitted over the Internet than existing traditional methods, unless business and consumer markets embrace the use of a scanning device and believe the benefits of increased accuracy outweigh implementation costs, our solution will not gain market acceptance.

The market for our solutions is still developing and if the biometrics industry adopts standards or a platform different from our standards or platform, our competitive position would be negatively affected.

The market for identity solutions is still developing. The evolution of this market may result in the development of different technologies and industry standards that are not compatible with our current solutions, products or technologies. Several organizations set standards for biometrics to be used in identification and documentation. Although we believe that our biometric technologies comply with existing standards, these standards may change and any standards adopted could prove disadvantageous to or incompatible with our business model and current or future solutions, products and services.

Our software products may contain defects which will make it more difficult for us to establish and maintain customers.

Although we have completed the development of our core biometric technology, it has only been used by a limited number of business customers. Despite extensive testing during development, our software may contain undetected design faults and software errors, or “bugs” that are discovered only after it has been installed and used by a greater number of customers. Any such defect or error in new or existing software or applications could cause delays in delivering our technology or require design modifications. These could adversely affect our competitive position and cause us to lose potential customers or opportunities. Since our technologies are intended to be utilized to secure physical and electronic access, the effect of any such bugs or delays will likely have a detrimental impact on us. In addition, given that biometric technology generally, and our biometric technology specifically, has yet to gain widespread acceptance in the market, any delays would likely have a more detrimental impact on our business than if we were a more established company.

8

In order to generate revenue from our biometric products, we are dependent upon independent original equipment manufacturers, system integrators and application developers, which we do not control. As a result, it may be more difficult to generate sales.

We market our technology through licensing arrangements with:

●  Original equipment manufacturers, system integrators and application developers which develop and market products and applications which can then be sold to end users;

●  Companies which distribute goods, services or software applications over the Internet

As a technology licensing company, our success will depend upon the ability of these manufacturers and developers to effectively integrate our technology into products and services which they market and sell. We have no control over these licensees and cannot assure you that they have the financial, marketing or technical resources to successfully develop and distribute products or applications acceptable to end users or generate any meaningful revenue for us. These third parties may also offer the products of our competitors to end users. While we have commenced a significant sales and marketing effort, we have only begun to develop a significant distribution channel and may not have the resources or ability to sustain these efforts or generate any meaningful sales.

We face intense competition and may not have the financial and human resources necessary to keep up with rapid technological changes, which may result in our technology becoming obsolete.

The Internet, facility access control and information security markets are subject to rapid technological change and intense competition. We compete with both established biometric companies and a significant number of startup enterprises as well as providers of more traditional methods of access control. Most of our competitors have substantially greater financial and marketing resources than we do and may independently develop superior technologies, which may result in our technology becoming less competitive or obsolete. We may not be able to keep pace with this change. If we are unable to develop new applications or enhance our existing technology in a timely manner in response to technological changes, we will be unable to compete in our chosen markets. In addition, if one or more other biometric technologies such as voice, face, iris, hand geometry or blood vessel recognition are widely adopted, it would significantly reduce the potential market for our fingerprint identification technology.

We introduced our products in Asian markets in 2016. Our financial performance will be subject to risks associated with changes in the value of the U.S. dollar versus local currencies.

Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales and operating expenses worldwide. Weakening of foreign currencies relative to the U.S. dollar will adversely affect the U.S. dollar value of our foreign currency-denominated sales and earnings, if any, and could lead to us raising international pricing, potentially reducing the demand for our products. In addition, margins on sales of our products in foreign countries and on sales of products that include components obtained from foreign suppliers could be materially adversely affected by foreign currency exchange rate fluctuations.

We depend on key employees and members of our management team, including our Chairman of the Board and Chief Executive Officer and our Chief Technology Officer, in order to achieve our goals. We cannot assure you that we will be able to retain or attract such persons.

Our employment contracts with Michael W. DePasquale, our Chairman of the Board and Chief Executive Officer, and Mira LaCous, our Chief Technology Officer, expire annually, and renew automatically for successive one year periods unless notice of non-renewal is provided by the Company. Although the contracts do not prevent them from resigning, they do contain confidentiality and non-compete clauses, which are intended to prevent them from working for a competitor within one year after leaving our Company. Our success depends on our ability to attract, train and retain employees with expertise in developing, marketing and selling software solutions. In order to successfully market our technology, we will need to retain additional engineering, technical support and marketing personnel. The market for such persons remains highly competitive and our limited financial resources will make it more difficult for us to recruit and retain qualified persons.

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We cannot assure you that the intellectual property protection for our core technology provides a sustainable competitive advantage or barrier to entry against our competitors.

Our success and ability to compete is dependent in part upon proprietary rights to our technology. We rely primarily on a combination of patent, copyright and trademark laws, trade secrets and technical measures to protect our propriety rights. We have filed a patent application relating to both the optic technology and biometrics solution components of our technology wherein several claims have been allowed. The U.S. Patent and Trademark Office has issued us a series of patents for our Vector Segment fingerprint technology (VST), and our other core biometric analysis and identification technologies. However, we cannot assure you that we will be able to adequately protect our technology or other intellectual property from misappropriation in the U.S. and abroad. Any patent issued to us could be challenged, invalidated or circumvented or rights granted thereunder may not provide a competitive advantage to us. Furthermore, patent applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and other rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property rights on a worldwide basis in a cost-effective manner. In jurisdictions where foreign laws provide less intellectual property protection than afforded in the U.S. and abroad, our technology or other intellectual property may be compromised, and our business would be materially adversely affected. If any of our proprietary rights are misappropriated or we are forced to defend our intellectual property rights, we will have to incur substantial costs. Such litigation could result in substantial costs and diversion of our resources, including diverting the time and effort of our senior management, and could disrupt our business, as well as have a material adverse effect on our business, prospects, financial condition and results of operations. We can provide no assurance that we will have the financial resources to oppose any actual or threatened infringement by any third party. Furthermore, any patent or copyrights that we may be granted may be held by a court to infringe on the intellectual property rights of others and subject us to the payment of damage awards.

We may be subject to claims with respect to the infringement of intellectual property rights of others, which could result in substantial costs and diversion of our financial and management resources.

Third parties may claim that we are infringing on their intellectual property rights. We may violate the rights of others without our knowledge. We may expose ourselves to additional liability if we agree to indemnify our customers against third party infringement claims. While we know of no basis for any claims of this type, the existence of and ownership of intellectual property can be difficult to verify and we have not made an exhaustive search of all patent filings. Additionally, most patent applications are kept confidential for twelve to eighteen months, or longer, and we would not be aware of potentially conflicting claims that they make. We may become subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, and we may incur licensing fees or be forced to develop alternative technology or obtain other licenses. In addition, we may incur substantial expenses in defending against these third party infringement claims and be diverted from devoting time to our business and operational issues, regardless of the merits of any such claim.

In addition, in the event that we recruit employees from other technology companies, including certain potential competitors, and these employees are engaged in the development of portions of products which are similar to the development in which they were involved at their former employers, we may become subject to claims that such employees have improperly used or disclosed trade secrets or other proprietary information. If any such claims were to arise in the future, litigation or other dispute resolution procedures might be necessary to retain our ability to offer our current and future services, which could result in substantial costs and diversion of our financial and management resources. Successful infringement or licensing claims against us may result in substantial monetary damages, which may materially disrupt the conduct of our business and have a material adverse effect on our reputation, business, financial condition and results of operations. Even if intellectual property claims brought against us are without merit, they could result in costly and time consuming litigation, and may divert our management and key personnel from operating our business.

If we are unable to effectively protect our intellectual property rights on a worldwide basis, we may not be successful in the international expansion of our business.

Access to worldwide markets depends in part on the strength of our intellectual property portfolio. There can be no assurance that, as our business expands into new areas, we will be able to independently develop the technology, software or know-how necessary to conduct our business or that we can do so without infringing the intellectual property rights of others. To the extent that we have to rely on licensed technology from others, there can be no assurance that we will be able to obtain licenses at all or on terms we consider reasonable. The lack of a necessary license could expose us to claims for damages and/or injunction from third parties, as well as claims for indemnification by our customers in instances where we have a contractual or other legal obligation to indemnify them against damages resulting from infringement claims. With regard to our own intellectual property, we actively enforce and protect our rights. However, there can be no assurance that our efforts will be adequate to prevent the misappropriation or improper use of our protected technology in international markets.

10

We face inherent product liability or other liability risks that could result in large claims against us.

We have inherent risk of exposure to product liability and other liability claims resulting from the use of our products, especially to the extent customers may depend on our products in public safety situations that may involve physical harm or even death to individuals, as well as exposure to potential loss or damage to property. Despite quality control systems and inspection, there remains an ever-present risk of an accident resulting from a faulty manufacture or maintenance of products, or an act of an agent outside of our or our supplier’s control. Even if our products perform properly, we may become subject to claims and costly litigation due to the catastrophic nature of the potential injury and loss. A product liability claim, or other legal claims based on theories including personal injury or wrongful death, made against us could adversely affect operations and financial condition. Although we may have insurance to cover product liability claims, the amount of coverage may not be sufficient. 

We expect that we will need to obtain additional financing to execute our business plan over the long-term, which may not be available. If we are unable to raise additional capital or generate significant revenue, we may not be able to continue operations.

We have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. We currently require approximately $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 2017, we generated approximately $6,303,000 of revenue, which is below our average monthly requirements. If we are unable to generate sufficient revenue to cover operating expenses and fund our business plan, we will need to obtain additional third-party financing 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. We cannot assure you that we will be able to secure any such additional financing on terms acceptable to us or at all. If we cannot obtain such financing, we will not be able to execute our business plan, will be required to reduce operating expenses, and in the extreme case, discontinue operations. 

We may not achieve sustainable profitability with respect to the biometric component of our business if we are unable to maintain, improve our offerings.

We believe that our future business prospects depend in part on our ability to maintain and improve our current services and to develop new ones on a timely basis. Our services will have to achieve market acceptance, maintain technological competitiveness, and meet an expanding range of customer requirements. As a result of the complexities inherent in our service offerings, major new wireless data services and service enhancements require long development and testing periods. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new services and service enhancements. Additionally, our new services and service enhancements may not achieve market acceptance. If we cannot effectively develop and improve services, we may not be able to recover our fixed costs or otherwise become profitable.

If we fail to adequately manage our resources, it could have a severe negative impact on our financial results or stock price.

We could be subject to fluctuations in technology spending by existing and potential customers. Accordingly, we will have to actively manage expenses in a rapidly changing economic environment. This could require reducing costs during economic downturns and selectively growing in periods of economic expansion. If we do not properly manage our resources in response to these conditions, our results of operations could be negatively impacted.

Our business could be negatively impacted by security threats, including cybersecurity threats, and other disruptions.

As a technology company, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information. Although we utilize various procedures and controls to monitor these threats and mitigate our exposure to such threats, there can be no assurance that these procedures and controls will be sufficient in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of sensitive information, critical infrastructure, personnel or capabilities, essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations, or cash flows.

Cybersecurity attacks in particular are evolving and include but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. These events could damage our reputation and lead to financial losses from remedial actions, loss of business or potential liability.

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Risks Related To Our Common Stock

We have issued a substantial number of securities that are convertible into shares of our common stock which could result in substantial dilution to the ownership interests of our existing shareholders.

As of the date of this report, approximately 6,406,440 shares of our common stock were reserved for issuance upon exercise or conversion of outstanding stock options, convertible preferred stock, and warrants. Our Series A-1 and Series B-1 Convertible Preferred Stock and certain warrants, contain “blocker provisions” which prohibit the conversion or exercise of such securities if such conversions would result in the holder of such securities beneficially owing in excess of 9.99% of our outstanding shares. The sole holder of shares of our Series A-1 Convertible Preferred Stock has increased the blocker provision cap to 34.99%, and subsequent year end a holder of our Series B-1 Convertible Preferred Stock has increased the blocker provision cap to 19.99%. The exercise or conversion of these securities will result in a significant increase in the number of outstanding shares and substantially dilute the ownership interests of our existing stockholders. 

The availability of a substantial number of shares of our common stock for public sale may cause the price of our common stock to decline.

Our most recent registration statements, which were declared effective in January 2017, cover the public resale of 6,314,830 shares of our common stock, including 516,667 shares of common stock issued in our November 2016 private placement, 1,738,778 shares of common stock issuable upon conversion of Series A-1 Convertible Preferred Stock issued in our October 2015 and November 2015 private offerings, 2,916,667 shares of common stock issuable upon conversion of Series B-1 Convertible Preferred Stock issued in our November 2015 private offering, and 1,142,718 shares of common stock underlying warrants issued in our July 2013 and November 2014 private offerings. The shares of common stock being offered by the selling security holders represent approximately 82% of our outstanding shares. The availability of these shares for sale to the public, whether or not sales have occurred or are occurring, and the sale of such shares in the public markets could have an adverse effect on the market price of our common stock. Such an adverse effect on the market price would make it more difficult for us to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

An active trading market for our common stock may not be sustained.

Although our common stock is listed on the Nasdaq Capital Market “Nasdaq”, an active trading market for our shares may not be developed and if developed, sustained. If an active market for our common stock is not developed or sustained, it may be difficult for you to sell your shares without depressing the market price for the shares or sell your shares at all. Any inactive trading market for our common stock may also impair our ability to raise capital to continue to fund our operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

If we fail to comply with the continued minimum closing bid requirements of the Nasdaq or other requirements for continued listing, our Common Stock may be delisted and the price of our Common Stock and our ability to access the capital markets could be negatively impacted.

Our Common Stock is listed for trading on Nasdaq. We must satisfy Nasdaq’s continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share for 30 consecutive business days. A delisting of our Common Stock from Nasdaq could materially reduce the liquidity of our Common Stock and result in a corresponding material reduction in the price of our Common Stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees and fewer business development opportunities.

We intend to raise additional funds in the future through issuances of securities and such additional funding may be dilutive to stockholders or impose operational restrictions.

We expect that we will need to raise additional capital in the future to help fund our operations through sales of shares of our common stock or securities convertible into shares of our common stock, as well as issuances of debt. Such additional financing may be dilutive to our stockholders, and debt financing, if available, and may involve restrictive covenants which may limit our operating flexibility. If additional capital is raised through the issuance of shares of our common stock or securities convertible into shares of our common stock, the percentage ownership of existing stockholders will be reduced. These stockholders may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.

Because we do not expect to pay dividends for the foreseeable future, investors seeking cash dividends should not purchase our shares of common stock.

We have never declared or paid any cash dividends on our common stock. Our Series A-1 Convertible Preferred Stock accrues dividends at the rate of 6% per annum payable quarterly on April 1, July 1, October 1 and January 1 of each year, in cash or kind through the issuance of additional shares of common stock. Our Series B-1 Convertible Preferred Stock accrues 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. Following the payment of dividends on our Series A-1 and B-1 Convertible Preferred Stock, we currently intend to retain future earnings, if any, to finance the expansion of our business. As a result, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. Accordingly, investors seeking cash dividends should not purchase shares of our common stock.

12

Our share ownership is highly concentrated which will limit your ability to influence corporate matters.

Our directors, officers and principal stockholders, beneficially own approximately 47% of our common stock and will continue to have significant influence over the outcome of all matters submitted to the stockholders for approval, including the election of our directors and approval of significant corporate transactions. This concentration of ownership will limit your ability to influence corporate matters, and as a result, actions may be taken that you may not view as beneficial.

Provisions of our certificate of incorporation, bylaws and Delaware law may make a contested takeover of our Company more difficult.

Certain provisions of our certificate of incorporation, bylaws and the General Corporation Law of the State of Delaware ("DGCL") could deter a change in our management or render more difficult an attempt to obtain control of us, even if such a proposal is favored by a majority of our stockholders. For example, we are subject to the provisions of the DGCL that prohibit a public Delaware corporation from engaging in a broad range of business combinations with a person who, together with affiliates and associates, owns 15% or more of the corporation’s outstanding voting shares (an "interested stockholder") for three years after the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Our certificate of incorporation also includes undesignated preferred stock, which may enable our board of directors to discourage an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise. Finally, our bylaws include an advance notice procedure for stockholders to nominate directors or submit proposals at a stockholders meeting. Delaware law and our charter may, therefore, inhibit a takeover. 

The trading price of our common stock may be volatile.

The trading price of our shares has from time to time fluctuated widely and in the future may be subject to similar fluctuations. The trading price may be affected by a number of factors including the risk factors set forth in this prospectus as well as our operating results, financial condition, announcements of innovations or new products by us or our competitors, general conditions in the biometrics and access control industries, and other events or factors. We cannot assure you that any of the broker-dealers that currently make a market in our common stock will continue to serve as market makers or have the financial capability to stabilize or support our common stock. A reduction in the number of market makers or the financial capability of any of these market makers could also result in a decrease in the trading volume of and price of our shares. In recent years broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. Such broad market fluctuations may adversely affect the future-trading price of our common stock.

ITEM 2. DESCRIPTION OF PROPERTY

We do not own any real estate. We conduct operations from leased premises in Eagan, Minnesota (5,544 square feet), and Wall, New Jersey (4,517 square feet), as well as in several home-office locations across the country. Internationally, we conduct operations from leased premises in Tsuen Wan, Hong Kong (1,098 square feet), and Jiangmen, China (3,267 square feet).

ITEM 3. LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.  As of December 31, 2017, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations.

ITEM 4.      MINE SAFETY DISCLOSURES

None

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock currently trades on the Nasdaq Capital Market under the symbol “BKYI”. The following table sets forth the range of high and low bid prices per share of our common stock for each of the calendar quarters identified below as reported by Nasdaq, and previously the OTCQB Marketplace. These quotations represent inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions. The quotations for all periods reflect the 1-for-12 reverse stock split which was effective December 29, 2016.

2017:	High		Low
Quarter ended December 31, 2017	$	2.90	$	1.20
Quarter ended September 30, 2017		3.67		2.52
Quarter ended June 30, 2017		3.08		1.75
Quarter ended March 31, 2017		3.50		2.00

2016:	High		Low
Quarter ended December 31, 2016	$	3.60	$	1.56
Quarter ended September 30, 2016		3.24		1.44
Quarter ended June 30, 2016		3.72		1.44
Quarter ended March 31, 2016		2.28		1.32

The last price of our common stock as reported on the Nasdaq Stock Market as of March 27, 2018 was $1.91. 

Holders

As of March 27, 2018, the number of stockholders of record of our common stock was 143.

Dividends

We have not paid any cash dividends on our common stock to date, and have no intention of paying any cash dividends on our common stock in the foreseeable future. The declaration and payment of dividends on our common stock is also subject to the discretion of our Board of Directors and certain limitations imposed under the DGCL. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors.

ITEM 6. SELECTED FINANCIAL DATA

Not Applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion And Analysis Of Financial Condition And Results Of Operations, and other parts of this Report contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in the section captioned “RISK FACTORS” in Item 1A and elsewhere in this Report. The following should be read in conjunction with our audited financial statements included elsewhere herein.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand the Company. The MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes. Effective December 29, 2016, we implemented a reverse stock split of our outstanding common stock at a ratio of 1-for-12 shares. All share figures are reflected on a post-split basis.

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OVERVIEW

We develop and market advanced fingerprint biometric identification and identity verification technologies, as well as related identity management and credentialing fingerprint biometric hardware and 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 every sector of our economy including government, retail, healthcare and financial services.

In partnerships with OEMs, integrators, and solution providers, we provide biometric software solutions to private and public sector customers.  We provide the ability to positively identify and authenticate individuals before granting access to valuable corporate resources, web portals or applications in seconds.  Powered by our patented Vector Segment Technology or VST, WEB-key and BSP development kits are fingerprint biometric solutions that provide interoperability with all major reader manufacturers, enabling application developers and integrators to integrate fingerprint biometrics into their applications. 

In 2016, we began to sell through distribution and directly to consumers and commercial users our SideSwipe, SideTouch 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. In 2017, we expanded our consumer product line to include biometric and blue tooth enabled pad locks, TSA approved luggage locks, and bicycle locks. In 2018, we introduced OmniPass Consumer, a secure biometric-enabled application to manage multiple passwords for online apps, services or accounts.

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, enterprise access, mobile payments & credentialing, online payments, and healthcare record and payment data security.  Our secondary focus includes government and educational markets.

STRATEGIC OUTLOOK

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 authentic 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.

We believe there is potential for significant market growth in the following 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; and

● Growth in the Asia Pacific region.

● Biometric based consumer products.

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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. Finally, our entry into the Asian market and licensing arrangement with CGG has further expanded our business by opening new markets along with the new and innovative hardware offerings. We expect our SideSwipe, EcoID and SideTouch finger readers, and our biometric and Bluetooth enabled padlocks, luggage locks, and bicycle locks to continue to drive incremental revenue and growth.

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. Our recently introduced SAML and Open ID solutions will create new opportunities for us in 2018.

RESULTS OF OPERATIONS

Consolidated Results of Operations

Two Year % trend

	Years ended December 31,
	2017			2016
Revenues
Services		19	%		28	%
License fees and other		51	%		40	%
Hardware		30	%		32	%
		100	%		100	%
Costs and other expenses
Cost of services		7	%		7	%
Cost of license, hardware and other		44	%		18	%
		51	%		25	%
Gross Profit		49	%		75	%
Operating expenses
Selling, general and administrative		91	%		148	%
Research, development and engineering		26	%		68	%
		117	%		216	%
Operating loss		68	%		141	%
Other income (deductions)
Total other income (deductions)		0	%		0	%
Net loss		-68	%		-141	%

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Revenues and Costs of goods sold

					2017 - 2016
	2017		2016		$ Chg		% Chg
Revenues
Service	$	1,193,190	$	821,178	$	372,012		45	%
License & other		3,220,371		1,189,089		2,031,282		171	%
Hardware		1,889,423		965,489		923,934		96	%
Total Revenue	$	6,302,984	$	2,975,756	$	3,327,228		112	%
Cost of goods sold
Service	$	439,291	$	216,465	$	222,826		103	%
License, hardware & other		2,802,860		513,218		2,289,642		446	%
Total COGS	$	3,242,151	$	729,683	$	2,512,468		344	%

Revenues

Revenue increased $3,327,228 or 112% to $6,302,984 in 2017 as compared to $2,975,756 in 2016. As described more fully below, the increase was due primarily to one large software order received in the fourth quarter, increased sales of our fingerprint readers, and the introduction of our biometric locks. 

For the years ended December 31, 2017 and 2016, service revenues included approximately $501,000 and $722,000, respectively, of recurring maintenance and support revenue, and approximately $692,000 and $99,000, respectively, of non-recurring custom services revenue.  Recurring service revenue decreased 31% from 2016 to 2017 due to the non-renewal of two large maintenance contracts, offset by several smaller orders from new customers. We expect the recurring revenue to increase going forward based on the receipt of the large software order received in the fourth quarter of 2017. Non-recurring custom services increased 599% in 2017 as a result of a special software requirement from an existing customer which we do not expect to continue.

For the years ended December 31, 2017 and 2016, license and other revenue (royalty) increased 171% to $3,220,371 due primarily to one large software order from an existing customer, offset by a decrease in royalty income of approximately $21,000 during the corresponding period in 2016, as an OEM agreement was completed and was not renewed in the second quarter of 2016.

      Hardware sales increased by approximately $924,000, or 96%, to $1,889,423 as a result of increases in existing and new customer deployments, and retail sales.  Fingerprint reader sales increased approximately $573,000, or 59%, while the introduction of our new line of biometric locks generated revenue of approximately $351,000 in 2017.

Costs of goods sold

For the year ended December 31, 2017, cost of service increased approximately 103% to $439,291, due to added resources and reallocated research and development personnel to support the custom services revenue.

License, hardware and other costs for the year ended December 31, 2017 increased approximately 446% to $2,802,860. The increase was primarily attributable to the amortization of the software rights in the approximate amount of $1,510,000 as well as costs associated with the hardware mix.

Selling, general and administrative

				2017 - 2016
2017		2016		$ Chg		% Chg
$	5,676,323	$	4,438,950	$	1,237,373		28	%

 Selling, general and administrative costs for year ended December 31, 2017 were $5,676,323 representing a 28% increase from the corresponding period in 2016. The increases included additional expenses related to our Hong Kong subsidiary, including payroll, non-cash, share-based compensation expenses, commitment fees related to the Nasdaq uplisting, and increased commission expenses related to higher revenue. These amounts were offset by a decrease in factoring, legal fees, and contractors.

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Research, development and engineering

				2017 - 2016
2017		2016		$ Chg			% Chg
$	1,659,875	$	2,008,942	$	(349,067	)		-17	%

For the year ended December 31, 2017, research, development and engineering costs were $1,659,875 representing a 17% decrease over the corresponding period in 2016, as a result of decreased temporary outside services and recruiting expenses, and reallocation of research and development personnel to support the custom services revenue. These amounts were offset by an increase in total personnel and related costs, purchases, costs related to our Hong Kong subsidiary, and non-cash compensation costs.

Other income and expense

					2017 - 2016
	2017		2016		$ Chg			% Chg
Interest income	$	27	$	30	$	-3			-10	%
Gain on derivative liabilities		-		12,085		(12,085	)		-100	%
	$	27	$	12,115	$	(12,088	)		-100	%

Interest income for the years ended December 31, 2017 and 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. 

  LIQUIDITY AND CAPITAL RESOURCES

Operating activities overview

Net cash used for operations during the year ended December 31, 2017 was approximately $2,465,000. Items of note included:

● Negative cash flows related to changes in prepayments, accounts receivable, deferred revenue, and inventory of approximately $1,643,000, due to working capital management, and

● Net positive cash flows related to the adjustments for non-cash expenses for depreciation, amortization, share-based compensation, and an increase in allowance for doubtful accounts of approximately $3,049,000. 

Investing activities overview

Net cash used for investing activities during the year ended December 31, 2017 was approximately $227,000 and consisted of capital expenditures.

Financing activities overview

Net cash provided by financing activities during the year ended December 31, 2017 was approximately $1,920,000 and attributable primarily to the following:

● Positive cash flows from the issuance of shares of common stock of approximately $2,000,000, less financing costs of approximately $80,000.

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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 $100,000 during the next twelve months.  We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution.

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, 2018. Pursuant to the terms of the arrangement, from time to time, we sell to the Factor a minimum of $150,000 per quarter of certain of our accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 35% of the foreign and 75% of the domestic accounts receivable balance to us (the “Advance Amount”), with the remaining balance, less fees, 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 15% of the face value of the invoice factored, and are determined by the number of days required for collection of the invoice. We expect to continue to use this factoring arrangement periodically to assist with our general working capital requirements due to contractual requirements.   

On November 18, 2016, we issued to Wong Kwok Fong, a director, executive officer and principal stockholder 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, a director, executive officer and principal stockholder 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, we 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. As of the date of this report, the registration statement has not been filed. From time to time over the term of the facility, we 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 September 22, 2017, we issued to Wong Kwok Fong, a director, executive officer and principal stockholder of the Company, 427,778 shares of common stock and warrants to purchase 138,889 shares of common stock for an aggregate purchase price of $1,540,000, or $3.60 per share. The purchase consisted of a cash payment of $1,000,000 and the conversion of accrued dividends payable on the Company’s Series A-1 Convertible Preferred Stock of $540,000.

 LIQUIDITY OUTLOOK

At December 31, 2017, our total cash and cash equivalents were approximately $289,000, 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 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 2017, we generated approximately $6,303,000 of revenue, which is below our average monthly requirements.

If we are unable to generate sufficient revenue to fund current operations or 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 registered public accounting firm has 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 continue as a going concern.

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OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have, or are in the opinion of management reasonably likely to have, a current or future effect on our financial condition or results of operations.

CRITICAL ACCOUNTING POLICIES

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions. There have been no material changes to these estimates for the periods presented in this Annual Report on Form 10-K.

We believe that of our significant accounting policies, which are described in Note A of the notes to our consolidated financial statements included in this Annual Report on Form 10-K, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

1. Revenue Recognition

Revenues from software licensing are recognized in accordance with ASC 985-605, “Software Revenue Recognition." Accordingly, revenue from software licensing is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.

We intend to enter into arrangements with end users for items which may include software license fees, and services or various combinations thereof. For each arrangement, revenues will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is probable, delivery of the product has occurred and no other significant obligations remain.

Multiple-Element Arrangements: For multiple-element arrangements, we apply the residual method in accordance with ASC 985-605. The residual method requires that the portion of the total arrangement fee attributable to the undelivered elements be deferred based on its Vendor Specific Objective Evidence “VSOE” of fair value and subsequently recognized as the service is delivered. The difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements, which is generally the software license. VSOE of fair value for all elements in an arrangement is based upon the normal pricing for those products and services when sold separately. VSOE of fair value for support services is additionally determined by the renewal rate in customer contracts. We have established VSOE of fair value for support as well as consulting services.

License Revenues: Amounts allocated to license revenues are recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have been met.

Revenue from licensing software, which requires significant customization and modification, is recognized using the percentage of completion method, based on the hours of effort incurred by us in relation to the total estimated hours to complete. In instances where third party hardware, software or services form a significant portion of a customer’s contract, we recognize revenue for the element of software customization by the percentage of completion method described above. Otherwise, third party hardware, software, and services are recognized upon shipment or acceptance as appropriate. If we make different judgments or utilize different estimates of the total amount of work expected to be required to customize or modify the software, the timing and revenue recognition, from period to period, and the margins on the project in the reporting period, may differ materially from amounts reported. Anticipated contract losses are recognized as soon as they become known and are estimable.

Service Revenues: Revenues from services are comprised of maintenance and consulting and implementation services. Maintenance revenues include providing for unspecified when-and-if available product updates and customer telephone support services, and are recognized ratably over the term of the service period. Consulting services are generally sold on a time-and-materials basis and include a range of services including installation of software and assisting in the design of interfaces to allow the software to operate in customized environments. Services are generally separable from other elements under the arrangement since performance of the services are not essential to the functionality of any other element of the transaction and are described in the contract such that the total price of the arrangement would be expected to vary as the result of the inclusion or exclusion of the services. Revenues from services are generally recognized as the services are performed.

20

We provide customers, free of charge or at a minimal cost, testing kits which potential licensing customers may use to test compatibility/acceptance of our technology with the customer’s intended applications.

Costs and other expenses: Includes professional compensation and other direct contract expenses, as well as costs attributable to the support of client service professional staff, depreciation and amortization costs related to assets used in revenue-generating activities, and other costs attributable to serving our client base. Professional compensation consists of payroll costs and related benefits including stock-based compensation and bonuses. Other direct contract expenses include costs directly attributable to client engagements, such as out-of-pocket costs including travel and subsistence for client service professional staff, costs of hardware and software and costs of subcontractors. The allocation of lease and facilities charges for occupied offices is included in costs of service.

We account for our warranties under the FASB ASC 450 “Contingencies.” We generally warrant that our products are free from defects in material and workmanship for a period of one year from the date of initial delivery to its customers. The warranty does not cover any losses or damage that occurs as a result of improper installation, misuse or neglect or repair or modification by anyone other than the Company or its authorized repair agent. Our policy is to accrue anticipated warranty costs based upon historical percentages of items returned for repair within one year of the initial sale. Our repair rate of products under warranty has been minimal, and a historical percentage has not been established. Our software license agreements generally include certain provisions for indemnifying customers against liabilities if our software products infringe upon a third party’s intellectual property rights. We have not provided for any reserves for warranty liabilities as it was determined to be immaterial.

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

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

3. Research and Development Expenditures

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

4. Income Taxes

The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. We evaluate, on a quarterly basis whether, based on all available evidence, it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Because of our historical performance and estimated future taxable income a full valuation allowance has been established.

21

5. Accounting for Stock-Based Compensation

We account for share based compensation in accordance with the provisions of ASC 718-10, “Compensation — Stock Compensation,” which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The majority of our share-based compensation arrangements vest over either a three or four year vesting schedule. We expense our share-based compensation under the ratable method, which treats each vesting tranche as if it were an individual grant. The fair value of stock options is determined using the Black-Scholes valuation model, and requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of our common stock price over the option’s expected term, the risk-free interest rate over the option’s expected term, and our expected annual dividend yield. Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized as an expense in the consolidated statements of operations. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, are likely to change our valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the service period, net of estimated forfeitures (the number of individuals that will ultimately not complete their vesting requirements). The estimation of stock awards that will ultimately vest requires significant judgment. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See financial statements appearing at pages 25-50 of this Annual Report on Form 10-K

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None,

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2017, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

22

Under the supervision and with the participation of our management, including our CEO and CFO, we have conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017, based upon the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2017.

As we are a smaller reporting company, this annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

No change in our internal control over financial reporting occurred during the quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. – OTHER INFORMATION

None.

ITEM 10. – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item will be set forth under “Proposal No. 1: Election of Directors” in the 2018 Proxy Statement and incorporated herein by reference.

ITEM 11. – EXECUTIVE COMPENSATION

The information required by this item will be set forth under “Executive and Director Compensation” in the 2018 Proxy Statement and incorporated herein by reference.

ITEM 12. – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 403 of Regulation S-K regarding security ownership of certain beneficial owners and management will be set forth under “Stock Ownership” in the 2018 Proxy Statement and incorporated herein by reference.

The Equity Compensation Plan Information table required pursuant to Item 201(d) of Regulation S-K will be set forth in the 2018 Proxy Statement and incorporated herein by reference.

ITEM 13. – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item will be set forth under “Transactions with Related Persons” and “Director Independence” in the 2018 Proxy Statement and incorporated herein by reference.

ITEM 14. – PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item will be set forth under “Ratification of Rotenberg Meril Solomon Bertiger & Guttilla, P.C. as Independent Registered Public Accounting Firm for 2018” in the 2018 Proxy Statement and incorporated herein by reference. 

ITEM 15. – EXHIBITS

(a)      The following documents are filed as part of this Report. Portions of Item 15 are submitted as separate sections of this Report:

 (1)  Financial statements filed as part of this Report:

  Reports of Independent Registered Public Accounting Firm

  Consolidated Balance Sheets as at December 31, 2017 and 2016

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  Consolidated Statements of Operations—Years ended December 31, 2017 and 2016

  Consolidated Statement of Stockholders’ Equity—Years ended December 31, 2017 and 2016

  Consolidated Statements of Cash Flows—Years ended December 31, 2017 and 2016

  Notes to Consolidated Financial Statements—December 31, 2017 and 2016

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

ITEM 16. – FORM 10-K SUMMARY

None.

ITEM 8—FINANCIAL STATEMENTS

The following financial statements of BIO-key International, Inc. are included herein at the indicated page numbers:

Report of Independent Registered Public Accounting Firm	25
Consolidated Balance Sheets as at December 31, 2017 and 2016	26
Consolidated Statements of Operations—Years ended December 31, 2017 and 2016	27
Consolidated Statements of Stockholders’ Equity—Years ended December 31, 2017 and 2016	28
Consolidated Statements of Cash Flows—Years ended December 31, 2017 and 2016	29
Notes to the Consolidated Financial Statements—December 31, 2017 and 2016	31

24

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of

BIO-key International, Inc.

Wall, NJ

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of BIO-key International, Inc. and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in the consolidated financial statements, the Company has suffered substantial net losses in recent years, has an accumulated deficit at December 31, 2017 and is dependent on debt and equity financing to fund its operations, all of which raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are disclosed in Note A. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We have served as the Company's auditor since 2010.

/s/ Rotenberg Meril Solomon Bertiger & Guttilla, P.C.

ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.

Saddle Brook, New Jersey

April 2, 2018

25

BIO-key International, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

	December 31,
	2017			2016
ASSETS
Cash and cash equivalents	$	288,721		$	1,061,307
Accounts receivable, net		2,875,946			1,563,246
Due from factor		109,865			53,638
Inventory		946,847			465,428
Resalable software license rights		2,640,000			1,560,000
Prepaid expenses and other		152,654			206,677
Total current assets		7,014,033			4,910,296
Resalable software license rights, net of current portion		7,933,808			10,598,411
Accounts receivable, net of current portion		760,000			1,570,000
Equipment and leasehold improvements, net		181,165			67,814
Deposits and other assets		8,712			8,712
Intangible assets, net		181,104			134,132
Total non-current assets		9,064,789			12,379,069
TOTAL ASSETS	$	16,078,822		$	17,289,365
LIABILITIES
Accounts payable	$	499,230		$	466,842
Accrued liabilities		688,023			335,323
Dividends payable on preferred stock		630,408			401,250
Deferred revenue		507,866			633,062
Total current liabilities		2,325,527			1,836,477
TOTAL LIABILITIES		2,325,527			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 62,596 and 90,000 of $.0001 par value at December 31, 2017 and December 31, 2016, respectively		6			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 December 31, 2017 and December 31, 2016		11			11
Common stock — authorized, 170,000,000 shares; issued and outstanding; 7,691,324 and 6,093,843 of $.0001 par value at December 31, 2017 and December 31, 2016, respectively		769			609
Additional paid-in capital		80,829,001			78,253,413
Accumulated deficit		(67,076,492	)		(62,801,154	)
TOTAL STOCKHOLDERS’ EQUITY		13,753,295			15,452,888
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	16,078,822		$	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 are an integral part of these statements.

26

BIO-key International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years ended December 31,
	2017			2016
Revenues
Services	$	1,193,190		$	821,178
License fees and other		3,220,371			1,189,089
Hardware		1,889,423			965,489
Total revenues		6,302,984			2,975,756
Costs and other expenses
Cost of services		439,291			216,465
Cost of license fees and other		2,802,860			513,218
Total costs and other expenses		3,242,151			729,683
Gross Profit		3,060,833			2,246,073
Operating expenses
Selling, general and administrative		5,676,323			4,438,950
Research, development and engineering		1,659,875			2,008,942
Total operating expenses		7,336,198			6,447,892
Operating loss		(4,275,365	)		(4,201,819	)
Other income
Interest income		27			30
Gain on derivative liabilities		-			12,085
Total other income		27			12,115
Net loss		(4,275,338	)		(4,189,704	)
Convertible preferred stock dividends		(769,158	)		(802,500	)
Net loss available to common stockholders		(5,044,496	)		(4,992,204	)
Basic and Diluted Loss per Common Share	$	(0.76	)	$	(0.89	)
Weighted Average Shares Outstanding:
Basic and Diluted		6,638,382			5,587,144

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 are an integral part of these statements.

27

BIO-key International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Series A-1 Preferred Stock						Series B-1 Preferred Stock				Common Stock				Additional Paid-in			Accumulated
	Shares			Amount			Shares		Amount		Shares		Amount		Capital			Deficit			Total
Balance as of December 31, 2015		90,000		$	9			105,000	$	11		5,508,261	$	551	$	76,760,796		$	(58,611,450	)	$	18,149,917
Issuance of common stock for directors’ fees and CEO stock award												27,248		2		61,998						62,000
Issuance of common stock pursuant to securities purchase agreement												516,667		52		1,859,948						1,860,000
Dividends declared on preferred stock																(802,500	)					(802,500	)
Issuance of stock for consultants												41,667		4		104,996						105,000
Stock issuance costs																(84,866	)					(84,866	)
Reclassification of derivative liability																92,199						92,199
Share-based compensation																260,842						260,842
Net loss																			(4,189,704	)		(4,189,704	)
Balance as of December 31, 2016		90,000		$	9			105,000	$	11		6,093,843	$	609	$	78,253,413		$	(62,801,154	)	$	15,452,888
Issuance of common stock for directors’ fees												11,244		1		32,029						32,030
Issuance of common stock pursuant to securities purchase agreement												555,556		56		1,999,944						2,000,000
Dividends declared on preferred stock																(769,158	)					(769,158	)
Conversion of dividends payable on A-1 preferred stock												150,000		15		539,985						540,000
Conversion of A-1 preferred stock to common stock		(27,404	)		(3	)						761,222		76		(73	)					-
Issuance of stock for consultants												117,849		12		354,573						354,585
Stock issuance costs																(80,366	)					(80,366	)
Exercise of stock options												1,610		-		-						-
Share-based compensation																498,654						498,654
Net loss																			(4,275,338	)		(4,275,338	)
Balance as of December 31, 2017		62,596		$	6			105,000	$	11		7,691,324	$	769	$	80,829,001		$	(67,076,492	)	$	13,753,295

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 are an integral part of these statements.  

28

BIO-key International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years ended December 31,
	2017			2016
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss	$	(4,275,338	)	$	(4,189,704	)
Adjustments to reconcile net loss to cash used for operating activities:
Provision for losses on accounts receivable		500,000			500,000
Depreciation		52,709			49,038
Amortization of Intangible assets		13,726			13,606
Amortization of Software license rights		1,510,051			21,589
Share and warrant-based compensation for employees and consultants		940,734			260,842
Gain on derivative liabilities		-			(12,085	)
Stock based fees to Directors and consultants		32,030			167,000
Change in assets and liabilities:
Accounts receivable		(1,002,700	)		(241,841	)
Due from factor		(56,227	)		(16,217	)
Inventory		(481,419	)		(296,783	)
Software license rights		74,552			-
Prepaid expenses and other		(33,472	)		(109,474	)
Accounts payable		32,388			(691,713	)
Accrued liabilities		352,700			(157,745	)
Deferred revenue		(125,196	)		256,657
Net cash used for operating activities		(2,465,462	)		(4,446,830	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Patents		(60,698	)		-
Capital expenditures		(166,060	)		(52,975	)
Net cash used for investing activities		(226,758	)		(52,975	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred dividends paid		-			(535,100	)
Proceeds from issuances of common stock		2,000,000			1,860,000
Stock issuance costs		(80,366	)		(84,866	)
Net cash provided by financing activities		1,919,634			1,240,034
NET DECREASE IN CASH AND CASH EQUIVALENTS		(772,586	)		(3,259,771	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		1,061,307			4,321,078
CASH AND CASH EQUIVALENTS, END OF YEAR	$	288,721		$	1,061,307

The accompanying notes are an integral part of these statements.

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SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

	Years ended December 31,
	2017		2016
Cash paid for:
Interest	$	-	$	-
Noncash investing and financing activities:
Accrual of unpaid preferred dividends	$	630,408	$	401,250
Conversion of A-1 preferred dividends payable to common stock		540,000		-
Conversion of A-1 preferred stock to common stock		2,740,400		-
Reclassification of derivative liability to additional paid-in capital		-		92,199
Issuance of common stock as a commitment fee for the Equity facility		198,000		-
Issuance of common stock as consulting services for the Equity facility		244,084		-

The accompanying notes are an integral part of these statements. 

30

BIO-key International, Inc. and Subsidiaries

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2017 and 2016

NOTE A —THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

The Company, founded in 1993, develops and markets proprietary fingerprint identification biometric technology and software solutions. The Company was a pioneer in developing automated, finger identification technology that supplements or compliments other methods of identification and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, PKI, credit card, passports, driver’s licenses, OTP or other form of possession or knowledge-based credentialing. Additionally, advanced BIO-key® technology has been, and is, used to improve both the accuracy and speed of competing finger-based biometrics.

Basis of Presentation

The Company has incurred significant losses to date, and at December 31, 2017, it had an accumulated deficit of approximately $67.1 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 December 31, 2017, total cash and cash equivalents were approximately $289,000, as compared to approximately $1,061,000 at December 31, 2016.

As discussed below, 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 currently requires approximately $592,000 per month to conduct operations and pay dividend obligations, a monthly amount that it has been unable to achieve through revenue generation.  

If the Company is unable to generate sufficient revenue to meet our 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.

Effective December 29, 2016, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1 for 12 shares. All share figures and results are reflected on a post-split basis.

Summary of Significant Accounting Policies

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

1.  Basis of Consolidation

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

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2. Use of Estimates

Our consolidated financial statements are prepared in accordance with GAAP as set forth in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) and consider the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission (SEC). These accounting principles require us to make certain estimates, judgments and assumptions. The Company believes that the estimates, judgments and assumptions upon which it relies are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, its consolidated financial statements will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result.

 3. Revenue Recognition

Revenues from software licensing are recognized in accordance with ASC 985-605, "Software Revenue Recognition." Accordingly, revenue from software licensing is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.

The Company intends to enter into arrangements with end users for items which may include software license fees, and services or various combinations thereof. For each arrangement, revenues will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is probable, delivery of the product has occurred and no other significant obligations remain.

Multiple-Element Arrangements: For multiple-element arrangements, the Company applies the residual method in accordance with ASC 985-605. The residual method requires that the portion of the total arrangement fee attributable to the undelivered elements be deferred based on its vendor-specific objective evidence ("VSOE") of fair value and subsequently recognized as the service is delivered. The difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements, which is generally the software license. VSOE of fair value for all elements in an arrangement is based upon the normal pricing for those products and services when sold separately. VSOE of fair value for support services is additionally determined by the renewal rate in customer contracts. The Company has established VSOE of fair value for support as well as consulting services.

License Revenues: Amounts allocated to license revenues are recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have been met.

Revenue from licensing software, which requires significant customization and modification, is recognized using the percentage of completion method, based on the hours of effort incurred by the Company in relation to the total estimated hours to complete. In instances where third party hardware, software or services form a significant portion of a customer’s contract, the Company recognizes revenue for the element of software customization by the percentage of completion method described above. Otherwise, third party hardware, software, and services are recognized upon shipment or acceptance as appropriate. If the Company makes different judgments or utilizes different estimates of the total amount of work expected to be required to customize or modify the software, the timing and revenue recognition, from period to period, and the margins on the project in the reporting period, may differ materially from amounts reported. Anticipated contract losses are recognized as soon as they become known and are estimable.

Service Revenues: Revenues from services are comprised of maintenance and consulting and implementation services. Maintenance revenues include providing for unspecified when-and-if available product updates and customer telephone support services, and are recognized ratably over the term of the service period. Consulting services are generally sold on a time-and-materials basis and include a range of services including installation of software and assisting in the design of interfaces to allow the software to operate in customized environments. Services are generally separable from other elements under the arrangement since performance of the services are not essential to the functionality of any other element of the transaction and are described in the contract such that the total price of the arrangement would be expected to vary as the result of the inclusion or exclusion of the services. Revenues from services are generally recognized as the services are performed.

The Company provides customers, free of charge or at a minimal cost, testing kits which potential licensing customers may use to test compatibility/acceptance of the Company’s technology with the customer’s intended applications.

Costs and other expenses: Includes professional compensation and other direct contract expenses, as well as costs attributable to the support of client service professional staff, depreciation and amortization costs related to assets used in revenue-generating activities, and other costs attributable to serving the Company’s client base. Professional compensation consists of payroll costs and related benefits including stock-based compensation and bonuses. Other direct contract expenses include costs directly attributable to client engagements, such as out-of-pocket costs including travel and subsistence for client service professional staff, costs of hardware and software and costs of subcontractors. The allocation of lease and facilities charges for occupied offices is included in costs of service.

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The Company accounts for its warranties under the FASB ASC 450, “Contingencies.” The Company generally warrants that its products are free from defects in material and workmanship for a period of one year from the date of initial receipt by its customers. The warranty does not cover any losses or damage that occurs as a result of improper installation, misuse or neglect or repair or modification by anyone other than the Company or its authorized repair agent. The Company’s policy is to accrue anticipated warranty costs based upon historical percentages of items returned for repair within one year of the initial sale. The Company’s repair rate of products under warranty has been minimal, and a historical percentage has not been established. The Company’s software license agreements generally include certain provisions for indemnifying customers against liabilities if the Company’s software products infringe upon a third party’s intellectual property rights. The Company has not provided for any reserves for warranty liabilities as it was determined to be immaterial.

4.  Cash Equivalents

Cash equivalents consist of liquid investments with original maturities of three months or less.  At December 31, 2017 and 2016, cash equivalents consisted of a money market account.

5. 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 quarter ended September 30, 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, at December 31, 2017 the Company has reserved $1,000,000, which represents 57% of the remaining balance owed under the contract. Recoveries of accounts receivable previously written off are recorded when received. Accounts receivable at December 31, 2017 and 2016 consisted of the following:

	December 31,
	2017			2016
Accounts receivable - current	$	2,889,731		$	1,577,031
Accounts receivable - non current		1,760,000			2,070,000
		4,649,731			3,647,031
Allowance for doubtful accounts - current		(13,785	)		(13,785	)
Allowance for doubtful accounts - non current		(1,000,000	)		(500,000	)
		(1,013,785	)		(513,785	)
Accounts receivable, net of allowances for doubtful accounts	$	3,635,946		$	3,133,246

The allowance for doubtful accounts for the years ended December 31, 2017 and 2016 is as follows:

	Balance at Beginning of Year		Charged to Costs and Expenses		Deductions From Reserves		Balance at End of Year
Year Ended December 31, 2017
Allowance for Doubtful Accounts	$	513,785	$	500,000	$	-	$	1,013,785
Year Ended December 31, 2016
Allowance for Doubtful Accounts	$	13,785	$	500,000	$	-	$	513,785

The bad debt expense is recorded in selling, general, and administrative expense.

6. Software License Rights

Software license rights acquired for re-sale to end users are recorded as assets when purchased and are stated at the lower of cost or estimated net realizable value.

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The cost of the software license rights has been initially allocated pro-rata to the maximum number of resalable end-user licenses in the rights contract. Licenses are amortized to cost of sales over the greater of the following: 1) an estimate of the economic use of such license rights over a 10 year period with weighting towards the beginning of the term, 2) straight line method over ten years or 3) ratably at cost basis as each end user license is resold to a customer. Management re-evaluates the total sub-licenses it expects to sell during the proceeding twelve months and will adjust the allocation of the current portion vs. non-current portion of software rights.

The rights are also evaluated by management on a periodic basis to determine if estimated future net revenues, on a per sub-license basis, support the recorded basis of each license. If the estimated net revenues are less than the current carrying value of the capitalized software license rights, the Company will reduce the rights to their net realizable value.

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

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

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

	Years
Equipment and leasehold improvements
Equipment (years)	3	-	5
Furniture and fixtures (years)	3	-	5
Software (years)		3
Leasehold improvements	life or lease term

Intangible assets consist of patents.  Patent costs are capitalized until patents are awarded. Upon award, such costs are amortized using the straight-line method over their respective economic lives. If a patent is denied, all costs are charged to operations in that year.

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

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

9. Advertising Expense

The Company expenses the costs of advertising as incurred. Advertising expenses for 2017 and 2016 were approximately $386,000 and $299,000, respectively.

10. Deferred Revenue

Deferred revenue includes customer advances and amounts that have been billed per the contractual terms but have not been recognized as revenue. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which generally is 12 months from the date the customer is delivered the products.

11. Research and Development Expenditures

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

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

The Company’s EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuances of common stock, such as stock issuable pursuant to the conversion of preferred stock, exercise of stock options and warrants, when the effect of their inclusion is dilutive. See Note R - Earnings Per Share “EPS” for additional information.

13. Accounting for Stock-Based Compensation

The Company accounts for share based compensation in accordance with the provisions of ASC 718-10, “Compensation — Stock Compensation,” which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The majority of its share-based compensation arrangements vest over either a three or four year vesting schedule. The Company expenses its share-based compensation under the ratable method, which treats each vesting tranche as if it were an individual grant. The fair value of stock options is determined using the Black-Scholes valuation model, and requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of its common stock price over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized as an expense in the consolidated statements of operations. As required under the accounting rules, the Company reviews its valuation assumptions at each grant date and, as a result, the Company is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the service period, net of estimated forfeitures (the number of individuals that will ultimately not complete their vesting requirements). The estimation of stock awards that will ultimately vest requires significant judgment. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from current estimates.

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

	Year ended December 31,
	2017		2016
Selling, general and administrative	$	864,036	$	353,056
Research, development and engineering		108,728		74,786
	$	972,764	$	427,842

Valuation Assumptions for Stock Options

For 2017 and 2016, 1,234,167 and 27,087 stock options were granted, respectively. The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Year ended December 31,
	2017			2016
Weighted average Risk free interest rate		1.92	%		1.11	%
Expected life of options (in years)		4.51			4.50
Expected dividends		0	%		0	%
Weighted average Volatility of stock price		138	%		93	%

The stock volatility for each grant is determined based on the review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected option term. The expected term was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla” options; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

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14. 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 early-adopted the new provisions issued July 2017, for derivative liability instruments under FASB 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. Under ASU 2017-11, down round features do not meet the criteria for derivative accounting and no liability is to be recorded until an actual issuance of securities triggers the down-round feature. Prior to these provisions, the liabilities were recorded without the actual issuance of the securities triggering the down-round feature.

15. Income Taxes

The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. The Company evaluates, on a quarterly basis whether, based on all available evidence, if it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Because of the Company’s historical performance and estimated future taxable income, a full valuation allowance has been established.

The Company accounts for uncertain tax provisions in accordance with ASC 740-10-05, “Accounting for Uncertainty in Income Taxes.” The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

16. Recent Accounting Pronouncements

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASC 606”), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard contains a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods and services. The FASB has issued several amendments to the standard, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations. 

The Company will adopt ASC 606 effective January 1, 2018 using the modified retrospective transition method. While the Company is finalizing the impact this standard has on its consolidated financial statements and related disclosures, the Company expects the new standard will not have a material impact on the timing of its revenue recognition. The Company expects that certain contract acquisition costs such as sales commissions, will be amortized over an expected benefit period that is longer than the Company’s current policy of expensing these amounts over either the contract term or up-front, depending on the size of the order. The Company does not expect the adoption of ASC 606 to have any impact on its operating cash flows.

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.

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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 for amounts yet to be determined.

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 as of January 1, 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 Company will continue to estimate forfeitures at each reporting period, rather than electing an accounting policy change to record the impact of such forfeitures as they occur. 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. Under ASU 2017-11, down round features do not meet the criteria for derivative accounting and no liability is to be recorded until an actual issuance of securities triggers the down-round feature. 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 fiscal 2017 year 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 N 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.

17.  Reclassifications

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.

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NOTE B—FACTORING

Due from factor consisted of the following as of December 31:

	Original Invoice Value		Factored Amount		Factored Balance due
Year Ended December 31, 2017
Factored accounts receivable	$	423,349	$	313,484	$	109,865
Year Ended December 31, 2016
Factored accounts receivable	$	214,556	$	160,918	$	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, 2018. Pursuant to the terms of the arrangement, the Company, from time to time, sells to the Factor a minimum of $150,000 per quarter of 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 15% 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: 

	Years Ended December 31,
	2017		2016
Factoring fees	$	224,142	$	341,023

NOTE C—FAIR VALUES OF FINANCIAL INSTRUMENTS

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

NOTE D—CONCENTRATION OF RISK

Financial instruments which potentially subject the Company to risk primarily consist of cash and accounts receivables.

The Company maintains its cash and cash equivalents with various financial institutions, which, at times may exceed the amounts insured by the Federal Deposit Insurance Corporation. The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company has not incurred any losses on these accounts. At December 31, 2017 and 2016, amounts in excess of insured limits were approximately $0 and $811,000, respectively.

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

The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, as follows:

	Years Ended December 31,
	2017			2016
Customer A		54	%		34	%
Customer B		*			12	%

*      Less than 10% of total revenue

The Company had certain customers whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, as follows:

	As of December 31,
	2017			2016
Customer A		55	%		35	%
Customer B		37	%		56	%

Customer B’s receivable of $1,760,000 has been past due per the terms of the invoice for thirty months as of December 31, 2017. The Company has reserved $1,000,000 which represents 57% of the remaining balance owed under the contract.  

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NOTE E—INVENTORY

Inventory is stated at the lower of cost, determined on a first in, first out basis, or realizable value, and consists primarily of fabricated assemblies and finished goods. Inventory is comprised of the following as of December 31: 

	2017		2016
Current
Finished goods		487,858		381,762
Fabricated assemblies		458,989		83,666
Total current inventory	$	946,847	$	465,428

NOTE F—RESALABLE SOFTWARE LICENSES 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 amortized in the following 12 months is $2,640,000 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 our 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. A total of $1,556,687 and $1,909 was expensed during the 2017 and 2016 years, respectively. Since the license purchase, a cumulative amount of $1,558,596 has been expensed, with a carrying balance of $10,441,404 as of December 31, 2017. The 2017 amortization expense was based on the economic use model as this was the greater of the three methods.

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 the total cost over the same methodology described above with the greatest of the three approaches being the amortization for the periods. A total of $35,916 and $19,680 was expensed for actual sales during the 2017 and 2016 years, respectively. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $47,596 has been expensed, with a carrying balance of $132,404 as of December 31, 2017.  During 2017, the Company also purchased $8,000 of another third-party software licenses. The Company has classified these balances as non-current until a larger deployment occurs. Software license rights is comprised of the following as of:

	2017		2016
Current software license rights	$	2,640,000	$	1,560,000
Non-current software license rights		7,933,808		10,598,411
Total software license rights	$	10,573,808	$	12,158,411

During the year ended December 31, 2017, there were no events or changes in circumstances that indicated the carrying amount of the software license rights may not be recoverable from their undiscounted cash flows. Consequently, we did not perform an impairment test. The Company did not record an impairment loss related to the software license rights during the years ended December 31, 2017 and 2016.

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Estimated amortization expense based on economic use of the software license rights for each of the next five years and thereafter approximates the following:

Years ending December 31
2018	2,640,000
2019	3,000,000
2020	2,400,000
2021	1,200,000
2022	720,000
Thereafter	613,808

NOTE G—EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

	2017			2016
Equipment	$	567,473		$	403,425
Furniture and fixtures		164,079			162,067
Software		32,045			32,045
Leasehold improvements		23,403			23,403
		787,000			620,940
Less accumulated depreciation and amortization		(605,835	)		(553,126	)
Total	$	181,165		$	67,814

Depreciation was $52,709 and $49,038 for 2017 and 2016, respectively. Amounts are recorded in Selling, General, and Administrative Expense and Cost of Services.

NOTE H—INTANGIBLE ASSETS

Intangible assets consisted of the following as of December 31:

	2017							2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Patents and patents pending	$	347,946	$	(166,842	)	$	181,104	$	287,248	$	(153,116	)	$	134,132
Total	$	347,946	$	(166,842	)	$	181,104	$	287,248	$	(153,116	)	$	134,132

Aggregate amortization expense for 2017 and 2016 was $13,726 and $13,606, respectively. Amounts are recorded in Research, Development and engineering expense. The estimated aggregate amortization expense of intangible assets for the years following December 31, 2017 is approximately $14,000 per year for 2018 through 2022, and approximately $111,000 thereafter.

NOTE I—ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of December 31:

	2017		2016
Compensation	$	341,884	$	66,152
Compensated absences		164,132		154,368
Accrued legal and accounting fees		85,633		79,633
Sales tax payable		5,614		26,988
Factoring fees		32,357		3,600
Other		58,403		4,582
Total	$	688,023	$	335,323

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NOTE J—RELATED PARTY

Licensing Agreement with Subsidiaries of China Goldjoy Group Limited.

On November 11, 2015, BIO-key Hong Kong Limited, a subsidiary of the Company, entered into a license purchase agreement with certain subsidiaries of China Goldjoy Group Limited (“CGG”). The license agreement provides for the grant of a perpetual, irrevocable, exclusive, worldwide, fully-paid license to all software and documentation regarding the software code, toolkit, electronic libraries and related technology currently known as or offered under the Finger Q name, together with perpetual license under all related patents held by the licensors and any other intellectual property rights owned by the licensors related to the forgoing software.  The Company made a one-time payment of $12,000,000 to the licensors. Mr. Yao Jianhu is the chairman and chief executive officer of CGG and a director of the Company. Mr. Wong Kwok Fong served as the chief technology officer of CGG through October 2016 and is the beneficial owner of 33.2% of the Company’s common stock, and a director and executive officer of the Company.

Securities Purchase Agreements with Wong Kwok Fong

On November 18, 2016, the Company issued to Wong Kwok Fong, a director, executive officer and principal stockholder 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, 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 September 22, 2017, the Company issued to Wong Kwok Fong, a director and executive officer of the Company, 427,778 shares of common stock and warrants to purchase 138,889 shares of common stock for the aggregate purchase price of $1,540,000, or $3.60 per share. The purchase price was paid via a cash payment of $1,000,000 for 277,778 shares of common stock, and the conversion of an accrued dividend payable in the amount of $540,000 on the Company’s Series A-1 Convertible Preferred Stock for 150,000 shares of common stock.

On August 7, 2017, the Company received written notice from Wong Kwok Fong, the holder of an aggregate of 90,000 shares of the Company’s Series A-1 Convertible Preferred Stock, of his desire to increase the maximum percentage of shares of common stock issuable upon conversion of the Series A-1 Convertible Preferred Stock from 9.99% to 35%. The Company waived a standstill provision to permit such increase. In accordance with the Certificate of Designation of the Series A-1 Shares, such notice became effective on the 61st day following the date such notice was provided to the Company. On October 17, 2017, Wong Kwok Fong converted 27,404 of the Series A-1 Shares at a conversion price of $3.60 per share resulting in the acquisition of 761,222 shares of the Company’s Common Stock

NOTE K—DEFERRED REVENUE

Deferred revenue represents unearned revenue on maintenance contracts. Maintenance contracts include provisions for unspecified when-and-if available product updates and customer telephone support services, and are recognized ratably over the term of the service period. At December 31, 2017 and 2016, amounts in deferred revenue were approximately $508,000 and $633,000, respectively.

NOTE L—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 87% and 78% of the Company’s total revenues for 2017 and 2016, respectively.

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NOTE M—COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company does not own any real estate but conducts operations from three leased premises. These non-cancelable operating leases expire at various dates through 2020. In addition to base rent, the Company pays for property taxes, maintenance, insurance and other occupancy expenses according to the terms of the individual leases.

Future minimum rental commitments of non-cancelable operating leases are approximately as follows:

Years ending December 31,
2018		148,862
2019		45,033
2020		31,898
	$	225,793

Rental expense was approximately $221,000 and $193,000 during 2017 and 2016, respectively. Amounts are recorded in Selling, General, and administrative expenses.

Litigation

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.  As of December 31, 2017, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations.

NOTE N— EQUITY

1. Preferred Stock

Within the limits and restrictions provided in the Company’s Certificate of Incorporation, the Board of Directors has the authority, without further action by the shareholders, to issue up to 5,000,000 shares of preferred stock, $.0001 par value per share, 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 December 31, 2017, 100,000 shares of preferred stock have been designated as Series A-1 Convertible Preferred Stock, of which 62,596 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 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 the 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. These provisions have been waived on 61 days’ written notice which have been received from Series A-1 holder on August 7, 2017. 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. 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 common stock on all matters presented to the Company’s 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).

On September 22, 2017, the holder of the Series A-1 Shares elected to convert $540,000 in accrued dividends payable into 150,000 shares of common stock at a conversion price of $3.60. On October 17, 2017, the holder of the Series A-1 Shares converted 27,404 Series A-1 Shares into 761,222 shares of common stock at a conversion price of $3.60

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As of December 31, 2017, $236,658 was accrued for the holder of the Series A-1 Shares, for October 1, 2017 and January 1, 2018 dividends. As of December 31, 2016, $270,000 of dividends were accrued for the holder 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 Series A-1 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 holders of a majority of the outstanding Series A-1 Shares had the right to elect to have the 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 the 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 holders of a 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 the Company’s 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 December 31, 2017, $393,750 was accrued for the holders of the Series A-1 Shares, for October 1, 2016, January 1, 2017, April 1, 2017, July 1, 2017, October 1, 2017 and January 1, 2018 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 Series B-1 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 holders of the majority of the outstanding Series B-1 shares 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.

 Stock Issuance Costs

Costs of approximately $80,000 were incurred during 2017 in relation to the issuance of common and preferred stock.

2. 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.

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Holders of common stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Holders of common stock have one vote for each share held of record and do not have cumulative voting rights.

Holders of common stock are entitled, upon liquidation of the Company, to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of common stock are not redeemable and have no preemptive or similar rights. All outstanding shares of common stock are fully paid and nonassessable.

Issuances of Common Stock

Pursuant to a Securities Purchase Agreement, dated November 11, 2016, by and between the Company and Wong Kwok Fong the Company issued 516,667 shares of common stock for aggregate gross proceeds of $1,860,000.

On April 28, 2017, the Company issued to Wong Kwok Fong, a director, executive officer and principal stockholder 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. As of December 31, 2017, the registration statement has not been filed. 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 September 22, 2017, the Company issued to Wong Kwok Fong, a director, executive officer and principal stockholder of the Company, 427,778 shares of common stock and warrants to purchase 138,889 shares of common stock for an aggregate purchase price of $1,540,000, or $3.60 per share. The purchase price was paid via a cash payment of $1,000,000 for 277,778 shares and conversion of an accrued dividend payable on the Company’s Series A-1 Convertible Preferred Stock of $540,000 into 150,000 shares.

Also on September 22, 2017, Wong Kwok Fong converted 27,404 Series A-1 Shares into 761,222 shares of common stock at a conversion price of $3.60

Issuances to Directors, Executive Officers and Consultants

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 May 11, 2017, the Company issued 1,925 shares of common stock to its directors in payment of board fees, valued at $5,005.

In May 2017, the Company issued 55,000 shares of common stock in payment of a commitment fee for the equity facility of $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 which has been fully amortized as of December 31, 2017.

On August 9, 2017, the Company issued 5,148 shares of common stock to its directors in payment of board fees valued at $18,017. 

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On November 13, 2017, the Company issued 2,276 shares of common stock to its directors in payment of board fees valued at $4,005. 

During the year ended December 31, 2016, the Company issued 18,914 shares of common stock to its directors in lieu of payment of board fees, valued at $45,000, and issued 8,334 shares of common stock to the Chief Executive Officer as compensation, valued at $17,000.

During the year ended December 31, 2016, the Company issued 41,667 shares of common stock to a consultancy firm in lieu of payment for services. The fair value at issuance was calculated at $2.52 per share, with the total amount of $105,000 to be expensed over the period of the services.

Employees’ exercise options

During 2017, 4,167 employee stock options were exercised resulting in the cashless issuance of 1,610 shares of common stock. There were no stock options exercised during 2016.

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 early-adopted the new provisions issued July 2017, for derivative liability instruments under FASB 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. Under ASU 2017-11, down round features do not meet the criteria for derivative accounting and no liability is to be recorded until an actual issuance of securities triggers the down-round feature. Prior to these provisions, the liabilities were recorded without the actual issuance of the securities triggering the down-round feature.

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

Pursuant to a series of Private Investors Securities Purchase Agreements, 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 and warrants to purchase an additional 1,026,972 shares of common stock 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 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 year ended December 31, 2016, the Company recorded a gain on the change in the fair value of the cashless exercise feature of $7,478. 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.

B) 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.

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The common stock had 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 sold or issued shares of common stock or securities that are convertible into common stock at a price lower than $2.40 per share, the Company would have been 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 A – 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.

C) Securities Purchase Agreement dated September 23, 2015

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 A – 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. 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. 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 the period. For the year ended December 31, 2016 the Company recorded income of $4,607 in order to reverse the net cumulative loss on the warrant liability that had been previously recorded.

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3. Warrants

The Company has issued warrants to certain creditors, investors, investment bankers and consultants. A summary of warrant activity is as follows:

	Total Warrants			Weighted average exercise price		Weighted average remaining life (in years)		Aggregate intrinsic value
Outstanding, as of January 1, 2016		1,704,628			4.40		3.02
Granted		—			—
Exercised		—			—
Forfeited		—			—
Expired		(444,548	)		6.00
Outstanding, as of December 31, 2016		1,260,080			3.84		2.78		—
Granted		138,889			3.60
Exercised		—			—
Forfeited		—			—
Expired		—			—
Outstanding, as of December 31, 2017		1,398,969			3.81		2.06		—
Vested or expected to vest at December 31, 2017		1,398,969			3.81		2.06		—
Exercisable at December 31, 2017		1,398,969			3.81		2.06		—

On September 22, 2017, the Company issued to Wong Kwok Fong, a director and executive officer of the Company, warrants to purchase 138,889 shares of Common Stock in connection with the purchase of 427,778 shares of common stock by Mr. Fong. The warrants are immediately exercisable at an exercise price of $3.60 per share and have a term of five years.

NOTE O—STOCK OPTIONS

2004 Stock Option Plan

On October 12, 2004, the Board of Directors of the Company approved the 2004 Stock Option Plan (the 2004 Plan). The 2004 Plan was not presented to stockholders for approval and thus incentive stock options were not available under this plan. Under the terms of this plan, 166,667 shares of common stock were reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which may not be below 85% of fair market value. The term of stock options granted may not exceed ten years. Options issued under the 2004 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, as defined, all options outstanding vest immediately. The 2004 Plan expired in October 2014.

2015 Stock Option Plan

On January 27, 2016, the shareholders approved the 2015 Equity Incentive Plan (the 2015 Plan). Under the terms of this plan, 666,667 shares of common stock are reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which may not be below 100-110% of fair market value. The term of stock options granted may not exceed ten years. Options issued under the 2015 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, certain stock awards issued under this plan may be subject to additional acceleration of vesting as may be provided in the participants’ written agreement. The 2015 Plan expires in December 2025.

Non-Plan Stock Options

Periodically, the Company has granted options outside of the 2004 and 2015 Plans to various employees and consultants. In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately.

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Stock Option Activity

Information summarizing option activity is as follows:

	Number of Options															Weighted average		Weighted average remaining		Aggregate
	1999 Plan			2004 Plan			2015 Plan			Non Plan			Total			exercise price		life (in years)		intrinsic value
Outstanding, as of December 31, 2015		20,834			85,008			—			259,088			364,930		$	3.87
Granted		—			—			27,087			—			27,087			2.74
Exercised		—			—			—			—			—
Forfeited		—			—			(2,084	)		(8,335	)		(10,419	)		2.16
Expired		(20,834	)		(15,628	)		—			(3,473	)		(39,935	)		2.50
Outstanding, as of December 31, 2016		—			69,380			25,003			247,280			341,663		$	3.99		4.23	$	53,936
Granted		—			—			64,167			1,170,000			1,234,167			2.69
Exercised		—			—			—			(4,167	)		(4,167	)		2.16
Forfeited		—			—			(7,084	)		(65,140	)		(72,224	)		2.62
Expired		—			(17,084	)		—			(4,862	)		(21,946	)		8.86
Outstanding, as of December 31, 2017		—			52,296			82,086			1,343,111			1,477,493		$	2.91		5.64	$	0
Vested or expected to vest at December 31, 2017														1,083,691		$	2.98		5.43	$	0
Exercisable at December 31, 2017														261,294		$	3.96		3.09	$	0

The options outstanding and exercisable at December 31, 2017 were in the following exercise price ranges:

				Options Outstanding						Options Exercisable
Range of exercise prices				Number of shares		Weighted average exercise price		Weighted average remaining life (in years)		Number exercisable		Weighted average exercise price
$	1.90	-	2.50		87,064	$	2.16		4.65		56,422	$	2.16
	2.51	-	3.50		1,207,296		2.70		6.15		21,740		3.23
	3.51	-	5.04		183,132		4.60		2.77		183,132		4.60
$	1.90	-	5.04		1,477,493						261,294

The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $1.77 as of December 31, 2017, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of December 31, 2017 was 0.

The weighted average fair value of options granted during the years ended December 31, 2017 and 2016 was $2.32 and $1.86 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2017 and 2016 was $5,667 and $0, respectively. The total fair value of shares vested during the years ended December 31, 2017 and 2016 was $197,281 and $285,430 respectively.

As of December 31, 2017, future compensation cost related to nonvested stock options is $1,634,611 and will be recognized over an estimated weighted average period of 2.19 years.

NOTE P—INCOME TAXES

There was no provision for federal or state taxes as at December 31, 2017 and 2016.

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In December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly impacts the future ongoing U.S. corporate income tax by, among things, lowering the U.S. corporate income tax rates from 34% to 21%, providing for unlimited net operating loss carry-forward periods, and implementing a territorial tax system. The reduction of the U.S. corporate tax rate required the Company to revalue its U.S. deferred tax assets and liabilities and valuation allowances to the recently enacted federal rate of 21%. This transitional impact resulted in a provisional reduction of certain of the Company’s US deferred tax assets which are offset by a full valuation allowance.

The Company has deferred taxes due to income tax credits, net operating loss carryforwards, and the effect of temporary differences between the carrying values of certain assets and liabilities for financial reporting and income tax purposes. Significant components of deferred taxes are as follows at December 31:

	2017			2016
Current asset:
Accrued compensation	$	118,000		$	67,000
Accounts receivable allowance		277,000			202,000
Non-current asset (liability):
Stock-based compensation		387,000			360,000
Basis differences in fixed assets		(18,000	)		(8,000	)
Basis differences in intangible assets		46,000			60,000
Net operating loss and credit carryforwards		12,052,000			18,597,000
Valuation allowances		(12,862,000	)		(19,278,000	)
	$	—		$	—

The Company has a valuation allowance against the full amount of its net deferred taxes due to the uncertainty of realization of the deferred tax assets due to operating loss history of the Company. The Company currently provides a valuation allowance against deferred taxes when it is more likely than not that some portion, or all of its deferred tax assets will not be realized. The valuation allowance could be reduced or eliminated based on future earnings and future estimates of taxable income. Similarly, income tax benefits related to stock options exercised have not been recognized in the financial statements.

As of December 31, 2017, the Company has federal net operating loss carryforwards of approximately $57,064,000 subject to expiration between 2021 and 2037.  These net operating loss carryforwards are subject to the limitations under Section 382 of the Internal Revenue Code due to changes in the equity ownership of the Company.

A reconciliation of the effective income tax rate on operations reflected in the Statements of Operations to the US Federal statutory income tax rate is presented below.

	2017			2016
Federal statutory income tax rate		34	%		34	%
Permanent differences		—			—
Change in tax laws/tax rate		(13	)		-
Effect of net operating loss		(21	)		(34	)
Effective tax rate		—	%		—	%

The Company has not been audited by the Internal Revenue Service (“IRS”) or any states in connection with income taxes. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The periods from 2014 through 2017 remain open to examination by the IRS and state jurisdictions. The Company believes it is not subject to any tax audit risk beyond those periods. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any significant interest expense recognized during the years ended December 31, 2017 and 2016.

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NOTE Q—PROFIT SHARING PLAN

The Company has established a savings plan under section 401(k) of the Internal Revenue Code. All employees of the Company, after completing one day of service, are eligible to enroll in the 401(k) plan. Participating employees may elect to defer a portion of their salary on a pre-tax basis up to the limits as provided by the IRS Code. The Company is not required to match employee contributions but may do so at its discretion. The Company made no contributions during the years ended December 31, 2017 and 2016.

NOTE R—EARNINGS PER SHARE (EPS)

The Company’s basic EPS is calculated using net income (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 preferred stock.

The reconciliation of the numerator of the basic and diluted EPS calculations, due to the inclusion of preferred stock dividends was as follows for the following fiscal years ended December 31:

	2017			2016
Basic Numerator:
Loss from continuing operations	$	(4,275,338	)	$	(4,189,704	)
Convertible preferred stock dividends		(769,158	)		(802,500	)
Net loss available to common stockholders (basic and diluted EPS)	$	(5,044,496	)	$	(4,992,204	)

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.

	Years ended December 31,
	2017		2016
Preferred stock		5,264,422		5,416,667
Stock options		15,529		17,657
Warrants		2,109		1,018
Potentially dilutive securities		5,282,060		5,435,342

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

	Years ended December 31,
	2017		2016
Stock options		1,390,428		235,845
Warrants		1,351,052		1,212,163
Total		2,741,480		1,448,008

NOTE S—SUBSEQUENT EVENTS

On March 23, 2018, holders of shares of the Company’s Series B-1 Convertible Preferred Stock (the “Series B-1 Preferred”) converted 60,240 shares of Series B-1 Preferred into 1,678,334 shares of common stock.

On March 23, 2018, the Company issued 115,857 shares of common stock to holders of shares of Series B-1 Preferred in consideration of the conversion of $417,084 of accrued dividends payable on the Series B-1 Preferred resulting in a per share purchase price of $3.60.  In connection with the forgoing transaction, the Company waived a standstill provision to permit a holder of shares of Series B-1 Preferred to increase its conversion limitation to 19.99% of the Company’s issued and outstanding shares of common stock to be effective 61 days after such waiver.

On March 23, 2018, the Company issued 7,659 shares of common stock to its directors in payment of board and board committee fees.

On March 23, 2018, the Company issued options to purchase 9,000 shares of common stock to six non-employee members of the Board of Directors.  The options have a three year vesting period, seven year term, and exercise price of $1.96.  

On March 23, 2018, the Company issued options to purchase 212,918 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 $1.96.  

On March 28, 2018, the Company issued 762 shares of common stock to its directors in payment of committee fees.

The Company has reviewed subsequent events through the date of this filing.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
Date: April 2, 2018	By:	/s/  MICHAEL W. DEPASQUALE
		Michael W. DePasquale
		CHIEF EXECUTIVE OFFICER (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated.

Signature	Title	Date
/s/  MICHAEL W. DEPASQUALE	Chairman of the Board of Directors, Chief Executive Officer and Director (Principal Executive Officer)	April 2, 2018
Michael W. DePasquale
/s/  CECILIA WELCH	Chief Financial Officer (Principal Financial and Accounting Officer)	April 2, 2018
Cecilia Welch
/s/ROBERT J. MICHEL	Director	April 2, 2018
Robert J. Michel
/s/  THOMAS E. BUSH III	Director	April 2, 2018
Thomas E. Bush
/s/  THOMAS GILLEY	Director	April 2, 2018
Thomas Gilley
/s/  WONG KWOK FONG	Director	April 2, 2018
Wong Kwok Fong
/s/  YAO JIANHUI	Director	April 2, 2018
Yao Jianhui
/s/  FABIAN SHIN	Director	April 2, 2018
Fabian Shin
/s/  PIETER KNOOK	Director	April 2, 2018
Pieter Knook

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EXHIBIT INDEX

Exhibit	Exhibit
No.
3.1	Certificate of Incorporation of BIO-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on January 5, 2005)
3.2	Bylaws (incorporated by reference to Exhibit 3.3 to the current report on Form 8-K, filed with the SEC on January 5, 2005)
3.3	Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Appendix A to the definitive proxy statement, filed with the SEC on January 18, 2006)
3.4	Certificate of Amendment of Certificate of Incorporation of Bio-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.4 to the annual report on Form 10-K, filed with the SEC on March 31, 2015)
3.5	Certificate of Elimination of BIO-key International, Inc. filed October 6, 2015 (incorporated by reference to Exhibit 3.5 to the registration statement on Form S-1 File No. 333-208747 filed with the SEC on December 23, 2015)
3.6	Certificate of Designation of Preferences, Rights and Limitations of Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on November 2, 2015)
3.7	Certificate of Designation of Preferences, Rights and Limitations of Series B-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the quarterly report on Form 10-Q, filed with the SEC on November 16, 2015)
3.8	Certificate of Amendment of Certificate of Incorporation of Bio-key International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on December 28, 2016)
4.1	Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the registration statement on Form SB-2, File No. 333-16451)
10.1	Employment Agreement by and between BIO-key International, Inc. and Mira LaCous dated November 20, 2001 (incorporated by reference to Exhibit 10.39 to the current report on Form 8-K, filed with the SEC on January 22, 2002)
10.2	BIO-key International, Inc. 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.48 to amendment no. 1 the registrant’s registration statement on Form SB-2, File No. 33-120104, filed with the SEC on December 14, 2004)
10.3	Employment Agreement, effective March 25, 2010, by and between the Company and Michael W. DePasquale (incorporated by reference to Exhibit 10.93 to the annual report on Form 10-K, filed with the SEC on March 26, 2010)
10.4	Form of Warrant (incorporated by reference to Exhibit 10.30 to the registration statement on Form S-1, filed with the SEC on July 26, 2013)
10.5	Employment Agreement by and between BIO-key International, Inc. and Cecilia Welch dated May 15, 2013 (incorporated by reference to Exhibit 10.42 to the annual report on Form 10-K, filed with the SEC on March 31, 2014)
10.6	Third Amendment to Lease Agreement by and between BIO-key International, Inc. and Victor AOP, Inc. dated June 30, 2013 (incorporated by reference to Exhibit 10.43 to the annual report on Form 10-K, filed with the SEC on March 31, 2014)
10.7	First Amendment to Lease Agreement by and between BIO-key International, Inc. and BRE/DP MN LLC dated September 12, 2013 (incorporated by reference to Exhibit 10.44 to the annual report on Form 10-K, filed with the SEC on March 31, 2014)
10.8	Form of Investor Warrant, by and between the Company and certain investors dated November 13, 2014 (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q, filed with the SEC on November 14, 2014)
10.9	Form of Convertible Preferred Stock Purchase Agreement (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on November 2, 2015)
10.10	Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K, filed with the SEC on November 2, 2015)

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10.11	Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q, filed with the SEC on November 16, 2015)
10.12	Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q, filed with the SEC on November 16, 2015)
10.13	BIO-key International, Inc. 2015 Equity Incentive Plan (incorporated by reference to Appendix A to the definitive proxy statement filed with the SEC on December 15, 2015)
10.14	Software License Purchase Agreement Dated November 11, 2015 by and among BIO-key Hong Kong Limited, Shining Union Limited, WWTT Technology China, Golden Vast Macao Commercial Offshore Limited, Giant Leap International Limited (incorporated by reference to Exhibit 10.36 to the registration statement on Form S-1 File No. 333-208747 filed with the SEC on December 23, 2015)**
10.15	Securities Purchase Agreement dated November 11, 2016 by and between Registrant and Wong Kwok Fong (Kelvin) (incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q, filed with the SEC on November 14, 2016)
10.16	Securities Purchase Agreement dated April 28, 2017 by and between Registrant and Wong Kwok Fong (Kelvin) (incorporated by reference to Exhibit 10.1 to the quarterly report on Form 8-K, filed with the SEC on May 5, 2017)
10.17	Common Stock Purchase Agreement dated May 2, 2017 by and between Registrant and Xanthe Holdings Ltd. (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 8-K, filed with the SEC on May 5, 2017)
10.18	Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K, filed with the SEC on May 5, 2017)
10.19	Form Non-Plan Option Agreement between the Company and certain of its directors, officers, employees and contractors (incorporated by reference to Exhibit 10.4 to the quarterly report on Form 10-Q filed with the SEC on May 15, 2017)
21.1	List of subsidiaries of BIO-key International, Inc. (incorporated by reference to Exhibit 21.1 to the annual report on Form 10-K, filed with the SEC on March 30, 2016)
23.1*	Consent of RMSBG
31.1*	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

* filed herewith

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

53

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference into the registration statement of BIO-key International, Inc. on Form S-8 (file no. 333-137414 and 333-212066) of our report dated April 2, 2018 relating to the financial statements which appear in this Form 10-K for the year ended December 31, 2017

ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.

Saddle Brook, New Jersey

April 2, 2018

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Michael W. DePasquale, certify that:

1. I have reviewed this annual report on Form 10-K 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: April 2, 2018
	/s/ Michael W. DePasquale
	Michael W. DePasquale
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Cecilia C. Welch, certify that:

1. I have reviewed this annual report on Form 10-K 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: April 2, 2018
	/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 Annual Report of BIO-key International, Inc. (the “Company”) on Form 10-K for the period ended December 31, 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: April 2, 2018

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 Annual Report of BIO-key International, Inc. (the “Company”) on Form 10-K for the period ended December 31, 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: April 2, 2018

XML

Document And Entity Information - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2017	Mar. 27, 2018	Jun. 30, 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)		9,493,174
Entity Public Float			$ 15.3
Document Type	10-K
Document Period End Date	Dec. 31, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	FY
Amendment Flag	false

XML

Consolidated Balance Sheets - USD ($)	Dec. 31, 2017	Dec. 31, 2016
ASSETS
Cash and cash equivalents	$ 288,721	$ 1,061,307
Accounts receivable, net	2,875,946	1,563,246
Due from factor	109,865	53,638
Inventory	946,847	465,428
Resalable software license rights	2,640,000	1,560,000
Prepaid expenses and other	152,654	206,677
Total current assets	7,014,033	4,910,296
Resalable software license rights, net of current portion	7,933,808	10,598,411
Accounts receivable, net of current portion	760,000	1,570,000
Equipment and leasehold improvements, net	181,165	67,814
Deposits and other assets	8,712	8,712
Intangible assets, net	181,104	134,132
Total non-current assets	9,064,789	12,379,069
TOTAL ASSETS	16,078,822	17,289,365
LIABILITIES
Accounts payable	499,230	466,842
Accrued liabilities	688,023	335,323
Dividends payable on preferred stock	630,408	401,250
Deferred revenue	507,866	633,062
Total current liabilities	2,325,527	1,836,477
TOTAL LIABILITIES	2,325,527	1,836,477
Commitments and Contingencies
STOCKHOLDERS’ EQUITY
Common stock — authorized, 170,000,000 shares; issued and outstanding; 7,691,324 and 6,093,843 of $.0001 par value at December 31, 2017 and December 31, 2016, respectively	769	609
Additional paid-in capital	80,829,001	78,253,413
Accumulated deficit	(67,076,492)	(62,801,154)
TOTAL STOCKHOLDERS’ EQUITY	13,753,295	15,452,888
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	16,078,822	17,289,365
Series A-1 Convertible Preferred Stock [Member]
STOCKHOLDERS’ EQUITY
Preferred stock	6	9
TOTAL STOCKHOLDERS’ EQUITY	6	9
Series B-1 Convertible Preferred Stock [Member]
STOCKHOLDERS’ EQUITY
Preferred stock	11	11
TOTAL STOCKHOLDERS’ EQUITY	$ 11	$ 11

XML

Consolidated Balance Sheets (Parentheticals) - USD ($)	Dec. 31, 2017	Dec. 31, 2016
Preferred stock, shares authorized (in shares)	5,000,000
Preferred stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Common stock, shares authorized (in shares)	170,000,000	170,000,000
Common stock, shares issued (in shares)	7,691,324	6,093,843
Common stock, shares outstanding (in shares)	7,691,324	6,093,843
Series A-1 Convertible Preferred Stock [Member]
Preferred stock, shares authorized (in shares)	100,000	100,000
Preferred stock, liquidation value	$ 100	$ 100
Preferred stock, shares issued (in shares)	62,596	90,000
Preferred stock, shares outstanding (in shares)	62,596	90,000
Preferred stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Series B-1 Convertible Preferred Stock [Member]
Preferred stock, shares authorized (in shares)	105,000	105,000
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)	$ 0.0001	$ 0.0001

XML

Consolidated Statements of Operations - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Revenues
Services	$ 1,193,190	$ 821,178
License fees and other	3,220,371	1,189,089
Hardware	1,889,423	965,489
Total revenues	6,302,984	2,975,756
Costs and other expenses
Cost of services	439,291	216,465
Cost of license fees and other	2,802,860	513,218
Total costs and other expenses	3,242,151	729,683
Gross Profit	3,060,833	2,246,073
Operating expenses
Selling, general and administrative	5,676,323	4,438,950
Research, development and engineering	1,659,875	2,008,942
Total operating expenses	7,336,198	6,447,892
Operating loss	(4,275,365)	(4,201,819)
Other income
Interest income	27	30
Gain on derivative liabilities		12,085
Total other income	27	12,115
Net loss	(4,275,338)	(4,189,704)
Convertible preferred stock dividends	(769,158)	(802,500)
Net loss available to common stockholders	$ (5,044,496)	$ (4,992,204)
Basic and Diluted Loss per Common Share (in dollars per share)	$ (0.76)	$ (0.89)
Weighted Average Shares Outstanding:
Basic and Diluted (in shares)	6,638,382	5,587,144

XML

Consolidated Statements of Stockholders' Equity - USD ($)	Series A-1 Convertible Preferred Stock [Member]	Series B-1 Convertible Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Total
Balance as of December 31, 2015 (in shares) at Dec. 31, 2015	90,000	105,000	5,508,261
Balance as of December 31, 2015 at Dec. 31, 2015	$ 9	$ 11	$ 551	$ 76,760,796	$ (58,611,450)	$ 18,149,917
Issuance of common stock for directors’ fees and CEO stock award (in shares)			27,248
Issuance of common stock for directors’ fees and CEO stock award			$ 2	61,998		62,000
Issuance of common stock pursuant to securities purchase agreement (in shares)			516,667
Issuance of common stock pursuant to securities purchase agreement			$ 52	1,859,948		1,860,000
Dividends declared on preferred stock				(802,500)		(802,500)
Issuance of stock for consultants (in shares)			41,667
Issuance of stock for consultants			$ 4	104,996		105,000
Stock issuance costs				(84,866)		(84,866)
Reclassification of derivative liability				92,199		92,199
Share-based compensation				260,842		260,842
Net loss					(4,189,704)	(4,189,704)
Balance as of December 31, 2016 (in shares) at Dec. 31, 2016	90,000	105,000	6,093,843
Balance as of December 31, 2016 at Dec. 31, 2016	$ 9	$ 11	$ 609	78,253,413	(62,801,154)	15,452,888
Issuance of common stock for directors’ fees (in shares)			27,248
Issuance of common stock for directors’ fees			$ 2	61,998		$ 62,000
Exercise of stock options (in shares)						0
Issuance of common stock for directors’ fees and CEO stock award (in shares)			11,244			1,610
Issuance of common stock for directors’ fees and CEO stock award			$ 1	32,029		$ 32,030
Issuance of common stock pursuant to securities purchase agreement (in shares)			555,556
Issuance of common stock pursuant to securities purchase agreement			$ 56	1,999,944		2,000,000
Dividends declared on preferred stock				(769,158)		(769,158)
Issuance of stock for consultants (in shares)			117,849
Issuance of stock for consultants			$ 12	354,573		354,585
Stock issuance costs				(80,366)		(80,366)
Share-based compensation				498,654		498,654
Net loss					(4,275,338)	(4,275,338)
Balance as of December 31, 2016 (in shares) at Dec. 31, 2017	62,596	105,000	7,691,324
Balance as of December 31, 2016 at Dec. 31, 2017	$ 6	$ 11	$ 769	80,829,001	$ (67,076,492)	$ 13,753,295
Issuance of common stock for directors’ fees (in shares)			11,244			1,610
Issuance of common stock for directors’ fees			$ 1	32,029		$ 32,030
Conversion of dividends payable on A-1 preferred stock (in shares)			150,000
Conversion of dividends payable on A-1 preferred stock			$ 15	539,985		$ 540,000
Conversion of A-1 preferred stock to common stock (in shares)	(27,404)		761,222
Conversion of A-1 preferred stock to common stock	$ (3)		$ 76	$ (73)
Exercise of stock options (in shares)			1,610			4,167

XML

Consolidated Statements of Cash Flows	12 Months Ended
	Dec. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss	$ (4,275,338)	$ (4,189,704)
Adjustments to reconcile net loss to cash used for operating activities:
Provision for losses on accounts receivable	500,000	500,000
Depreciation	52,709	49,038
Amortization of Intangible assets	13,726	13,606
Amortization of Software license rights	1,510,051	21,589
Share and warrant-based compensation for employees and consultants	940,734	260,842
Gain on derivative liabilities		(12,085)
Stock based fees to Directors and consultants	32,030	167,000
Change in assets and liabilities:
Accounts receivable	(1,002,700)	(241,841)
Due from factor	(56,227)	(16,217)
Inventory	(481,419)	(296,783)
Software license rights	74,552
Prepaid expenses and other	(33,472)	(109,474)
Accounts payable	32,388	(691,713)
Accrued liabilities	352,700	(157,745)
Deferred revenue	(125,196)	256,657
Net cash used for operating activities	(2,465,462)	(4,446,830)
CASH FLOWS FROM INVESTING ACTIVITIES:
Patents	(60,698)
Capital expenditures	(166,060)	(52,975)
Net cash used for investing activities	(226,758)	(52,975)
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred dividends paid		(535,100)
Proceeds from issuances of common stock	2,000,000	1,860,000
Stock issuance costs	(80,366)	(84,866)
Net cash provided by financing activities	1,919,634	1,240,034
NET DECREASE IN CASH AND CASH EQUIVALENTS	(772,586)	(3,259,771)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	1,061,307	4,321,078
CASH AND CASH EQUIVALENTS, END OF YEAR	288,721	1,061,307
Cash paid for:
Interest
Noncash investing and financing activities:
Accrual of unpaid preferred dividends	630,408	401,250
Conversion of Dividends Payable, Amount Converted	540,000
Conversion of A-1 preferred stock to common stock	2,740,400
Reclassification of derivative liability to additional paid-in capital		92,199
Issuance of common stock as a commitment fee for the Equity facility	198,000
Issuance of common stock as consulting services for the Equity facility	$ 244,084

XML

Note A - The Company and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Business Description and Accounting Policies [Text Block]

NOTE A

—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

The Company, founded in

1993,

develops and markets proprietary fingerprint identification biometric technology and software solutions.

The Company was a pioneer in developing automated, finger identification technology that supplements or compliments other methods of identification and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, PKI, credit card, passports, driver’s licenses, OTP or other form of possession or knowledge-based credentialing. Additionally, advanced BIO-key® technology has been, and is, used to improve both the accuracy and speed of competing finger-based biometrics.

Basis of Presentation

The Company has incurred significant losses to date, and at

December

 

31,

2017,

it had an accumulated deficit of approximately

$67.1

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

December 31, 2017,

total cash and cash equivalents were approximately

$289,000,

as compared to approximately

$1,061,000

at

December 31, 2016.

As discussed below, 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 currently requires approximately

$592,000

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

If the Company is unable to generate sufficient revenue

to meet our 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.

Effective

December 29, 2016,

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

1

for

12

shares. All share figures and results are reflected on a post-split basis.

Summary of Significant Accounting Policies

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

1.

 

Basis of Consolidation

The accompanying consolidated financial statements include the accounts of BIO-key International,

 Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Intercompany accounts and transactions have been eliminated in consolidation.

2.

Use of Estimates

Our consolidated financial statements are prepared in accordance with GAAP as set forth in the Financial Accounting Standards Board

’s (FASB) Accounting Standards Codification (ASC) and consider the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission (SEC). These accounting principles require us to make certain estimates, judgments and assumptions. The Company believes that the estimates, judgments and assumptions upon which it relies are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, its consolidated financial statements will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does

not

require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would

not

produce a materially different result.

 

3.

 

Revenue Recognition

Revenues from software licensing are recognized in accordance with ASC

985

-

605,

"Software Revenue Recognition." Accordingly, revenue from software licensing is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.

The Company intends to enter into arrangements with end users for items which

may

 include software license fees, and services or various combinations thereof. For each arrangement, revenues will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is probable, delivery of the product has occurred and

no

other significant obligations remain.

Multiple-Element Arrangements: For multiple-element arrangements, the Company applies the residual method in accordance with ASC

985

-

605.

The residual method requires that the portion of the total arrangement fee attributable to the undelivered elements be deferred based on its

 vendor-specific objective evidence ("VSOE") of fair value and subsequently recognized as the service is delivered. The difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements, which is generally the software license. VSOE of fair value for all elements in an arrangement is based upon the normal pricing for those products and services when sold separately. VSOE of fair value for support services is additionally determined by the renewal rate in customer contracts. The Company has established VSOE of fair value for support as well as consulting services.

License Revenues: Amounts allocated to license revenues are recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have been met.

Revenue from licensing software, which requires significant customization and modification, is recognized using the percentage of completion method, based on the hours of effort incurred by the Company in relation to the total estimated hours to complete. In instances where

third

party hardware, software or services form

 a significant portion of a customer’s contract, the Company recognizes revenue for the element of software customization by the percentage of completion method described above. Otherwise,

third

party hardware, software, and services are recognized upon shipment or acceptance as appropriate. If the Company makes different judgments or utilizes different estimates of the total amount of work expected to be required to customize or modify the software, the timing and revenue recognition, from period to period, and the margins on the project in the reporting period,

may 

differ materially from amounts reported. Anticipated contract losses are recognized as soon as they become known and are estimable.

Service Revenues: Revenues from services are comprised of maintenance and consulting and implementation services. Maintenance revenues include providing for unspecified when-and-if available product updates and customer telephone support services, and are recognized ratably over the term of the service period. Consulting services are generally sold on a time-and-materials basis and include a range of services including installation of software and assisting in the design of interfaces to allow the software to operate in customized environments. Services are generally separable from other elements under the arrangement since performance of the services are

not

essential to the functionality of any other element of the transaction and are described in the contract such that the total price of the arrangement would be expected to vary as the result of the inclusion or exclusion of the services. Revenues from services are generally recognized as the services are performed.

The Company provides customers, free of charge or at a minimal cost, testing kits which potential licensing customers

may

 use to test compatibility/acceptance of the Company’s technology with the customer’s intended applications.

Costs and other expenses: Includes professional compensation and other direct contract expenses, as well as costs attributable to the support of client service professional staff, depreciation and amortization costs related to assets used in revenue-generating activities, and other costs attributable to serving the Company

’s client base. Professional compensation consists of payroll costs and related benefits including stock-based compensation and bonuses. Other direct contract expenses include costs directly attributable to client engagements, such as out-of-pocket costs including travel and subsistence for client service professional staff, costs of hardware and software and costs of subcontractors. The allocation of lease and facilities charges for occupied offices is included in costs of service.

The Company accounts for its warranties under the FASB ASC

450,

“Contingencies.” The Company generally warrants that its products are free from defects in material and workmanship for a period of

one

year from the date of initial receipt by its customers. The warranty does

not

cover any losses or damage that occurs as a result of improper installation, misuse or neglect or repair or modification by anyone other than the Company or its authorized repair agent. The Company

’s policy is to accrue anticipated warranty costs based upon historical percentages of items returned for repair within

one

year of the initial sale. The Company’s repair rate of products under warranty has been minimal, and a historical percentage has

not

been established. The Company’s software license agreements generally include certain provisions for indemnifying customers against liabilities if the Company’s software products infringe upon a

third

party’s intellectual property rights. The Company has

not

provided for any reserves for warranty liabilities as it was determined to be immaterial.

4.

 

Cash

Equivalents

Cash equivalents consist of liquid investments with original maturities of

three

months or less.

  At

December 31, 2017

and

2016,

cash equivalents consisted of a money market account.

5.

 

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 quarter ended

September 30, 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, at

December 31, 2017

the Company has reserved

$1,000,000,

which represents

57%

of the remaining balance owed under the contract. Recoveries of accounts receivable previously written off are recorded when received. Accounts receivable at

December 31, 2017

and

2016

 consisted of the following:

	December 31,
	201 7			201 6
Accounts receivable - current	$	2,889,731		$	1,577,031
Accounts receivable - non current		1,760,000			2,070,000
		4,649,731			3,647,031
Allowance for doubtful accounts - current		(13,785	)		(13,785	)
Allowance for doubtful accounts - non current		(1,000,000	)		(500,000	)
		(1,013,785	)		(513,785	)
Accounts receivable, net of allowances for doubtful accounts	$	3,635,946		$	3,133,246

The allowance for doubtful accounts for the years ended

December 31,

201

7

and

2016

is as follows:

	Balance at Beginning of Year		Charged to Costs and Expenses		Deductions From Reserves		Balance at End of Year
Year Ended December 31, 201 7
Allowance for Doubtful Accounts	$	513,785	$	500,000	$	-	$	1,013,785
Year Ended December 31, 201 6
Allowance for Doubtful Accounts	$	13,785	$	500,000	$	-	$	513,785

The bad debt expense is recorded in selling, general, and administrative expense.

6.

Software License Rights

Software license rights acquired for re-sale to end users are recorded as assets when purchased and are stated at the lower of cost or estimated net realizable value.

The cost of the software license rights has been initially allocated pro-rata to the maximum number of resalable end-user licenses in the rights contract. Licenses are amortized to cost of sales over the greater of the following:

1

) an estimate of the economic use of such license rights over a

10

year period with weighting towards the beginning of the term,

2

) straight line method over

ten

years or

3

) ratably at cost basis as each end user license is resold to a customer. Management re-evaluates the total sub-licenses it expects to sell during the proceeding

twelve

months and will adjust the allocation of the current portion vs. non-current portion of software rights.

The rights are also evaluated by management on a periodic basis to determine if estimated future net revenues, on a per sub-license basis, support the recorded basis of each license. If the estimated net revenues are less than the current carrying value of the capitalized software license rights, the Company will reduce the rights to their net realizable value.

7.

 

Equipment and Leasehold Improvements, Intangible Assets and

Depreciation and Amortization

Equipment and leasehold improvements are stated at cost.

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

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

	Years
Equipment and leasehold improvements
Equipment (years)	3	-	5
Furniture and fixtures (years)	3	-	5
Software (years)		3
Leasehold improvements	life or lease term

Intangible assets consist of patents.

  Patent costs are capitalized until patents are awarded. Upon award, such costs are amortized using the straight-line method over their respective economic lives. If a patent is denied, all costs are charged to operations in that year.

8.

 Impairment or Disposal of Long Lived Assets, including Intangible Assets

The Company reviews long-lived assets, including intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such an asset

may

not

be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is equal to the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. In assessing recoverability, the Company must make assumptions regarding estimated future cash flows and discount factors. If these estimates or related assumptions change in the future, the Company

may

be required to record impairment charges. Intangible assets with determinable lives are amortized over their estimated useful lives, based upon the pattern in which the expected benefits will be realized, or on a straight-line basis, whichever is greater.

 The Company did

not

record any impairment charges in any of the years presented.

9.

 

Advertising Expense

The Company expenses the costs of advertising as incurred. Advertising expenses for

201

7

and

2016

were approximately

$386,000

and

$299,000,

respectively.

10.

 

Deferred Revenue

Deferred revenue includes customer advances and amounts that have been billed per the contractual terms but have

not

been recognized as revenue. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which generally is

12

months from the date the customer is delivered the products.

11.

 

Research and Development Expenditures

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

12.

 

Earnings Per Share of Common Stock (“EPS”)

The Company

’s EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuances of common stock, such as stock issuable pursuant to the conversion of preferred stock, exercise of stock options and warrants, when the effect of their inclusion is dilutive. See Note R - Earnings Per Share “EPS” for additional information.

13.

 

Accounting for Stock-Based Compensation

The Company accounts for share based compensation in accordance with the provisions of ASC

718

-

10,

“Compensation

 — Stock Compensation,” which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The majority of its share-based compensation arrangements vest over either a

three

or

four

year vesting schedule. The Company expenses its share-based compensation under the ratable method, which treats each vesting tranche as if it were an individual grant. The fair value of stock options is determined using the Black-Scholes valuation model, and requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of its common stock price over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized as an expense in the consolidated statements of operations. As required under the accounting rules, the Company reviews its valuation assumptions at each grant date and, as a result, the Company is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the service period, net of estimated forfeitures (the number of individuals that will ultimately

not

complete their vesting requirements). The estimation of stock awards that will ultimately vest requires significant judgment. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates,

may

differ substantially from current estimates.

The following table presents share-based compensation expenses included in the Company

’s consolidated statements of operations:

	Year ended December 31,
	2017		2016
Selling, general and administrative	$	864,036	$	353,056
Research, development and engineering		108,728		74,786
	$	972,764	$	427,842

Valuation Assumptions for Stock Options

For

201

7

and

2016,

1,234,167

and

27,087

stock options were granted, respectively. The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Year ended December 31,
	2017			2016
Weighted average Risk free interest rate		1.92	%		1.11	%
Expected life of options (in years)		4.51			4.50
Expected dividends		0	%		0	%
Weighted average Volatility of stock price		138	%		93	%

The stock volatility for each grant is determined based on the review of the experience of the weighted average of historical daily price changes of the Company

’s common stock over the expected option term. The expected term was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla” options; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

14.

 

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 early-adopted the new provisions issued

July 2017,

for derivative liability instruments under FASB 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. Under ASU

2017

-

11,

down round features do

not

meet the criteria for derivative accounting and

no

liability is to be recorded until an actual issuance of securities triggers the down-round feature. Prior to these provisions, the liabilities were recorded without the actual issuance of the securities triggering the down-round feature.

15

. 

Income Taxes

The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. The Company evaluates, on a quarterly basis whether, based on all available evidence, if it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than

not

that the tax benefit of the deferred tax asset will

not

be realized. The evaluation, as prescribed by ASC

740

-

10,

“Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which

may

be employed to prevent an operating loss or tax credit carryforward from expiring unused. Because of the Company

’s historical performance and estimated future taxable income, a full valuation allowance has been established.

The Company accounts for uncertain tax provisions in accordance with ASC

740

-

10

-

05,

“Accounting for Uncertainty in Income Taxes.” The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise

’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

1

6.

 

Recent Accounting Pronouncements

In

May 2014

, FASB issued ASU

No.

 

2014

-

09,

 Revenue from Contracts with Customers: Topic

606

 (“

ASC

606”

), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard contains a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods and services. The FASB has issued several amendments to the standard, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations. 

The Company will adopt ASC

606

effective

January 1, 2018

using the

modified retrospective transition method. While the Company is finalizing the impact this standard has on its consolidated financial statements and related disclosures, the Company expects the new standard will

not

have a material impact on the timing of its revenue recognition. The Company expects that certain contract acquisition costs such as sales commissions, will be amortized over an expected benefit period that is longer than the Company’s current policy of expensing these amounts over either the contract term or up-front, depending on the size of the order. The Company does

not

expect the adoption of ASC

606

to have any impact on its operating cash flows.

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

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

 for amounts yet to be determined.

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

as of

January 1, 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 Company will continue to estimate forfeitures at each reporting period, rather than electing an accounting policy change to record the impact of such forfeitures as they occur. 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. Under ASU

2017

-

11,

down round features do

not

meet the criteria for derivative accounting and

no

liability is to be recorded until an actual issuance of securities triggers the down-round feature. 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 fiscal

2017

year 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 N 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.

1

7.

  Reclassifications

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 B - Factoring

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Factoring [Text Block]

NOTE B

—FACTORING

Due from factor consisted of the following as of

December 31:

	Original Invoice Value		Factored Amount		Factored Balance due
Year Ended December 31, 2017
Factored accounts receivable	$	423,349	$	313,484	$	109,865
Year Ended December 31, 2016
Factored accounts receivable	$	214,556	$	160,918	$	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,

201

8.

Pursuant to the terms of the arrangement, the Company, from time to time, sells to the Factor a minimum of

$150,000

per quarter of 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

15%

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: 

	Years Ended December 31,
	2017		2016
Factoring fees	$	224,142	$	341,023

XML

Note C - Fair Values of Financial Instruments

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE C

—FAIR VALUES OF FINANCIAL INSTRUMENTS

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

XML

Note D - Concentration of Risk

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

NOTE D

—CONCENTRATION OF RISK

Financial instruments which potentially subject the Company to risk primarily consist of cash and accounts receivables.

The Company maintains its cash and cash equivalents with various financial institutions, which, at times

may

exceed the amounts insured by the Federal Deposit Insurance Corporation. The

exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company has

not

incurred any losses on these accounts. At

December 31, 2017

and

2016,

amounts in excess of insured limits were approximately

$0

and

$811,000,

respectively.

The Company extends credit to customers on an unsecured basis in the normal course of business. The Company

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

The Company had certain customers whose revenue individually represented

10%

or more of the Company

’s total revenue, as follows:

	Years Ended December 31,
	201 7			201 6
Customer A		54	%		34	%
Customer B		*			12	%

*

      Less than

10%

of total revenue

The Company had certain customers whose accounts receivable balances individually represented

10%

or more of the Company

’s total accounts receivable, as follows:

	As of December 31,
	201 7			201 6
Customer A		55	%		35	%
Customer B		37	%		56	%

Customer

B’s receivable of

$1,760,000

has been past due per the terms of the invoice for

thirty

months as of

December 31, 2017.

The Company has reserved

$1,000,000

which represents

57%

of the remaining balance owed under the contract.  

XML

Note E - Inventory

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Inventory Disclosure [Text Block]

NOTE E

—INVENTORY

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

first

in,

first

out basis, or

realizable value, and consists primarily of fabricated assemblies and finished goods. Inventory is comprised of the following as of

December 31: 

	2017		2016
Current
Finished goods		487,858		381,762
Fabricated assemblies		458,989		83,666
Total current inventory	$	946,847	$	465,428

XML

Note F - Resalable Software Licenses Rights

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

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

NOTE F

—

RESALABLE

SOFTWARE LICENSES 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 amortized in the following

12

months is

$2,640,000

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 our 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.

A total of

$1,556,687

and

$1,909

was expensed during the

2017

and

2016

years, respectively. Since the license purchase, a cumulative amount of

$1,558,596

has been expensed, with a carrying balance of

$10,441,404

as of

December 31, 2017.

The

2017

amortization expense was based on the economic use model as this was the greater of the

three

methods.

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 the total cost over the same methodology described above with the greatest of the

three

approaches being the amortization for the periods. A total of

$35,916

and

$19,680

was expensed for actual sales during the

2017

and

2016

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

$47,596

has been expensed, with a carrying balance of

$132,404

as of

December 31, 2017. 

During

2017,

the Company also purchased

$8,000

of another

third

-party software licenses. The Company has classified these balances as non-current until a larger deployment occurs. Software license rights is comprised of the following as of:

	2017		2016
Current software license rights	$	2,640,000	$	1,560,000
Non-current software license rights		7,933,808		10,598,411
Total software license rights	$	10,573,808	$	12,158,411

During the year ended

December 31,

201

7,

there were

no

events or changes in circumstances that indicated the carrying amount of the software license rights

may

not

be recoverable from their undiscounted cash flows. Consequently, we did

not

perform an impairment test. The Company did

not

record an impairment loss related to the software license rights during the years ended

December 31, 2017

and

2016.

Estimated amortization expense based on economic use of the software license rights for each of the next

five

years and thereafter approximates the following:

Years ending December 31
2018	2,640,000
2019	3,000,000
2020	2,400,000
2021	1,200,000
2022	720,000
Thereafter	613,808

XML

Note G - Equipment and Leasehold Improvements

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

NOTE G

—EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consisted of the following as of

December

 

31:

	2017			2016
Equipment	$	567,473		$	403,425
Furniture and fixtures		164,079			162,067
Software		32,045			32,045
Leasehold improvements		23,403			23,403
		787,000			620,940
Less accumulated depreciation and amortization		(605,835	)		(553,126	)
Total	$	181,165		$	67,814

Depreciation

was

$52,709

and

$49,038

for

2017

and

2016,

respectively. Amounts are recorded in Selling, General, and Administrative Expense and Cost of Services.

XML

Note H - Intangible Assets

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Intangible Assets Disclosure [Text Block]

NOTE H

—INTANGIBLE ASSETS

Intangible assets consisted of the following as of

December

 

31:

	2017							2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Patents and patents pending	$	347,946	$	(166,842	)	$	181,104	$	287,248	$	(153,116	)	$	134,132
Total	$	347,946	$	(166,842	)	$	181,104	$	287,248	$	(153,116	)	$	134,132

Aggregate amortization expense for

2017

and 

2016

was

$13,726

and

$13,606,

respectively. Amounts are recorded in Research, Development and engineering expense. The estimated aggregate amortization expense of intangible assets for the years following

December 

31,

2017

is approximately

$14,000

per year for

2018

through

2022,

and approximately

$111,000

thereafter.

XML

Note I - Accrued Liabilities

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

NOTE

I

—ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of

December

 

31:

	201 7		201 6
Compensation	$	341,884	$	66,152
Compensated absences		164,132		154,368
Accrued legal and accounting fees		85,633		79,633
Sales tax payable		5,614		26,988
Factoring fees		32,357		3,600
Other		58,403		4,582
Total	$	688,023	$	335,323

XML

Note J - Related Party

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

NOTE

J

—RELATED PARTY

Licensing Agreement with Subsidiaries of China Goldjoy Group Limited.

On

November 11, 2015

, BIO-key Hong Kong Limited, a subsidiary of the Company, entered into a license purchase agreement with certain subsidiaries of China Goldjoy Group Limited (“CGG”). The license agreement provides for the grant of a perpetual, irrevocable, exclusive, worldwide, fully-paid license to all software and documentation regarding the software code, toolkit, electronic libraries and related technology currently known as or offered under the Finger Q name, together with perpetual license under all related patents held by the licensors and any other intellectual property rights owned by the licensors related to the forgoing software.  The Company made a

one

-time payment of

$12,000,000

to the licensors. Mr. Yao Jianhu is the chairman and chief executive officer of CGG and a director of the Company. Mr. Wong Kwok Fong served as the chief technology officer of CGG through

October 2016

and is the beneficial owner of

33.2%

of the Company’s common stock, and a director and executive officer of the Company.

Securities Purchase Agreement

s

with Wong Kwok Fong

On

November 18, 2016,

the Company issued to

Wong Kwok Fong, a director, executive officer and principal stockholder 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,

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

September 22, 2017,

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

427,778

shares of common stock and warrants to purchase

138,889

shares of common stock for the aggregate

 purchase price of

$1,540,000,

or

$3.60

per share. The purchase price was paid via a cash payment of

$1,000,000

for

277,778

shares of common stock, and the conversion of an accrued dividend payable in the amount of

$540,000

on the Company’s Series A-

1

Convertible Preferred Stock for

150,000

shares of common stock.

On

August 7, 2017,

the Company received written notice from Wong Kwok Fong, the holder of an aggregate of

90,000

shares of the Company

’s Series A-

1

Convertible Preferred Stock, of his desire to increase the maximum percentage of shares of common stock issuable upon conversion of the Series A-

1

Convertible Preferred Stock from

9.99%

to

35%.

The Company waived a standstill provision to permit such increase. In accordance with the Certificate of Designation of the Series A-

1

Shares, such notice became effective on the

61st

 day following the date such notice was provided to the Company. On

October 17, 2017,

Wong Kwok Fong converted

27,404

of the Series A-

1

Shares at a conversion price of

$3.60

per share resulting in the acquisition of

761,222

shares of the Company’s Common Stock

XML

Note K - Deferred Revenue

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Deferred Revenue Disclosure [Text Block]

NOTE

K

—DEFERRED REVENUE

Deferred revenue

represents unearned revenue on maintenance contracts. Maintenance contracts include provisions for unspecified when-and-if available product updates and customer telephone support services, and are recognized ratably over the term of the service period. At

December 31, 2017

and

2016,

amounts in deferred revenue were approximately

$508,000

and

$633,000,

respectively.

XML

Note L - Segment Information

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

NOTE

L

—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

87%

and

78%

of the Company’s total revenues for

2017

and

2016,

respectively.

XML

Note M - Commitments and Contingencies

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Commitments Disclosure [Text Block]

NOTE

M

—COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company does

not

own any real estate but conducts operations from

three

leased premises. These non-cancelable operating leases expire at various dates through

20

20.

In addition to base rent, the Company pays for property taxes, maintenance, insurance and other occupancy expenses according to the terms of the individual leases.

Future minimum rental commitments of non-cancelable operating leases are approximately as follows:

Years ending December 31,
201 8		148,862
2019		45,033
20 20		31,898
	$	225,793

Rental expense was approximately

$221,000

and

$193,000

during

2017

and

2016,

respectively. Amounts are recorded in Selling, General, and administrative expenses.

Litigation

From time to time, we

may

be involved in litigation relating to claims arising out of our operations in the normal course of business.  As of

December 31, 2017,

there were

no

pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations.

XML

Note N - Equity

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

NOTE

N

— EQUITY

1.

Preferred Stock

Within the limits and restrictions provided in the Company

’s Certificate of Incorporation, the Board of Directors has the authority, without further action by the shareholders, to issue up to

5,000,000

shares of preferred stock,

$.0001

par value per share, 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

December 31, 2017,

100,000

shares of preferred stock have been designated as Series A-

1

Convertible Preferred Stock, of which

62,596

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 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 the 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. These provisions have been waived on

61

days’ written notice which have been received from Series A-

1

holder on

August 7, 2017.

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. 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 common stock on all matters presented to the Company

’s 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).

On

September 22, 2017,

the holder of the Series A-

1

Shares elected to convert

$540,000

in accrued dividends payable into

150,000

shares of common stock at a conversion price of

$3.60.

On

October 17, 2017, t

he holder of the Series A-

1

Shares converted

27,404

Series A-

1

Shares into

761,222

shares of common stock at a conversion price of

$3.60

As of

December 31, 2017,

$2

36,658

was accrued for the holder of the Series A-

1

Shares, for

October 1, 2017

and

January 1, 2018

dividends. 

As of

December 31, 2016,

$270,000

of dividends were accrued for the holder 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 Series A-

1

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 holders of a majority of the outstanding Series A-

1

Shares had the right to elect to have the 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 the 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 holders of a 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 the Company

’s 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

December 31, 2017,

$393,750

was accrued for the holders of the Series A-

1

Shares, for

October 1, 2016,

January 1, 2017,

April 1, 2017,

July 1, 2017,

October 1, 2017

and

January 1, 2018

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 Series B-

1

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 holders of the majority of the outstanding Series B-

1

shares

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.

Stock Issuance Costs

Costs of approximately

$8

0,000

were incurred during

2017

in relation to the issuance of common and preferred stock.

2.

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.

Holders of common stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Holders of common stock have

one

vote for each share held of record and do

not

have cumulative voting rights.

Holders of common stock are entitled, upon liquidation of the Company, to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of common stock are

not

redeemable and have

no

preemptive or similar rights. All outstanding shares of common stock are fully paid and nonassessable.

Issuances of Common Stock

Pursuant to a Securities Purchase Agreement, dated

November 11, 2016,

by and between the Company and Wong Kwok Fong the Company issued

516,667

shares of common stock for aggregate gross proceeds of

$1,860,000.

On

April 28, 2017,

the Company issued to Wong Kwok Fong,

a director, executive officer and principal stockholder 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.

As of

December 31, 2017,

the registration statement has

not

been filed. 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

September 22, 2017,

the Company issued to Wong Kwok Fong,

a director, executive officer and principal stockholder of the Company,

427,778

shares of common stock and warrants to purchase

138,889

shares of common stock for an aggregate purchase price of

$1,540,000,

or

$3.60

per share. The purchase price was paid via a cash payment of

$1,000,000

for

277,778

shares and conversion of an accrued dividend payable on the Company’s Series A-

1

Convertible Preferred Stock of

$540,000

into

150,000

shares.

Also on

September 22, 2017,

Wong Kwok Fong converted

27,404

Series A-

1

Shares into

761,222

shares of common stock at a conversion price of

$3.60

Issuances to Directors, Executive Officers and Consultants

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

May 11, 2017,

the Company issued

1,925

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

$5,005.

In

May 2017,

the Company issued

55,000

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

of

$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

which has been fully amortized as of

December 31, 2017.

On

August 9, 2017,

the Company issued

5,148

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

$18,

017.

 

On

November 13, 2017,

the Company issued

2,276

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

$4,

005.

 

During the year ended

December 31, 2016,

the Company issued

18,914

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

$45,000,

and issued

8,334

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

$17,000.

During the year ended

December 31, 2016

, the Company issued

41,667

shares of common stock to a consultancy firm in lieu of payment for services. The fair value at issuance was calculated at

$2.52

per share, with the total amount of

$105,000

to be expensed over the period of the services.

Employees

’ exercise options

During

2017,

4,167

employee stock options were exercised resulting in the cashless issuance of

1,610

shares of common stock. There were

no

stock options exercised during

2016.

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 early-adopted the new provisions issued

July 2017,

for derivative liability instruments under FASB 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. Under ASU

2017

-

11,

down round features do

not

meet the criteria for derivative accounting and

no

liability is to be recorded until an actual issuance of securities triggers the down-round feature. Prior to these provisions, the liabilities were recorded without the actual issuance of the securities triggering the down-round feature.

A) Securities Purchase Agreements dated

October 25, 2013

and

November 8, 2013

Pursuant to a series of Private Investors Securities Purchase Agreements, 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 and warrants to purchase an additional

1,026,972

shares of common stock 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 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 year ended

December 31, 2016,

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

$7,478.

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.

B) 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

 had 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 sold or issued shares of common stock or securities that are convertible into common stock at a price lower than

$2.40

per share, the Company would have been 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 A – 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.

C) Securities Purchase Agreement dated

September 23, 2015

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 orgrants 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

A – 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. 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. 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 the period. For the year ended

December 31, 2016

the Company recorded income of

$4,607

in order to reverse the net cumulative loss on the warrant liability that had been previously recorded.

3.

Warrants

The Company has issued warrants to certain creditors, investors, investment bankers and consultants. A summary of warrant activity is as follows:

	Total Warrants			Weighted average exercise price		Weighted average remaining life (in years)		Aggregate intrinsic value
Outstanding, as of January 1, 2016		1,704,628			4.40		3.02
Granted		—			—
Exercised		—			—
Forfeited		—			—
Expired		(444,548	)		6.00
Outstanding, as of December 31, 2016		1,260,080			3.84		2.78		—
Granted		138,889			3.60
Exercised		—			—
Forfeited		—			—
Expired		—			—
Outstanding, as of December 31, 2017		1,398,969			3.81		2.06		—
Vested or expected to vest at December 31, 2017		1,398,969			3.81		2.06		—
Exercisable at December 31, 2017		1,398,969			3.81		2.06		—

On

September 22, 2017,

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

138,889

shares of Common Stock in connection with the purchase of

427,778

shares of common stock by Mr. Fong. The warrants are immediately exercisable at an exercise price of

$3.60

per share and have a term of

five

years.

XML

Note O - Stock Options

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

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

NOTE

O

—STOCK OPTIONS

2004

Stock Option Plan

On

October

 

12,

2004,

the Board of Directors of the Company approved the

2004

Stock Option Plan (the

2004

Plan). The

2004

Plan was

not

presented to stockholders for approval and thus incentive stock options were

not

available under this plan. Under the terms of this plan,

166,667

shares of common stock were reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which

may

not

be below

85%

of fair market value. The term of stock options granted

may

not

exceed

ten

years. Options issued under the

2004

Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, as defined, all options outstanding vest immediately. The

2004

Plan expired in

October 

2014.

2015

Stock Option Plan

On

January 27, 2016,

the shareholders approved the

2015

Equity Incentive Plan (the

2015

Plan). Under the terms of this plan,

666,667

shares of common stock are reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which

may

not

be below

100

-

110%

of fair market value. The term of stock options granted

may

not

exceed

ten

years. Options issued under the

2015

Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, certain stock awards issued under this plan

may

be subject to additional acceleration of vesting as

may

be provided in the participants

’ written agreement. The

2015

Plan expires in

December 2025.

Non-Plan Stock Options

Periodically, the Company has granted options outside of the

2004

and

2015

Plans to various employees and consultants. In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately.

Stock Option Activity

Information summarizing option activity is as follows:

	Number of Options															Weighted average		Weighted average remaining		Aggregate
	1999 Plan			2004 Plan			2015 Plan			Non Plan			Total			exercise price		life (in years)		intrinsic value
Outstanding, as of December 31, 2015		20,834			85,008			—			259,088			364,930		$	3.87
Granted		—			—			27,087			—			27,087			2.74
Exercised		—			—			—			—			—
Forfeited		—			—			(2,084	)		(8,335	)		(10,419	)		2.16
Expired		(20,834	)		(15,628	)		—			(3,473	)		(39,935	)		2.50
Outstanding, as of December 31, 2016		—			69,380			25,003			247,280			341,663		$	3.99		4.23	$	53,936
Granted		—			—			64,167			1,170,000			1,234,167			2.69
Exercised		—			—			—			(4,167	)		(4,167	)		2.16
Forfeited		—			—			(7,084	)		(65,140	)		(72,224	)		2.62
Expired		—			(17,084	)		—			(4,862	)		(21,946	)		8.86
Outs tanding, as of December 31, 2017		—			52,296			82,086			1,343,111			1,477,493		$	2.91		5.64	$	0
Vested or expec ted to vest at December 31, 2017														1,083,691		$	2.98		5.43	$	0
Exercisable at December 31, 2017														261,294		$	3.96		3.09	$	0

The options outstanding and exercisable at

December

 

31,

2017

were in the following exercise price ranges:

				Options Outstanding						Options Exercisable
Range of exercise prices				Number of shares		Weighted average exercise price		Weighted average remaining life (in years)		Number exercisable		Weighted average exercise price
$	1.90	-	2.50		87,064	$	2.16		4.65		56,422	$	2.16
	2.51	-	3.50		1,207,296		2.70		6.15		21,740		3.23
	3.51	-	5.04		183,132		4.60		2.77		183,132		4.60
$	1.90	-	5.04		1,477,493						261,294

The aggregate intrinsic value in the table above represents the

total intrinsic value, based on the Company’s closing stock price of

$1.77

as of

December 

31,

2017,

which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of

December 

31,

2017

was

0.

The weighted average fair value of options granted during the years ended

December

 

31,

2017

and

2016

was

$2.32

and

$1.86

per share, respectively. The total intrinsic value of options exercised during the years ended

December 

31,

2017

and

2016

was

$5,667

and

$0,

respectively. The total fair value of shares vested during the years ended

December 

31,

2017

and

2016

was

$197,281

and

$285,430

respectively.

As of

December

 

31,

2017,

future compensation cost related to nonvested stock options is

$1,634,611

and will be recognized over an estimated weighted average period of

2.19

years.

XML

Note P - Income Taxes

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE

P

—INCOME TAXES

There was

no

provision for federal or state taxes as at

December 31, 2017

and

2016.

In

December 22, 2017,

the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the

“

Tax Act”

). The Tax Act significantly impacts the future ongoing U.S. corporate income tax by, among things, lowering the U.S. corporate income tax rates from 

34%

 to 

21%,

providing for unlimited net operating loss carry-forward periods, and implementing a territorial tax system. The reduction of the U.S. corporate tax rate required the Company to revalue its U.S. deferred tax assets and liabilities and valuation allowances to the recently enacted federal rate of 

21%.

This transitional impact resulted in a provisional reduction of certain of the Company’

s US deferred tax assets which are offset by a full valuation allowance.

The Company has deferred taxes due to income tax credits, net operating loss carryforwards, and the effect of temporary differences between the carrying values of certain assets and liabilities for financial reporting and income tax purposes. Significant components of deferred taxes are as follows at

December

 

31:

	2017			2016
Current asset:
Accrued compensation	$	118,000		$	67,000
Accounts receivable allowance		277,000			202,000
Non-current asset (liability):
Stock-based compensation		387,000			360,000
Basis differences in fixed assets		(18,000	)		(8,000	)
Basis differences in intangible assets		46,000			60,000
Net operating loss and credit carryforwards		12,052,000			18,597,000
Valuation allowances		(12,862,000	)		(19,278,000	)
	$	—		$	—

The Company has a valuation allowance against the full amount of its net deferred taxes due to the uncertainty of realization of the deferred tax assets due to operating loss history of the Company. The Company currently provides a valuation allowance against deferred taxes when it is more likely than

not

that some portion, or all of its deferred tax assets will

not

be realized. The valuation allowance could be reduced or eliminated based on future earnings and future estimates of taxable income. Similarly, income tax benefits related to stock options exercised have

not

been recognized in the financial statements.

As of

December

 

31,

2017,

the Company has federal net operating loss carryforwards of approximately

$57,064,000

subject to expiration between

2021

and

2037.

  These net operating loss carryforwards are subject to the limitations under Section 

382

of the Internal Revenue Code due to changes in the equity ownership of the Company.

A reconciliation of the effective income tax rate on operations reflected in the Statements of Operations to the US Federal statutory income tax rate is presented below.

	2017			2016
Federal statutory income tax rate		34	%		34	%
Permanent differences		—			—
Change in tax laws/tax rate		(13	)		-
Effect of net operating loss		(21	)		(34	)
Effective tax rate		—	%		—	%

The Company has

not

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

201

4

through

2017

remain open to examination by the IRS and state jurisdictions. The Company believes it is

not

subject to any tax audit risk beyond those periods. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does

not

have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any significant interest expense recognized during the years ended

December 

31,

2017

and

2016.

XML

Note Q - Profit Sharing Plan

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Pension and Other Postretirement Benefits Disclosure [Text Block]

NOTE

Q

—PROFIT SHARING PLAN

The Company has established a savings plan under section

 

401

(k) of the Internal Revenue Code. All employees of the Company, after completing

one

day of service, are eligible to enroll in the

401

(k) plan. Participating employees

may

elect to defer a portion of their salary on a pre-tax basis up to the limits as provided by the IRS Code. The Company is

not

required to match employee contributions but

may

do so at its discretion. The Company made

no

contributions during the years ended

December 

31,

2017

and

2016.

XML

Note R - Earnings Per Share (EPS)

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Earnings Per Share [Text Block]

NOTE

R

—EARNINGS PER SHARE (EPS)

The Company

’s basic EPS is calculated using net income (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 preferred stock.

The reconciliation of the numerator of the basic and diluted EPS calculations, due to the inclusion of preferred stock dividends was as follows for the following fiscal years ended

December

 

31:

	2017			2016
Basic Numerator:
Loss from continuing operations	$	(4,275,338	)	$	(4,189,704	)
Convertible preferred stock dividends		(769,158	)		(802,500	)
Net loss available to common stockholders (basic and diluted EPS)	$	(5,044,496	)	$	(4,992,204	)

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.

	Years ended December 31,
	2017		2016
Preferred stock		5,264,422		5,416,667
Stock options		15,529		17,657
Warrants		2,109		1,018
Potentially dilutive securities		5,282,060		5,435,342

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

	Years ended December 31,
	2017		2016
Stock options		1,390,428		235,845
Warrants		1,351,052		1,212,163
Total		2,741,480		1,448,008

XML

Note S - Subsequent Events

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Subsequent Events [Text Block]

NOTE

S

—SUBSEQUENT EVENTS

On

March 23, 2018,

holders of shares of the Company

’s Series B-

1

Convertible Preferred Stock (the “Series B-

1

Preferred”) converted

60,240

shares of Series B-

1

Preferred into

1,678,334

shares of common stock.

On

March 23, 2018,

the Company issued

115,857

shares of common stock to holders of shares of Series B-

1

Preferred in consideration of the conversion of

$417,084

of accrued dividends payable on the Series B-

1

Preferred resulting in a per share purchase price of

$3.60.

  In connection with the forgoing transaction, the Company waived a standstill provision to permit a holder of shares of Series B-

1

Preferred to increase its conversion limitation to

19.99%

of the Company’s issued and outstanding shares of common stock to be effective

61

days after such waiver.

On

March 23, 2018,

the Company issued

7,659

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

On

March 23, 2018,

the Company issued options to purchase

9,000

shares of common stock to

six

non-employee members of the Board of Directors.

 The options have a

three

year vesting period,

seven

year term, and exercise price of

$1.96.

 

On

March 23, 2018,

the Company issued options to purchase

212,918

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

$1.96.

 

On

March 28, 2018,

the Company issued

762

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

The Company has reviewed subsequent events through the date of this filing.

XML

Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2017

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

The Company has incurred significant losses to date, and at

December

 

31,

2017,

it had an accumulated deficit of approximately

$67.1

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

December 31, 2017,

total cash and cash equivalents were approximately

$289,000,

as compared to approximately

$1,061,000

at

December 31, 2016.

As discussed below, 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 currently requires approximately

$592,000

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

If the Company is unable to generate sufficient revenue

to meet our 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.

Effective

December 29, 2016,

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

1

for

12

shares. All share figures and results are reflected on a post-split basis.

Consolidation, Policy [Policy Text Block]

1.

 

Basis of Consolidation

The accompanying consolidated financial statements include the accounts of BIO-key International,

 Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates, Policy [Policy Text Block]

2.

Use of Estimates

Our consolidated financial statements are prepared in accordance with GAAP as set forth in the Financial Accounting Standards Board

’s (FASB) Accounting Standards Codification (ASC) and consider the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission (SEC). These accounting principles require us to make certain estimates, judgments and assumptions. The Company believes that the estimates, judgments and assumptions upon which it relies are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, its consolidated financial statements will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does

not

require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would

not

produce a materially different result.

Revenue Recognition, Policy [Policy Text Block]

3.

 

Revenue Recognition

Revenues from software licensing are recognized in accordance with ASC

985

-

605,

"Software Revenue Recognition." Accordingly, revenue from software licensing is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.

The Company intends to enter into arrangements with end users for items which

may

 include software license fees, and services or various combinations thereof. For each arrangement, revenues will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is probable, delivery of the product has occurred and

no

other significant obligations remain.

Multiple-Element Arrangements: For multiple-element arrangements, the Company applies the residual method in accordance with ASC

985

-

605.

The residual method requires that the portion of the total arrangement fee attributable to the undelivered elements be deferred based on its

 vendor-specific objective evidence ("VSOE") of fair value and subsequently recognized as the service is delivered. The difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements, which is generally the software license. VSOE of fair value for all elements in an arrangement is based upon the normal pricing for those products and services when sold separately. VSOE of fair value for support services is additionally determined by the renewal rate in customer contracts. The Company has established VSOE of fair value for support as well as consulting services.

License Revenues: Amounts allocated to license revenues are recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have been met.

Revenue from licensing software, which requires significant customization and modification, is recognized using the percentage of completion method, based on the hours of effort incurred by the Company in relation to the total estimated hours to complete. In instances where

third

party hardware, software or services form

 a significant portion of a customer’s contract, the Company recognizes revenue for the element of software customization by the percentage of completion method described above. Otherwise,

third

party hardware, software, and services are recognized upon shipment or acceptance as appropriate. If the Company makes different judgments or utilizes different estimates of the total amount of work expected to be required to customize or modify the software, the timing and revenue recognition, from period to period, and the margins on the project in the reporting period,

may 

differ materially from amounts reported. Anticipated contract losses are recognized as soon as they become known and are estimable.

Service Revenues: Revenues from services are comprised of maintenance and consulting and implementation services. Maintenance revenues include providing for unspecified when-and-if available product updates and customer telephone support services, and are recognized ratably over the term of the service period. Consulting services are generally sold on a time-and-materials basis and include a range of services including installation of software and assisting in the design of interfaces to allow the software to operate in customized environments. Services are generally separable from other elements under the arrangement since performance of the services are

not

essential to the functionality of any other element of the transaction and are described in the contract such that the total price of the arrangement would be expected to vary as the result of the inclusion or exclusion of the services. Revenues from services are generally recognized as the services are performed.

The Company provides customers, free of charge or at a minimal cost, testing kits which potential licensing customers

may

 use to test compatibility/acceptance of the Company’s technology with the customer’s intended applications.

Costs and other expenses: Includes professional compensation and other direct contract expenses, as well as costs attributable to the support of client service professional staff, depreciation and amortization costs related to assets used in revenue-generating activities, and other costs attributable to serving the Company

’s client base. Professional compensation consists of payroll costs and related benefits including stock-based compensation and bonuses. Other direct contract expenses include costs directly attributable to client engagements, such as out-of-pocket costs including travel and subsistence for client service professional staff, costs of hardware and software and costs of subcontractors. The allocation of lease and facilities charges for occupied offices is included in costs of service.

The Company accounts for its warranties under the FASB ASC

450,

“Contingencies.” The Company generally warrants that its products are free from defects in material and workmanship for a period of

one

year from the date of initial receipt by its customers. The warranty does

not

cover any losses or damage that occurs as a result of improper installation, misuse or neglect or repair or modification by anyone other than the Company or its authorized repair agent. The Company

’s policy is to accrue anticipated warranty costs based upon historical percentages of items returned for repair within

one

year of the initial sale. The Company’s repair rate of products under warranty has been minimal, and a historical percentage has

not

been established. The Company’s software license agreements generally include certain provisions for indemnifying customers against liabilities if the Company’s software products infringe upon a

third

party’s intellectual property rights. The Company has

not

provided for any reserves for warranty liabilities as it was determined to be immaterial.

Cash and Cash Equivalents, Policy [Policy Text Block]

4.

 

Cash

Equivalents

Cash equivalents consist of liquid investments with original maturities of

three

months or less.

  At

December 31, 2017

and

2016,

cash equivalents consisted of a money market account.

Receivables, Policy [Policy Text Block]

5.

 

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 quarter ended

September 30, 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, at

December 31, 2017

the Company has reserved

$1,000,000,

which represents

57%

of the remaining balance owed under the contract. Recoveries of accounts receivable previously written off are recorded when received. Accounts receivable at

December 31, 2017

and

2016

 consisted of the following:

	December 31,
	201 7			201 6
Accounts receivable - current	$	2,889,731		$	1,577,031
Accounts receivable - non current		1,760,000			2,070,000
		4,649,731			3,647,031
Allowance for doubtful accounts - current		(13,785	)		(13,785	)
Allowance for doubtful accounts - non current		(1,000,000	)		(500,000	)
		(1,013,785	)		(513,785	)
Accounts receivable, net of allowances for doubtful accounts	$	3,635,946		$	3,133,246

The allowance for doubtful accounts for the years ended

December 31,

201

7

and

2016

is as follows:

	Balance at Beginning of Year		Charged to Costs and Expenses		Deductions From Reserves		Balance at End of Year
Year Ended December 31, 201 7
Allowance for Doubtful Accounts	$	513,785	$	500,000	$	-	$	1,013,785
Year Ended December 31, 201 6
Allowance for Doubtful Accounts	$	13,785	$	500,000	$	-	$	513,785

The bad debt expense is recorded in selling, general, and administrative expense.

Inventory, Policy [Policy Text Block]

6.

Software License Rights

Software license rights acquired for re-sale to end users are recorded as assets when purchased and are stated at the lower of cost or estimated net realizable value.

The cost of the software license rights has been initially allocated pro-rata to the maximum number of resalable end-user licenses in the rights contract. Licenses are amortized to cost of sales over the greater of the following:

1

) an estimate of the economic use of such license rights over a

10

year period with weighting towards the beginning of the term,

2

) straight line method over

ten

years or

3

) ratably at cost basis as each end user license is resold to a customer. Management re-evaluates the total sub-licenses it expects to sell during the proceeding

twelve

months and will adjust the allocation of the current portion vs. non-current portion of software rights.

The rights are also evaluated by management on a periodic basis to determine if estimated future net revenues, on a per sub-license basis, support the recorded basis of each license. If the estimated net revenues are less than the current carrying value of the capitalized software license rights, the Company will reduce the rights to their net realizable value.

Property, Plant and Equipment, Policy [Policy Text Block]

7.

 

Equipment and Leasehold Improvements, Intangible Assets and

Depreciation and Amortization

Equipment and leasehold improvements are stated at cost.

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

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

	Years
Equipment and leasehold improvements
Equipment (years)	3	-	5
Furniture and fixtures (years)	3	-	5
Software (years)		3
Leasehold improvements	life or lease term

Intangible assets consist of patents.

  Patent costs are capitalized until patents are awarded. Upon award, such costs are amortized using the straight-line method over their respective economic lives. If a patent is denied, all costs are charged to operations in that year.

Goodwill and Intangible Assets, Policy [Policy Text Block]

8.

 Impairment or Disposal of Long Lived Assets, including Intangible Assets

The Company reviews long-lived assets, including intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such an asset

may

not

be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is equal to the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. In assessing recoverability, the Company must make assumptions regarding estimated future cash flows and discount factors. If these estimates or related assumptions change in the future, the Company

may

be required to record impairment charges. Intangible assets with determinable lives are amortized over their estimated useful lives, based upon the pattern in which the expected benefits will be realized, or on a straight-line basis, whichever is greater.

 The Company did

not

record any impairment charges in any of the years presented.

Advertising Costs, Policy [Policy Text Block]

9.

 

Advertising Expense

The Company expenses the costs of advertising as incurred. Advertising expenses for

201

7

and

2016

were approximately

$386,000

and

$299,000,

respectively.

Revenue Recognition, Deferred Revenue [Policy Text Block]

10.

 

Deferred Revenue

Deferred revenue includes customer advances and amounts that have been billed per the contractual terms but have

not

been recognized as revenue. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which generally is

12

months from the date the customer is delivered the products.

Research and Development Expense, Policy [Policy Text Block]

11.

 

Research and Development Expenditures

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

Earnings Per Share, Policy [Policy Text Block]

12.

 

Earnings Per Share of Common Stock (“EPS”)

The Company

’s EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuances of common stock, such as stock issuable pursuant to the conversion of preferred stock, exercise of stock options and warrants, when the effect of their inclusion is dilutive. See Note R - Earnings Per Share “EPS” for additional information.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

13.

 

Accounting for Stock-Based Compensation

The Company accounts for share based compensation in accordance with the provisions of ASC

718

-

10,

“Compensation

 — Stock Compensation,” which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The majority of its share-based compensation arrangements vest over either a

three

or

four

year vesting schedule. The Company expenses its share-based compensation under the ratable method, which treats each vesting tranche as if it were an individual grant. The fair value of stock options is determined using the Black-Scholes valuation model, and requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of its common stock price over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized as an expense in the consolidated statements of operations. As required under the accounting rules, the Company reviews its valuation assumptions at each grant date and, as a result, the Company is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the service period, net of estimated forfeitures (the number of individuals that will ultimately

not

complete their vesting requirements). The estimation of stock awards that will ultimately vest requires significant judgment. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates,

may

differ substantially from current estimates.

The following table presents share-based compensation expenses included in the Company

’s consolidated statements of operations:

	Year ended December 31,
	2017		2016
Selling, general and administrative	$	864,036	$	353,056
Research, development and engineering		108,728		74,786
	$	972,764	$	427,842

Valuation Assumptions for Stock Options

For

201

7

and

2016,

1,234,167

and

27,087

stock options were granted, respectively. The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Year ended December 31,
	2017			2016
Weighted average Risk free interest rate		1.92	%		1.11	%
Expected life of options (in years)		4.51			4.50
Expected dividends		0	%		0	%
Weighted average Volatility of stock price		138	%		93	%

The stock volatility for each grant is determined based on the review of the experience of the weighted average of historical daily price changes of the Company

’s common stock over the expected option term. The expected term was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla” options; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

Derivatives, Embedded Derivatives [Policy Text Block]

14.

 

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 early-adopted the new provisions issued

July 2017,

for derivative liability instruments under FASB 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. Under ASU

2017

-

11,

down round features do

not

meet the criteria for derivative accounting and

no

liability is to be recorded until an actual issuance of securities triggers the down-round feature. Prior to these provisions, the liabilities were recorded without the actual issuance of the securities triggering the down-round feature.

Income Tax, Policy [Policy Text Block]

15

. 

Income Taxes

The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. The Company evaluates, on a quarterly basis whether, based on all available evidence, if it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than

not

that the tax benefit of the deferred tax asset will

not

be realized. The evaluation, as prescribed by ASC

740

-

10,

“Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which

may

be employed to prevent an operating loss or tax credit carryforward from expiring unused. Because of the Company

’s historical performance and estimated future taxable income, a full valuation allowance has been established.

The Company accounts for uncertain tax provisions in accordance with ASC

740

-

10

-

05,

“Accounting for Uncertainty in Income Taxes.” The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise

’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

New Accounting Pronouncements, Policy [Policy Text Block]

1

6.

 

Recent Accounting Pronouncements

In

May 2014

, FASB issued ASU

No.

 

2014

-

09,

 Revenue from Contracts with Customers: Topic

606

 (“

ASC

606”

), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard contains a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods and services. The FASB has issued several amendments to the standard, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations. 

The Company will adopt ASC

606

effective

January 1, 2018

using the

modified retrospective transition method. While the Company is finalizing the impact this standard has on its consolidated financial statements and related disclosures, the Company expects the new standard will

not

have a material impact on the timing of its revenue recognition. The Company expects that certain contract acquisition costs such as sales commissions, will be amortized over an expected benefit period that is longer than the Company’s current policy of expensing these amounts over either the contract term or up-front, depending on the size of the order. The Company does

not

expect the adoption of ASC

606

to have any impact on its operating cash flows.

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

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

 for amounts yet to be determined.

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

as of

January 1, 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 Company will continue to estimate forfeitures at each reporting period, rather than electing an accounting policy change to record the impact of such forfeitures as they occur. 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. Under ASU

2017

-

11,

down round features do

not

meet the criteria for derivative accounting and

no

liability is to be recorded until an actual issuance of securities triggers the down-round feature. 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 fiscal

2017

year 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 N 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]

1

7.

  Reclassifications

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 A - The Company and Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

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

	December 31,
	201 7			201 6
Accounts receivable - current	$	2,889,731		$	1,577,031
Accounts receivable - non current		1,760,000			2,070,000
		4,649,731			3,647,031
Allowance for doubtful accounts - current		(13,785	)		(13,785	)
Allowance for doubtful accounts - non current		(1,000,000	)		(500,000	)
		(1,013,785	)		(513,785	)
Accounts receivable, net of allowances for doubtful accounts	$	3,635,946		$	3,133,246

Summary of Valuation Allowance [Table Text Block]

	Balance at Beginning of Year		Charged to Costs and Expenses		Deductions From Reserves		Balance at End of Year
Year Ended December 31, 201 7
Allowance for Doubtful Accounts	$	513,785	$	500,000	$	-	$	1,013,785
Year Ended December 31, 201 6
Allowance for Doubtful Accounts	$	13,785	$	500,000	$	-	$	513,785

Useful Lives of Property Plan and Equipment [Table Text Block]

	Years
Equipment and leasehold improvements
Equipment (years)	3	-	5
Furniture and fixtures (years)	3	-	5
Software (years)		3
Leasehold improvements	life or lease term

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

	Year ended December 31,
	2017		2016
Selling, general and administrative	$	864,036	$	353,056
Research, development and engineering		108,728		74,786
	$	972,764	$	427,842

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	Year ended December 31,
	2017			2016
Weighted average Risk free interest rate		1.92	%		1.11	%
Expected life of options (in years)		4.51			4.50
Expected dividends		0	%		0	%
Weighted average Volatility of stock price		138	%		93	%

XML

Note B - Factoring (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

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

	December 31,
	201 7			201 6
Accounts receivable - current	$	2,889,731		$	1,577,031
Accounts receivable - non current		1,760,000			2,070,000
		4,649,731			3,647,031
Allowance for doubtful accounts - current		(13,785	)		(13,785	)
Allowance for doubtful accounts - non current		(1,000,000	)		(500,000	)
		(1,013,785	)		(513,785	)
Accounts receivable, net of allowances for doubtful accounts	$	3,635,946		$	3,133,246

Factoring Fees [Table Text Block]

	Years Ended December 31,
	2017		2016
Factoring fees	$	224,142	$	341,023

Factored Accounts Receivable [Member]

Notes Tables

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

	Original Invoice Value		Factored Amount		Factored Balance due
Year Ended December 31, 2017
Factored accounts receivable	$	423,349	$	313,484	$	109,865
Year Ended December 31, 2016
Factored accounts receivable	$	214,556	$	160,918	$	53,638

XML

Note D - Concentration of Risk (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Revenue by Major Customers by Reporting Segments [Table Text Block]

	Years Ended December 31,
	201 7			201 6
Customer A		54	%		34	%
Customer B		*			12	%

Schedules of Concentration of Risk, by Risk Factor [Table Text Block]

	As of December 31,
	201 7			201 6
Customer A		55	%		35	%
Customer B		37	%		56	%

XML

Note E - Inventory (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	2017		2016
Current
Finished goods		487,858		381,762
Fabricated assemblies		458,989		83,666
Total current inventory	$	946,847	$	465,428

XML

Note F - Resalable Software Licenses Rights (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Software License Rights [Table Text Block]

	2017		2016
Current software license rights	$	2,640,000	$	1,560,000
Non-current software license rights		7,933,808		10,598,411
Total software license rights	$	10,573,808	$	12,158,411

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block]

Years ending December 31
2018	2,640,000
2019	3,000,000
2020	2,400,000
2021	1,200,000
2022	720,000
Thereafter	613,808

XML

Note G - Equipment and Leasehold Improvements (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Property, Plant and Equipment [Table Text Block]

	2017			2016
Equipment	$	567,473		$	403,425
Furniture and fixtures		164,079			162,067
Software		32,045			32,045
Leasehold improvements		23,403			23,403
		787,000			620,940
Less accumulated depreciation and amortization		(605,835	)		(553,126	)
Total	$	181,165		$	67,814

XML

Note H - Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Finite-Lived Intangible Assets [Table Text Block]

	2017							2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Patents and patents pending	$	347,946	$	(166,842	)	$	181,104	$	287,248	$	(153,116	)	$	134,132
Total	$	347,946	$	(166,842	)	$	181,104	$	287,248	$	(153,116	)	$	134,132

XML

Note I - Accrued Liabilities (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Accrued Liabilities [Table Text Block]

	201 7		201 6
Compensation	$	341,884	$	66,152
Compensated absences		164,132		154,368
Accrued legal and accounting fees		85,633		79,633
Sales tax payable		5,614		26,988
Factoring fees		32,357		3,600
Other		58,403		4,582
Total	$	688,023	$	335,323

XML

Note M - Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

Years ending December 31,
201 8		148,862
2019		45,033
20 20		31,898
	$	225,793

XML

Note N - Equity (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block]

	Total Warrants			Weighted average exercise price		Weighted average remaining life (in years)		Aggregate intrinsic value
Outstanding, as of January 1, 2016		1,704,628			4.40		3.02
Granted		—			—
Exercised		—			—
Forfeited		—			—
Expired		(444,548	)		6.00
Outstanding, as of December 31, 2016		1,260,080			3.84		2.78		—
Granted		138,889			3.60
Exercised		—			—
Forfeited		—			—
Expired		—			—
Outstanding, as of December 31, 2017		1,398,969			3.81		2.06		—
Vested or expected to vest at December 31, 2017		1,398,969			3.81		2.06		—
Exercisable at December 31, 2017		1,398,969			3.81		2.06		—

XML

Note O - Stock Options (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Share-based Compensation, Stock Options, Activity [Table Text Block]

	Number of Options															Weighted average		Weighted average remaining		Aggregate
	1999 Plan			2004 Plan			2015 Plan			Non Plan			Total			exercise price		life (in years)		intrinsic value
Outstanding, as of December 31, 2015		20,834			85,008			—			259,088			364,930		$	3.87
Granted		—			—			27,087			—			27,087			2.74
Exercised		—			—			—			—			—
Forfeited		—			—			(2,084	)		(8,335	)		(10,419	)		2.16
Expired		(20,834	)		(15,628	)		—			(3,473	)		(39,935	)		2.50
Outstanding, as of December 31, 2016		—			69,380			25,003			247,280			341,663		$	3.99		4.23	$	53,936
Granted		—			—			64,167			1,170,000			1,234,167			2.69
Exercised		—			—			—			(4,167	)		(4,167	)		2.16
Forfeited		—			—			(7,084	)		(65,140	)		(72,224	)		2.62
Expired		—			(17,084	)		—			(4,862	)		(21,946	)		8.86
Outs tanding, as of December 31, 2017		—			52,296			82,086			1,343,111			1,477,493		$	2.91		5.64	$	0
Vested or expec ted to vest at December 31, 2017														1,083,691		$	2.98		5.43	$	0
Exercisable at December 31, 2017														261,294		$	3.96		3.09	$	0

Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding and Exercisable [Table Text Block]

				Options Outstanding						Options Exercisable
Range of exercise prices				Number of shares		Weighted average exercise price		Weighted average remaining life (in years)		Number exercisable		Weighted average exercise price
$	1.90	-	2.50		87,064	$	2.16		4.65		56,422	$	2.16
	2.51	-	3.50		1,207,296		2.70		6.15		21,740		3.23
	3.51	-	5.04		183,132		4.60		2.77		183,132		4.60
$	1.90	-	5.04		1,477,493						261,294

XML

Note P - Income Taxes (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Deferred Tax Assets and Liabilities [Table Text Block]

	2017			2016
Current asset:
Accrued compensation	$	118,000		$	67,000
Accounts receivable allowance		277,000			202,000
Non-current asset (liability):
Stock-based compensation		387,000			360,000
Basis differences in fixed assets		(18,000	)		(8,000	)
Basis differences in intangible assets		46,000			60,000
Net operating loss and credit carryforwards		12,052,000			18,597,000
Valuation allowances		(12,862,000	)		(19,278,000	)
	$	—		$	—

Schedule of Effective Income Tax Rate Reconciliation [Table Text Block]

	2017			2016
Federal statutory income tax rate		34	%		34	%
Permanent differences		—			—
Change in tax laws/tax rate		(13	)		-
Effect of net operating loss		(21	)		(34	)
Effective tax rate		—	%		—	%

XML

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

12 Months Ended

Dec. 31, 2017

Notes Tables

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

	2017			2016
Basic Numerator:
Loss from continuing operations	$	(4,275,338	)	$	(4,189,704	)
Convertible preferred stock dividends		(769,158	)		(802,500	)
Net loss available to common stockholders (basic and diluted EPS)	$	(5,044,496	)	$	(4,992,204	)

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

	Years ended December 31,
	2017		2016
Preferred stock		5,264,422		5,416,667
Stock options		15,529		17,657
Warrants		2,109		1,018
Potentially dilutive securities		5,282,060		5,435,342

	Years ended December 31,
	2017		2016
Stock options		1,390,428		235,845
Warrants		1,351,052		1,212,163
Total		2,741,480		1,448,008

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Note A - The Company and Summary of Significant Accounting Policies (Details Textual)		12 Months Ended
	Dec. 29, 2016	Dec. 31, 2017 USD ($) shares	Dec. 31, 2016 USD ($) shares	Dec. 31, 2015 USD ($)
Retained Earnings (Accumulated Deficit)		$ (67,076,492)	$ (62,801,154)
Cash and Cash Equivalents, at Carrying Value		288,721	1,061,307	$ 4,321,078
Operational Costs Per Month		592,000
Allowance for Doubtful Accounts Receivable, Noncurrent		$ 1,000,000	500,000
Percentage of Remaining Balance Owned Reserved		57.00%
Advertising Expense		$ 386,000	$ 299,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross | shares		1,234,167	27,087
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period		3 years
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period		4 years
Licensing Agreements [Member]
Finite-Lived Intangible Asset, Useful Life		10 years
Reverse Stock Split [Member]
Stockholders' Equity Note, Stock Split, Conversion Ratio	12

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Note A - The Company and Summary of Significant Accounting Policies - Summary of Accounts Receivable (Details) - USD ($)	Dec. 31, 2017	Dec. 31, 2016
Accounts receivable - current	$ 2,889,731	$ 1,577,031
Accounts receivable - non current	1,760,000	2,070,000
	4,649,731	3,647,031
Allowance for doubtful accounts - current	(13,785)	(13,785)
Allowance for doubtful accounts - non current	(1,000,000)	(500,000)
	(1,013,785)	(513,785)
Accounts receivable, net of allowances for doubtful accounts	$ 3,635,946	$ 3,133,246

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Note A - The Company and Summary of Significant Accounting Policies - Allowance for Doubtful Accounts (Details) - Allowance for Doubtful Accounts [Member] - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Balance at beginning of year	$ 513,785	$ 13,785
Charges to costs and expenses	500,000	500,000
Deductions from reserves
Balance at end of year	$ 1,013,785	$ 513,785

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Note A - The Company and Summary of Significant Accounting Policies - Estimated Useful Lives for Depreciation and Amortization (Details)	12 Months Ended
	Dec. 31, 2017
Equipment [Member] | Minimum [Member]
Property, Plant, and Equipment (Year)	3 years
Equipment [Member] | Maximum [Member]
Property, Plant, and Equipment (Year)	5 years
Furniture and Fixtures [Member] | Minimum [Member]
Property, Plant, and Equipment (Year)	3 years
Furniture and Fixtures [Member] | Maximum [Member]
Property, Plant, and Equipment (Year)	5 years
Software Development [Member]
Property, Plant, and Equipment (Year)	3 years
Leasehold Improvements [Member]
Property, Plant, and Equipment, useful life	life or lease term

XML

Note A - The Company and Summary of Significant Accounting Policies - Share-based Compensation Expenses for Continuing Operations (Details) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Share-based compensation expense	$ 972,764	$ 427,842
Selling, General and Administrative Expenses [Member]
Share-based compensation expense	864,036	353,056
Research and Development Expense [Member]
Share-based compensation expense	$ 108,728	$ 74,786

XML

Note A - The Company and Summary of Significant Accounting Policies - Valuation Assumptions for Stock Options (Details)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Weighted average Risk free interest rate	1.92%	1.11%
Expected life of options (in years) (Year)	4 years 186 days	4 years 182 days
Expected dividends	0.00%	0.00%
Weighted average Volatility of stock price	138.00%	93.00%

XML

Note B - Factoring (Details Textual)	1 Months Ended
	Dec. 31, 2011 USD ($)
Factoring Arrangement Term	2 years
Factoring Arrangement, Minimum Amount of Accounts Receivable Per Quarter	$ 150,000
Minimum [Member]
Factoring Fees Percent	2.75%
Maximum [Member]
Factoring Fees Percent	15.00%
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 B - Factoring - Due From Factor (Details) - USD ($)	Dec. 31, 2017	Dec. 31, 2016
Original invoice value	$ 423,349	$ 214,556
Factored amount	313,484	160,918
Factored balance due	$ 109,865	$ 53,638

XML

Note B - Factoring - Fees (Details) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Factoring fees	$ 224,142	$ 341,023

XML

Note D - Concentration of Risk (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Cash, Uninsured Amount	$ 0	$ 811,000
Accounts Receivable, Net	3,635,946	3,133,246
Allowance for Doubtful Accounts Receivable, Noncurrent	$ 1,000,000	$ 500,000
Percentage of Remaining Balance Owned Reserved	57.00%
Customer B [Member]
Accounts Receivable, Net	$ 1,760,000
Allowance for Doubtful Accounts Receivable, Noncurrent	$ 1,000,000
Percentage of Remaining Balance Owned Reserved	57.00%

XML

Note D - Concentration of Risk - Revenue Concentration Risk by Major Customer (Details) - Sales Revenue, Net [Member] - Customer Concentration Risk [Member]	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Customer A [Member]
Percentage of revenues	54.00%	34.00%
Customer B [Member]
Percentage of revenues		12.00%

XML

Note D - Concentration of Risk - Accounts Receivable Concentration Risk by Major Customer (Details) - Accounts Receivable [Member] - Customer Concentration Risk [Member]	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Customer A [Member]
Percentage of revenues	55.00%	35.00%
Customer B [Member]
Percentage of revenues	37.00%	56.00%

XML

Note E - Inventory - Components of Inventory (Details) - USD ($)	Dec. 31, 2017	Dec. 31, 2016
Finished goods	$ 487,858	$ 381,762
Fabricated assemblies	458,989	83,666
Total current inventory	$ 946,847	$ 465,428

XML

Note F - Resalable Software Licenses Rights (Details Textual) - USD ($)			12 Months Ended		24 Months Ended
	Dec. 31, 2015	Nov. 11, 2015	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2017
Payments to Acquire Intangible Assets			$ 60,698
Software License Rights, Current			2,640,000	1,560,000	$ 2,640,000
Amortization of Intangible Assets			13,726	13,606
Software License Rights			10,573,808	12,158,411	10,573,808
Payments to Acquire Software	$ 180,000
License Costs			2,802,860	513,218
Software License Rights, Noncurrent			$ 7,933,808	10,598,411	7,933,808
Licensing Agreements [Member]
Payments to Acquire Intangible Assets		$ 12,000,000
Finite-Lived Intangible Asset, Useful Life			10 years
Amortization of Intangible Assets			$ 1,556,687	1,909
Software License Rights [Member]
Amortization of Intangible Assets					1,558,596
Software License Rights			10,441,404		10,441,404
Payments to Acquire Software			8,000
License Costs			35,916	$ 19,680	47,596
Software License Rights, Noncurrent			$ 132,404		$ 132,404

XML

Note F - Resalable Software Licenses Rights - Summary of Software License Rights (Details) - USD ($)	Dec. 31, 2017	Dec. 31, 2016
Resalable software license rights	$ 2,640,000	$ 1,560,000
Resalable software license rights, net of current portion	7,933,808	10,598,411
Total software license rights	$ 10,573,808	$ 12,158,411

XML

Note F - Resalable Software Licenses Rights - Amortization Expense (Details)	Dec. 31, 2017 USD ($)
Finite-Lived Intangible Assets, Amortization Expense, Next Twelve Months	$ 14,000
Finite-Lived Intangible Assets, Amortization Expense, Year Two	14,000
Finite-Lived Intangible Assets, Amortization Expense, Year Three	14,000
Finite-Lived Intangible Assets, Amortization Expense, Year Four	14,000
Finite-Lived Intangible Assets, Amortization Expense, Year Five	14,000
Finite-Lived Intangible Assets, Amortization Expense, after Year Five	111,000
Licensing Agreements [Member]
Finite-Lived Intangible Assets, Amortization Expense, Next Twelve Months	2,640,000
Finite-Lived Intangible Assets, Amortization Expense, Year Two	3,000,000
Finite-Lived Intangible Assets, Amortization Expense, Year Three	2,400,000
Finite-Lived Intangible Assets, Amortization Expense, Year Four	1,200,000
Finite-Lived Intangible Assets, Amortization Expense, Year Five	720,000
Finite-Lived Intangible Assets, Amortization Expense, after Year Five	$ 613,808

XML

Note G - Equipment and Leasehold Improvements (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Selling, General and Administrative Expenses [Member]
Depreciation, Depletion and Amortization, Nonproduction	$ 52,709	$ 49,038

XML

Note G - Equipment and Leasehold Improvements - Summary of Equipment and Leasehold Improvements (Details) - USD ($)	Dec. 31, 2017	Dec. 31, 2016
Property, plant, and equipment, gross	$ 787,000	$ 620,940
Less accumulated depreciation and amortization	(605,835)	(553,126)
Total	181,165	67,814
Equipment [Member]
Property, plant, and equipment, gross	567,473	403,425
Furniture and Fixtures [Member]
Property, plant, and equipment, gross	164,079	162,067
Software Development [Member]
Property, plant, and equipment, gross	32,045	32,045
Leasehold Improvements [Member]
Property, plant, and equipment, gross	$ 23,403	$ 23,403

XML

Note H - Intangible Assets (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Amortization of Intangible Assets	$ 13,726	$ 13,606
Finite-Lived Intangible Assets, Amortization Expense, Next Twelve Months	14,000
Finite-Lived Intangible Assets, Amortization Expense, after Year Five	111,000
Finite-Lived Intangible Assets, Amortization Expense, Year Two	14,000
Finite-Lived Intangible Assets, Amortization Expense, Year Three	14,000
Finite-Lived Intangible Assets, Amortization Expense, Year Four	14,000
Finite-Lived Intangible Assets, Amortization Expense, Year Five	14,000
Research, Development, and Engineering Expense [Member]
Amortization of Intangible Assets	$ 13,726	$ 13,606

XML

Note H - Intangible Assets - Summary of Intangible Assets (Details) - USD ($)	Dec. 31, 2017	Dec. 31, 2016
Gross carrying amount	$ 347,946	$ 287,248
Accumulated amortization	(166,842)	(153,116)
Net carrying amount	181,104	134,132
Patents [Member]
Gross carrying amount	347,946	287,248
Accumulated amortization	(166,842)	(153,116)
Net carrying amount	$ 181,104	$ 134,132

XML

Note I - Accrued Liabilities - Summary of Accrued Liabilities (Details) - USD ($)	Dec. 31, 2017	Dec. 31, 2016
Compensation	$ 341,884	$ 66,152
Compensated absences	164,132	154,368
Accrued legal and accounting fees	85,633	79,633
Sales tax payable	5,614	26,988
Factoring fees	32,357	3,600
Other	58,403	4,582
Total	$ 688,023	$ 335,323

XML

Note J - Related Party (Details Textual) - USD ($)						12 Months Ended
	Oct. 17, 2017	Sep. 22, 2017	Apr. 28, 2017	Nov. 18, 2016	Nov. 11, 2016	Dec. 31, 2017	Dec. 31, 2016	Aug. 07, 2017	Nov. 11, 2015
Share Price						$ 1.77
Proceeds from Issuance of Common Stock						$ 2,000,000	$ 1,860,000
Conversion of Dividends Payable, Amount Converted						$ 540,000
Conversion of Dividends Payable, Shares Issued		150,000
Maximum Ownership as a Result of Conversion	35.00%							9.99%
Conversion of Series A-1 Shares into Common Stock [Member]
Conversion of Stock, Shares Converted	27,404	27,404
Preferred Stock, Conversion Price	$ 3.60	$ 3.60
Conversion of Stock, Shares Issued	761,222	761,222
Director and Executive Officer [member]
Stock Issued During Period, Shares, New Issues		277,778	277,778
Share Price			$ 3.60
Proceeds from Issuance of Common Stock		$ 1,000,000	$ 1,000,000
Class of Warrant or Right, Number of Securities Called by Warrants or Rights		138,889
Stock and Warrants Issued During Period, Vaue		$ 1,540,000
Class of Warrant or Right, Exercise Price of Warrants or Rights		$ 3.60
Conversion of Dividends Payable, Amount Converted		$ 540,000
Conversion of Dividends Payable, Shares Issued		150,000
Director [Member]
Software License, Total									$ 12,000,000
Noncontrolling Interest, Ownership Percentage by Noncontrolling Owners									33.20%
Wong Kwok Fong [Member]
Stock Issued During Period, Shares, New Issues				516,667	516,667
Share Price				$ 3.60
Proceeds from Issuance of Common Stock				$ 1,860,000	$ 1,860,000

XML

Note K - Deferred Revenue (Details Textual) - USD ($)	Dec. 31, 2017	Dec. 31, 2016
Maintenance Contracts [Member]
Deferred Revenue, Current	$ 508,000	$ 633,000

XML

Note L - Segment Information (Details Textual)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Number of Reportable Segments	1
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member] | North America [Member]
Concentration Risk, Percentage	87.00%	78.00%

XML

Note M - Commitments and Contingencies (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Selling, General and Administrative Expenses [Member]
Operating Leases, Rent Expense	$ 221,000	$ 193,000

XML

Note M - Commitments and Contingencies - Future Minimum Rental Commitments of Non-cancelable Operating Leases (Details)	Dec. 31, 2017 USD ($)
2018	$ 148,862
2019	45,033
2020	31,898
	$ 225,793

XML

Note N - Equity (Details Textual)																			1 Months Ended	9 Months Ended	12 Months Ended
	Nov. 13, 2017 USD ($) shares	Oct. 17, 2017 USD ($) $ / shares shares	Sep. 22, 2017 USD ($) $ / shares shares	Aug. 09, 2017 USD ($) shares	May 11, 2017 USD ($) shares	May 02, 2017 USD ($) $ / shares	Apr. 28, 2017 USD ($) $ / shares shares	Mar. 15, 2017 USD ($) shares	Dec. 29, 2016	Nov. 18, 2016 USD ($) $ / shares shares	Nov. 11, 2016 USD ($) shares	Nov. 11, 2015 USD ($) $ / shares shares	Oct. 29, 2015 USD ($) $ / shares shares	Sep. 23, 2015 $ / shares shares	Mar. 09, 2015	Nov. 13, 2014 USD ($) $ / shares shares	Nov. 08, 2013 USD ($) $ / shares shares	Oct. 25, 2013 shares	May 31, 2017 USD ($) $ / shares shares	Sep. 30, 2016 USD ($)	Dec. 31, 2017 USD ($) $ / shares shares	Dec. 31, 2016 USD ($) $ / shares shares	Aug. 07, 2017	Nov. 30, 2016 $ / shares
Preferred Stock, Shares Authorized																					5,000,000
Preferred Stock, Par or Stated Value Per Share | $ / shares																					$ 0.0001	$ 0.0001
Share Price | $ / shares																					$ 1.77
Maximum Ownership as a Result of Conversion		35.00%																					9.99%
Conversion of Dividends Payable, Amount Converted | $																					$ 540,000
Conversion of Dividends Payable, Shares Issued			150,000
Dividends Payable | $																					630,408	401,250
Payments of Stock Issuance Costs | $																					80,366	84,866
Proceeds from Issuance of Common Stock | $																					2,000,000	1,860,000
Committed Equity Facility Amount | $						$ 5,000,000
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
Per Share Price That Is Used in Calculation for Purchase Price under Committed Equity Facility | $ / shares						$ 3.83
Percentage of Lowest VWAP That Equals or Exceeds Specified per Share Price under Committed Equity Facility						94.00%
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																			61,667
Stock Issued During Period, Value, Issued for Services | $																			$ 156,584		$ 354,585	$ 105,000
Stock Issued During Period As a Commitment Fee, Shares																			55,000
Stock Issued During Period As a Commitment Fee, Value | $																			$ 198,000
Stock Issued During Period, Issued for Services, Weighted Average Share Price | $ / shares																			$ 2.54
Stock Issued During Period, Shares, Share-based Compensation, Net of Forfeitures																					1,610
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period																					4,167	0
Stock Issued During Period, Value, New Issues | $																					$ 2,000,000	$ 1,860,000
September 2015 Warrants [Member]
Debt Instrument, Unamortized Discount | $																				$ 92,199
Fair Value Adjustment of Warrants | $																				$ 4,607
September 2017 [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares			$ 3.60
Class of Warrant or Right, Number of Securities Called by Warrants or Rights			138,889
Term Of Warrant			5 years
Promissory Note [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights														69,445
Warrants Issued Under PISPA [Member]
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Liability, Gain (Loss) Included in Earnings | $																						7,478
Fair Value, Measurement with Unobservable Inputs Reconciliations, Recurring Basis, Liability Value | $																						$ 0
Warrants Issued Under PISPA [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Liability, Issuances | $																	$ 325,891
Common Stock [Member]
Stock Issued During Period, Shares, New Issues																					555,556	516,667
Stock Issued During Period, Shares, Issued for Services																					117,849	41,667
Stock Issued During Period, Value, Issued for Services | $																					$ 12	$ 4
Stock Issued During Period, Shares, Share-based Compensation, Net of Forfeitures																					11,244	27,248
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period																					1,610
Stock Issued During Period, Value, New Issues | $																					$ 56	$ 52
Warrant [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Assumptions, Expected Term															5 years
Private Investor SPA [Member]
Stock Issued During Period, Shares, New Issues																664,584
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares																	$ 6
Class of Warrant or Right, Number of Securities Called by Warrants or Rights																996,877
Stock Issued During Period, Value, New Issues | $																	$ 3,697,100
Term Of Warrant																	3 years
Proceeds from Issuance of Private Placement | $																$ 1,595,000
Placement Agent Warrants [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights																	82,158
Commissions and Fees, Percent of Gross Proceeds																	8.00%
Private Investor SPA [Member]
Stock Issued During Period, Shares, New Issues																		1,026,972
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares																$ 3.60								$ 3.60
Private Investor SPA [Member] | Common Stock [Member]
Stock Issued During Period, Shares, New Issues																		1,026,972
Private Investor SPA [Member] | Warrant [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights																		1,026,972
Consultancy Firm [Member]
Share Price | $ / shares																						$ 2.52
Stock Issued During Period, Shares, Issued for Services																						41,667
Stock Issued During Period, Value, Issued for Services | $																						$ 105,000
Conversion of Series A-1 Shares into Common Stock [Member]
Conversion of Stock, Shares Converted		27,404	27,404
Conversion of Stock, Shares Issued		761,222	761,222
Preferred Stock, Conversion Price | $ / shares		$ 3.60	$ 3.60
Director and Executive Officer [member]
Stock Issued During Period, Shares, New Issues			277,778				277,778
Share Price | $ / shares							$ 3.60
Initial Conversion Price | $ / shares							$ 3.60
Conversion of Dividends Payable, Amount Converted | $			$ 540,000
Conversion of Dividends Payable, Shares Issued			150,000
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares			$ 3.60
Proceeds from Issuance of Common Stock | $			$ 1,000,000				$ 1,000,000
Stock Issued During Period, Shares, Cash Issuance and Conversion of Dividend Payable			427,778
Class of Warrant or Right, Number of Securities Called by Warrants or Rights			138,889
Stock and Warrants Issued During Period, Vaue | $			$ 1,540,000
Director [Member]
Stock Issued During Period, Shares, Issued for Services	2,276			5,148	1,925			1,895
Stock Issued During Period, Value, Issued for Services | $	$ 4,005			$ 18,017	$ 5,005			$ 5,003
Stock Issued During Period, Shares, Share-based Compensation, Net of Forfeitures																						18,914
Stock Granted, Value, Share-based Compensation, Net of Forfeitures | $																						$ 45,000
Chief Executive Officer [Member]
Stock Issued During Period, Shares, Share-based Compensation, Net of Forfeitures																						8,334
Stock Granted, Value, Share-based Compensation, Net of Forfeitures | $																						$ 17,000
Wong Kwok Fong [Member]
Stock Issued During Period, Shares, New Issues										516,667	516,667
Share Price | $ / shares										$ 3.60
Proceeds from Issuance of Common Stock | $										$ 1,860,000	$ 1,860,000
Reverse Stock Split [Member]
Stockholders' Equity Note, Stock Split, Conversion Ratio									12
Series A-1 Convertible Preferred Stock [Member]
Preferred Stock, Shares Authorized																					100,000	100,000
Preferred Stock, Par or Stated Value Per Share | $ / shares																					$ 0.0001	$ 0.0001
Preferred Stock, Shares Outstanding																					62,596	90,000
Stock Issued During Period, Shares, New Issues												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
Preferred Stock, Dividend Rate, Percentage												6.00%
Period Preceding the Dividend Payment Date												10 days
Conversion of Dividends Payable, Amount Converted | $		$ 27,404	$ 540,000
Conversion of Dividends Payable, Shares Issued		761,222	150,000
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares		$ 3.60	$ 3.60
Dividends Payable | $																					$ 236,658	$ 270,000
Preferred Stock, Shares Issued																					62,596	90,000
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, Shares Authorized																					105,000	105,000
Preferred Stock, Par or Stated Value Per Share | $ / shares																					$ 0.0001	$ 0.0001
Preferred Stock, Shares Outstanding																					105,000	105,000
Stock Issued During Period, Shares, New Issues												105,000
Share Price | $ / shares												$ 100
Proceeds from Issuance of Convertible Preferred Stock | $												$ 10,500,000
Preferred Stock, Dividend Rate, Percentage												2.50%
Period Preceding the Dividend Payment Date												10 days
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares												$ 3.60
Dividends Payable | $																					$ 393,750	$ 131,250
Liquidation Value Per Share | $ / shares												$ 100
Preferred Stock, Shares Issued																					105,000	105,000
Series B-1 Convertible Preferred Stock [Member] | Maximum [Member]
Maximum Ownership as a Result of Conversion												9.99%
September 2015 Warrants [Member]
Initial Conversion Price | $ / shares														$ 3.60
Term Of Warrant														5 years

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Note N - Equity - Summary of Warrant Activity (Details) - $ / shares	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Total warrants (in shares)	1,260,080	1,704,628
Weighted average exercise price (in dollars per share)	$ 3.84	$ 4.40
Weighted average remaining contractual life (Year)	2 years 21 days	2 years 284 days	3 years 7 days
Granted (in shares)	138,889
Granted, weighted average exercise price (in dollars per share)	$ 3.60
Exercised (in shares)
Exercised, weighted average exercise price (in dollars per share)
Forfeited (in shares)
Forfeited, weighted average exercise price (in dollars per share)
Expired (in shares)		(444,548)
Expired, weighted average exercise price (in dollars per share)		$ 6
Total warrants (in shares)	1,398,969	1,260,080	1,704,628
Weighted average exercise price (in dollars per share)	$ 3.81	$ 3.84	$ 4.40
Vested or expected to vest at December 31, 2017 (in shares)	1,398,969
Vested or expected to vest at December 31, 2017 (in dollars per share)	$ 3.81
Vested or expected to vest at December 31, 2017 (Year)	2 years 21 days
Exercisable at December 31, 2017 (in shares)	1,398,969
Exercisable at December 31, 2017 (in dollars per share)	$ 3.81
Exercisable at December 31, 2017 (Year)	2 years 21 days

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Note O - Stock Options (Details Textual) - USD ($)			12 Months Ended
	Jan. 27, 2016	Oct. 12, 2004	Dec. 31, 2017	Dec. 31, 2016
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term			5 years 233 days	4 years 83 days
Share Price			$ 1.77
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Number			261,294
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value			$ 2.32	$ 1.86
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period, Intrinsic Value			$ 5,667	$ 0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested in Period, Fair Value			197,281	$ 285,430
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options			$ 1,634,611
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition			2 years 69 days
In The Money Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Number			0
The2004 Stock Option Plan [Member]
Common Stock, Capital Shares Reserved for Future Issuance		166,667
The2004 Stock Option Plan [Member] | Nonstatutory Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term		10 years
The2004 Stock Option Plan [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Purchase Price of Common Stock, Percent		85.00%
The 2015 Equity Incentive Plan [Member]
Common Stock, Capital Shares Reserved for Future Issuance	666,667
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period	10 years
The 2015 Equity Incentive Plan [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Purchase Price of Common Stock, Percent	100.00%
The 2015 Equity Incentive Plan [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Purchase Price of Common Stock, Percent	110.00%

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Note O - Stock Options - Option Activity (Details) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Outstanding (in shares)	341,663	364,930
Outstanding, weighted average exercise price (in dollars per share)	$ 3.99	$ 3.87
Granted (in shares)	1,234,167	27,087
Granted, weighted average exercise price (in dollars per share)	$ 2.69	$ 2.74
Exercise of stock options (in shares)	4,167	0
Exercised, weighted average exercise price (in dollars per share)	$ 2.16
Forfeited (in shares)	(72,224)	(10,419)
Forfeited, weighted average exercise price (in dollars per share)	$ 2.62	$ 2.16
Expired (in shares)	(21,946)	(39,935)
Expired, weighted average exercise price (in dollars per share)	$ 8.86	$ 2.50
Outstanding (in shares)	1,477,493	341,663
Outstanding, weighted average exercise price (in dollars per share)	$ 2.91	$ 3.99
Outstanding, weighted average remaining life (Year)	5 years 233 days	4 years 83 days
Outstanding, aggregate intrinsic value	$ 0	$ 53,936
Exercised (in shares)	(4,167)	0
Vested or expected to vest at December 31, 2017 (in shares)	1,083,691
Vested or expected, weighted average exercise price (in dollars per share)	$ 2.98
Vested or expected to vest, weighted average remaining life (Year)	5 years 156 days
Vested or expected to vest, aggregate intrinsic value	$ 0
Exercisable at December 31, 2017 (in shares)	261,294
Options exercisable, weighted average exercise price (in dollars per share)	$ 3.96
Exercisable, weighted average remaining life (Year)	3 years 32 days
Exercisable, aggregate intrinsic value	$ 0
The1999 Stock Option Plan [Member]
Outstanding (in shares)		20,834
Granted (in shares)
Exercise of stock options (in shares)
Forfeited (in shares)
Expired (in shares)		(20,834)
Outstanding (in shares)
Exercised (in shares)
The2004 Stock Option Plan [Member]
Outstanding (in shares)	69,380	85,008
Granted (in shares)
Exercise of stock options (in shares)
Forfeited (in shares)
Expired (in shares)	(17,084)	(15,628)
Outstanding (in shares)	52,296	69,380
Exercised (in shares)
The 2015 Equity Incentive Plan [Member]
Outstanding (in shares)	25,003
Granted (in shares)	64,167	27,087
Exercise of stock options (in shares)
Forfeited (in shares)	(7,084)	(2,084)
Expired (in shares)
Outstanding (in shares)	82,086	25,003
Exercised (in shares)
Non Plan [Member]
Outstanding (in shares)	247,280	259,088
Granted (in shares)	1,170,000
Exercise of stock options (in shares)	4,167
Forfeited (in shares)	(65,140)	(8,335)
Expired (in shares)	(4,862)	(3,473)
Outstanding (in shares)	1,343,111	247,280
Exercised (in shares)	(4,167)

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Note O - Stock Options - Options Outstanding and Exercisable (Details)	12 Months Ended
	Dec. 31, 2017 $ / shares shares
Range of exercise prices, lower range (in dollars per share)	$ 1.90
Range of exercise prices, upper range (in dollars per share)	$ 5.04
Options outstanding (in shares) | shares	1,477,493
Options exercisable (in shares) | shares	261,294
Options exercisable, weighted average exercise price (in dollars per share)	$ 3.96
Exercise Price Range 1 [Member]
Range of exercise prices, lower range (in dollars per share)	1.90
Range of exercise prices, upper range (in dollars per share)	$ 2.50
Options outstanding (in shares) | shares	87,064
Options outstanding, weighted average exercise price (in dollars per share)	$ 2.16
Options outstanding, weighted average remaining remaining life (Year)	4 years 237 days
Options exercisable (in shares) | shares	56,422
Options exercisable, weighted average exercise price (in dollars per share)	$ 2.16
Exercise Price Range 2 [Member]
Range of exercise prices, lower range (in dollars per share)	2.51
Range of exercise prices, upper range (in dollars per share)	$ 3.50
Options outstanding (in shares) | shares	1,207,296
Options outstanding, weighted average exercise price (in dollars per share)	$ 2.70
Options outstanding, weighted average remaining remaining life (Year)	6 years 54 days
Options exercisable (in shares) | shares	21,740
Options exercisable, weighted average exercise price (in dollars per share)	$ 3.23
Exercise Price Range 3 [Member]
Range of exercise prices, lower range (in dollars per share)	3.51
Range of exercise prices, upper range (in dollars per share)	$ 5.04
Options outstanding (in shares) | shares	183,132
Options outstanding, weighted average exercise price (in dollars per share)	$ 4.60
Options outstanding, weighted average remaining remaining life (Year)	2 years 281 days
Options exercisable (in shares) | shares	183,132
Options exercisable, weighted average exercise price (in dollars per share)	$ 4.60

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Note P - Income Taxes (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent		34.00%	34.00%
Domestic Tax Authority [Member] | Internal Revenue Service (IRS) [Member]
Operating Loss Carryforwards		$ 57,064,000
Scenario, Forecast [Member]
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent	21.00%

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Note P - Income Taxes - Components of Deferred Taxes (Details) - USD ($)	Dec. 31, 2017	Dec. 31, 2016
Current asset:
Accrued compensation	$ 118,000	$ 67,000
Accounts receivable allowance	277,000	202,000
Stock-based compensation	387,000	360,000
Basis differences in fixed assets	(18,000)	(8,000)
Basis differences in intangible assets	46,000	60,000
Net operating loss and credit carryforwards	12,052,000	18,597,000
Valuation allowances	$ (12,862,000)	$ (19,278,000)

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Note P - Income Taxes - Reconciliation of the Effective Income Tax Rate to US Federal Statutory Income Tax Rate (Details)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Federal statutory income tax rate	34.00%	34.00%
Permanent differences
Change in tax laws/tax rate	(13.00%)
Effect of net operating loss	(21.00%)	(34.00%)
Effective tax rate

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Note Q - Profit Sharing Plan (Details Textual) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Defined Contribution Plan, Employer Discretionary Contribution Amount	$ 0	$ 0

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Note R - Earnings Per Share (EPS) - Reconciliation of Numerator of Basic and Diluted EPS Calculations (Details) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Basic Numerator:
Loss from continuing operations	$ (4,275,338)	$ (4,189,704)
Convertible preferred stock dividends	(769,158)	(802,500)
Net loss available to common stockholders (basic and diluted EPS)	$ (5,044,496)	$ (4,992,204)

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Note R - Earnings Per Share (EPS) - Securities Excluded From the Diluted Per Share Calculation (Details) - shares	6 Months Ended		12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2017	Dec. 31, 2016
Exercise Price Less Than Average Market Price Of Common Shares [Member]
Antidilutive securities (in shares)			5,282,060	5,435,342
Exercise Price Less Than Average Market Price Of Common Shares [Member] | Preferred Stock [Member]
Antidilutive securities (in shares)			5,264,422	5,416,667
Exercise Price Less Than Average Market Price Of Common Shares [Member] | Employee Stock Option [Member]
Antidilutive securities (in shares)			15,529	17,657
Exercise Price Less Than Average Market Price Of Common Shares [Member] | Warrant [Member]
Antidilutive securities (in shares)			2,109	1,018
Exercise Price Greater Than Average Market Price Of Common Shares [Member]
Antidilutive securities (in shares)	2,741,480	1,448,008
Exercise Price Greater Than Average Market Price Of Common Shares [Member] | Employee Stock Option [Member]
Antidilutive securities (in shares)	1,390,428	235,845
Exercise Price Greater Than Average Market Price Of Common Shares [Member] | Warrant [Member]
Antidilutive securities (in shares)	1,351,052	1,212,163

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Note S - Subsequent Events (Details Textual) - USD ($)								1 Months Ended	12 Months Ended
	Mar. 28, 2018	Mar. 23, 2018	Nov. 13, 2017	Sep. 22, 2017	Aug. 09, 2017	May 11, 2017	Mar. 15, 2017	May 31, 2017	Dec. 31, 2017	Dec. 31, 2016
Conversion of Dividends Payable, Shares Issued				150,000
Conversion of Dividends Payable, Amount Converted									$ 540,000
Stock Issued During Period, Shares, Issued for Services								61,667
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price									$ 2.69	$ 2.74
Stock Issued During Period As a Commitment Fee, Shares								55,000
Director [Member]
Stock Issued During Period, Shares, Issued for Services			2,276		5,148	1,925	1,895
Subsequent Event [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures		212,918
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price		$ 1.96
Stock Issued During Period As a Commitment Fee, Shares	762
Subsequent Event [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
Subsequent Event [Member] | Director [Member]
Stock Issued During Period, Shares, Issued for Services		7,659
Subsequent Event [Member] | Six Non-Employee Members of the Board of Directors [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures		9,000
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price		$ 1.96
Subsequent Event [Member] | Six Non-Employee Members of the Board of Directors [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
Subsequent Event [Member] | Series B-1 Convertible Preferred Stock [Member]
Preferred Stock Conversion Limitation, Percent		19.99%
Subsequent Event [Member] | Conversion of Series B-1 Shares into Common Stock [Member]
Conversion of Stock, Shares Converted		60,240
Conversion of Stock, Shares Issued		1,678,334
Subsequent Event [Member] | Conversion of Dividends Payable on Series B-1 Preferred Stock to Common Stock [Member]
Conversion of Dividends Payable, Shares Issued		115,857
Conversion of Dividends Payable, Amount Converted		$ 417,084
Shares Issued, Price Per Share		$ 3.60