(Exact ~~name~~Name of ~~registrant~~Registrant as ~~specified~~Specified in ~~its charter)~~Its Charter)

(~~Registrant’s telephone number, including area code)~~Issuer’s Telephone Number)

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

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

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

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

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

Number of shares of Common Stock, $.0001 par value per share, outstanding as of ~~November 13, 2017 was 7,691,324.~~August 13, 2018 is 12,591,279.

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

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

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

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

International, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

1.	NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

BIO-key International, Inc. ~~was~~, founded in 1993, ~~as a~~develops and markets proprietary fingerprint identification biometric technology ~~company. Biometric~~and software solutions. The Company was a pioneer in developing automated, finger identification technology ~~is the science~~that supplements or compliments other methods of ~~analyzing specific human characteristics which are unique to each individual in order to identify a specific person from a broader population. We develop and market advanced fingerprint biometric~~ identification and ~~identity~~ verification, ~~technologies, cryptographic authentication-transaction security technologies,~~such as ~~well as related identity management~~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 ~~credentialing software solutions. We sell our products~~is, used to improve both the accuracy and ~~provide services primarily to commercial entities within highly regulated industries, like healthcare and financial services and the broader corporate enterprise.~~speed of competing finger-based biometrics.

��

Basis of Presentation

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

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all necessary adjustments, consisting only of those of a recurring nature, and disclosures to present fairly the ~~Company~~’sCompany’s financial position and the results of its operations and cash flows for the periods presented. The balance sheet at ~~December 31, 2016~~June 30, 2018 was derived from the audited financial statements, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America. These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, ~~2016 (the “Form 10-K”),~~2017, filed with the SEC on ~~March 31, 2017.~~ April 2, 2018.

Recently Issued Accounting Pronouncements

In May 2014, ASU No. 2014-09, “Revenue from Contracts with Customers” was issued. The ~~comprehensive new standard will supersede existing revenue recognition guidance~~Company adopted ASU 2014-09 and ~~require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect~~its related amendments (collectively known as ASC 606) effective on January 1, 2018 using the consideration to which the Company expects to be entitled in exchange for those goods or services. The guidance will also require that certain contract costs incurred to obtain or fulfill a contract, such as sales commissions, be capitalized as an asset and amortized as revenue is recognized. Adoption of the new rules could affect the timing of both revenue recognition and the incurrence of contract costs for certain transactions. The guidance permits two implementation approaches, one requiringmodified retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The new standard was scheduled to be effective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. In August 2015, the FASB issued ASU 2015-14,method. Please see Note 3 "Revenue from Contracts with ~~Customers (Topic 606): Deferral of Effective Date" ("ASU 2015-14") which defers~~Customers" for the ~~effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017 including interim periods within that reporting period.~~

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

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

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

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~~and 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 during the quarter ended March 31, 2017.

~~In March 2016, the FASB issued Accounting Standards Update 2016-09, “Compensation~~ – Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 requires, among other things, that excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement rather than as additional paid-in capital, changes the classification of excess tax benefits from a financing activity to an operating activity in the statement of cash flows, and allows forfeitures to be accounted for when they occur rather than estimated. ASU 2016-09 is effective for public companies for interim and annual periods beginning after December 15, 2016. The 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 ~~nine months ended September 30,~~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 9 for updated disclosures.~~

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

Reclassification

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

3.	REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as "legacy GAAP" or the "previous guidance". The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:

●

Identify the contract with a customer

●

Identify the performance obligations in the contract

●

Determine the transaction price

●

Allocate the transaction price to performance obligations in the contract

●

Recognize revenue when or as the Company satisfies a performance obligation

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers for the three month periods ended:

	North America		South America		EMEA*		Asia		June 30, 2018

License fees	$	69,151	$	30,000	$	55,100	$	-	$	154,251
Hardware		120,496		53,040		10,298		160,935		344,769
Support and Maintenance		225,602		16		12,503		3,000		241,121
Professional services		6,000		-		2,000		-		8,000
Total Revenues	$	421,249	$	83,056	$	79,901	$	163,935	$	748,141

	North America		South America		EMEA*		Asia		June 30, 2017

License fees	$	37,168	$	583	$	-	$	90,000	$	127,751
Hardware		359,732		2,011		590		262,736		625,069
Support and Maintenance		114,275		176		9,100		310		123,861
Professional services		4,800		-		-		5,400		10,200
Total Revenues	$	515,975	$	2,770	$	9,690	$	358,446	$	886,881

The following table summarizes revenue from contracts with customers for the six month periods ended:

	North America		South America		EMEA*		Asia		June 30, 2018

License fees	$	130,120	$	30,000	$	96,850	$	-	$	256,970
Hardware		220,086		53,040		225,074		282,856		781,056
Support and Maintenance		403,518		16		21,216		16,970		441,720
Professional services		107,850		-		2,000		-		109,850
Total Revenues	$	861,574	$	83,056	$	345,140	$	299,826	$	1,589,596

	North America		South America		EMEA*		Asia		June 30, 2017

License fees	$	531,735	$	583	$	-	$	92,000	$	624,318
Hardware		721,822		2,341		590		501,496		1,226,249
Support and Maintenance		247,701		245		15,295		708		263,949
Professional services		185,300		-		-		5,400		190,700
Total Revenues	$	1,686,558	$	3,169	$	15,885	$	599,604	$	2,305,216

*EMEA – Europe, Middle East, Africa

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

Software licenses

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

Hardware

Hardware revenue consists of fees for associated equipment sold with or without a software license arrangement, such as servers, locks and fingerprint readers. Customers are not obligated to buy third party hardware from the Company, and may procure these items from a number of suppliers. Revenue is recognized at a point in time once the hardware is shipped to the customer. Hardware items are generally invoiced in full on execution of the arrangement.

Support and Maintenance

Support and Maintenance revenue consists of fees for unspecified upgrades, telephone assistance and bug fixes. The Company satisfies its Support and Maintenance performance obligation by providing “stand-ready” assistance as required over the contract period. The Company records deferred revenue (contract liability) at time of invoice until the contracts term occurs. Revenue is recognized over time on a ratable basis over the contract term. Support and Maintenance contracts are up to one year in length and are generally invoiced either annually or quarterly in advance.

Professional Services

Professional services revenues consist primarily of fees for deployment and optimization services, as well as training. The majority of the Company’s consulting contracts are billed on a time and materials basis, and revenue is recognized based on the amount billable to the customer in accordance with practical expedient ASC 606-10-55-18. For other professional services contracts, the Company utilizes an input method and recognizes revenue based on labor hours expended to date relative to the total labor hours expected to be required to satisfy its performance obligation.

Contracts with Multiple Performance Obligations

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

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

Accounts receivable from customers are typically due within 30 days of invoicing. The Company does not record a reserve for product returns or warranties as amounts are deemed immaterial based on historical experience.

Costs to Obtain and Fulfill a Contract

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

Financial Statement Impact of Adopting ASC 606

The Company adopted ASC 606 using the modified retrospective method. The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. The cost of obtaining the contract reflects the outcome of the sales effort in educating, demonstrating and selling our solutions. Accordingly under ASC 606, commissions are a capitalized cost due to the acquisition of a new customer.

As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to the following select condensed consolidated balance sheet line items as of January 1, 2018:

	As reported - December 31, 2017			Adjustments		As adjusted - January 1, 2018

Capitalized contract assets	$	-		$	240,017	$	240,017
Total assets	$	16,078,822		$	240,017	$	16,318,839

Accumulated deficit	$	(67,076,492	)	$	240,017	$	(66,836,475	)
Total Stockholders’ Equity	$	13,753,295		$	240,017	$	13,993,312
Total Liabilities and Stockholders’ Equity	$	16,078,822		$	240,017	$	16,318,839

Impact of New Revenue Guidance on Financial Statement Line Items

The following table compares selected reported condensed consolidated balance sheet, statement of operations and cash flows, as of and for the three and six months ended June 30, 2018, to the pro-forma amounts had the previous guidance still been applied:

	As of June 30, 2018
	As reported		Pro-forma		Increase (decrease)

Consolidated balance sheet data:
Capitalized contract costs, net	$	341,622	$	-	$	(341,622	)

	Three Months Ended June 30, 2018									Six Months Ended June 30, 2018
	As reported			Pro-forma			Increase (decrease)			As reported			Pro-forma			Increase (decrease)
Consolidated statement of operations data:
Selling, general and administrative expenses		1,076,184			1,052,439			(23,745	)	$	2,538,038		$	2,639,643		$	101,605
Net loss		(1,655,465	)		(1,631,720	)		23,745			(3,847,456	)		(3,949,061	)		(101,605	)
Net loss available to common stockholders		(1,697,335	)		(1,673,590	)		23,745			(4,045,489	)		(4,147,094	)		(101,605	)
Basic & Diluted Loss per Common Share		(0.15	)		(0.15	)		0.00			(0.42	)		(0.43	)		(0.01	)

	Six Months Ended June 30, 2018
	As reported			Pro-forma			Increase (decrease)
Consolidated statement of cash flow data:
Net loss		(3,847,456	)		(3,949,061	)		(101,605	)
Change in contract assets		(101,605	)		-			101,605
Net cash provided by operating activities		98,976			98,976			-

Revenue recognized during the three and six months ended June 30, 2018 from amounts included in deferred revenue at the beginning of the period was approximately $79,000 and $197,000 respectively. The Company did not recognize any revenue from performance obligations satisfied in prior periods. Total deferred revenue (contract liability) was $328,183 and $507,866 at June 30, 2018 and December 31, 2017, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as at June 30, 2018. The guidance provides certain practical expedients that limit this requirement, which the Company’s contracts meet as follows:

●

The performance obligation is part of a contract that has an original expected duration of one year or less, in accordance with ASC 606-10-50-14.

At June 30, 2018 deferred revenue represents our remaining performance obligations related to support and maintenance, all of which is expected to be recognized within one year.

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

The ~~future amortization under the economic use model for the next five years is as follows: 2018 - 2.6 million, 2019 - 3.0 million, 2020 - 2.4 million, 2021 - 1.2 million, and 2022 - 720,000.~~

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

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

The reconciliation of the ~~numerators~~numerator of the basic and diluted EPS calculations was as follows for both of the following three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016:~~2017:

	Three Months ended September 30,						Nine Months ended September 30,
	2017			2016			2017			2016			Three Months ended June 30,						Six Months ended June 30,
													2018			2017			2018			2017
Basic Numerator:

Net loss	$	(1,605,784	)	$	(1,134,422	)	$	(4,751,301	)	$	(3,673,125	)	$	(1,655,465	)	$	(1,789,329	)	$	(3,847,456	)	$	(3,145,516	)
Convertible preferred stock dividends		(200,625	)		(200,625	)		(601,875	)		(601,875	)		(41,870	)		(200,625	)		(198,033	)		(401,250	)
Net loss available to common stockholders	$	(1,806,409	)	$	(1,335,047	)	$	(5,353,176	)	$	(4,275,000	)	$	(1,697,335	)	$	(1,989,954	)	$	(4,045,489	)	$	(3,546,766	)
Basic Denominator		6,535,449			5,530,105			6,333,530			5,521,218
Per Share Amount	$	(0.28	)	$	(0.24	)	$	(0.85	)	$	(0.77	)

~~All potential common shares were antidilutive, and accordingly diluted EPS equaled basic EPS for all periods presented in the accompanying financial statements.~~

The following table ~~sets forth~~summarizes the ~~options and warrants which~~weighted average securities that were excluded from the diluted per share calculation ~~even though the exercise prices were less than the average market price of the common shares~~ because the effect of including these potential shares was antidilutive due to the net losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016:~~2017:

	Three Months ended September 30,				Nine Months ended September 30,				Three Months ended June 30,				Six Months ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017

Preferred stock		5,416,667		5,416,667		5,416,667		5,416,667		1,200,767		5,416,667		2,853,513		5,416,667
Stock options		205,497		28,992		101,327		13,398		37,015		35,706		19,863		44,580
Warrants		9,492		6,529		5,608		-		-		3,004		-		3,336
Total		5,631,656		5,452,188		5,523,602		5,430,065		1,237,782		5,455,377		2,873,376		5,464,583

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

	Three Months ended September 30,				Nine Months ended September 30,				Three Months ended June 30,				Six Months ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017

Stock options		262,094		215,000		278,761		231,667		1,366,467		218,761		1,445,891		218,761
Warrants		1,351,052		1,656,702		1,351,052		1,704,618		1,398,969		1,212,163		1,398,969		1,212,163
Total		1,613,146		1,871,702		1,629,813		1,936,285		2,765,436		1,430,924		2,844,860		1,430,924

9.10.

~~STOCKHOLDERS~~’STOCKHOLDERS’ EQUITY

Preferred Stock

Within the limits and restrictions provided in the ~~Company~~’sCompany’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 ~~September~~June 30, ~~2017,~~2018, 100,000 shares of preferred stock have been designated as Series A-1 Convertible Preferred Stock, ~~(the “Series A-1 Shares),~~ of which ~~90,000~~0 shares are issued and outstanding, and 105,000 shares of preferred stock have been designated as Series B-1 Convertible Preferred Stock, ~~(the “Series B-1 Shares”), all~~ of which 0 are issued and outstanding.

Series A-1 Convertible Preferred Stock

On October 22 and 29, 2015, the Company issued 84,500 shares of Series A-1 Convertible Preferred Stock (“Series A-1 Stock”) at a purchase price of $100.00 per share, for aggregate gross proceeds of $8,450,000. On November 11, 2015, 5,500 additional shares of Series A-1 ~~Convertible Preferred~~ Stock were issued at a purchase price of $100.00 per share, for gross cash proceeds of $550,000. Shares of ~~the~~ Series A-1 ~~Convertible Preferred~~ Stock are convertible at any time at the option of the holder into shares of common stock by dividing the Series A-1 Original Issue Price by an initial conversion price of $3.60 per share, subject to adjustment for stock dividends, stock splits, combinations, and reclassifications of the Company’s capital stock, and subject to a “blocker provision” which prohibits conversion if such conversion would result in the holder being the beneficial owner of in excess of 9.99% of the Company’s common stock. In connection with the request of the sole holder of the Series A-1 Stock, on August 7, 2017 the Company waived a standstill agreement to permit the holder to increase his conversion cap to 35% effective 61 days after such waiver request. The Series A-1 ~~Shares accrue~~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. ~~Unless holders of at least a majority of the outstanding shares of Series A-1 Preferred Stock elect otherwise by written notice to the Company, until~~Until October 1, 2017, the dividends ~~are~~were 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~~Stock are entitled to designate one person to serve on the Board of Directors of the Company. The holders of the Series A-1 ~~Shares~~Stock are entitled to vote on an as converted to common stock basis together with the holders of our common stock on all matters presented to our stockholders. Upon any liquidation or dissolution of the Company, any merger or consolidation involving the Company or any subsidiary of the Company in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation do not represent immediately following such merger or consolidation at least a majority of the voting power of the capital stock of the resulting or surviving corporation, or the sale of all or substantially all assets in a single transaction or a series of related transactions, unless the holders of at least a majority of the outstanding Series A-1 ~~Shares~~Stock elect otherwise, holders of Series A-1 ~~Shares~~Stock shall be entitled to receive prior to any payment to any holders of the ~~Company~~’sCompany’s common stock an amount per share equal to $100.00 per share plus any declared and unpaid dividends (pari-passu with the ~~holders of~~ Series B-1 ~~Shares)~~holders). On

Between September 22, 2017 aand May 31, 2018, the holder of the Series A-1 ~~Shares elected to convert $540,000 in accrued dividends payable~~Stock converted all shares of Series A-1 Stock into ~~150,000~~an aggregate of 2,500,000 shares of common stock ~~at a conversion price~~and purchased an aggregate of ~~$3.60 as agreed, due to~~248,893 shares of common stock in consideration of the conversion ~~before the December 31, 2017 contractual term. As~~ of ~~September 30, 2017, $135,000 was~~$896,015 of accrued ~~for the holders of~~dividends payable on the Series A-1 ~~Shares, for October 1, 2017 dividends.~~ Stock

As ~~of December 31, 2016, $270,000 of dividends were accrued for the holders~~a result of the forgoing conversions, there are no longer any issued and outstanding shares of Series A-1 ~~Shares for October 1, 2016~~Stock.

Overall balances and ~~January 1, 2017 dividends.~~conversion of Series A-1 shares and accrued dividends into common stock has been as follows:

	Series A-1			Accrued Dividends

Balance – January 1, 2017		90,000		$	270,000
Accrual of dividends – Q1 2017					135,000
Accrual of dividends – Q2 2017					135,000
Accrual of dividends – Q3 2017					135,000
Conversion into common stock – September 2017		-			(540,000	)
Conversion into common stock – October 2017		(27,404	)		-
Accrual of dividends – Q4 2017					101,658
Balance – December 31, 2017		62,596		$	236,658
Accrual of dividends – Q1 2018					93,894
Conversion into common stock – April 2018		(39,088	)		(330,552	)
Accrual of dividends – Q2 2018 (until final conversion)					25,463
Conversion into common stock – May 2018		(23,508	)		(25,463	)
Balance – June 30, 2018		-		$	-

The Series A-1 ~~Preferred~~ Stock contains options that based on an evaluation of FASB ASC 815-15, “Embedded Derivatives” and FASB ASC 815-40-15, “Contracts in Entity’s Own Equity - Scope and Scope Exceptions,” are considered embedded features: Preferred Stock’s conversion option: The ~~Preferred~~Series A-1 Stock is convertible at the ~~Holder’s~~holder’s option at any time at the fixed conversion price of $3.60 per share; Quarterly Dividend Conversion Option: From issuance until December 31, 2017, the majority of ~~Holders may elect~~holders could have elected to have the ~~Stock’s Quarterly~~quarterly dividend payment made in shares of ~~Common Stock,~~common stock, having a value equal to the volume weighted average trading price of the ~~Common Stock~~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 (the “Series B-1 Stock”) at a purchase price of $100.00 per share, for gross proceeds of $10,500,000. Shares of the Series B-1 ~~Convertible Preferred~~ Stock are convertible at any time at the option of the holder into shares of common stock by dividing the Series B-1 Original Issue Price by an initial conversion price of $3.60 per share, subject to adjustment for stock dividends, stock splits, combinations, and reclassifications of the Company’s capital stock, and subject to a “blocker provision” which prohibits conversion if such conversion would result in the holder being the beneficial owner of in excess of 9.99% of the Company’s common stock. During a conversion detailed in the table below, the Company waived a standstill provision to permit a holder of Series B-1 Stock to increase conversion limitation to 19.99% of the Company's issued and outstanding shares of common stock to be effective 61 days after such waiver. The Series B-1 ~~Shares accrue~~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 provided that if payment in cash would be prohibited under applicable Delaware corporation law or cause the Company to breach any agreement for borrowed money, or if the majority of the outstanding shares of the Series B-1 ~~Shares~~Stock 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~~Stock are entitled to designate one person to serve on the Board of Directors of the Company. The holders of the Series B-1 ~~Shares~~Stock are entitled to vote on an as converted to common stock basis together with the holders of our common stock on all matters presented to our stockholders. Upon any liquidation or dissolution of the Company, any merger or consolidation involving the Company or any subsidiary of the Company in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation do not represent immediately following such merger or consolidation at least a majority of the voting power of the capital stock of the resulting or surviving corporation, or the sale of all or substantially all assets in a single transaction or a series of related transactions, unless the holders of at least a majority of the outstanding Series B-1 ~~Shares~~Stock elect otherwise, holders of Series B-1 ~~Shares~~Stock shall be entitled to receive prior to any payment to any holders of the ~~Company~~’sCompany’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

Between March 23, 2018 and May 23, 2018, holders of ~~September 30, 2017, $328,125 was~~shares of Series B-1 Stock converted all shares of Series B-1 Stock into an aggregate of 2,916,668 shares of common stock and purchased an aggregate of 131,230 shares of common stock in consideration of the conversion of $472,426 of accrued ~~for the holders of~~dividends payable on the Series B-1 ~~Shares, for October 1, 2016, January 1, 2017, April 1, 2017, July 1, 2017, and October 1, 2017 dividends.~~ Stock.

As ~~of December 31, 2016, $131,250 of dividends were accrued for the holders~~a result of the forgoing conversions, there are no longer any issued and outstanding shares of Series B-1 ~~Shares for October 1, 2016~~Stock.

Overall balances and ~~January 1, 2017 dividends.~~conversion of Series B-1 shares and accrued dividends into common stock has been as follows:

	Series B-1			Accrued Dividends

Balance – January 1, 2017		105,000		$	131,250
Accrual of dividends – Q1 2017					65,625
Accrual of dividends – Q2 2017					65,625
Accrual of dividends – Q3 2017					65,625
Accrual of dividends – Q4 2017					65,625
Balance – December 31, 2017		105,000			393,750
Conversion into common stock – March 2018		(60,420	)		(417,084	)
Accrual of dividends – Q1 2018					62,268
Accrual of dividends – Q2 2018 (until final conversion)					16,408
Conversion into common stock – May 2018		(44,580	)		(55,342	)
Balance – June 30, 2018		-		$	-

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

Common Stock

~~Effective December 29, 2016, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-12.~~ The number of authorized shares and the par value of the Company's common stock and preferred stock were not affected by the reverse stock split. Stockholders who otherwise would be entitled to receive fractional shares were rounded upOn March 23, 2018, in addition to the ~~nearest whole share. The reverse~~conversion of Series B-1 Stock and accrued dividends payable into a total of 1,794,191 shares of common stock, ~~split became effective on the OTCQB at the opening of trading on December 29, 2016.~~

~~On March 15, 2017,~~ the Company issued ~~1,895~~7,659 shares of common stock to its directors in payment of board and board committee fees valued at ~~$5,003.~~$15,011.

On March ~~8, 2016,~~28, 2018, the ~~company~~Company issued ~~8,333~~762 shares of common stock to its directors in payment of committee fees valued at $1,501.

On April 3, 2018, the holder of Series A-1 Stock converted shares and accrued dividends payable into a total of 1,177,598 shares of common stock.

On May 10, 2018, the Company issued 2,035 shares of common stock to its directors in payment of board ~~fees valued at $16,000.~~

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

On May ~~11, 2017,~~14, 2018, the Company issued ~~1,925~~648 shares of common stock to its directors in payment of ~~board fees, valued at $5,005.~~ committee fees.

On May ~~11, 2016,~~23, 2018, the ~~Company issued 3,431~~holders of Series B-1 Stock converted shares and accrued dividends payable into a total of 1,253,707 shares of common ~~stock to its directors in payment of board fees valued at $6,999.~~ stock.

On May ~~11, 2016,~~31, 2018, the ~~Company issued 8,333~~holder of Series A-1 Stock converted shares and accrued dividends payable into a total of 660,073 shares of common ~~stock to the Chief Executive Officer as compensation valued at $17,000.~~

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

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

~~On August 9, 2017, the Company issued 5,148 shares of common stock to its directors in payment of board fees valued at $18,018.~~ ~~On August 10, 2016, the Company issued 3,125 shares of common stock to its directors in payment of board fees valued at $9,000.~~

On September 22, 2017, the Company issued to Wong Kwok Fong (Kelvin), 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 and the conversion of an accrued dividend payable in the amount of $540,000 on the Company’s Series A-1 Convertible Preferred Stock.

~~During the three and the nine months ended September 30, 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 the three and nine months ended September 30, 2016.~~

~~Stock Issuance Costs~~

~~For the~~ ~~nine months ended September 30, 2017, $80,366 were incurred in relation to the issuance of stock.~~

Derivative Liabilities

In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company ~~accounts~~early-adopted the new provisions issued July 2017, for derivative liability instruments under ~~the provisions of~~ FASB ~~ASC 815, “Derivatives~~ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and ~~Hedging.”~~

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

Pursuant to a series of Private Investors Securities Purchase Agreements (the “PI SPA”), on October 25, 2013 and November 8, 2013, the Company issued to certain private investors an aggregate of 1,026,972 units consisting of 1,026,972 shares of common stock (the “Shares”) and warrants to purchase an additional 1,026,972 shares of common stock (the “Warrants”)Hedging (Topic 815): I. Accounting 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~~Certain Financial Instruments 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%~~Down Round Features; II. Replacement of the ~~gross proceeds~~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 ~~offering, reimbursed~~securities triggering the placement agent for its reasonable out of pocket expenses, and issued to the placement agent warrants (the “Placement Agent Warrants”) to purchase an aggregate of 82,158 shares of common stock. The Placement Agent Warrants have substantially the same terms as the warrants issued to the investors, except the Placement Agent Warrants were immediately exercisable on a cashless basis.

The cashless exercise features contained in the warrants were considered to be derivatives and the Company recorded warrant liabilities on the consolidated balance sheet. The Company initially recorded the warrant liabilities equal to their estimated fair value of $325,891. Such amount was also recorded as a reduction of additional paid-in capital. The Company is required to mark-to-market the warrant liabilities at the end of each reporting period. For the three months ended September 30, 2016, the Company recorded a gain on the change in fair value of the cashless exercise features of $4,368. For the nine months ended September 30, 2016, the Company recorded a gain on the change in the fair value of the cashless exercise feature of $6,272. 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.

down-round feature.

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 sells or issues shares of common stock or securities that are convertible into common stock at a price lower than $2.40 per share, the Company will be required to issue additional shares of common stock for no additional consideration.

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

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

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

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

~~Warrants~~

On March 9, 2015, the Company issued a warrant to purchase 47,917 shares of common stock to a consultant which vested in equal quarterly installments over one year and is exercisable at $2.52 per share through March 8, 2020. For the ~~three and nine months ended~~Securities Purchase Agreement dated September ~~30, 2016, the Company recorded an expense of $0 and $11,625 related to the stock warrants. The service period was completed on March 8, 2016.~~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.

~~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 the quarter ended September 30, 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 quarter. For the quarter ended September 30, 2016 the Company recorded income of $56,017 in order to reverse the net cumulative loss on the warrant liability that had been previously recorded. For the nine months ended September 30, 2016 the Company recorded income on the change in warrant liability of $4,607. The warrant liability was $0 as of December 31, 2016.

~~On September 22, 2017, the Company issued to Wong Kwok Fong, a director and executive officer of the Company, w~~arrants 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.

Issuances of Stock Options

On March ~~15, 2017,~~23, 2018, the Company issued options to purchase ~~40,000~~9,000 shares of ~~the Company~~’s common stock to ~~four~~six non-employee members of the Board of Directors. ~~On March 15, 2017, the Company also issued options to purchase 4,167 shares of the Company’s common stock to an employee.~~ The options have a ~~three-year~~three year vesting period, ~~seven-year~~seven year term, and exercise price of $2.64. The options were estimated on the date of grant at $100,602 using the Black-Scholes option-pricing model with the following assumptions: risk free interest rate: 1.91 %, expected life of options in years: 4.5, expected dividends: 0, volatility of stock price: 138 %.$1.96.

On March ~~16, 2017, the Board of Directors issued options to purchase 1,120,000 shares of the Company~~’s common stock to certain officers, employees, and contractors. The options have a three-year vesting period, seven-year term, and exercise price of $2.65. The options were estimated on the date of grant at $2,560,081 using the Black-Scholes option-pricing model with the following assumptions: risk free interest rate: 1.91 – 2.11 %, expected life of options in years: 4.5 – 7.0, expected dividends: 0, volatility of stock price: 138 %.

~~On April 10, 2017,~~23, 2018, the Company issued options to purchase ~~10,000 shares of the Company~~’s common stock to a newly appointed Director. The options have a three-year vesting period, seven-year term, and exercise price of $2.64. The options were estimated on the date of grant at $20,538 using the Black- Scholes option-pricing model with the following assumptions: risk free interest rate: 1.81%, expected life of options in years: 4.5, expected dividends: 0, volatility of stock price: 138%.

~~On August 9, 2017, the~~ ~~Company issued options to purchase 60,000~~212,918 shares of the Company’s common stock to certain officers, employees, and contractors. The options have a ~~three-year~~three year vesting period, ~~seven-year~~seven year term, and exercise price of ~~$3.50.~~$1.96.

The fair value of the options issued during the three months ended ~~September 30, 2017 on August 9, 2017~~March 31, 2018 was estimated on the date of grant at ~~$179,220~~$381,876 using the Black-Scholes option-pricing model with the following assumptions: risk free interest rate: ~~1.73%~~2.56%, expected life of options in years: 4.5, expected dividends: 0, volatility of stock price: ~~135%~~143%.

There were no additional options issued during the three months ended June 30, 2018.

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

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

~~The information contained in this Report on Form 10-Q and in other public statements by the Company and Company officers include or may contain certain forward-looking statements.~~ All statements other than statements of historical facts contained in this Report on Form 10-Q, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “will,” “may,” “future,” “plan,” “intend” and “expect” and similar expressions generally identify forward-looking statements. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Although we believe that our plans, intentions and expectations reflected in the forward-looking statements are reasonable, we cannot be sure that they will be achieved. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: our history of losses and limited revenue; our ability to raise additional capital; our ability to protect our intellectual property; changes in business conditions; changes in our sales strategy and product development plans; changes in the marketplace; continued services of our executive management team; security breaches; competition between us and other companies in the biometric technology industry; market acceptance of biometric products generally and our products under development; our ability to expand into the Asian market; delays in the development of products and statements of assumption underlying any of the foregoing, as well as other factors set forth under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 filed with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

The following discussion and analysis summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of our Company as of and for the periods presented below and should be read in conjunction with our unaudited condensed consolidated financial statements and related information contained herein and in our audited financial statements as of December 31, 2017.

We develop and market advanced fingerprint biometric identification and identity verification technologies, ~~cryptographic authentication-transaction security technologies,~~ as well as related identity management and credentialing 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~~’sdriver’s licenses, OTP or other form of possession or knowledge-based credentialing. Advanced ~~BIO-key®~~BIO-key technology has been and is used to improve both the accuracy and speed of competing finger-based biometrics. Our solutions are used by many customers in ~~numerous sectors~~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 ~~distribute~~sell through distributors and directly to consumers and commercial users our ~~SideSwipe™, SideTouch™~~,SideSwipe, SideTouch and ~~EcoID™~~EcoID products. SideSwipe, SideTouch and EcoID are stand-alone fingerprint readers that can be used on any laptop, tablet or other device with a USB port.

At ~~the Consumer Electronics Show~~ In 2017, we ~~introduced a number of new products. These included TouchLock, fingerprint~~expanded our consumer product line to include biometric and ~~bluetooth~~blue tooth enabled ~~padlocks, FreePass,~~pad locks, TSA approved luggage locks, and bicycle locks. In 2018, we introduced OmniPass Consumer, a ~~wearable, mobile USB fingerprint reader, Q-180 Touch, a Micro USB compatible fingerprint reader~~secure biometric-enabled application to manage multiple passwords for Android devices, and SidePass, a compact, square, touch reader for Windows devices. We started distribution of the TouchLock padlock in the Asia Pacific market in June of 2017 and August of 2017 in the US.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~~our technology into commercial logical and physical privilege entitlement & access control markets and our products in both consumer and commercial markets. Our primary market focus includes, among others, enterprise access, mobile payments & credentialing, online payments, ~~and credentialing,~~ and healthcare record and payment data security. Our secondary focus includes government and educational markets.

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

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)~~(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.~~Cloud. We have developed our technology to enable, on-device authentication as well as network or cloud-based authentication and believe we may be the only technology vendor capable of providing this flexibility and capability. Our core technology works on over 40 commercially available fingerprint readers, across both Windows and Linux platforms, and Apple iOS and Android mobile operating systems. This interoperability, coupled with the ability to ~~authenticate~~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.

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

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

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

~~Over the longer term, we~~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 (Security Assertion Markup Language) and Open ID solutions will create new opportunities for us in 2018.

For detailed information regarding our critical accounting policies and estimates, see our financial statements and notes thereto included in this Report and in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. There have been no material changes to our critical accounting policies (except where described in note 3) and estimates from those disclosed in our most recent Annual Report on Form 10-K.

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

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, 20178 AS COMPARED TO ~~SEPTEMBER~~JUNE 30, 20167

For the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, service revenues included approximately ~~$117,000~~$241,000 and ~~$182,000,~~$124,000, respectively, of recurring maintenance and support revenue, and approximately ~~$260,000~~$8,000 and ~~$5,400~~$10,000 respectively, of non-recurring custom services revenue. Recurring service revenue increased 95% in 2018 as we continued to bundle maintenance agreements to our expanding customer license base, including one large new customer and renewed existing maintenance agreements from our legacy customers. Non-recurring custom services decreased ~~36% in 2017~~22% for custom services due to ~~the non-renewal of two large maintenance contracts. The increase in non-recurring custom services revenues resulted from a special software requirement from an existing customer.~~fewer customized installations.

For the three months ended ~~September~~June 30, 2018 and 2017, license ~~and other~~ revenue ~~(royalties)~~ increased ~~108%~~21% from the corresponding period in ~~2016,~~2017. The higher revenue included revenue from both new and existing customers.

~~Hardware~~For the three months ended June 30, 2018, hardware sales ~~increased~~decreased by ~~approximately $293,000 (134%)~~45%, as a result of an ~~increase in existing and~~smaller new customer ~~deployments. During the three months ended September 30, 2017, we continued to ship our new line~~deployments and an increased volume of ~~biometric locks in the amount of approximately $164,000.~~

For the three months ended ~~September~~June 30, ~~2017,~~2018, cost of service increased ~~313%~~117%, due to ~~added resources and reallocated research and development personnel to~~engineering support ~~the custom services revenue.~~for maintenance services.

License, hardware, and other costs for the three months ended ~~September~~June 30, ~~2017~~2018 increased approximately ~~483%~~23%. The increase ~~was directly associated with the costs of the hardware mix, and $388,681~~ was directly associated with the amortization of the software rights.

Selling, general and administrative costs for the three months ended ~~September~~June 30, ~~2017 increased~~ ~~34%~~2018 decreased 25% from the corresponding period in ~~2016.~~2017. The ~~increase~~decrease is attributable to ~~additional expenses~~reduced factoring fees, personnel and related ~~to our Hong Kong subsidiary,~~costs, and commitment fees, ~~non- cash compensation, Nasdaq related fees, and commissions,~~which was offset by ~~lower~~higher non-cash compensation, and legal fees.

For the three months ended June 30, 2018, research, development and engineering costs decreased 34% as compared to the corresponding period in 2017, as a result of decreased temporary outside services, and decrease in personnel and related costs.

For the six months ended June 30, 2018 and 2017, service revenues included approximately $442,000 and $264,000, respectively, of recurring maintenance and support revenue, and approximately $110,000 and $191,000, respectively, of non-recurring custom services revenue. Recurring service revenue increase 67% from 2017 as we continued to bundle maintenance agreements to our expanding customer license base including one large new customer and renewed existing maintenance agreements from our legacy customers. Non-recurring custom services decreased 42% for custom services due to fewer customized installations and software.

For the six months ended June 30, 2018, license revenue decreased as a result of the following contributing factors. First, we received a large order in the first quarter of 2017 and no comparable orders in the first half of 2018. Second, although we increased the number of new customer orders in 2018, they were for smaller total values.

For the six months ended June 30, 2018, hardware sales decreased by 36%, as a result of smaller new customer deployments and an increased volume of smaller lock orders.

For the six months ended June 30, 2018 and 2017, cost of service increased 192%, due to engineering support for customized software and maintenance services.

License, hardware, and other costs for the six months ended June 30, 2018 increased approximately 42%. The increase was directly associated with the amortization of the software rights.

Selling, general and administrative costs for the three months ended June 30, 2018 decreased 17% from the corresponding period in 2017. The decrease is attributable to reduced factoring fees personnel and related expenses, and commitment fees which was offset by higher non-cash compensation, and legal fees.

For the ~~three~~six months ended ~~September~~June 30, ~~2017,~~2018, research, development and engineering costs decreased 27% ~~as compared~~from to the corresponding period in ~~2016,~~2017, as a result of decreased temporary outside services, ~~and recruiting expenses, and reallocated personnel expenses to support custom services revenue, offset by an increase in~~ personnel and related ~~costs.~~

~~Interest income for the quarter ended September 30, 2017 and September 30, 2016 consisted of bank interest.~~

During the fourth quarters of 2013 and 2014 and third quarter of 2015, we issued various warrants that contained derivative liabilities. Such derivative liabilities are required to be marked-to-market each reporting period. In the third quarter of 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.

~~NINE MONTHS ENDED SEPTEMBER 30, 201~~7 ~~AS COMPARED TO SEPTEMBER 30, 201~~6

~~For the nine months ended September 30, 201~~7 and 2016, service revenues included approximately $381,000 and $593,000, respectively, of recurring maintenance and support revenue, and approximately $451,000 and $99,000, respectively, of non-recurring custom services revenue. Recurring service revenue decreased 36% from 2016 due to the non-renewal of two large maintenance contracts. Non-recurring custom services increased 353% as a result of increased custom software requirements for the first nine months of 2017, compared to the same period in the 2016.

~~For the nine months ended September~~ 30, 2017, license and other revenue (royalty) increased 375% from both new and existing customers, which includes an offsetting 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 $~~1,296,000 (293%), as a result of increases in existing and new customer deployments. Additionally, during the nine months ended September 30, 2017, we shipped our new line of biometric locks in the amount of approximately $322,000.

~~For~~ ~~the nine months ended September 30, 2017, cost of service increased approximately 69%, due to added resources and reallocated research and development personnel to support the custom services revenue.~~

~~License, hardware and other costs for the nine months ended September 30, 2017 increased approximately 733%. The increase was~~ ~~primarily attributable to the amortization of the software rights in the amount of $1,118,436, as well as costs associated with the hardware mix.~~

~~Selling, general and administrative costs for the nine months ended September 30, 2017 increased 45% from the corresponding period in 2016. The increase was largely~~ due to a bad debt expense related to a contract whose payments are behind schedule. As a result of the payment delays, we reserved $500,000 which represents 24% of the remaining balance owed under the contract, for a total reserve of $1,000,000. Other increases resulted from additional expenses related to our Hong Kong subsidiary, non-cash, share-based compensation expenses, commitment fees and increased commission expense related to higher revenue. These amounts were offset by a decrease in factoring, legal fees and contractors and temporary labor.

For the nine months ended September 30, 2017, research, development and engineering costs decreased 16% compared to the corresponding period in 2016, as a result of decreased temporary outside services, and recruiting expenses, offset by an increase in ~~personnel and related costs, Hong Kong subsidiary costs and~~ non-cash compensation costs.

~~Interest income for the~~ ~~period ended September 30, 2017 and September 30, 2016 consisted of bank interest.~~

During the fourth quarters of 2013 and 2014, and third quarter of 2015, we issued various warrants that contained derivative liabilities. Such derivative liabilities are required to be marked-to-market each reporting period. In the third quarter of 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.

Net cash ~~used for~~provided by operations during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 was approximately ~~$1,804,000.~~$99,000. The cash ~~used in~~provided by operating activities was attributable primarily ~~attributable~~ to the following items:

Approximately $~~204,000~~$68,000 was used for investing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 related to capital expenditures.

Approximately $~~1,920,000~~$15,000 was ~~provided by~~used for financing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2017 consisting~~2018 related to costs of ~~approximately $2,000,000 from~~converting the ~~issuance of~~preferred stock to common ~~stock net of approximately $80,000 of stock issuance costs.~~ stock.

WeAt June 30, 2018, we had a net working capital at ~~September 30, 2017~~ of approximately ~~$3,281,000~~$3,587,000 as compared to net working capital of approximately ~~$3,074,000~~$4,689,000 at December 31, ~~2016.~~2017. At June 30, 2018, net working capital excluding resalable software license rights was approximately $767,000 as compared to net working capital excluding resalable software license rights of approximately $2,049,000 at December 31, 2017.

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 ~~$220,000~~$100,000 during the next twelve months.

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

~~As of December 2011, we~~We entered into ~~a 24-month~~an accounts receivable factoring arrangement with a financial institution (the “Factor”) which ~~was~~has since been extended through October 31, ~~2017~~.2018. Pursuant to the terms of the arrangement, from time to time, we ~~sold~~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 ~~remitted~~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 ~~received~~receive over advances from the Factor. Factoring fees ~~ranged~~range from 2.75% to ~~21%~~15% of the face value of the invoice factored, and are determined by the number of days required for collection of the invoice.

~~On September 23, 2015, we issued a promissory note and a warrant~~ We expect to ~~purchase~~ 69,445 shares of common stock for an aggregate principal sum of $250,000. The warrants have a term of five years and have an exercise price of $0.30 per share. The note was repaid in full in October 2015.

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

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

On November 18, 2016, we issued to Wong Kwok Fong (Kelvin), a director, ~~and~~ 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 (Kelvin), a director, ~~and~~ 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 we may issue and sell up to $5.0 million worth of shares of common stock, subject to certain limitations and satisfaction of certain conditions, over a 36-month term following the effectiveness of a registration statement covering the public resale of the shares of common stock issued under the facility. 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 ~~in our sole discretion,~~ issue requests to the investor to purchase a specified dollar amount of shares up to a maximum of $100,000 over a five trading day period based on the daily volume weighted average price of our common stock (VWAP) to the extent the VWAP equals or exceeds the greater of a formula amount or $3.83 per share. The per share purchase price for the shares issued under the facility will be equal to 94% of the lowest VWAP that equals or exceeds $3.83 per share. Aggregate sales under the facility are limited to 19.99% of the total outstanding shares of the ~~Company~~’sCompany’s common stock as of May 2, 2017, unless ~~we obtain~~ stockholder approval is obtained, and wesales under the facility are prohibited ~~from making requests~~ if ~~the~~such a sale ~~of shares pursuant to a request~~ would result in beneficial ownership by the investor of more than 9.99% of ~~our~~the Company’s common stock.

On September 22, 2017, ~~the Company~~we issued to Wong Kwok Fong (Kelvin), a director, ~~and~~ 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 ~~the~~an aggregate purchase price of $1,540,000,or $3.60 per share. The purchase ~~price was paid via~~consisted of a cash payment of $1,000,000 and the conversion of an accrued ~~dividend~~dividends payable ~~in the amount of $540,000~~ on the Company’s Series A-1 Convertible Preferred Stock ~~into 150,000 shares~~ of ~~common stock.~~$540,000.

At ~~September~~June 30, ~~2017,~~2018, our total cash and cash equivalents were approximately ~~$972,000,~~$304,000, as compared to approximately ~~$1,061,000~~$289,000 at December 31, ~~2016.~~2017.

As discussed above, we have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. We estimate that we currently require approximately $592,000 per month to conduct our operations, ~~and pay dividend obligations,~~ a monthly amount that we have been unable to consistently achieve through revenue generation. During the ~~nine months~~first half of ~~2017,~~2018, we generated approximately ~~$3,248,000~~$1,590,000 of revenue, which is below our average monthly requirements.

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

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

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of ~~September~~June 30, ~~2017.~~2018. Based on the evaluation of our disclosure controls and procedures as of ~~September~~June 30, ~~2017,~~2018, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting occurred during the fiscal quarter ended ~~September~~June 30, ~~201~~7,2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

On ~~September 22, 2017, the Company~~May 10, 2018, we issued ~~to Wong Kwok Fong (Kelvin), a director and executive~~ ~~officer of the Company, 427,778~~2,035 shares of common stock ~~and warrants~~ to ~~purchase 138,889~~certain of our non-employee directors in payment of directors’ fees.

On May 14, 2018, we issued 648 shares of common stock ~~for the aggregate purchase price~~to certain of ~~$1,540,000, or $3.60 per share. The purchase price was paid via a cash~~our non-employee directors in payment of ~~$1,000,000 and the conversion of an accrued dividend payable in the amount of $540,000 on the Company’s Series A-1 Convertible~~ ~~Preferred Stock into 150,000 shares of common stock.~~ board committee fees

The foregoing securities were issued in a private placement ~~transaction~~transactions pursuant to anthe exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, without general solicitation or advertising of any kind and without payment of placement agent or brokerage fees to any person.

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

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

DELAWARE	41-1741861
(State or ~~other jurisdiction~~Other Jurisdiction of ~~incorporation~~Incorporation of ~~organization)~~Organization)	(IRS Employer Identification Number)

PART I. FINANCIAL INFORMATION

Item 1	—	Financial ~~Statements~~Statements.
		Condensed ~~and~~ consolidated balance sheets as of ~~September~~June 30, ~~201~~72018 (unaudited) and December 31, ~~2016~~2017	3
		Condensed ~~and~~ consolidated statements of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~201~~72018 and ~~2016~~2017 (unaudited)	4
		Condensed ~~and~~ consolidated statements of cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~201~~72018 and ~~2016~~2017 (unaudited)	5
		Notes to condensed consolidated financial statements (unaudited)	7
Item 2	~~Management~~’s—	Management’s Discussion and Analysis of Financial Conditions and Results of ~~Operations~~Operations.	19
Item 4	—	Controls and ~~Procedures~~Procedures.	2726

PART II. OTHER INFORMATION

Item 2	—	Unregistered Sales of Equity Securities and Use of ~~Proceeds~~Proceeds.	2826
Item 6	~~Exhibits~~—	28Exhibits.	26

Signatures			29 27

	September 30, 2017			December 31, 2016
	(Unaudited)
ASSETS
Cash and cash equivalents	$	971,857		$	1,061,307
Accounts receivable, net		562,296			1,563,246
Due from factor		28,750			53,638
Inventory		879,592			465,428
Software license rights		2,370,000			1,560,000
Prepaid expenses and other		175,955			206,677
Total current assets		4,988,450			4,910,296
Software license rights, net of current portion		8,590,368			10,598,411
Accounts receivable, net of current portion		1,070,000			1,570,000
Equipment and leasehold improvements, net		186,917			67,814
Deposits and other assets		8,712			8,712
Intangible assets, net		175,896			134,132
Total non-current assets		10,031,893			12,379,069
TOTAL ASSETS	$	15,020,343		$	17,289,365

LIABILITIES
Accounts payable	$	507,886		$	466,842
Accrued liabilities		427,671			335,323
Dividends payable on preferred stock		463,125			401,250
Deferred revenue		308,622			633,062
Total current liabilities		1,707,304			1,836,477
TOTAL LIABILITIES		1,707,304			1,836,477

Commitments and contingencies

STOCKHOLDERS’ EQUITY:
Series A-1 convertible preferred stock; authorized, 100,000 (liquidation preference of $100 per share): issued and outstanding 90,000 of $.0001 par value at September 30, 2017 and December 31, 2016, respectively		9			9
Series B-1 convertible preferred stock; authorized, 105,000 (liquidation preference of $100 per share): issued and outstanding 105,000 of $.0001 par value at September 30, 2017 and December 31, 2016, respectively		11			11
Common stock — authorized, 170,000,000 shares; $.0001 par value issued and outstanding; 6,927,826 and 6,093,843 at September 30, 2017 and December 31, 2016, respectively		692			609
Additional paid-in capital		80,864,782			78,253,413
Accumulated deficit		(67,552,455	)		(62,801,154	)
TOTAL STOCKHOLDERS’ EQUITY		13,313,039			15,452,888
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	15,020,343		$	17,289,365

	June 30, 2018			December 31, 2017
	(Unaudited)
ASSETS
Cash and cash equivalents	$	304,006		$	288,721
Accounts receivable, net		491,651			2,875,946
Due from factor		27,663			109,865
Inventory		930,478			946,847
Resalable software license rights		2,820,000			2,640,000
Prepaid expenses and other		156,695			152,654
Total current assets		4,730,493			7,014,033
Resalable software license rights, net of current portion		6,425,706			7,933,808
Accounts receivable, net of current portion		720,000			760,000
Equipment and leasehold improvements, net		189,360			181,165
Capitalized contract costs, net		341,622			-
Deposits and other assets		8,712			8,712
Intangible assets, net		187,826			181,104
Total non-current assets		7,873,226			9,064,789
TOTAL ASSETS	$	12,603,719		$	16,078,822

LIABILITIES
Accounts payable	$	330,431		$	499,230
Accrued liabilities		484,578			688,023
Dividends payable		-			630,408
Deferred revenue		328,183			507,866
Total current liabilities		1,143,192			2,325,527
TOTAL LIABILITIES		1,143,192			2,325,527

Commitments and contingencies

STOCKHOLDERS’ EQUITY

Series A-1 convertible preferred stock: authorized, 100,000 (liquidation preference of $100 per share); issued and outstanding 0 and 62,596 of $.0001 par value at June 30, 2018 and December 31, 2017, respectively		-			6
Series B-1 convertible preferred stock; authorized, 105,000 (liquidation preference of $100 per share): issued and outstanding 0 and 105,000 of $.0001 par value at June 30, 2018 and December 31, 2017, respectively		-			11
Common stock: authorized, 170,000,000 shares; issued and outstanding; 12,587,997 and 7,691,324 of $.0001 par value at June 30, 2018 and December 31, 2017, respectively		1,259			769
Additional paid-in capital		82,143,199			80,829,001
Accumulated deficit		(70,683,931	)		(67,076,492	)
TOTAL STOCKHOLDERS’ EQUITY		11,460,527			13,753,295
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	12,603,719		$	16,078,822

	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016

Revenues
Services	$	377,113		$	187,025		$	831,761		$	692,677
License fees and other		53,023			25,435			677,342			142,651
Hardware		512,281			219,003			1,738,530			442,541
Total Revenues		942,417			431,463			3,247,633			1,277,869
Costs and other expenses
Cost of services		190,889			46,257			285,369			168,636
Cost of license fees, hardware and other		732,192			125,526			2,094,608			251,485
Total costs and other expenses		923,081			171,783			2,379,977			420,121
Gross Profit		19,336			259,680			867,656			857,748

Operating Expenses
Selling, general and administrative		1,238,296			925,939			4,289,655			2,957,368
Research, development and engineering		386,830			528,554			1,329,322			1,584,403
		1,625,126			1,454,493			5,618,977			4,541,771
Operating loss		(1,605,790	)		(1,194,813	)		(4,751,321	)		(3,684,023	)

Other income
Interest income		6			6			20			19
Gain on derivative liabilities		-			60,385			-			10,879
Total other income		6			60,391			20			10,898
Net loss		(1,605,784	)		(1,134,422	)		(4,751,301	)		(3,673,125	)
Convertible preferred stock dividends		(200,625	)		(200,625	)		(601,875	)		(601,875	)
Net loss available to common stockholders	$	(1,806,409	)	$	(1,335,047	)	$	(5,353,176	)	$	(4,275,000	)

Basic and Diluted Loss per Common Share	$	(0.28	)	$	(0.24	)	$	(0.85	)	$	(0.77	)

Weighted Average Shares Outstanding:
Basic and Diluted		6,535,449			5,530,105			6,333,530			5,521,218

	Nine Months Ended September 30,						Six Months Ended June 30,
	2017			2016			2018			2017

CASH FLOW FROM OPERATING ACTIVITIES:
Net loss	$	(4,751,301	)	$	(3,673,125	)	$	(3,847,456	)	$	(3,145,516	)
Adjustments to reconcile net loss to cash used for operating activities:
Allowance for doubtful accounts		500,000
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Bad debt expense								-			500,000
Depreciation		33,526			37,764			44,596			15,513
Amortization of intangible assets		10,280			10,205			8,966			6,833
Amortization of software license rights		1,118,436			-
Gain on derivative liabilities		-			(10,879	)
Amortization of resalable software license rights								1,318,559			729,755
Amortization of capitalized contract costs								59,044			-
Share-based and warrant compensation for employees and consultants		774,968			231,983			676,454			564,275
Stock based directors fees		28,025			48,999			23,021			10,008
Change in operating assets and liabilities:
Change in assets and liabilities:
Accounts receivable		1,000,950			957,024			2,424,295			715,357
Due from factor		24,888			33,380			82,202			24,176
Capitalized contract costs								(160,649	)		-
Inventory		(414,164	)		(219,591	)		16,369			(101,754	)
Resalable software license rights								9,543			75,648
Prepaid expenses and other		(18,578	)		(39,205	)		(4,041	)		16,556
Software license rights		79,607			450
Accounts payable		41,044			(607,748	)		(168,799	)		(133,215	)
Accrued liabilities		92,348			(156,000	)		(203,445	)		86,027
Deferred revenue		(324,440	)		(136,251	)		(179,683	)		(215,598	)
Net cash used for operating activities		(1,804,411	)		(3,522,994	)
Net cash provided by (used for) operating activities								98,976			(851,935	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(204,673	)		(52,976	)		(68,479	)		(140,664	)
Net cash used for investing activities		(204,673	)		(52,976	)		(68,479	)		(140,664	)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock		2,000,000						-			1,000,000
Preferred dividends paid		-			(535,100	)
Costs to issue preferred and common stock		(80,366	)		(32,620	)		(15,212	)		(80,366	)
Net cash provided by (used for) financing activities		1,919,634			(567,720	)		(15,212	)		919,634
NET DECREASE IN CASH AND CASH EQUIVALENTS		(89,450	)		(4,143,690	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS								15,285			(72,965	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		1,061,307			4,321,078			288,721			1,061,307
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	971,857		$	177,388		$	304,006		$	988,342

	September 30,			December 31,			June 30,			December 31,
	2017			2016			2018			2017

Accounts receivable - current	$	576,081		$	1,577,031		$	505,436		$	2,889,731
Accounts receivable - non current		2,070,000			2,070,000			1,720,000			1,760,000
		2,646,081			3,647,031
Total accounts receivable								2,225,436			4,649,731
Allowance for doubtful accounts - current		(13,785	)		(13,785	)		(13,785	)		(13,785	)
Allowance for doubtful accounts - non current		(1,000,000	)		(500,000	)		(1,000,000	)		(1,000,000	)
Total allowance for doubtful accounts								(1,013,785	)		(1,013,785	)
Accounts receivable, net of allowance for doubtful accounts	$	1,632,296		$	3,133,246		$	1,211,651		$	3,635,946

	Three Months Ended September 30,		Three Months Ended September 30,		Three Months Ended June 30,
	2017		2016		2018		2017

Selling, general and administrative	$	207,047	$	31,610	$	128,620	$	394,264
Research, development and engineering		21,663		25,074		20,922		18,930
	$	228,710	$	56,684	$	149,542	$	413,194

	Nine Months Ended September 30,		Nine Months Ended September 30,
	2017		2016

Selling, general and administrative	$	714,167	$	221,791
Research, development and engineering		88,826		59,191
	$	802,993	$	280,982

	September 30,			December 31,
	2017			2016

Original invoice value	$	115,001		$	214,556
Factored amount		(86,251	)		(160,918	)
Balance due from factor	$	28,750		$	53,638

	●	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~~ drivers’ licenses, campus and school ID, passports/visas;

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

	●	~~Direct sales of biometric locks to consumers and commercial customers;~~Growth in the Asia Pacific region; and

	●	~~Growth in the Asia Pacific region.~~Biometric based consumer products.

	●	Net positive cash flows related to adjustments for non-cash expenses for ~~allowances for doubtful accounts,~~ depreciation, amortization, share-based compensation, and issuance of common stock to our non-employee directors of approximately $~~2,465,000,~~$2,130,000, and a decrease in accounts receivable of approximately ~~$1,001,000, and a decrease in due from factor of approximately $25,000, an increase for payables and liabilities of approximately $134,000.~~$2,424,000.

	●	Net negative cash flows related to ~~inventory,~~payments for liabilities and reductions of deferred revenue of approximately ~~$739,000.~~$552,000.

	~~BIO-key~~	BIO-Key International, Inc.

Dated: ~~November~~August 14, ~~201~~72018		/s/ Michael W. DePasquale
		Michael W. DePasquale
		Chief Executive Officer
		(Principal Executive Officer)

Dated: ~~November~~August 14, ~~201~~72018		/s/ Cecilia C. Welch
		Cecilia C. Welch
		Chief Financial Officer
		(Principal Financial Officer)

Exhibit No.		Description



31.1		Certificate of CEO of Registrant required under Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended

31.2		Certificate of CFO of Registrant required under Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended

32.1		Certificate of CEO of Registrant required under 18 U.S.C. Section 1350

32.2		Certificate of CFO of Registrant required under 18 U.S.C. Section 1350

101.INS		XBRL Instance

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation

101.DEF		XBRL Taxonomy Extension Definition

101.LAB		XBRL Taxonomy Extension Labels

101.PRE		XBRL Taxonomy Extension Presentation