1.	NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

The Company, founded in

1993,

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

Basis of Presentation

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

not

necessarily indicative of results that

may

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

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

March 31, 2019

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

-K for the fiscal year ended

December 31, 2018,

filed with the SEC on

April 1, 2019.

Updated Significant Accounting Policies

Leases

February 2016,

the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)

2016

02,

“Leases” (Topic

842

), as amended (ASC

842

). 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

months and classify as either operating or finance leases. We adopted this standard effective

January 1, 2019

using the modified retrospective approach for all leases entered into before the effective date. Adoption of the ASC

842

had a significant effect on our balance sheet resulting in increased non-current assets and increased current and non-current liabilities. There was

impact to retained earnings upon adoption of the new standard. We did

not

have any finance leases (formerly referred to as capital leases prior to the adoption of ASC

842

), therefore there was

change in accounting treatment required. For comparability purposes, we will continue to comply with the previous disclosure requirements in accordance with the existing lease guidance and prior periods are

not

restated.

We elected the package of practical expedients as permitted under the transition guidance, which allowed us: (

) to carry forward the historical lease classification; (

)

not

to reassess whether expired or existing contracts are or contain leases; and, (

)

not

to reassess the treatment of initial direct costs for existing leases.

In accordance with ASC

842,

at the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of the lease including whether the contract involves the use of a distinct identified asset, whether we obtain the right to substantially all the economic benefit from the use of the asset, and whether we have the right to direct the use of the asset. Leases with a term greater than

one

year are recognized on the balance sheet as right-of-use (ROU) assets, lease liabilities and, if applicable, long-term lease liabilities. We have elected

not

to recognize on the balance sheet leases with terms of

one

year or less under practical expedient in paragraph ASC

842

For contracts with lease and non-lease components, we have elected

not

to allocate the contract consideration and to account for the lease and non-lease components as a single lease component.

Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The implicit rate within our operating leases are generally

not

determinable and therefore we use the incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment. We determine our incremental borrowing rate for each lease using our estimated borrowing rate, adjusted for various factors including level of collateralization, term and currency to align with the terms of the lease. The operating lease ROU asset also includes any lease prepayments, offset by lease incentives.

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

not

exercise the option.

For periods prior to the adoption of ASC

842,

we recorded rent expense based on the term of the related lease. The expense recognition for operating leases under ASC

842

is substantially consistent with prior guidance. As a result, there are

significant differences in our results of operations presented.

The impact of the adoption of ASC

842

on the balance sheet was:

	As reported		Adoption of ASC				Balance
	December 31, 2018		842 - increase (decrease)				January 1, 2019
Operating lease right-of-assets	$	-	$	602,937		$	602,937
Prepaid expenses and other	$	150,811	$	(12,595	)	$	138,216
Total assets	$	11,692,332	$	590,342		$	12,282,674
Operating lease liabilities, current portion	$	-	$	135,519		$	135,519
Operating lease liabilities, net of current portion	$	-	$	454,823		$	454,823
Total liabilities	$	1,226,110	$	590,342		$	1,816,452
Total liabilities and stockholders’ equity	$	11,692,332	$	590,342		$	12,282,674

Recently Issued Accounting Pronouncements

August 2018,

the FASB issued ASU

No.

2018

15,

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

(“ASU

2018

15”

). ASU

2018

aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update to the standard is effective for interim and annual periods beginning after

December 15, 2019,

with early adoption permitted. Entities can choose to adopt the ASU

2018

prospectively or retrospectively. The Company is currently assessing the impact ASU

2018

will have on its consolidated financial statements.

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

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

effect on the reported net loss.