BIO KEY INTERNATIONAL INC

The Company accounts for foreign currency transactions pursuant to ASC 830, Foreign Currency Matters ("ASC 830”). The functional currency of the Company is the U.S. dollar, which is the currency of the primary economic environment in which it operates. In accordance with ASC 830, monetary balances denominated in or linked to foreign currency are stated on the basis of the exchange rates prevailing at the applicable balance sheet date.  For foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used. Gains or losses arising from changes in the exchange rates used in the translation of such transactions and from the remeasurement of the monetary balance sheet items are recorded as gain (loss) on foreign currency transactions.

Effective January 1, 2021, the Company adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”) to reduce the cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of U.S. GAAP.  Most amendments within ASU 2019-12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of ASU 2019-12 did not have a significant impact on the Company’s consolidated financial statements.

For the three months ended March 31, 2021, cost of service increased approximately $105,000 or 150% to $175,944 due to the increased revenue and the direct support for the PortalGuard installations, compared to $70,445 for the three months ended March 31, 2020. For the three months ended March 31, 2021, license fees increased to $38,969 from $10,456 during the three months ended March 31, 2020, due largely to increase in revenue. For the three months ended March 31, 2021, hardware costs increased to $551,722 from $43,362 during the three months ended March 31, 2020, due to increased hardware revenue.

For the three months ended March 31, 2021, research, development and engineering expenses increased 31% to $441,651 as compared to $336,889 for the corresponding period in 2020. Included in the increase were personnel costs associated with PistolStar, increased expenses by our Hong Kong subsidiary in connection with the development of our newly introduced USB-C connector fingerprint readers, and increased amortization related to PistolStar intangible assets acquired, offset by reduced non-cash compensation expenses.

In 2019, we received net cash provided by financing activities of approximately $2,100,000.  We issued two convertible notes in April 2019 and June 2019 with original principal of approximately $707,000, which were paid off in July 2019 from proceeds from $3,060,000 convertible note issued in July 2019.  The July 2019 note was amended to increase principal amount to $3,789,000.  The full balance of the note was converted into common stock in 2020.