The Board of Directors and the President of Precise Biometrics AB (publ), CIN 556545-6596, with headquarters in Lund, Sweden, hereby submits their Annual Report and consolidated financial statements for the fiscal year 2010.

Activities

Precise Biometrics is an innovative company that offers commercial solutions based on fingerprint recognition to establish personal identity. With cutting-edge competence in fingerprint recognition, Precise Biometrics offers rapid, reliable and secure verification.

The Company’s core technology, Precise BioMatch™, can easily be integrated in many systems –such as ID, SIM and bank cards, security circuits, access to computers, networks and physical access control. The company operates in a global market and its technology is licensed to nearly 100 million users throughout the world.

Precise Biometrics’ business concept is, together with strong partners and through global networks, to offer countries, public authorities, companies and organizations user-friendly and interoperable solutions to determine personal identity in a simple, cost-effective and reliable way.

Precise Biometrics' vision is to be a global leader and independent provider of interoperable and adaptable solutions based on fingerprint recognition intended for small secure platforms, as well as more complete, end-to-end solutions for specific segments.

The group’s most important operational objectives in the coming year and beyond include:

• Continued roll out and market leading position within the important National ID card segment, with expansion into the high volume segment for smart cards, and the SIM and bank card segment.
   
• Underpinning Precise Biometrics’ market image as a reliable supplier with core competencies and long experience of highly advanced fingerprint solutions.
   
• Precise Biometrics has continued to cultivate and package its world‐leading technology to clarify how the company solves specific problems for their customers. The company has launched several products during 2010 and will continue with product launches in 2011.
   
• During 2010 Precise Biometrics has established a strategic platform for the future development of company. From this platform an ambitious business plan to the year 2015 has been set - Plan 2015, and a new customer‐oriented organization has been developed.

The sales organization

In 2010 Precise Biometrics’ markets and sales have been organized in five geographical markets Europe (including the Nordic markets), North America, Middle East & Africa, Asia and Latin America. Read more about the geographical market in Note 3.

Precise Biometrics has during 2010 reorganized its sales organization due to increase of new business opportunities in combination with developing a more customer oriented organization. The new organization came into full effect January 1, 2011 – and consists of three business units Mobile, IAM and Access Solutions. Mobile is a brand new and strategically important business unit, from which Precise Biometrics will provide solutions for the SmartPhone and TabletPC markets.

The most important business events during the year

• Nigerian partner Interswitch is rolling out a state ID card with technology from Precise Biometrics. It’s the first project of its kind in the world, as the state ID card also includes e‐payment.
   
• Precise Biometric received two follow‐up orders for hardware from an existing customer in the Middle East at a total value of SEK 6.7 million for a Match‐on‐Card project for government employees.
   
• Precise Biometrics launched several products during the year. Among them a tool for integration of standardized Match‐on‐Card – Precise BioMatch™ ISO Match‐on‐Card; an integration tool for standardized fingerprint recognition for both PC and Mac: Precise BioMatch™ ANSI 378 and a biometric logon solution for Microsoft’s new operating system Windows 7, Precise BioMatch™ Logon for Windows 7. After the end of the year Precise Biometrics released a new family of fingerprint readers, Precise Sense™, targeted towards the banking and enterprise segments. The readers focus on cost‐efficiency, user friendliness and a high degree of functionality options.
   
• Precise Biometrics has during 2010 reorganized its sales organization due to increase of new business opportunities in combination with developing a more customer oriented organization.
   
• The Board of Directors of Precise Biometrics has resolved, subject to approval of the AGM on April 27, to undertake an issue with preferential rights for Precise Biometrics’ shareholders that will raise a maximum of SEK 54 million before deduction of issue related costs. The rights issue is carried out to realize the Company’s business plan – Plan 2015 

Patents

The group’s overall patent strategy is based on primarily applying for patents based on innovations within the company’s Match-on-Card technology. This strategy aims at guaranteeing rights to our own technology, creating value for future business, and providing protection from competitors. New patent applications will focus on mobile applications of Precise Match-on-Card™.

Since 2001, the patent portfolio has gradually been enhanced to include 68 different patents and 28 patent applications within 17 different patent families at the end of 2010. Precise Biometrics has 10 different patent families for the Match-on-Card technology alone.

Brands

Precise Biometrics works actively and strategically with its trademark portfolio which contains a few carefully selected trademarks:

PRECISE BIOMETRICS™ – registered both as a device mark and as a word mark in a number of countries

PRECISE BIOMATCH™ – comprehensive trademark for the core technology. It is also used as foundation in the branding of the software products. The trademark is registered as a Community Trademark and in the USA

PRECISE MATCH-ON-CARD™ – well established and well-known trademark of Precise Biometrics that refers for the technology to save and match a fingerprint on a smart card. The trademark is registered as a Community Trademark

PRECISE SENSE™ - the trademark for the new biometric readers

Sales and income

Sales during the financial year amounted to SEK 44.9 million (68.7). The gross margin was 61 percent compared with 52 percent in the previous year. The group’s net loss for the fiscal year was SEK -14.6 million (-21.8).

Operating expenses for the financial year amounted to SEK -42.0 million (-51.1).

Earnings per share (average number of shares) for the period was SEK -0.11 (-0.19).

Financing and liquidity

As of 31 December 2010, equity stock amounted to SEK 31.2 million (45.4) and equity per share to SEK 0.23 (0.34).

The cash flow from current operations during the year amounted to SEK -10.1 million (-21.2). Cash and cash equivalents at the end of the financial year amounted to SEK 24.5 million (40.9).

Capitalization and depreciation of development work

Development expenditures of SEK 4.5 million (1.3) were capitalized during the financial year. During the year, depreciation and writedowns of capitalized development expenditures amounted to SEK 1.6 million (2.2), of which writedowns accounted for SEK 0.3 million (0.1).

Research and development    

The R&D department works on both product development and research activities aimed at generate or further develop products, solutions and algorithms. By participating in various standardization bodies, the Company works to influence standardization development in the group’s core technology.

In 2010, Precise Biometrics has launched several software products – several of them focusing on standardization. Among the new product are:

• Precise BioMatch™ ISO Match-on-Card - a tool for integration of standardized Match-on-Card
• Precise BioMatch™ ANSI 378 – an integration tool for standardized fingerprint recognition for both PC and Mac
• Precise BioMatch™ Logon for Windows 7 - a logon product with fingerprint recognition for Windows 7.

Organization and personnel

Precise Biometrics has its headquarters in Lund, Sweden. The organization also consists of the subsidiaries, Precise Biometrics Inc. in Washington DC, USA and Precise Biometrics Solutions AB with offices in Karlstad, Sweden. The dormant companies Precise Biometrics Services AB is also part of the group. During 2010 the former subsidiary Precise Biometrics Asia Ltd has been closed.

There were 34 (36) employees at the end of the year, of which two are based in the US. Of the total number of employees at the end of the year, 24 (26) were men and 10 (10) were women.

Absence due to illness in the Group was low during the year, amounting to 1.0 (1.7) percent overall. Personnel turnover in the group was 11.7 percent (21.0).

Salaries and other remuneration, excluding payroll overheads, amounted to SEK 23.1 million (28.2) during the year.

The share

The Company’s stock is listed on the Small Cap list of the NASDAQ OMX Nordic.

The total number of registered shares at the end of the financial year was 134,960,800, and the value of capital stock was SEK 53,984,320. During the financial year, average sales amounted to SEK 1 949 thousand per day and the share price fluctuated between SEK 1.40 and 2.58.

Proposed guidelines for the compensation of leading officials  

The stockholders’ meeting decided to adopt the board of directors’ proposal for establishing guidelines for the compensation of leading officials, mainly involving remuneration and employment terms and conditions on general market and competitive terms and predetermined caps on remuneration. Bonus remuneration must not exceed 50% of the fixed annual salary for the president and 30% for other executives. Bonus remuneration for US employees must not exceed 50% of basic salary. Remuneration may also be provided in the form of options or other stock-related incentive programs.

The president is subject to a mutual period of notice of 6 months and the other executives to a period of notice of 3-6 months. Severance pay for the president may not exceed 12 months’ salary if employment is terminated at the discretion of the company. Other executives are not entitled to severance pay.

Retirement age is 65; pension premiums are calculated on a scale based on age and salary, and may amount to a maximum of 25% of the fixed salary. The proposal implies a level of remuneration that basically corresponds to the previous year.

Parent company

Parent company sales for the financial year amounted to SEK 38.8 million (57.4). Operating loss before tax for the financial year amounted to SEK -16.3 million (-23.8).

At the end of the financial year, 23 persons were employed in the parent company.

Liquid assets at the end of the year amounted to SEK 21.1 million (28.5). Investments in property, plant and equipment amounted to SEK 0.2 million (0.0).

During the financial year, capitalized development expenditure amounted to SEK 4.5 million (1.1).

Proposed treatment of accumulated loss

Parent company

The following assets are at the disposal of the annual stockholders’ meeting:

Accumulated loss, SEK…………………………………………0

Net loss for the year, SEK.........................................-16 266 877

Total accumulated loss...........................................-16 266 877

The board of directors and the president propose managing the accumulated loss as follows:

Reduction of share premium reserve SEK.............13 315 567 (in non-restricted equity)

Reduction of statutory reserve SEK......................2 951 310

Total…............................................................................16 266 877

CORPORATE GOVERNANCE REPORT 

From July 1, 2008, Precise Biometrics has applied the Swedish corporate governance code (the Code). Corporate governance is founded on the company by-laws, the Swedish Companies Act and stock exchange rules, including the Code. Precise Biometrics differs from the Code mainly when it comes to the following items:

• The company has decided to not establish a specific internal audit function. This is further explained in the section “The board of directors’ report on internal control for the 2010 financial year”
   
• The board of Directors has chosen to not establish a specific audit committee, instead the Board of Directors self constitutes the audit committee. Read more in the section “Audit Committee”
   
• The board of Directors has chosen to not establish a specific compensation committee, instead the Board of Directors self constitutes the compensation committee. Read more in the section “Compensation committee”

The Corporate Governance Report describes in outline the way in which the company applies the Code.

The Annual General Meeting

The Swedish Companies Act and the company by-laws describe how General Annual Meetings must be convened and who is entitled to attend and vote at them. The minutes of the meeting are available on the Precise Biometrics website.

The annual general meeting for Precise Biometrics AB (publ) will be held on Wednesday April 27, 2011 at 16.00 at Precise Biometrics headquarters in Lund, Scheelevägen 30.

Under the company by-laws, the meeting must be convened through announcements posted in the Post- och Inrikes Tidningar newpaper. Shareholders wishing to attend the meeting must be entered in the capital stock register by 19 April at the latest. Applications to attend the meeting must be made in the manner specified in the convening notice.

The nomination committee

Under a decision taken at the company’s General Annual Meeting held on 21 April 2010 a nomination committee must be appointed. The nomination committee must consist of representatives from each of the three largest shareholders as of 31 August prior to the General Annual Meeting and the chairman of the board of directors. The nomination committee is made up of the following persons: Kerstin Stenberg (Swedbank Robur funds), Per Brenhult (Stockpicker fonder) and Uno Jonsson (HJ Byggkonsulter AB). The Chairman of the Board, Lisa Thorsted, is also represented in the Nomination Committee, and is the convener.

The nomination committee’s proposals for the board of directors and fees paid to members of the board of directors, proposals for auditors and auditors’ fees and proposals for the chairman of the meeting must be contained in the notice convening the General Annual Meeting.

The board of directors

The members of the board of directors are elected at the General Annual Meeting. During the periods between General Annual Meetings, the board of directors of Precise Biometrics is the highest executive body.

The company by-laws contain no restrictions concerning the eligibility of the members of the board. Under the by-laws, the board of directors must consist of at least three and at the most seven members with a maximum of three alternates.

Following the General Annual Meetings in April 2008, the board of directors consisted of five ordinary members. None of the members of the board are employed in the company. The composition of the board of directors and the various tasks of its members are described under the headline “Board of directors” in the Annual report.

The work of the board of directors

The work of the board of directors complies with annually established rules of procedure. The rules of procedure include instructions to the company’s president, the tasks of the chairman of the board, the agenda of board meetings and the decision-making procedure. In 2010, the board of directors held six meetings at which the minutes were taken. Issues discussed during the year included strategy and long-term aims, organization, Corporate Governance, and quarter and year-end reports.

During the year, the board of directors also appraised the work of the board.

In addition to the ordinary meetings, the chairman and other board members were in constant contact with leading officials of the company, primarily the president and the CFO. Besides meetings where minutes were taken, the board of directors also received monthly updates on the company’s financial results and position.

Fees paid to the members of the board of directors appear in Note 26 of the financial statements.

Group executive

The Precise Biometrics executive is based at the head office in Lund. The composition of the executive as of December 31 2010 is described under the headline “Management team” in the financial statements, and is designed to shorten decision-making pathways. During the year, the group held formal weekly meetings and a strategy and budget meeting.

Compensation committee

The task of the compensation committee is to manage questions relating to salary, pension terms, incentive schemes and other terms and conditions of employment for the company executive. Proposal of guidelines for leading officials are described in the administration report in the Annual Report. The compensation committee is made up of the entire board of directors. Since the board consist of five members it has been decided that no separate compensation committee should be set up, and instead the board of directors self constitutes the compensation committee.

The audit committee

Since the board of directors consists of five members it has been decided not to form a separate audit committee. These issues are managed by the board as a whole. There are two separate Audit Committee meetings held during the year. Discussion topics in the meetings include reporting, business related risks and internal control. To provide for disclosure needs the company’s auditors report to the board of directors at least twice a year. In addition, the chairman of the board has regular contact with the head auditor.

See further below in the section “The board of directors’ report on internal control for the 2010 financial year”.

Auditors

The annual 2008 General Annual Meeting chose Öhrlings Price WaterhouseCoopers AB, with Eva Carlsvi as chief auditor, as Precise Biometrics’ auditors up to and including the General Annual Meeting in 2012. Öhrlings Price WaterhouseCoopers have been the company’s auditors since the company was established in 1998. The auditors perform assignments for other listed companies, but not to an extent which would interfere with the proper auditing of Precise Biometrics. None of the auditors have assignments which would throw doubts on their independence.

Information about the auditors’ fees may be found in the Annual Report, Note 8 for both the consolidated statements and the parent company.

Policies (within Corporate Governance)

Precise Biometrics has established a number of policies. Overall these policies represent the guidelines determined by the board of directors and executive management to govern the organization’s operations. Below is a description of the policies established by the company. All policies are revised annually.

Finance policy

This policy is intended to establish clear guidelines for how the company manages financing, currency exposure, investments, insurances, and financial and accounting reporting.

Information policy  

The information policy ensures that the company publishes consistent and correct information about its business and meets stock exchange requirements about disclosures to the stock market.

Insider policy

This policy ensures that there is no insider trading in the company stock. The company maintains a log of all transactions which may affect the stock price and the people in the company and on the board of directors who may have knowledge of these transactions. 

IT policy

This policy is intended to establish guidelines for ownership rights and the purchase of computers. The IT policy also includes stipulations as to which programs are allowed and the procedures which apply to the installation of software. Rules for internet use also form part of the IT policy.
 

Ethics policy

The company’s ethics policy deals with issues and values concerning the company’s relations with its environment, its staff, its market and its stockholders. 

Environmental policy

The purpose of the company´s environmental policy is to fulfill the policy’s guidelines regarding operations, investments and other activities and their effect on the environment. This is primarily focused on how the company is using recyclable material in its production of hardware. Another focus area is that the employees should, as to what is possible, use environmental friendly travel alternatives.

Risks

See Note 30 in the Annual report for information.

Change of control clause

There are no agreements to which the company is committed that would come into effect, cause the company to be changed, or cease to be valid, if the control of the company was changed as a result of a public takeover bid, and no agreements of such a nature that nationalization would in all probability seriously damage the Company.

The board of directors’ report on internal control for the 2010 financial year

Under the Swedish Companies Act and the Code, the board of directors is responsible for internal control. According to the Code, the board of directors must ensure there is good internal control and keep itself constantly informed about and evaluate the functioning of the company’s internal control system. The board of directors’ report has been limited only to include internal control of the financial reports. The report has not been examined by the auditors.

The control environment

In order to create and maintain an efficient control environment, the board of directors has drawn up a number of documents of significance to financial reporting. These documents include the board of directors’ rules of procedure and instructions for the president. The president is responsible for ensuring compliance in day-to-day operational work with the guidelines prepared by the board of directors. The president regularly reports to the board of directors based on established procedures, at meetings of the board and more informal update meetings.

In addition, the company auditors report to the board of directors at least twice per financial year. It should also be noted that the review of the internal control is done in the external audit.The head auditor also has regular contact with the chairman of the board.

The most important parts of the control environment are the steering documents on reporting and financial reporting. The company follows a clear procedure in relation to annual and monthly financial reporting. The closing financial statements are presented to the board of directors every month according to a predetermined template.

The company organization and the way in which business is run are also important bases for internal control. All areas of responsibility and employees have clearly defined roles. In general, the company policies are important bases for the functioning of the control environment.

Risk assessment and inspection activities

Precise Biometrics constantly assesses the current risk situation applying to financial reporting. Above all, the company examines the risk in financial statements, i.e. whether there are errors in accounting and the way in which assets and liabilities are assessed as well as the completness of these. There may also be risks associated with the management of intragroup balances. However, such risks are assessed as being minor in nature, as the company has a clear monthly financial closing process and established monitoring procedures and policies. It should also be noted that the company constantly updates its finance handbook.

Manual inspections are performed in order to prevent errors in financial reporting. The inspections are also incorporated in reporting and other IT systems.

Information and communications

The board of directors receives monthly reports from the president and CFO about the company’s financial position, progress and ongoing projects.

The company constantly informs relevant staff about updated financial reporting principles, policies and other changes to reporting requirements.

External information and communications are subject to the company information policy.

Follow-up

The board of directors and the auditing committee constantly assess the information submitted by the company executive. The company’s financial position is discussed at every board meeting and at more informal monthly update meetings. Comparisons with budgets and forecasts, along with analysis of non-compliances, are described in monthly reports.

The board of directors examines interim and year-end financial statements before they are published.

External auditing information also includes auditing internal control in the group.

In this light, the board of directors did not find it necessary to perform a separate internal audit.

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