Investments in stocks are always associated with risk-taking and an investment in the Company can also be considered to be a risk, since the Company is relatively new and commercially still at an early stage. A number of factors beyond the control of the Company can influence its earnings and financial position, as is the case with several factors which the Company can influence through the measures it takes. Therefore, in addition to the information in this Annual Report, an assessment should be made of each risk factor and its importance for the future development of the Company.

The following specification of risk factors does not claim to be complete, nor are the risks ranked in their order of importance.

Risks related to operations

Technological development

The market in which the Company operates is subject to rapid change. New technology and new players are constantly appearing. The Company’s technology must therefore to a large extent be accepted by the leading players in the market, both suppliers and customers. The market must be mature enough to understand and accept the new technology supplied by the Company. This may require major investment in marketing and sales to achieve the expected sales volumes.

Key persons

There are a number of key persons in Precise Biometrics who are important for operations, especially in research and development, where they possess unique competence. If one or more of these key persons should leave the Company it could, in the short term, have a negative impact on operations. There is also the risk that the recruitment of new employees for these positions can take time and result in additional costs for the Company.

Partners

Today the Company cooperates with several different partners. They include smart card manufacturers, chip manufacturers and suppliers of applications. The Company relies on this cooperation in order to be able to offer end customers complete security solutions. There is a risk that one or more of these partners could end their cooperation or fail to achieve the expected results, which would result in a loss of expected future earnings.

Technological and market development and production

As the market in which the Company operates grows and the number of players increases, there is a risk that alternative technologies will be developed and that the price of comparable products will thereby be reduced. The Company depends on external production capacity. If the demand for components and production capacity should increase, the manufacturing costs for the Company’s products will also increase.

An increase in the demand for components could also lead to delayed deliveries, which could result in income displacement.

Patents and industrial and intellectual property rights

It is important for the Company to protect its technology through patents or other industrial and intellectual property rights, and thereby retain its technological lead and create the opportunity for license earnings in the future. The company therefore pursues an active patent strategy, which involves applying for patents for strategically important inventions in the countries where this is considered to be appropriate.

Nevertheless, it cannot be guaranteed that the Company will obtain patents in the countries where it has made applications, nor that it can protect patents that have been acquired. Over and above this, there is a risk that new technologies will be developed, which could circumvent or replace the Company’s patents. The Company does not consider that its own technology encroaches on the industrial and intellectual property rights of another party at the present time. In spite of this, it cannot be guaranteed that the patents granted to the Company will not be considered to encroach on the patents of other parties.

Competitors

The Company is active in the market for biometrics. The competition in this market is severe. The competing companies can have substantially larger financial and industrial resources at their disposal than the Company, and it cannot be excluded that competition from players like these will lead to diminished market shares and/or a reduction in the profitability of Precise Biometrics.

Financial risks

Future capital

There is no guarantee that the capital will be sufficient until the Company achieves a positive cash flow. Neither is there any guarantee that new capital can be acquired if the need should arise, or that such capital can be acquired on preferential terms.

Forecasting problems

The Company operates in a market that is in an early stage of growth and which is characterized by low initial sales levels, which implies considerable problems with accurate forecasts. Earlier or later submissions of orders can have a significant effect on annual sales and earnings.

Currency exposure risks

A large part of the Company’s expenses is in Swedish kronor (SEK), while a significant part of earnings and production costs are generated in foreign currency (mainly USD), which increases the Company’s currency exposure risks. The Company has adopted a currency exposure risk policy for the purpose of minimizing the risks in operations.

Credit risk

The Company has guidelines for awarding credit to its clients. The Company believes that there is no significant concentration of credit risks in relation to any individual client or other party.

Interest risks

The Company is not subject to any tangible interest risks.

Cash flow

The Company puts a lot of effort into minimizing the time capital is tied up, for example in inventory and accounts receivable. To reduce the risk involved in tied up capital, the Company works actively to improve the internal process for forecasting and production planning. The Company also endeavors to ensure that the long ID card projects are not an excessive burden in terms of the cash flow.

During the present financial crisis the Company has focused on cash flows and prevailing payment terms. This has resulted in Precise Biometrics increasing the stringency of its payment terms for customers.

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