Precise Biometrics — Annual Report 2017

Aug 3, 2018

ANNUAL REPORT 2017

SOLUTIONS FOR CONVENIENT AND SECURE IDENTITY VERIFICATION

CONVENIENT AND SECURE IDENTITY AUTHENTICATION FOR EVERYONE, EVERYWHERE

This report contains prospective information based on Precise Biometrics' current expectations. Even if company management considers expectations based on such prospective information to be reasonable, no guarantee can be given that these expectations will prove to be correct. Consequently, actual future results may vary significantly compared with what is set out in the prospective information, for reasons including changed conditions in respect of the economy, market and competition, changes in legal requirements and other political measures, exchange rate variations and other factors. The Annual Report is published in Swedish and English. The Swedish version is the original version and has been audited by Precise Biometrics' auditors.

CONTENTS

The year in brief	4
This is Precise Biometrics	6
Chairman's comments	8
Payments and financial services are driving the biometrics market	10
Our business	14
A developmental workplace	28
Sustainability	31
Administration Report	32
Consolidated income statement & statement of comprehensive income	42
Consolidated balance sheet	43
Consolidated cash flow statement	44
Change in equity in the group	45
Note, Group	46
Parent company's income statement & statement of comprehensive income	67
Parent company balance sheet	68
Parent company's cash flow statement	69
Change in equity in the parent company	70
Notes, Parent company	71
Assurance	84
Audit Report	85
Corporate Governance Report 2017	89
Auditor's statement on the Corporate Governance Report	95
Financial glossary	96
Annual General Meeting	97
Financial calendar	98
The share and shareholders	99
Share capital development over the last ten years	100
Shareholder statistics	102

THE YEAR IN BRIEF

Precise Biometrics' net sales fell as a consequence of fewer orders won in the market for capacitive sensors for mobile phones. To better meet the demands of mobile manufacturers, there was greater collaboration with many of the company's customers, several of which operate in the field of ultrasound and opticaal sensors, which are expected to generate new business opportunities in 2018. Precise Biometrics strengthened its position in the market for biometric cards thanks to successful test projects, new business partners and an enhanced product offering. Precise Biometrics signed six new licensing agreements with sensor manufacturers and module houses, thereby continuing to widen the distribution channel for the company's solutions for both mobiles and biometric cards.

PRECISE BIOMETRICS IN FIGURES

• 61.0 Net sales, SEK million
• 93.3 Gross margin, %
• -13.9 Operating profit, SEK million
• 91.9 Working capital, SEK million
• 154.4 Average equity, SEK million
• 76.9 Equity/assets ratio, %
• 22.8 Operating cash flow, SEK million

THE COMPANY IN BRIEF

Founded 1997 Head office in Lund, Sweden Operations in Europe, Asia, USA Approximately 45 employees & consultants Listed on Nasdaq OMX Stockholm 2000

DID YOU KNOW THAT OUR SOLUTIONS

Verify a finger in hundredths of a second with a level of security five times higher than a four-digit PIN code

Are found in almost 200 mobile devices from more than 40 mobile manufacturers and in 160 million national ID cards

Are used hundreds of millions of times every day by people all over the world

Gross margin

IMPORTANT EVENTS 2017

SIGNED SIX NEW LICENSING AGREEMENTS, INCLUDING ONE WITH NXP, A LEADER IN THE FIELD OF SECURE CONNECTED SOLUTIONS FOR EMBEDDED APPLICATIONS

PRECISE BIOMATCH MOBILE WAS INTEGRATED INTO QUALCOMM'S NEW GENERATION OF ULTRASOUND SENSORS

SEK 17.5 million

AN EXTENDED LICENSING AGREEMENT WAS SIGNED WITH AN EXISTING SENSOR CUSTOMER WITH GUARANTEED LICENSING REVENUE OF AT LEAST SEK 17.5 MILLION OVER 2 YEARS

13 PHONES LAUNCHED WITH PRECISE BIOMATCH MOBILE

PRECISE BIOMATCH EMBEDDED WAS INTEGRATED INTO THE WORLD'S FIRST BIOMETRIC CONTACTLESS PAYMENT CARD FROM AIRPLUS INTERNATIONAL

ACQUIRED NEXID BIOMETRICS IN ORDER TO BE ABLE TO OFFER INCREASED SECURITY OF THE COMPANY'S FINGERPRINT SOFTWARE THROUGH LIVENESS DETECTION

LAUNCHED A SECURITY SUITE WITH SOLUTIONS FOR SPOOF AND LIVENESS DETECTION TO ENABLE SECURE MOBILE PAYMENTS

DECISION MADE TO DISPOSE OF THE MOBILE SMART CARD SOLUTIONS BUSINESS AREA TO IDENTOS GMBH

THIS IS PRECISE BIOMETRICS

ACTIVITIES

Precise Biometrics is a supplier of solutions for convenient and secure authentication of people's identity. The company develops and sells fingerprint recognition software that is optimized for products with small sensors and limited platforms such as smartphones, tablets, smart cards and wearables. Precise Biometrics' fingerprint software is technology-neutral, which means that it can be integrated into all current and future sensor technologies and also all hardware platforms. The company's fingerprint technology is based on 20 years' research and is developed by one of the most prominent R&D teams in the world in the field of fingerprint software. The company's solutions have been integrated into almost 200 mobile devices from over 40 smart phone manufacturers and into 160 million national ID cards, and they are used hundreds of millions of times every day by people all over the world.

Precise Biometrics also offers services and solutions for spoof and liveness detection. The company's software for identifying false fingerprints can be integrated with full-scale and small sensors in order to further enhance security in fingerprint recognition. Precise Biometrics'

liveness detection technology is based on more than ten years of research and close collaboration with Clarkson University, a leading authority in the field of biometric research.

MARKET

Precise Biometrics operates in a rapidly growing market with increasing demand for fingerprint software for small sensors. It is estimated that in 2018 there will be 900 million smartphones fitted with fingerprint technology, excluding Apple products. This represents a 20% increase compared with the previous year. The rapid growth of fingerprint technology in mobile devices is driving development in new product areas such as payment cards, smart cards, door locks and cars. Fingerprint technology has particularly high growth potential in the area of biometric payment cards, where the annual addressable market totals almost three billion cards.

CUSTOMERS

Precise Biometrics' fingerprint software is sold to sensor manufacturers, security companies and systems integrators. The company has over 30 customers that cover different sensor technologies and geographical regions in both the mobile market and the market for new product areas. The broad customer base and the technological independence of the software form the basis of a scalable business model that enables efficient sales and global distribution of the company's products. The company's customers include companies such as Elan Microelectronics, Fingerprint Cards, Focaltech, NXP, Idemia, Samsung Electronics, Silead, Synaptics and Qualcomm.

ABOUT THE COMPANY

Precise Biometrics has its head office in Lund and a facility in Karlstad, both in Sweden, and an office in Potsdam, USA. The company operates with local sales representatives in China, Taiwan and South Korea. The company has about 45 employees including consultants, with most key personnel having worked at the company for over ten years. The Board of Directors and management of Precise Biometrics have extensive experience in the areas of IT, telecoms and smart cards. Precise Biometrics has been listed on Nasdaq OMX Stockholm since 2000.

THE CHAIRMAN'S COMMENTS

The market for capacitive fingerprint sensors for mobile phones in the higher price segments was characterized in 2017 by increased pressure on price and tougher competition, with a small number of suppliers dominating the market. We can conclude that the company, together with its customers, did not win the business we expected in this segment during the year.

We are now seeing a shift in the market for capacitive sensors, which is gradually being transformed into a volume market primarily for mobile phones in the lower price segments. This new market has been created as a consequence of the pressure on price that is prevailing, and it has opened up the opportunity to use capacitive sensors in cheaper mobile phones in several geographical markets. The company has several customers working in this segment.

We are also seeing the design of mobile phones in the higher price segments moving towards displays that cover the entire front side, while at the same time induction charging ("wireless charging"), which requires a glass back, is growing. In both cases, optical or ultrasound sensors are the best alternative for a fingerprint solution. We have more than ten customers working with such sensors.

Precise Biometrics is supplying fingerprint software for smart cards to the first pilot project in the USA with biometric payment cards, which is being carried out by Visa and Mountain America Credit Union. The payment card can be used for contactless payments, where authentication takes place by placing the finger on the card's fingerprint sensor in connection with payment. This enhances both the user experience and security for contactless payment cards. The card can also be used in the retail sector's existing infrastructure, which reduces the introductory phase for putting it into commercial use. The pilot project is a milestone in the development of biometric payment cards and enhances our position in the market.

Our vision of convenient and secure authentication of identity for everyone, everywhere, is more relevant now than ever. Biometrics will increasingly replace passwords and other forms of authentication for cars, door locks and wearables, areas in which we are involved in several projects and intend to drive and continue to be part of developments in the future.

We look forward to seeing Stefan K. Persson, with his extensive experience of China and business development in technology companies, take over as the company's CEO by August 1 at the latest. He will further intensify our focus on the broad application of biometrics.

The company is in a strong financial position, which allows for continued investments in the future markets we have identified and where we hold an attractive position, which means that all in all I have a positive view of the company's outlook.

PAYMENTS & FINANCIAL SERVICES ARE DRIVING THE BIOMETRICS MARKET

Fingerprint technology is well on the way to becoming the standard in smartphones and tablets. The combination of convenience and security has resulted in an increase in the use of fingerprint technology for personal identification in a number of different applications. The next major expansion will be in the field of payments and financial services.

The use of mobile smart devices with fingerprint technology continues to grow. The combination of user-friendliness, high security and low cost has made fingerprint technology the natural choice for authentication in mobile devices. According to research firm Acuity Research, biometric sensors will be standard in all mobile phones by the year 2020. We have become used to using our smartphones with biometric solutions so that we can conveniently access more and more private and professional services. This is why mobile devices with integrated biometric solutions are on the way to becoming the natural means of personal identification. This will have the effect that in the future we will be using mobile devices for documents such as passports, drivers' licenses and payment cards.

CONTINUED GROWTH IN THE MARKET FOR BIOMETRIC MOBILE DEVICES

Acuity Research believes that the market for smart mobile devices with biometrics will increase at an average annual growth rate of around 41 per cent during the period 2016 until 2022, when it is expected to be worth 50.6 billion US dollars. This figure includes biometric sensors, software, apps and financial transactions that require biometric authentication. The research firm Goode Intelligence believes that in 2020 just over 1.1 billion fingerprint sensors for mobiles and tablets will be sold, excluding Apple products. This is an increase of around 50 per cent compared with the volume in 2017.

NEW SENSOR TECHNOLOGIES REACH THE MARKET IN 2018

There is a technology shift under way towards new sensor technologies in the mobile market, partly as a consequence of demand from mobile phone manufacturers for full-screen displays. Both optical and ultrasound sensors can be placed beneath and in the display without adapting the mobile's case, providing a more attractive design and simplifying the mobile's production process. It also offers new opportunities for users, such as using the fingerprint sensor under water. The increased interest in ultrasound and optical sensors is expected to broaden the sensor market and open up opportunities for new suppliers.

SECURE MOBILE PAYMENTS A DRIVING FORCE FOR BIOMETRICS

According to Acuity Research, the number of transactions processed using mobile biometric verification is expected to rise by almost 44 per cent each year between 2016 and 2022. According to the Biometrics Research Group, in 2020 biometrics for financial products and services will represent one third of the total market for biometric solutions. Major mobile payment services such as Apple Pay, Samsung Pay

Fingeravtryckssensorer smarta mobila enheter ex. Apple (Miljoner) Fingerprint sensors in smart mobile devices excl. Apple (millions)

Källa: Goode Intelligence Source: Goode Intelligence

and MiPay already support fingerprint authentication. More and more leading banks, financial institutions and e-commerce services are following suit and supporting payments using biometric authentication, which is increasingly able to replace passwords and PIN codes to authenticate payments and transactions. The increased use of fingerprint technology for mobile payments is being driven partly by user-friendliness, but also by increased security requirements and legislation.

REQUIREMENTS FOR BIOMETRIC TWO-FACTOR AUTHENTICATION

Banks, the payment card industry and legislators all over the world are now setting stricter requirements for identity proofing in connection with biometric authentication. Biometric two-factor authentication, in which fingerprint technology is supplemented with authentication via another biometric modality, offers stronger identity proofing.

The PSD2 Directive (European Banking Authorities Payment Services Directive 2), which came into force at the beginning of 2018, specifies requirements that electronic payment services and bank transactions within the EU and the European Economic Area must offer two-factor authentication for stronger identity proofing. At present a PIN code combined with fingerprint verification is usually used for two-factor authentication. A PIN code is, however, less user-friendly and provides weaker protection against undesired intrusion than biometric authentication. Fingerprint technology can be supplemented with other modalities such as facial recognition and behavior-based recognition. The launch of phones from both Samsung and Apple with facial recognition is an indication that more and more smart mobile devices will be offering more forms of authentication.

ANTI-SPOOFING IMPROVES SECURITY

With the increased use of biometrics for personal identification, demands are increasing from industry actors and legislators for greater security against fraud and identity theft, which have increased significantly in recent years. Annual losses from online fraud and identity theft run into the billions. Research firm Javelin Strategy & Research estimates that in the USA alone, fraud and identity theft cost consumers a total of 16 billion dollars in 2016, an increase of 16 per cent compared with the previous

year. Fingerprint technology with spoof and liveness detection increases the security of biometric authentication by identifying false fingerprints, thus reducing the risk of fraud.

SMART BIOMETRIC PAYMENT CARDS EXPECTED TO GROW QUICKLY

According to analysts, biometric payment cards are expected to be a major growth market for fingerprint technology in the next few years. There is currently an annual addressable market of almost three billion payment cards. Contactless payment cards have already achieved a high level of penetration in several geographical markets, primarily in Asia. The combination of contactless payment cards with fingerprint authentication increases protection against identity theft and fraud, while at the same time being more user-friendly than traditional contact cards using PIN code verification. This technology shift is appreciated by card customers; for example, 93 per cent of UniCredit Bulbank's European customers responded in a survey from 2017, after taking part in a test project with biometric cards, that they would prefer these cards ahead of cards with PIN codes. This was one of many successful test projects featuring biometric payment cards in 2017.

One challenge for commercial launches of biometric payment cards is the technology. To produce cost-efficient biometric smart cards, you need small sensors and energy-efficient microprocessors. A good user experience and a high level of security require an algorithm solution that is both powerful and efficient in order to meet the tough demands on matching speed, biometric performance and power consumption that exist in an environment as limited as a smart card. Technological developments are moving ahead quickly, and solutions were launched in 2017 that can be used for commercial biometric payment cards. Demand for biometric smart cards is

This is Precise Biometrics | 13 PAYMENTS & FINANCIAL SERVICES ARE DRIVING THE BIOMETRICS MARKET13

also high in other areas of application. One interesting example is the EU Commission's Horizon 2020 program, which is evaluating biometric smart cards to create secure payment, access, entry and ID card solutions for EU citizens.

GROWTH IN IOT SOLUTIONS

Convenience and security mean that fingerprint solutions are also growing in different areas of application such as biometric cards for access solutions as well as IoT products, including those for smart homes. For example, according to research firm Transparency Market Research (TMR), digital locks with biometrics accounted for 67 per cent of the market for digital door locks in 2016. According to TMR, the value of the total market for digital locks is expected to increase from one billion US dollars in 2016 to over 15 billion US dollars in 2025, an average annual increase of 32 per cent.

WHAT IS BIOMETRICS?

The word biometrics comes from the Greek words bi'os (life) and me'tron (measure). The Biometrics Research Group defines biometrics as measurable physical and behavioral properties that make it possible to authenticate an individual person's identity. Biometrics is used as a collective term for the technologies used to measure a person's unique characteristics and thus authenticate his or her identity.

BIOMETRIC TECHNOLOGIES

Biometrics involves measuring either an individual's personal attributes (e.g., fingerprint, iris) or something they do (e.g., movement patterns, speech). Biometric technologies are automatic systems set up in order to: (1) collect biometric information (e.g., fingerprints) from a person; (2) extract information from the material for a template; (3) compare information from templates saved previously; (4) determine whether the biometric information is identical. Biometric technologies therefore consist of both hardware (e.g., fingerprint sensor), which can physically read the biometric information, and software, which together with the hardware gathers biometric information in order to extract, compare and match the information.

USER EXPERIENCE

The key to the user experience of a biometric solution is that it works to the highest possible level of security (accuracy) and that it achieves the highest possible speed for processing the information so that the individual can be authenticated. This means that the time from the point when a person's unique physical characteristics start to be read until the person is either given access or rejected must be as short as possible.

FAR/FRR

The terms FAR (False Acceptance Rate) and FRR (False Rejection Rate) are used to describe the security of a solution. These terms have a symbiotic relationship with one another and are determined by the limits in the software. A low FAR means a more secure solution (no unauthorized persons are allowed in), but it can result in a high FRR (more authorized persons are denied). A high-quality biometric system with a good user experience provides rapid authentication and has a high level of accuracy (low FAR and FRR values). A four-digit PIN code corresponds to a security level of 1/10,000, which means that one person in 10,000 gains unauthorized access. This can be compared with the high level of security commonly used for fingerprint technology in modern mobile phones, where one user in 50,000 gains unauthorized access. This level of security is even higher in certain phones.

OUR BUSINESS

CONVENIENT AND SECURE IDENTITY AUTHENTICATION FOR EVERYONE, EVERYWHERE

Precise Biometrics' business is based on the premise that it must be convenient and secure to unlock your phone, access internet services, make payments and other everyday activities that require identity verification.

The company's vision is more relevant now than ever. We are drowning in services that require user names and passwords in order to gain access to them. So we make our passwords easy to remember and use the same or similar passwords for several services. The password will be easy to remember but it will not be secure or convenient. Precise Biometrics' vision is to enable convenient and secure identity authentication for everyone, everywhere.

BUSINESS CONCEPT

Precise Biometrics' business concept is to work together with strong partners to offer biometric authentication of digital identity that enable convenient and secure access to systems and information, and to perform secure transactions.

BUSINESS MODEL

Precise Biometrics develops and sells fingerprint software to sensor manufacturers, security companies and systems integrators. The company's revenues are based on three sources: Licensing revenues for the right to use the company's technology, royalties per product sold with the company's software and services.

MISSION

WE PROVIDE CONVENIENT & SECURE AUTHENTICATION OF DIGITAL IDENTITY, ENABLING ACCESS TO SYSTEMS, INFORMATION & RESOURCES

VISION

CONVENIENT & SECURE AUTHENTICATION OF IDENTITY FOR EVERYONE, EVERYWHERE

GROWTH STRATEGY

Precise Biometrics has identified four areas on which the company is focusing in order to create growth.

Capacitive sensors for mobile phones

This is the company's main market. Precise Biometrics' algorithm solution is integrated into customers' products and the company continues to be active in this market. Increased price pressure on capacitive sensors is driving growth in low-price smartphones, which is opening up additional business opportunities.

In-display sensors for high-end mobile phones

The design of mobile phones in the upper price segment is moving towards displays that cover the whole front. Optical or ultrasound sensors are the best alternative for a fingerprint solution that is integrated in or under the display. The company has more than ten customers working with such sensors.

Smart cards

Demand is increasing especially for contactless biometric payment cards. These cards reduce fraud and increase the convenience of contactless payments. Precise Biometrics is collaborating with several customers in projects for biometric cards.

New applications

Biometrics will increasingly replace passwords and other authentication methods in new areas of application such as cars, door locks and wearables. The need for security, convenience and the ability to personalize devices is driving the demand. The company is involved in several projects and intends to drive and continue to be part of the development in the future.

FOCUS AREAS FOCUS AREAS

PRODUCT PORTFOLIO

Precise Biometrics develop and sell fingerprint software for convenient and secure authentication of people's identity. Precise Biometrics' solutions are based on generic software that can be integrated into all kinds of sensors, operating systems, platforms or end products with fingerprint technology.

The company offers algorithm solutions for two different product areas, Precise BioMatch Mobile and Precise BioMatch Embedded, as well as a security suite of solutions and services that protects fingerprint sensors against false fingerprints, Precise BioLive. Precise Biometrics' patented software provides the best user experience for products with small sensors and platforms with limited processing power and memory.

PRECISE BIOMATCH™ MOBILE

Algorithm solution for fingerprint recognition in mobile phones and tablets.

PRECISE BIOMATCH™ EMBEDDED

Algorithm solution for fingerprint recognition in products with small sensors and limited platforms, such as smart cards, wearables, locks and cars.

PRECISE BIOLIVE™ Algorithm solution for spoof and liveness detection of fingerprints.

PRODUCT DEVELOPMENT

The Research and Development Department has been strengthened with experienced algorithm developers and project managers. More integration specialists have also been hired in the important Chinese market to enable the company to offer better local support and customized solutions for a growing number of sensor customers.

Precise Biometrics has a strong focus on the continuously developing the software for mobile devices, Precise BioMatch Mobile, in order to support smaller sensors and meet increased requirements for biometric performance. The company has also been working to support emerging sensor technologies, such as ultrasound and optical technology, which are the best alternatives for placing fingerprint sensors under glass, displays and metal in mobile devices. The sensors make it possible to produce mobile screens that cover the entire surface of the phone, from edge to edge, giving the mobile an attractive design and a better user experience. The location of the sensors sets higher demands on image improvement, which is an important part of the company's development efforts. Precise Biometrics is running a number of interesting customer projects in this area.

Precise Biometrics has also incorporated Precise BioLive, software for anti-spoofing and liveness detection that was acquired from NexID Biometrics, into Precise BioMatch Mobile. The company is working to benefit from even more synergies between the algorithms for fingerprint matching and anti-spoofing in order to improve security with a minimal impact on biometric performance.

Precise Biometrics has upgraded the company's industry-leading fingerprint solution, Precise BioMatch Embedded, which is an important component for the growth of smart biometric payment cards. The more powerful and more efficient version of the software supports even smaller fingerprint sensors and limited microprocessors, making it possible to produce energyefficient and cost-efficient biometric smart cards.

OUR SOFTWARE

Verifies a finger in hundredths of a second with a level of security five times higher than a four-digit PIN code

Is found in almost 200 mobile devices from more than 40 mobile manufacturers and in 160 million national ID cards

Is used hundreds of millions of times every day by people all over the world

1. A biometric sensor produces an image of the ngerprint.
2. An algorithm extracts the ngerprint's unique charac teristic from the image and creates a template.
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3. At enrolment, the template is saved in a secure place in the device.
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4. An algorithm compares the new template with the one enrolled.
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5. A similarity score is calculated.
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6. A predened threshold score determines whether it is a match or not.

HOW THE TECHNOLOGY WORKS

The company's fingerprint software consists of advanced algorithm solutions that process, analyze and verify images of fingerprints. This software is key to the user experience of fingerprint technology. The company's software solution for spoof and liveness detection enhances security in fingerprint recognition by protecting the fingerprint sensor against false fingers.

CUSTOMERS

The company's customers encompass both established market leaders and new players in the field of fingerprint technology and include sensor manufacturers, security companies and systems integrators. The company's customers, also partners, encompass several different sensor technologies and provide it with a strong, broad platform for effective sales and distribution in both current and new product areas.

SENSOR TECHNOLOGIES SENSOR TECHNOLOGIES

OPTICAL UNDER DISPLAY

ULTRASOUND UNDER DISPLAY

ULTRASOUND UNDER METALL/GLASS

ULTRASOUND/OPTICAL IN DISPLAY

TECHNOLOGICAL DEVELOPMENT IN THE SENSOR

MARKET DEVELOPMENT Challenging market for capacitive sensors

The rapid growth in the market has resulted in tough competition among capacitive sensor manufacturers. The market is dominated by a small number of suppliers who came early to the market. The mobile phone manufacturers' constantly increasing demands for smaller sensors, increased performance, lower price and delivery time have favored the already established suppliers and made it more difficult for Precise Biometrics and its customers. This has resulted in fewer deals than expected in this segment.

The market for capacitive sensors is gradually being transformed into a volume market primarily for mobile phones in the lower price segments. This new market has been created as a consequence of the pressure on price that is prevailing, and has opened up the opportunity to use capacitive sensors in cheaper mobile phones and in several geographical markets. The company has several customers working in this segment.

New smartphone design changes the sensor market

There is a technology shift on the sensor market, driven by the demands of mobile phone manufacturers for displays that cover the entire front, while at the same time induction charging ("wireless charging"), which requires a glass back, is growing. In both cases, optical or ultrasound sensors are the best alternative for a fingerprint solution. Full-screen displays create a better user experience of the mobile phone for consumers. Induction charging is becoming an increasingly important function, which means that the back of the mobile phone is often made of glass.

The ongoing technology shift is changing the competitive situation in the sensor market. Suppliers of ultrasound and optical sensors are challenging the market leaders. Qualcomm is one of the company's customers that has been early to the market with

2014 2018 2022 * Based on the company's and analysts' assessment of market developments

ultrasound technology, launching a new generation of sensors during the Mobile World Congress in Shanghai. The technology was displayed in a modified version of VIVO XPlay 6 and uses Precise BioMatch Mobile. Precise Biometrics has more than ten customers offering ultrasound or optical fingerprint sensors, which makes the company well positioned for a technology shift.

Increasing interest in biometric cards

The market for biometric cards is becoming increasingly attractive, especially for payment cards. Almost three billion payment cards are issued every year, which creates a great market potential. Precise Biometrics is supplying fingerprint software to the first pilot project in the USA with biometric payment cards, which is being carried out by Visa and Mountain America Credit Union. The payment card can be used for contactless payments, where authentication takes place by placing the finger on the card's fingerprint sensor when paying. This enhances both the user experience and security for contactless payment cards. The card can also be used in the retailer's existing infrastructure, which reduces the introductory phase for putting it into commercial use. The pilot project is a milestone in the development of biometric payment cards and enhances the company's position in the market.

Precise Biometrics is involved in several card projects. In the fall of 2017, the world's first contactless biometric payment card was introduced by AirPlus International with Precise BioMatch Embedded.

There is also a demand for the use of smart cards in other areas of application, especially for convenient and secure physical access. One example of this is the biometric smart card developed by MeReal Biometrics for Pleinair Casino to manage their employees' access and time and attendance recording. Another example is CardLab's reference design for a biometric smart card for EU citizens. Precise Biometrics' solution is being used in both cases.

Fingerprint technology spreading to more areas of application

The growing use of fingerprint technology is increasing demand for the use of the technology in more product areas. Different kinds of personal devices, such as wearables, are one product area where the company believes that demand will increase as

"PRECISE BIOMETRICS HAS MORE THAN THIRTY LICENSING AGREEMENTS WITH CUSTOMERS COVERING VARIOUS SENSOR TECHNOLOGIES, GEOGRAPHICAL REGIONS & PRODUCT AREAS."

the technology becomes more mature. Another example is gaming, where game controls with fingerprint technology can be used to facilitate personal settings and payments. Cars are another area of interest, where the first concepts have already appeared with sensors on door handles and starter buttons. The combination of user-friendliness, high security and low cost makes fingerprint technology the natural choice for authentication in a number of products, and it will increasingly replace passwords and other forms of authentication. Precise Biometrics is involved in several projects in new areas of application and intends to drive and continue to be part of the development in future.

Continued stable growth in customers

The growth of new customers continued in 2017 and a total of six new licensing agreements were signed. The agreement signed by the Chinese module house O-Film has reinforced the company's distribution channel for fingerprint software for mobile manufacturers and is the company's first agreement with a module house. O-Film is a leading supplier of modules for fingerprint sensors with several well-known sensor manufacturers as customers. Precise Biometrics signed a licensing agreement with Haptrics, a South Korean sensor manufacturer that focuses on the low-price segment in mobile phones, as well as an agreement with an Asian display manufacturer that is developing a new generation of displays for mobile phones in which fingerprint recognition is part of the display. The agree-

ment signed with NXP, a leader in the field of secure connected solutions for embedded applications, opens up opportunities for collaboration in several areas for secure identification, especially in the field of contactless biometric payment cards.

Precise Biometrics now has more than thirty licensing agreements with customers covering various sensor technologies, geographic regions and product areas. The broad customer base creates opportunities for growth, with global reach for the distribution of the company's solutions. Almost all customers have the agreement for mobile devices (Precise BioMatch Mobile), almost half of them also have the agreement for other product areas such as smart cards, wearables and IoT products (Precise BioMatch Embedded). ⁰

PRECISE BIOMETRICS' CUSTOMER GROWTH

PRECISE BIOMATCH EMBEDDED INTEGRATED INTO THE WORLD'S FIRST CONTACTLESS BIOMETRIC PAYMENT CARD

AirPlus, a world leader in the field of corporate travel management, has carried out the world's first successful use of a contactless biometric payment card with Precise BioMatch Embedded as part of the solution. Using the card, AirPlus's travelers will be able to easily verify transactions through contactless payment.

Global acceptance and the use of fingerprint technology is increasing the level of interest in using the technology in more and more products. Payment and card suppliers in particular can see major potential in integrating the technology into payment cards, as it enables greater convenience and more secure authentication at a reasonable cost. Payment cards contain an Embedded Secure Element (eSE), a processor chip that processes and stores sensitive data securely. Performing a fingerprint match in an eSE is a tough challenge, as the processors are limited in terms of speed and available memory for data storage. Furthermore, due to the cost, fingerprint sensors in a payment card must be very small, which sets even tougher demands on the software, which must be both efficient and powerful enough to meet the requirements for matching speed and biometric performance.

Using Precise Biometrics' powerful and efficient algorithm solution optimized for smart cards, Precise BioMatch Embedded, fingerprint matching and the storage of a template with information about the fingerprint can be performed inside an eSE. This reduces the risk that the fingerprint template can be stolen, and at the same time payment with the card becomes more convenient and more secure for the user.

AirPlus, a world leader in the field of corporate travel management, has chosen to integrate a fingerprint solution for biometric cards with Precise Biometrics' software. The card, which is in a test phase, will provide AirPlus's travelers with access to new, innovative technology that improves convenience and security in connection with contact and contactless transactions.

WE HAVE EXCITING TIMES AHEAD OF US

- Interview with Fredrik Sjöholm, Senior Sales Director & responsible for business development

Recent years, the interest in biometrics have increased in a number of different areas. "We have exciting times ahead of us, and Precise Biometrics is well positioned for the changes waiting around the corner," says Fredrik Sjöholm, who is responsible for business development at Precise Biometrics.

One clear trend in Precise Biometrics' primary focus area, fingerprint technology for mobile devices, is solutions with ultrasound and optical sensors, which are now starting to be integrated into mobile phones. "This is being driven by the trend towards mobile phones with fullscreen displays. Placing the sensor beneath the display enhances the user experience as you get a bigger screen, and the manufacturing process is also made simpler as you don't need to create cutouts for the sensor in the display. This opens up more business opportunities for us, as our algorithm solution work with all sensor technologies. We have close collaboration with many of our customers in order to help them bring these new sensors to market," says Fredrik Sjöholm.

Smart cards are another area where interest in biometrics is growing rapidly. "Putting a fingerprint sensor in a card is an ideal solution for contactless payments. It's easier for the user to verify a payment by simply placing their finger on the card instead of having to key in a PIN code. You can also perform contactless payments even for bigger amounts, which are limited at present," Fredrik Sjöholm.

Banks and card issuers view biometric payment cards as one way of enhancing the security of contactless payments and thereby reducing the risk of fraud. It is also a new, innovative technology, which is attractive for card manufacturers as it increases value of their offering. A number of market tests of biometric payment cards are currently ongoing, and Precise Biometrics is involved in many of these. "Working with smart cards is in our DNA. We've been working with this for just over 20 years and have leading technology in this area. Efficient algorithms are crucial if biometric cards, with their very limited hardware platform, are going to provide a good user experience with high security," says Fredrik Sjöholm.

He is seeing a few more trends as the use of biometrics spreads to more and more areas. "Biometrics used to be a way of identifying fraudsters and criminals, and was used primarily by the police and various authorities, for example to check IDs at border checkpoints. Acceptance among consumers hasn't been particularly high. The use of fingerprint technology in mobile phones has made biometrics acceptable to the general public, and biometrics is increasingly becoming a form of authentication for both consumers and within companies. This opens up opportunities for a new kind of use for biometrics, where in addition to simply being used for identification, it's a way of personalizing the things we interact with, for example cars and smart homes," says Fredrik Sjöholm.

Another trend is multi-factor authentication to protect payments and the use of financial services against fraud and identity theft, areas that are increasingly governed by various regulations. "Biometrics is ideal for meeting the tougher requirements on secure authentication without making the process more complicated for the customer. The combination of something that you are, such as your fingerprint, and something you have, such as your phone, is a much faster and more secure way to verify yourself compared with passwords, PIN codes or other similar systems. The next step is multi-factor authentication based on biometric modalities, in which fingerprint technology is supplemented with, for example, facial recognition or behavioral biometrics," says Fredrik Sjöholm.

"The launch of both Apple and Android smartphones with facial recognition will likely result in our smart mobile devices being equipped with more biometric modalities for authentication. We're keeping a very close eye on this development," concludes Fredrik Sjöholm.

INTERVIEW

A DEVELOPMENTAL WORKPLACE

Precise Biometrics aims to be an attractive workplace where creative people are happy, inspired and develop. We therefore have a culture that values initiative and employees' ambitions, and allows scope for personal development. The engagement, competence and loyalty of our employees, combined with our common values base, are decisive for Precise Biometrics in order to continue to be the market leader. Weare having a dialog about the company's objectives in order to create, drive and strengthen the community. Our employees' creativity and constant desire to evolve are valued highly and constitute an important success factor. All employees are proud of the fact that the company's products and solutions are used hundreds of millions of times every day. Precise Biometrics has five core values, that are deeply rooted within the staff and represent the foundation on which the company is governed:

OPENNESS: We are open, honest and responsive.

INNOVATION: We seek, strive and work together to create innovative ideas that meet our customers' needs.

RELIABILITY: We assume responsibility and keep our promises.

ENGAGEMENT: We always do our best and the work we produce has a direct impact on the success of our customers and our companies.

The company works actively to attract and retain employees with the right competence. Precise Biometrics encourages further education and offers benefits such as an occupational health care plan, result-based variable pay and an option plan. Many employees have worked for the company for a long time and have extensive experience in developing and selling solutions featuring fingerprint technology.

ONE DAY AT PRECISE BIOMETRICS

IN BRIEF Name: Mark Cornett Age: 60 Working at Precise Biometrics since: 2017, when Precise Biometrics acquired NexID Biometrics Works as: Senior Sales Director, North America

Leisure interests: I enjoy looking after the garden and growing things in my kitchen garden. I also enjoy watching professional baseball and ice hockey.

What's a normal working day like for you?

In the mornings I'm very busy responding to emails that have arrived overnight from Europe and Asia. I usually also take part in video conferences with colleagues and customers. Later in the day I plan and carry out various business development activities related to our customers in North America. I also prioritize our operational activities at our office here in Potsdam, NY, and provide support to our customers with the "on-boarding" process of BioLive, our software for spoof and liveness detection of fingerprints.

What's the most enjoyable thing about your job?

I get the most out of the intercultural interactions I have every day with the employees in our organization and with our partners and customers, whether it's welcoming visitors here in Potsdam or when I travel with colleagues to meet customers and partners all over the world.

What do you think will be the next big thing in fingerprint technology/ biometrics?

Apart from the ongoing development of fingerprint technology, for example with optical and ultrasound sensors being installed beneath displays in smartphones and IoT applications, I believe that fingerprint biometrics will converge with other modalities in order to create systems for multi-factor authentication. This, combined with both physiological and user-based factors, is making the concept of continuous authentication feasible. This development supports the growing need for efficient identity and access management.

What's a normal working day like for you?

I travel a lot, visiting our customers and helping them with technical matters. I also have technical discussions with our customers' customers, the end customers. When I'm in my office, my working day begins with a cup of strong coffee before I check my email and prioritize what I have to do during the day. When I'm visiting our customers, my day starts at the airport and my activity plan for the day is based on the customers' needs and requirements.

What are you looking forward to in 2018?

I look forward to working with new customers and helping them to solve their problems and meet their challenges.

What do you think will be the next big thing in fingerprint technology/ biometrics?

I believe that fingerprint sensors beneath displays will be the next big thing. They will replace small sensors and buttons on mobile devices.

IN BRIEF

Name: Vincent Chung Age: 37

Working at Precise Biometrics since: 2017

Works as: Technology Manager within APAC (Asia Pacific Region)

Leisure interests: Traveling the world, listening to rock and rap music, playing video games.

SUSTAINABILITY

Sustainability is an important element of Precise Biometrics' business and shall promote social and environmentally responsibility. The company focuses on the areas where our business is considered to have the greatest impact:

• • Working Environment
• • Equal Treatment in All Relationships
• • Business Ethics
• • Environment

The company's sustainability policy acts as a guiding principle for the company's actions when more short-term, operational decisions have to be made, and also for long-term, strategic development. Precise Biometrics evaluates the company's efforts in this area on an ongoing basis in order to further integrate sustainability into the company's development.

WORKING ENVIRONMENT

Precise Biometrics is a knowledge-based company that depends on the desire and ambition of our employees to continuously push the limits of technology. The company works actively to create a working environment that gives employees the right conditions where they can develop. A stimulating, secure working environment is created by means of openness, creating an understanding of the company's objectives, responsibility to the individual, training and salary benefits. Precise Biometrics' systematic work environment management prevents illness and promotes a good working environment. All forms of discrimination and abuse are unacceptable and it must be equally easy for all employees to pursue a career, regardless of background and gender.

EQUAL TREATMENT IN ALL RELATIONSHIPS

Precise Biometrics is evolving to become an increasingly international company with increased diversity. Different backgrounds and experiences are important for the company's development, and Precise Biometrics does not accept any form of discrimination against employees in connection with employment or duties at work on the basis of gender, religion, age, physical ability, sexual orientation, nationality, political opinion or social or ethnic origin. The company's long-term objective for equality is that there shall be no differences in the company with regard to professional roles and levels of compensation that can be related to gender affiliation. Furthermore, all employees should perceive that they have equal standing regardless of gender in their day-to-day work and in respect of the impact of work on their private and family life. The company also has an ambition to promote a more even gender balance, although without compromising on competence, and to achieve a situation in which the number of employees are more evenly distributed in respect of gender within all units.

CODE OF CONDUCT AND BUSINESS ETHICS

The company's Code of Conduct emphasizes the fundamental ethical principles that Precise Biometrics observes when conducting its business operations, and supports the company's employees and consultants in their relations with business partners and other stakeholders. The Code of Conduct includes, among other things, guidelines, values and rules on ethical business, relationships with employees, customers and suppliers, and information to shareholders. All employees are expected to support and uphold the company's values and responsibilities. The company's employees, business partners and other stakeholders have the opportunity to report any possible serious or sensitive irregularities or improper conduct that could have a detrimental effect on the company's business operations or stakeholders through what is known as a whistleblowing procedure.

ENVIRONMENTAL IMPACT

Precise Biometrics strives to select efficient, sustainable alternatives in order to reduce the company's impact on the environment. The company develops and sells fingerprint software, which in itself has little impact on the environment. Precise Biometrics strives to choose environmentally-friendly IT infrastructure and deliver software solutions as downloadable files, which involves minimal environmental impact in connection with delivery and distribution. Precise Biometrics is growing to become an increasingly international company with operations in a number of countries in Europe, North America and Asia. As air travel accounts for a large proportion of the company's climate impact, the use of videoconferencing is encouraged in order to minimize the number of trips. In 2017, more than one thousand video meetings were held, of which approximately five per cent replaced physical travel. This represents emissions savings equivalent to about 50 round trip flights to Beijing. The company operates in premises that have environmental certification in accordance with LEED Gold. LEED is an international certification system that assesses the environmental impact from five aspects: the location of the premises, water-saving, energy consumption, internal environment, and material and resource consumption. Precise Biometrics evaluates procedures and work methods on an ongoing basis in order to identify more effective methods that reduce the company's environmental impact.

ADMINISTRATION REPORT

The Board of Directors and the CEO of Precise Biometrics (publ), CIN 556545-6596, with headquarters in Lund Municipality, Sweden, hereby submit their Annual Report and consolidated financial statements for the fiscal year 2017.

ACTIVITIES

Precise Biometrics is a supplier of solutions for the convenient, secure authentication of people's identity. The company develops and sells fingerprint recognition software that is optimized for products with small sensors and limited platforms such as smartphones, tablets, smart cards, wearables and IoT products. Precise Biometrics' fingerprint software is technology-neutral, which means that it can be integrated into all current and future sensor technologies and also all hardware platforms. The company's fingerprint technology is based on 20 years' research and is developed by one of the most prominent R&D teams in the world in the field of fingerprint software. The company's solutions have been integrated into almost 200 mobile devices from over 40 smart phone manufacturers and into 160 million national ID cards, and they are used hundreds of millions of times every day by people all over the world.

Precise Biometrics also offers services and solutions for spoof and liveness detection. The company's software for identifying false fingerprints can be integrated with full-scale and small sensors in order to further enhance security in fingerprint recognition. Precise Biometrics' liveness detection technology is based on more than ten years of research and close collaboration with Clarkson University, a leading authority in the field of biometric research.

IMPORTANT EVENTS DURING AND SINCE THE END OF THE FISCAL YEAR

• The acquisition of NexID Biometrics was completed, which was an important step in order to be able to offer increased security of the company's fingerprint software through liveness detection.
• Signed six new licensing agreements, including one with NXP, a leader in the field of secure connected solutions for embedded applications.
• Precise BioMatch Mobile was integrated into Qualcomm's new generation of ultrasound sensors.
• An extended licensing agreement was signed with an existing sensor customer with guaranteed licensing revenue of at least SEK 17.5 million over two years.
• 13 phones launched with Precise BioMatch Mobile.
• Precise BioMatch Embedded was integrated into the world's first biometric contactless payment card from AirPlus International.
• Launched a powerful and efficient upgrade of Precise BioMatch Embedded for smart cards.
• Launched a security suite with solutions for spoof and liveness detection to enable secure mobile payments.
• The disposal of the Mobile Smart Card Solutions business area to Identos GmbH was completed as planned as of January 1, 2018.
• After the end of the quarter, Stefan K. Persson was appointed new CEO instead of Håkan Persson.

SALES AND EARNINGS FOR THE REMAINING OPERATION

As a consequence of the fact that the Mobile Smart Card Solutions business area has been classified as a business held for sale, previously reported figures have been converted in order to improve comparability. In order to obtain comparable historical data, previously reported figures have only been adjusted for the expenses relating directly to the discontinued business area, which will no longer affect the company's remaining operation. The resources that were previously allocated to the Mobile Smart Card Solutions business will be transferred to the Fingerprint Technology business area no later than in connection with the disposal and have therefore not been included in the business held for sale. This reinforcement of resources is taking place in order to meet the market's demand for increasingly advanced solutions in the field of Fingerprint Technology.

The discontinued operation's impact on cash flow has not been reported separately, as the company does not consider it possible to report the discontinued operation's impact on cash flow. Cash flow is instead reported for the total operation. Unless otherwise specified, reported figures relate to the remaining operation.

Net sales during the year amounted to SEK 61.0 million (83.3) and were negatively affected by fewer orders being won, which resulted in lower royalty revenues in 2017.

The gross margin in the full-year period was 93.3% (98.0%), representing a gross profit of SEK 56.9 million (81.6). The gross profit was charged with the amortization of capitalized development expenses and acquired intangible assets.

Operating expenses increased to SEK 70.9 million (56.2). Of these, selling and administrative expenses accounted for SEK 43.8 million (33.2) and R&D expenses for SEK 25.3 million (24.9). This increase is explained by increased personnel resources to meet our customers' demands for both existing and new sensor technologies, investments in the company's technology for new areas of application, increased local support resources close to our customers and currency effects of SEK -1.8 million (1.9).

The operating profit/loss amounted to SEK -13.9 million (25.4) as a consequence of lower net sales and increased operating expenses. The operating profit/loss at EBITDA level for the full year 2017 amounted to SEK -10.4 million (27.4). Earnings for the period amounted to SEK -22.7 million (38.6) and include an adjustment of the deferred tax asset of SEK -6.6 million (13.2).

INVESTMENTS IN FIXED ASSETS

The group invested SEK 0.7 million (0.4) during the year in fixed assets. Depreciation of fixed assets during the year amounted to SEK 0.3 million (0.3).

INVESTMENTS IN INTANGIBLE ASSETS

The group invested SEK 0.4 million (0.0) during the year in intangible assets in respect of software. Investments in acquired intangible assets through the acquisition of NexID Biometrics Inc. amounted to SEK 7.8 million. Amortization of intangible assets during the interim period amounted to SEK 0.7 million (0.0).

CAPITALIZATION AND AMORTIZATION OF DEVELOPMENT WORK

Development expenses of SEK 8.5 million (4.8) were capitalized during the year. Depreciation of capitalized development expenses amounted to SEK 2.5 million (1.7) during the year, and this is recorded in the Cost of Goods Sold.

FINANCIAL POSITION AND LIQUIDITY – TOTAL OPERATION

Cash flow from operations amounted to SEK 22.8 (MSEK 37.7).

Liquid assets at the year-end amounted to SEK 117.0 million (135.8). In December 2016, a new share issue was executed and registered at a value of SEK 50 million and included in liquid assets. After deducting expenses relating to the new share issue, SEK 47.2 million was added to the company's equity.

As of December 31, 2017, equity amounted to SEK 145.8 million (163.0) and equity per share to SEK 0.40 (0.45).

During the year the purchase price for the acquisition of NexID Biometrics Contact was paid in cash in the amount of SEK 31.4 million. The acquisition was structured as an acquisition of assets and liabilities. For additional information, see Note 21 in the notes for the group and Note 23 in the notes for the parent company.

FIVE-YEAR SUMMARY

The Five-Year Summary, which is part of the administration report, appears on pages 38-40 in order to better illustrate financial development.

An agreement was signed in 2017 with the Germany company IDEN-TOS GmbH on the takeover of the Mobile Smart Card Solutions business area, and after the agreement was signed the business area was recorded as a business held for sale, and previously reported figures for the fiscal year 2016 were therefore recalculated in order to improve comparability. For additional information, see Note 1 in the notes for the group.

THE SHARE AND THE SHAREHOLDERS

At the year-end, Precise Biometrics' share capital was SEK 10,806,944, distributed among 360,231,467 shares listed on Nasdaq Stockholm's Small Cap list, Industrial Goods & Services Sector. A standard trading unit is one share. The quote value of the share is SEK 0.03.

Share price development

In 2017 there was a total turnover of 952,044,828 PREC shares, i.e., an average turnover of 3,793,007 shares per day of trading. The closing price on Friday, December 29, 2017 was SEK 1.32. During the year the share price fluctuated from SEK 1.25 to 4.15.

Ownership

The number of shareholders at the end of the year was 24,268 (27,325). The proportion of foreign owners was 12.3% (15.6). No shareholder in the company holds shares, directly or indirectly, that represent at least one tenth of the voting rights for all shares.

Transferability of shares

There are no limits to the transferability of the shares. Nor are there any agreements known to the company between shareholders that can involve limitations on the right to transfer shares.

Warrants

At the AGM in May 2017, a decision was made to offer an incentive program for all of the company's employees in 2017, and the program was implemented during the year. The warrants were sold at a market value in accordance with the Black & Scholes valuation method. As the profit figure for 2017 is negative, outstanding warrants have no dilution effect.

In 2017, the company also had a warrant program covering all employees of the company in 2014. The program initiated in 2014 involved the issuing of warrants, which were transferred to the employees at market rates in accordance with the Black & Scholes valuation model. A total of 2,610,000 options were subscribed, and subscription to shares through the exercising of the stock options was possible during the period July 1-December 31, 2017, with each option providing a right to subscribe to one share for SEK 2.50. As the market price during the subscription period was lower than the subscription price, no shares were subscribed.

See also Note 5 under notes for the group and the section entitled The share and shareholders for further information.

PATENTS

The company's overall patent strategy has the objective of securing the rights to our own technology and products in selected markets, creating value for future business, and enhancing the company's competitiveness. The patent portfolio at the end of 2017 includes 75 (81) registered patents in selected markets and 21 patent applications within 27 different patent families. Two of the patents relate to Tactivo and have been transferred to IDENTOS GmbH in connection with the transfer of the Mobile Smart Card Solutions business area.

TRADE MARKS

Precise Biometrics works actively and strategically with a brand portfolio consisting of a small number of carefully selected trade marks:

PRECISE BIOMETRICS™ - registered as both an image and word mark in several countries.

PRECISE BIOMATCH™ - the overall trade mark for the technology, and also used as the basis for the naming of software products. The trade mark is registered in the EU, the US and China.

PRECISE Match-on-Card™ - the trade mark for Precise Biometrics' technology to save and match fingerprints on smart cards. The trade mark is registered in the EU.

PRECISE BioLive™ - registered as a trade mark in the EU.

TACTIVO™ - the trade mark for Precise Biometrics' smart card readers, which has been transferred to IDENSTOS GmbH in connection with the transfer of the Mobile Smart Card Solutions business area.

RESEARCH AND DEVELOPMENT (R&D)

Research at Precise Biometrics is of fundamental importance for the company and is important in order to maintain competitiveness in an industry that is continuously developing. The main objective of research and development is to further develop the fingerprint algorithms on which the company's products are based. Precise Biometrics' research and development department works with the development of existing products and patents, and to develop new solutions.

ORGANIZATION AND STAFF

The organization consists of a head office in Lund, Sweden and offices in Karlstad, Sweden and Potsdam, USA. To secure a local presence in key markets, sales consultants have been hired in Taiwan, China and Korea.

As of December 31, 2017 the group had 47 (36) staff members, including consultants. The number of employees was 35 (26), of which 30 (26) were in Sweden.

Until Stefan K Persson takes up the post of CEO no later than August 1, 2018, Göran Thuresson, CFO, will serve as Acting CEO and Torgny Hellström as acting Chairman of the Board.

During the year, the company's group executive team was augmented by Fredrik Sjöholm, with responsibility for sales and business development of new product areas, and Fredrik Clementson took up the position of R&D Director.

CORPORATE GOVERNANCE

The company has chosen to produce a Corporate Governance Report that is separate from the Administration Report.

GUIDELINES FOR REMUNERATION TO LEADING EXECUTIVES

A decision was made at the Annual General Meeting in 2017 on the establishment of guidelines for remuneration to leading executives, with the effect that remuneration and terms of employment shall be in line with the market and competitive and there will be a predetermined cap on remuneration. The variable salary will not exceed 75 per cent of the fixed annual salary for the CEO and 50 per cent for other executives. Remuneration will also be provided in the form of options or other share-related incentive plans.

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 CEO may not exceed 6 months' salary if employment is terminated at the initiative of the company. Other executives are not entitled to severance pay.

The retirement age is 65, and pension premiums are calculated on a scale based on age and salary, and may amount to a maximum of 25 per cent of the fixed salary. The guidelines laid down by the AGM correspond with those for the previous year.

THE BOARD'S PROPOSAL ON GUIDELINES FOR REMUNERATION TO LEADING EXECUTIVES

The board proposes that the AGM 2018 make a decision on guidelines for remuneration to leading executives that corresponds with the guidelines decided by the AGM 2017. Please refer to Note 5 for further information.

CHANGE OF CONTROL CLAUSE

The company is not a party to any agreement that takes effect or is amended or ceases to be valid if control over the company is changed as a consequence of a public takeover bid.

SUSTAINABILITY AND ENVIRONMENT

Sustainability is an important part of Precise Biometrics' business. The company focuses on the areas where our business is considered to have the greatest impact: Working Environment, Equal Treatment in All Relationships, Business Ethics and Environment.

Precise Biometrics works continuously to create a workplace that prevents any unhealthy impact on the health and well-being of employees. Different backgrounds and experiences are important for the company's development, and Precise Biometrics does not accept any form of discrimination against employees in connection with employment or duties at work on the basis of gender, religion, age, physical ability, sexual orientation, nationality, political opinion or social or ethnic origin. The company's Code of Conduct emphasizes the fundamental ethical principles that Precise Biometrics observes when conducting its business operations, and supports the company's employees and consultants in their relations with business partners and other stakeholders. The Code of Conduct includes, among other things, guidelines, values and rules on ethical business, relationships with employees, customers and suppliers, and information to shareholders. Precise Biometrics strives to select efficient, sustainable alternatives in order to reduce the company's impact on the environment. The company develops and sells fingerprint software, which in itself has little impact on the environment. Precise Biometrics strives to choose environmentally-friendly IT infrastructure and deliver software solutions as downloadable files, which involves minimal environmental impact in connection with delivery and distribution.

Within the divested business area, Mobile Smart Card Solutions, the company also conducted some development of smart card readers, which were manufactured and assembled at carefully selected manufacturers. The products are CE and FCC marked, which guaranteed high quality and compliance with current regulations and standards.

SIGNIFICANT RISKS AND UNCERTAINTIES

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

ACQUISITIONS

NexID Biometrics Inc. was acquired during 2017 and an acquisition calculation has been prepared. Risk associated with the acquisition is primarily if sales and earnings in the future do not develop as planned, in which case there may be a need to write down intangible assets.

RISKS RELATED TO OPERATIONS

Technological development

The market in which the company operates is subject to rapid changes. New technology and new players are constantly emerging. The Company's technology must therefore to a large extent be accepted by the leading players in the market, both by suppliers and customers. The market must be mature enough to understand and accept the new technology supplied by the company.

Market development

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. This can mean that major investments in marketing and sales may be required to achieve the expected sales volumes.

Staff

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 the business. There is also a risk that the recruitment of new staff for these positions could take time and result in additional costs for the company.

Partners

The company cooperates with several partners. They include smart card manufacturers, chip manufacturers and suppliers of applications. The company relies on these partnerships so it can offer end customers complete security solutions. There is a risk of closure for one or more of these partnerships, or that they fail to achieve the expected results, which would lead to a loss in expected future revenues.

Patents and industrial and intellectual property rights

It is important for the company to protect its technology and products through patents or other industrial and intellectual property rights in order to create opportunities for future revenues. The company therefore pursues an active patent strategy, which involves applying for patents for strategically important inventions in selected countries. Nevertheless, it cannot be guaranteed that the company will obtain patents in the countries where it has made applications, or that patents will not be declared invalid. There is also a risk that the company's patents will be circumvented (known as a design around) or that the company's technology will be used in countries where the company has no patent protection. The company cannot guarantee that its products will not be considered to infringe on other granted patents or other intellectual property rights, and if such is the case the company's business, profits, opportunities to deliver products and financial position may be negatively affected.

Competitors

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

Sales

The biometrics market is still at an early stage. Judgments and decisions in a rapidly developing industry are made with reservation for several uncertainty factors. There is a dependency on partners and the development of competitors, as well as the market's acceptance of biometrics. Another important factor is the development rate and penetration of the services in which biometric solutions will be used, which leads to difficulties in predicting the future development of the business. The development of the company depends on the continued expansion of the market for biometrics. A delay in the penetration of more applications and markets will affect sales and profits. For the business area Fingerprint Technology there are risks involved in the fact that Precise Biometrics has been dependent on a small number of hardware partners for its sales. These risks diminish by having more customers and a platform-independent product portfolio.

Forecasting problems

The company operates in a rapidly changing market. The market for Fingerprint Technology products is in an early stage of development and revenues are to a large extent based on royalties from customers using them. All products are characterized by long selling-in processes. Earlier or later submissions of orders can have a significant effect on sales and profits. These factors make forecasting very difficult.

Production capacity

The company was dependent on external production capacity and access to components for operations in the Mobile Smart Card Solutions business area. As the disposal of the business area was completed as of January 1, 2018 there is no further comment on this risk.

FINANCIAL RISKS

The company is exposed to various financial risks, which are managed in accordance with policies adopted by the board. The company is mainly exposed to capital risk, currency risk and credit risk. There is no guarantee that new capital can be acquired if the need should arise, or that such capital can be acquired on favorable terms. The currency risk to which the company is exposed arises primarily from the fact that the company's expenses are primarily in Swedish kronor (SEK), while a significant part of revenues are generated in foreign currency, mainly USD. The company works on the basis of a policy that aims to minimize currency exposure in the business by means of hedging USD. The company has guidelines on the issue of credit to its customers. The company works continuously to minimize the period for which the company currently has capital tied up, particularly in accounts receivable.

FUTURE PROSPECTS

Precise Biometrics is seeing a shift in the market for capacitive sensors, which is gradually being transformed into a volume market primarily for mobile phones in the lower price segments. The company has several customers working in this segment. Precise Biometrics is also seeing the design of mobile phones in the higher price segments moving towards displays that cover the entire front side, while at the same time induction charging ("wireless charging"), which requires a glass back, is growing. In both cases, optical or ultrasound sensors are the best alternative for a fingerprint solution. The company has more than ten customers working with such sensors.

Precise Biometrics is supplying fingerprint software for smart cards to the first pilot project in the USA with biometric payment cards, which is being carried out by Visa and Mountain America Credit Union. The pilot project is a milestone in the development of biometric payment cards and enhances the company's position in the market.

The company's vision of convenient, secure authentication of identity for all, everywhere, is more relevant now than ever. Biometrics will increasingly replace passwords and other forms of authentication for cars, locks on doors and wearables, areas in which the company is involved in several projects and intends to drive and continue to be part of developments in the future.

The company focuses on four areas

• Capacitive sensors for mobile phones, which is the company's main market.
• In-display sensors for mobile phones in the upper price segment.
• Smart cards.
• New applications

Precise Biometrics has a good financial position, which permits continued investment in the future markets identified by the company.

PARENT COMPANY - TOTAL OPERATION

Parent company sales for the fiscal year amounted to SEK 68.7 million (90.5). A previous write-down of the receivable in Precise Biometrics Inc. was reduced by SEK 10.7 million (-5.8), and this amount is included in Result from participations in group companies. Earnings before tax for the fiscal year amounted to SEK -12.5 million (20.4). Earnings for the period include an adjustment of the deferred tax asset of SEK -6.6 million (13.2). The acquisition of NexID Biometrics Inc. was completed in 2017 and the purchase price of SEK 31.4 million was paid in cash. The goodwill that arose in connection with the acquisition relates to the company's strong position in the field of liveness detection.

Liquid assets at the end of the year amounted SEK 115.3 million (120.8). At the end of the fiscal year there were 30 (26) persons employed in the parent company.

PROPOSED DISTRIBUTION OF EARNINGS

The following assets are at the disposal of the AGM:

Total non-restricted equity	118,969,781
Net loss for the year, SEK	- 19,065,110
Retained earnings, SEK	64,296,977
Share premium reserve, SEK	73,737,914

The board proposes that SEK 118,969,781 be carried forward to the new year. The board proposes that the AGM should not issue a dividend for the fiscal year 2017.

Five-Year Overview

INCOME STATEMENT - REMAINING OPERATION

SEK thousands	2017	2016	2015	2014	2013
Net sales	61,039	83,299	56,337	31,387	34,944
Cost of goods and services sold	-4,091	-1,681	-17,059	-14,208	-15,976
Gross profit/loss	56,948	81,618	39,278	17,179	18,968
Selling expenses	-29,735	-18,183	-12,685	-19,907	-24,777
Administration expenses	-14,105	-15,004	-13,587	-14,343	-14,706
R&D expenses	-25,276	-24,904	-22,631	-28,984	-21,307
Other operating income/expenses	-1,769	1,881	219	1,508	-358
Operating profit/loss	-13,936	25,407	-9,407	-44,547	-42,180
Net financial items	-1,664	-12	-62	502	-1,092
Profit/loss after financial items	-15,600	25,395	-9,469	-44,045	-43,272
Tax	-7,094	13,200	-	-	-
Profit/loss for the year	-22,694	38,595	-9,469	-44,045	-43,272

Conversion of comparative figures for reporting of the remaining operation and amortization of capitalized development expenses was not performed for the years 2013-2015, see also Note 1 in notes for the group.

BALANCE SHEET - TOTAL OPERATION

SEK thousands	12/31/2017	12/31/2016	12/31/2015	12/31/2014	12/31/2013
Assets
Intangible assets	45,306	10,436	11,152	17,360	21,574
Fixed assets	956	1,285	2,132	2,784	3,475
Financial assets	6,106	13,200	-	-	-
Current assets	135,688	171,176	85,664	86,056	127,875
of which liquid assets and current investments	116,955	135,753	52,356	59,659	101,197
Assets held for sale	1,562	-	-	-	-
Total assets	189,618	196,096	98,948	106,200	152,924
Equity and liabilities
Equity	145,805	163,009	83,059	91,983	134,547
Current liabilities and provisions	43,813	33,087	15,889	14,217	18,377
Total equity and liabilities	189,618	196,096	98,948	106,200	152,924

CASH FLOW STATEMENT - TOTAL OPERATION

SEK thousands	2017	2016	2015	2014	2013
Cash flow from operating activities before
change in working capital	-4,670	24,824	396	-30,664	-36,942
Changes in working capital	27,458	12,834	-4,854	-3,265	2,723
Cash flow from investing activities	-40,821	-5,268	-3,004	-7,870	-11,749
Cash flow from financing activities	194	50,000	-	261	109,580
Change in liquid assets	-17,840	82,390	-7,463	-41,538	63,612

KEY FIGURES, GROUP

Amounts in SEK thousands unless otherwise stated	2017	2016	2015	2014	2013
Net sales	61,039	83,299	56,337	31,387	34,944
Net sales growth, %	-26.7%	95.7%	79.5%	-10.2%	23.6%
Gross margin, %	93.3%	98.0%	69.7%	54.7%	54.3%
Operating profit/loss	-13,936	25,407	-	-	-
Operating profit/loss, total operation	-8,676	18,005	-9,407	-44,547	-42,180
Working capital, total operation	91,876	138,089	69,775	71,839	109,498
Capital employed, total operation	145,805	163,009	83,059	91,983	134,547
Liquidity ratio, total operation,%	310%	511%	486%	522%	618%
Equity/assets ratio, total operation,%	76.9%	83.1%	83.9%	86.6%	88.0%
Return on equity, total operation, %	neg	27.2%	neg	neg	neg
Earnings per share before dilution, SEK	-0.06	0.11	-0.03	-0.13	-0.14
Earnings per share before dilution, total operation, SEK	-0.05	0.09	-	-	-
Earnings per share after dilution, SEK	-0.06	0.11	-0.03	-0.13	-0.14
Earnings per share after dilution, total operation, SEK	-0.05	0.09	-	-	-
Equity per share, total operation, SEK	0.40	0.45	0.24	0.27	0.39
No. of shares (thousands)	360,231	360,231	345,306	345,306	345,306
Weighted average number of shares, adjusted for dilution
effect (thousands)	360,231	346,843	345,306	345,306	306,147
Number of employees at end of period	35	26	22	22	29
Average number of employees during the period	31	26	22	27	34

Conversion of comparative figures for reporting of the remaining operation and amortization of capitalized development expenses was not performed for the years 2013-2015, see also Note 1 in notes for the group.

See the Financial Glossary for definitions and purpose of key figures.

RECONCILIATION OF ALTERNATIVE KEY FIGURES, GROUP

Amounts in SEK thousands unless otherwise stated	2017	2016	2015	2014	2013
EBITDA	-10,350	27,424	-	-	-
Depreciation & Amortization	-3,586	-2,017	-	-	-
Write-downs	-	-	-	-	-
Operating profit/loss	-13,936	25,407	-	-	-
EBITDA, total operation	-3,953	24,836	457	-31,773	-35,293
Depreciation & Amortization, total operation	-4,719	-6,301	-9,865	-9,578	-4,792
Write-downs, total operation	-	-529	-	-3,196	-2,095
Operating profit/loss, total operation	-8,673	18,005	-9,408	-44,547	-42,180
Operating profit/loss, remaining operation	-13,936	25,407	-	-	-
Operating profit/loss, discontinued operation	5,264	-7,402	-	-	-
Operating profit/loss, total operation	-8,673	18,005	-	-	-
Selling expenses	-29,735	-18,183	-12,685	-19,907	-24,777
Administration expenses	-14,105	-15,004	-13,587	-14,343	-14,706
R&D expenses	-25,276	-24,904	-22,631	-28,984	-21,307
Other operating income/expenses	-1,769	1,881	219	1,508	-358
Total operating expenses, remaining operation	-70,885	-56,211	-48,685	-61,726	-61,148
Capital employed, total operation	145,805	163,009	83,059	91,983	134,547
Non-interest-bearing liabilities, total operation	43,813	33,087	15,889	14,217	18,377
Balance sheet total, total operation	189,618	196,096	98,949	106,200	152,924
Equity, total operation	145,805	163,009	83,059	91,983	134,547
Average equity, total operation	155,322	114,534	80,451	108,201	105,014
Current assets minus inventories	135,688	168,985	77,161	74,196	113,647
Current liabilities	43,813	33,087	15,889	14,217	18,377
Liquidity ratio	310%	511%	486%	522%	618%
Equity	145,805	163,009	83,059	91,983	134,547
Total assets	189,618	196,096	98,949	106,200	152,924
Equity/assets ratio	76.9%	83.1%	83.9%	86.6%	88.0%
Profit after taxes	-17,431	31,193	-9,469	-44,045	-43,272
Average equity	155,322	114,534	80,451	108,201	105,014
Return on equity	neg	27.2%	neg	neg	neg

Conversion of comparative figures for reporting of the remaining operation and amortization of capitalized development expenses was not performed for the years 2013-2015, see also Note 1 in notes for the group.

See the Financial Glossary for definitions and purpose of key figures. Some of the key figures, such as net sales growth, gross margin and earnings per share, can easily be calculated from the financial statements and are thus considered to be confirmed and are not presented above.

CONSOLIDATED INCOME STATEMENT

SEK thousands

	Note	2017	2016
Net sales	2	61,039	83,299
Cost of goods and services sold	1,3	-4,091	-1,681
Gross profit		56,948	81,618
Selling expenses		-29,735	-18,183
Administration expenses		-14,105	-15,004
R&D expenses		-25,276	-24,904
Other operating income/expenses		-1,769	1,881
	3,4,5,6,7	-70,885	-56,211
Operating profit/loss		-13,936	25,407
Interest income	8	15	2
Interest expenses	8	-1,679	-13
		-1,664	-12
Profit/loss before tax		-15,600	25,395
Tax	9	-7,094	13,200
Profit/loss for the year from remaining operation		-22,694	38,595
Profit/loss after tax from discontinued operation	20	5,263	-7,402
Profit/loss for the year, total operation		-17,431	31,193
Profit/loss for the year attributable to holders of participations in the parent company		-17,431	31,193
Earnings per share, remaining operation, SEK	10
- before dilution, SEK		-0.06	0.11
- after dilution, SEK		-0.06	0.11
Earnings per share, total operation, SEK	10
- before dilution, SEK		-0.05	0.09
- after dilution, SEK		-0.05	0.09

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Profit/loss for the year	-17,431	31,193
Other comprehensive income:
Items that may be reclassified to profit or loss
Translation differences, foreign operations	104	1,516
Other comprehensive income for the year	104	1,516
Total comprehensive income	-17,327	32,709
Comprehensive income for the year attributable to holders of participations in the parent company	-17,327	32,709

CONSOLIDATED BALANCE SHEET

SEK thousands

ASSETS	Note	12/31/2017	12/31/2016
Fixed assets
Intangible assets	12,21	45,306	10,436
Fixed assets	13,21	956	1,285
Deferred tax assets	9	6,106	13,200
Total fixed assets		52,368	24,921
Current assets
Inventories	14	-	2,190
Accounts receivable	15,19	13,106	18,432
Other receivables	19	2,358	2,631
Prepaid expenses and accrued income	16,19	3,269	12,169
Liquid assets	19	116,955	135,753
Total current assets		135,688	171,176
Assets held for sale	20	1,562	-
TOTAL ASSETS		189,618	196,096
EQUITY & LIABILITIES
Equity
Share capital		10,807	10,807
Additional paid-in capital		822,885	822,763
Reserves and translation differences		4,061	3,957
Retained loss/Profit or loss for the year		-691,948	-674,518
Total equity		145,805	163,009
Total equity attributable to the parent company's shareholders		145,805	163,009
Current liabilities
Accounts payable	19	3,349	4,599
Other current liabilities	19	2,405	1,181
Accrued expenses and prepaid income	18,19	37,860	27,098
Other provisions	17	198	208
Total current liabilities		43,813	33,087
TOTAL EQUITY AND LIABILITIES		189,618	196,096

CONSOLIDATED CASH FLOW STATEMENT

SEK thousands

	Note	2017	2016
Cash flow from operating activities
Operating profit/loss		-8,673	18,005
Adjustments for items not included in cash flow		5,667	6,831
Net financial items	8	-1,664	-12
Cash flow from operating activities before change in working capital		-4,670	24,824
Cash flow from changes in working capital
Change in inventories		2,190	6,421
Change in current receivables		14,500	-8,068
Change in provisions		-	-112
Change in current liabilities		10,768	14,593
		27,458	12,834
Cash flow from operating activities		22,788	37,658
Investment in business combination	21	-31,360	-
Investment in intangible assets		-8,737	-4,840
Investment in fixed assets		-725	-427
Cash flow from investing activities		-40,821	-5,268
Payment for issue of options		194	-
New share issue		-	50,000
Cash flow from financing activities		194	50,000
Net cash flow for the year		-17,840	82,390
Liquid assets at beginning of year		135,753	52,356
Exchange rate differences in liquid assets		-958	1,007
Liquid assets at end of year1)		116,955	135,753

The discontinued operation's impact on the financial position has not been reported separately, as the company does not consider it possible to report the discontinued operation's impact on cash flow. Cash flow is instead reported for the total operation, and the operating profit/loss consequently includes the profit/loss from the discontinued operation. Adjustments for items not included in cash flow consist of depreciation/amortization, writedowns and exchange rate losses.

There are no interest-bearing liabilities in either 2017 or 2016, so there is no need to specify a change between the years.

1) The balance sheet item liquid assets only includes bank balances at both the beginning and end of the year.

CHANGE IN EQUITY GROUP

SEK thousands

			Attributable to parent company's owners
		Share capital Additional paid-in capital	Translation Retained loss/Profit difference or loss for the year		Total equity
Opening balance as of January 1, 2016	10,359	775,969	2,441	-705,711	83,059
Comprehensive income
Profit/loss for the year	-	-	-	31,193	31,193
Other comprehensive income
Exchange rate differences	-	-	1,516	-	1,516
Total other comprehensive income	-	-	1,516	-	1,516
Total comprehensive income	-	-	1,516	31,193	32,709
Transactions with shareholders
New share issue 1)	448	46,794	-	-	47,243
Total transactions with shareholders	448	46,794	-	-	47,243
Closing balance as of December 31, 2016	10,807	822,763	3,957	-674,518	163,009
Opening balance as of January 1, 2017	10,807	822,763	3,957	-674,518	163,009
Comprehensive income
Profit/loss for the year	-	-	-	-17,431	-17,431
Other comprehensive income
Exchange rate differences	-	-	104	-	104
Total other comprehensive income	-	-	104	-	104
Total comprehensive income	-	-	104	-17,431	-17,327
Transactions with shareholders
New share issue 2)	-	-72	-	-	-72
Issue of subscription rights	-	194	-	-	194
Total transactions with shareholders	-	122	-	-	122
Closing balance as of December 31, 2017	10,807	822,885	4,061	-691,948	145,805

1) New share issue expenses amount to SEK 2,759 thousand.

2) New share issue expenses amount to SEK 72 thousand.

NOTES GROUP

NOTE 1 - GENERAL ACCOUNTING POLICIES NOTE 2 - REVENUE ALLOCATION NOTE 3 - COSTS ALLOCATED PER TYPE NOTE 4 - EMPLOYEES AND PERSONNEL EXPENSES NOTE 5 - REMUNERATION TO LEADING EXECUTIVES NOTE 6 - AUDITORS' REMUNERATION NOTE 7 - OPERATIONAL LEASING AGREEMENTS NOTE 8 - FINANCIAL INCOME AND EXPENSES NOTE 9 - INCOME TAX AND DEFERRED TAX NOTE 10 - EARNINGS PER SHARE NOTE 11 - RISK FACTORS NOTE 12 - INTANGIBLE ASSETS NOTE 13 - FIXED ASSETS NOTE 14 - INVENTORIES NOTE 15 - ACCOUNTS RECEIVABLE NOTE 16 - PREPAID EXPENSES AND ACCRUED INCOME NOTE 17 - OTHER PROVISIONS NOTE 18 - ACCRUED EXPENSES AND PREPAID INCOME NOTE 19 - FINANCIAL INSTRUMENTS NOTE 20 - ASSETS HELD FOR SALE NOTE 21 - BUSINESS COMBINATIONS NOTE 22 - IMPORTANT EVENTS SINCE THE END OF THE YEAR

NOTE 1 - GENERAL ACCOUNTING POLICIES

GENERAL

The consolidated financial statements have been prepared in accordance with the Swedish Annual Accounts Act, RFR 1 Supplementary Accounting Regulations for Groups and International Financial Reporting Standards (IFRS) as adopted by the EU.

The recognition and measurement policies applied in the Annual Report for 2016 have also been used in this annual report.

Precise Biometrics presents financial definitions and reconciliations of alternative key figures in this annual report. The presentation of alternative key figures provides valuable supplementary information for investors and company management, making it possible to evaluate the company's performance.

Unless otherwise stated, all amounts are given in SEK thousands, and unless otherwise stated amounts in brackets refer to the previous fiscal year.

In accordance with IFRS 5, the Mobile Smart Card Solutions business area is recorded as a business held for sale. As a consequence of the fact that the Mobile Smart Card Solutions business area has been classified as a business held for sale, previously reported figures have been converted in order to improve comparability. In order to obtain comparable historical data, previously reported figures have only been adjusted for the expenses relating directly to the discontinued business area, which will no longer affect the company's remaining operation. The resources that were previously allocated to the Mobile Smart Card Solutions business area have been transferred to the Fingerprint Technology business area and have therefore not been included in the business held for sale. In accordance with IFRS 8, the discontinued business area is not included in segment reporting. As the remaining operation consists exclusively of the Fingerprint Technology business area, there is therefore no longer any segment reporting.

New or amended accounting policies, 2017

None of the new and amended standards and interpretations to be applied as from January 1, 2017 had any material impact on the group's or the parent company's financial statements. No new or amended IFRS were applied in advance.

IAS 7 Financial instruments

According to the so-called Disclosure Initiative, IAS 7 Statement of Cash Flows shall clarify changes in the company's financial liabilities. The company has no financial liabilities for either 2017 or 2016, and the change in IAS 7 therefore has no effect.

New or amended accounting standards applicable after 2017

A number of new or amended IFRS have not yet come into force and have not been applied in advance in the preparation of the group's and the parent company's financial statements. Below is a description of the IFRS that may affect the group's or the parent company's financial statements. Other new or amended standards or interpretations published by IASB are not expected to have any impact on the group's or the parent company's financial statements.

IFRS 9 Financial instruments

IFRS 9 describes the recognition of financial assets and liabilities and replaces IAS 39 Financial instruments: Recognition and Measurement. During the year, the group has evaluated the effects of IFRS 9 Financial Instruments, and no change is expected on the basis of the analysis performed of the existing classification. The group and the parent company will introduce a model for providing for future bad debts based on historical performance combined with predictive analysis. It is not believed that the introduction of the model will have a significant impact on the group's profit.

IFRS 9 Financial instruments comes into force on January 1, 2018. The standard will be applied by the group and the parent company as from January 1, 2018.

IFRS 15 Revenue from contracts with customers

IFRS 15 replaces all previously issued standards and interpretations dealing with revenues with one combined model for revenue recognition. IFRS 15 comes into force on January 1, 2018. The standard is based on the principle that revenue shall be reported when a promised product or service has been transferred to the customer, i.e., when the customer has acquired control of it, which can take place over time or at one point in time. Revenue shall consist of the amount that the company expects to receive in compensation in exchange for the goods or services supplied.

Work by the group to evaluate IFRS 15 Revenue from contracts with customers started in 2016 and was completed during 2017. The analysis was performed on the basis of the standard's five-step model and assessed revenue streams based on identified and currently valid agreements with customers. The implementation of IFRS 15 does not have any impact on the group's and the parent company's revenue recognition.

Revenues in the Fingerprint Technology business area consist of the sale of a software solution for fingerprint identification. Agreements give the customer a license for the software, which is developed and updated on an ongoing basis. The group has made the assessment that there is a performance commitment to the customer. It has been concluded that the license should be classified as a right to access in accordance with the guidance in IFRS 15 for licenses. Part of the revenue streams for the software solution consists of usage-based royalties (the royalty is based on the number of end products in which the group's customers use the license). As a consequence of the license having been assessed to be a right to access, revenue from this is reported over time in accordance with IFRS 15. This is in accordance with how the group reports revenue at present. Usage-based royalties are reported after the customer has used the license in the end product. This recognition method also corresponds with the current policies and therefore requires no retroactive adjustment.

Revenues for the divested Mobile Smart Cards Solution business area, which included product sales, were reported at a point in time, i.e., when control passes to the customer, which normally takes place upon delivery and corresponds with the current accounting policy. The variable components consist of possible returns and discounts. There were no amounts for this during the current year. The introduction of IFRS 15 has no retroactive effect with regard to the reporting of product sales.

The group has chosen to apply the policy with full retroactivity in connection with the transition to the new accounting standard. As explained above, the transition to IFRS 15 does not, however, entail any need to translate historical figures. The extended disclosure requirements in IFRS 15 will, however, affect the group's financial reporting from 2018, and the group has started work to evaluate future changes in disclosure requirements in future interim reports and annual reports.

IFRS 16 Leases

IFRS 16 replaces IAS 17 as from January 1, 2019. According to the new standard, most leased assets shall be reported in the balance sheet and lessees shall divide the expense into interest payments and depreciation of the asset.

An analysis was launched in 2017 to investigate how the impact of IFRS 16 Leases will affect the company's financial reporting.

ALTERNATIVE KEY FIGURES

Precise Biometrics presents financial definitions and reconciliations of alternative key figures in this report. Precise Biometrics presents alternative key figures as these provide valuable supplementary information for investors and company management, making it possible to evaluate the company's performance.

CONSOLIDATED ACCOUNTS

The consolidated statements are prepared using the acquisition method. Subsidiaries are included in the consolidated financial statements as of the date the controlling influence is transferred to the parent company. Intergroup transactions, balance sheet items, earnings and expenses between group companies are eliminated. Profits and losses resulting from intergroup transactions, and which are reported in assets, are also eliminated. The accounting policies for subsidiaries have been changed as necessary in order to guarantee the consistent application of the group's policies.

SEGMENT REPORTING

Income is reported so as to correspond with the internal reporting submitted to the chief executive. The chief executive is the function responsible for the allocation of resources and assessment of the income trend, and consists of the CEO and the group executive team.

In accordance with IFRS 5, the Mobile Smart Card Solutions business area is recorded as a business held for sale. As a consequence of the fact that the Mobile Smart Card Solutions business area has been classified as a business held for sale, previously reported figures have been converted in order to improve comparability. In order to obtain comparable historical data, previously reported figures have only been adjusted for the expenses relating directly to the discontinued business area, which will no longer affect the company's remaining operation. The resources that were previously allocated to the Mobile Smart Card Solutions business area have been transferred to the Fingerprint Technology business area and have therefore not been included in the business held for sale. In accordance with IFRS 8, the discontinued business area is not included in segment reporting. As the remaining operation consists exclusively of the Fingerprint Technology business area, there is therefore no longer any segment reporting.

TRANSLATION OF FOREIGN CURRENCY Functional currency

Items included in the financial statements for the different units in the group are valued in the currency used in the financial environment where the respective companies are primarily active, the functional currency. Swedish kronor (SEK) is used in the consolidated financial statements, which is the parent company's functional currency and reporting currency.

Transactions and balance sheet items

Transactions in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction date. Exchange rate gains and losses incurred upon payment of such transactions and during conversion of monetary assets or liabilities in foreign currencies at the closing rate are reported in the income statement as Other operating income/expenses and as financial income/ expenses. Foreign exchange differences on financial transactions which are classified as net investment in foreign activities are reported in other comprehensive income.

Group companies

The earnings and financial position for all group companies which have a functional currency other than the reporting currency are translated to the group's reporting currency as follows: Assets and liabilities for each of the balance sheets are translated at the closing rate. Income and expenses for each of the income statements are translated at average exchange rates for the period, insofar as this average rate is a reasonable approximation of the accumulated effect of the rates applicable on the transaction date, otherwise income and expenses are converted at the rate prevailing on the transaction date. All accrued exchange rate differences are reported as a separate part of equity.

FIXED ASSETS

Fixed assets are valued at the acquisition value minus accumulated depreciation. The acquisition value includes charges that can be directly attributed to the acquisition of the asset.

Additional expenditures are added to the asset's reported value or are reported as a separate asset, depending on which is appropriate, only when it is likely that the future financial benefits associated with the asset will benefit the group and the asset's acquisition value can be reliably measured. All other forms of repairs and maintenance are recorded as expenses in the income statement in the period when they arise.

In order to reduce their acquisition value to the estimated residual value, fixed assets are depreciated on a straight-line basis according to plan over the estimated period of use as follows:

Computers 3 years Equipment 5 years

Depreciation of fixed assets is included in Selling expenses, Administration expenses and R&D expenses in the income statement. The residual values and life of assets are assessed on the balance sheet date, and adjusted when necessary. In the event the reported value of an asset is considered to exceed its estimated recovery value, the asset is immediately written down to its recovery value. Gains and losses on disposals are determined through a comparison between the proceeds of sale and the reported value, and are reported in the income statement.

INTANGIBLE ASSETS

Research and development

Research expenses are reported as they arise. Development expenses consist of expenses for the further development of equipment and software for biometric fingerprint identification. These are reported as intangible assets when it is likely that the project will be successful in terms of its commercial and technical potential, and if the costs can be reliably measured. Other development expenses are reported as they arise. Previously reported development expenses are not carried forward to the subsequent period. Development expenses have a limited useful life and are amortized on a straight-line basis from the date when the commercial production of the product can begin. The estimated useful life is five years.

Software

Expenses for the maintenance of software are reported as expenses as they arise. Expenses for the acquisition and development of software are capitalized on the basis of the expenses incurred when the actual software was acquired and deployed. These expenses are written off during the estimated useful life, which extends to five years. Software obtained in connection with the acquisition of NexID Biometrics Inc. is written off over the estimated useful life, which was confirmed as ten years in the acquisition calculation. The deviation in the amortization period is because of the nature of the software.

Patents

Patents have a limited useful life and are therefore reported at the acquisition value minus accumulated amortization. Patents obtained in connection with the acquisition of NexID Biometrics Inc. are written off over the estimated useful life, which is fifteen years.

Customer relations

Customer relations obtained in connection with the acquisition of NexID Biometrics Inc. are written off over the estimated useful life, which is five years.

Database

The database obtained in connection with the acquisition of NexID Biometrics Inc. is written off over the estimated useful life, which is ten years.

Goodwill

The value of the goodwill arising from the acquisition of NexID Biometrics Inc. is reviewed annually in order to determine whether it needs to be written down.

WRITE-DOWNS

Assets that are depreciated are assessed in relation to the reduction in value whenever events or changed conditions indicate that the reported value is not recoverable. Write-downs are recorded for the amount by which the asset's reported value exceeds its recovery value, which is the higher of the net sales value and the utility value. For an asset, the recovery value is calculated for the cash-generating unit that the asset belongs to, i.e., the lowest levels where there are identifiable cash flows.

FINANCIAL INSTRUMENTS Accounts receivable

Accounts receivable arise when the group supplies products or services directly to a customer without the intention of trading the resulting receivable.

Accounts receivable are reported initially at fair value and thereafter at the accrued acquisition value minus any provision for impairment. A provision for impairment of accounts receivable is made when there is objective evidence that the group will not be able to receive all the amounts due in accordance with the original conditions for the receivable. The amount of the provision consists of the difference between the asset's reported value and the current value of estimated future cash flows, discounted using the effective interest rate.

Other financial liabilities

A financial asset is recognized in the balance sheet when the company becomes a party to the contractual terms of the instrument. A liability is recognized when the counterparty has delivered and there is a contractual obligation to pay, even if an invoice has not yet been received. A supplier invoice is recognized when the invoice is received. A financial liability is removed from the balance sheet when the obligation specified in the contract is honored or settled in any other way. Other financial liabilities consist primarily of accounts payable, which are reported at accrued acquisition value.

Derivatives

Forward contracts are valued at fair value via the income statement.

EQUITY

Common stock is classified as equity. Transaction costs directly attributable to the issue of new common stock or options are reported in equity as a deduction from issue liquidity.

INCOME TAXES

Tax expenses for the period include current and deferred taxes. Tax is reported in the income statement, except when the tax relates to items reported in other comprehensive income or directly in equity.

In such cases, the tax is also reported in other comprehensive income or equity. The valuation of all tax liabilities/receivables is made at nominal amounts and the actual tax cost is calculated on the basis of the tax regulations decided on the balance sheet data, or decided in practice in the countries where the parent company and its subsidiaries operate and generate taxable income. The executive regularly assesses the claims made in tax returns concerning situations where the applicable tax regulations are subject to interpretation. When appropriate, it allocates provisions for amounts that will in all probability be paid to the tax authority.

Deferred tax is reported, in accordance with the balance sheet method, as all the temporary differences arising between the taxable value of assets and liabilities and their reported values in the consolidated financial statements. However, deferred tax is not reported if it has arisen as a result of a transaction that constitutes the first reporting of an asset or liability that is not a business acquisition, and which at the time of the transaction affects neither reported nor taxable income. Deferred income tax is calculated on application of tax rates (and laws) decided or advised on the balance sheet date and which are expected to apply when the deferred tax receivable is realized or the deferred tax liability is settled.

INVENTORIES

Inventories have been valued at the lower of the acquisition value and the net sales value, with due consideration for obsolescence. The net sales value is the estimated sales price in current operations, with a deduction for estimated costs of production and to achieve a sale. The acquisition value is calculated by applying the first-in/first-out (FIFO) valuation method and includes expenses incurred in connection with the acquisition of inventory assets and in order to bring them to their current condition and location. Remaining inventories are written down in full, and for this reason no value is recorded in the item "Assets held for sale", see Note 20 in the notes for the group.

REMUNERATION TO EMPLOYEES

Pensions

The group only has defined-contribution pension plans. Pension plans are financed through payments from respective group companies. For defined-contribution pension plans, the group pays contributions to privately managed pension insurance plans on a contractual basis. The group has no additional payment obligations after the contributions have been paid.

Severance pay

Compensation upon termination of employment is paid when an employee is given notice prior to the normal retirement date, or when an employee accepts voluntary retirement from employment in exchange for such compensation. The group reports severance pay when it is clearly obligated either to terminate an employee in accordance with a detailed, formal plan without any possibility of recall, or to pay compensation when serving notice as a result of an offer having been made to encourage voluntary layoff. Benefits that fall due more than 12 months after the balance sheet date are discounted to the current value.

Flexible pay

The group reports a liability and cost for flexible pay on the basis of the result for the year when an obligation exists.

Share-based compensation

Precise Biometrics has an outstanding options program for employees in Sweden. Warrants have been issued to employees in Sweden under the program (see Note 5 - Remuneration to leading executives) and transferred to them on ordinary market terms. On acquisition of subscription options by employees, the payments received are reported in other paid-in capital. The capital stock is increased by each newly issued share's nominal value on the utilization of options, and the corresponding share premium is reported in other paid-in capital.

ACCOUNTS PAYABLE

Accounts payable are initially valued at the fair value and thereafter at the accrued acquisition value with the application of the effective rate method.

PROVISIONS

Provisions are reported when the group has an existing legal or informal obligation as a result of previous events, and it is more likely than not that an outflow of resources will be necessary to settle the commitment, and the amount has been calculated reliably.

Provisions have been made for expected warranty claims in respect of products sold in the Mobile Smart Card Solutions business segment. Provisions are currently recorded at 2% of booked revenues, reflecting the estimate of the amount that will be paid out. Expenses are estimated to be incurred in the following fiscal year.

REVENUES

The group's revenues consist primarily of revenues from licenses, royalties and support/maintenance. Sales are posted net of VAT and discounts.

License revenues are reported when license agreements, without consequential loss clauses, have been signed and delivery has taken place and when the price and payment plans have been established and where there are no other commitments apart from the delivery of the licenses. Licenses sold in combination with hardware, which are a prerequisite for the functioning of the software, are reported as revenue when the hardware has been delivered. License revenues are normally invoiced for a twelve-month period at a one-time amount and reported as revenue on the basis of the length of the agreement, while royalties are reported as revenue for the period the customer reports the use of the licenses and is based on received royalty reporting. Revenues are thus reported in the period when they have been earned, based on received reporting. Support and Maintenance are reported on the basis of the length of the agreement. Revenues from sales of services are reported in the period in which the services are carried out.

Revenues for the divested Mobile Smart Cards Solution business area, which included product sales, were reported at a point in time, i.e., when control passed to the customer, which normally takes place upon delivery.

WITHHOLDING TAX

Withholding tax is posted and reported as a selling expense in connection with the underlying sales transaction being reported. Withholding tax arises on sales to customers in Asia.

LEASING AGREEMENTS

Leasing in which an essential part of the risks and advantages of ownership are retained by the lessor is classified as operational leasing. Payments made during the term of the lease (after deductions for any incentives from the lessor) are reported as an expense in the income statement on a straight-line basis over the term of the lease. The group has no financial leasing contracts.

IMPORTANT ESTIMATES AND EVALUATIONS FOR ACCOUNTING PURPOSES

In order to prepare the financial statements in accordance with generally accepted accounting principles, it is necessary to make estimates and assumptions that affect the income statement, balance sheet and other disclosures. Actual outcomes may differ from the estimates made.

Income recognition

Royalty income is confirmed by the customer reporting to the company on a quarterly basis by agreement. The base data must be quality-assured in order to guarantee completeness and accuracy, and a customer invoice is created on this basis. When the base data for revenue recognition is received after the balance sheet date, accrued royalty income is recorded.

Licensing revenues are reported as revenue when the licensing agreement has been signed and delivery has taken place, which may involve an estimate, depending on the nature of the agreement.

Capitalization of development expenses

The area where estimates and assumptions could involve the risk of adjustments to reported values for assets and liabilities during the next fiscal year is mainly related to capitalized development expenses. The group regularly examines whether there is a need for write-downs of capitalized development expenses in accordance with the accounting policies described under Intangible assets and Write-downs.

When examining the need for write-downs, forecasts of future cash flows are used, and these are based on the best possible estimates of future revenues and expenses, based on the historical trend, general market conditions, developments and forecasts for the industry, and other available information. Examination takes place by discounting future cash flows at a rate of 25%, and the examination conducted has not resulted in any need for write-downs.

Deferred tax

The group has to pay taxes in two countries. In view of the historical development of the group's earnings, an assessment has been made that the group's tax expense is limited, at least in the short term. The group makes regular assessments concerning the opportunity to

utilize loss deductions in the future. A deferred tax asset has been booked as of the third quarter of 2016. In 2017, the company carried out a new assessment in respect of the calculation of the deferred tax asset and bases the calculation on a cautious assessment of future foreseeable taxable earnings.

Acquisition

In connection with an acquisition, estimates are requested from company management, an important element of which relates to allocating the purchase price to acquired assets and liabilities. Several assumptions were made in connection with the acquisition analysis, including of future cash flows, growth, discount rate and choice of valuation model.

NOTE 2 - REVENUE ALLOCATION

As described in Note 1, the remaining operation following the divestment of the Mobile Smart Card Solutions business consists solely of Fingerprint Technology, and for this reason there is no longer any segment reporting.

THE GROUP

	ROYALTIES		LICENSES		SERVICES		TOTAL
	2017	2016	2017	2016	2017	2016	2017	2016
External sales	11,320	55,219	34,014	17,277	15,705	10,803	61,039	83,299

The group's revenues from external customers in Sweden amount to SEK 1.0 million (42.5) and total revenues from external customers in other countries amount to SEK 60.1 million (40.8), of which income from the USA, SEK 15.6 million (14.6) and Asia, SEK 40.9 million (20.7). The group has three (two) major customers that account for more than 10% of net sales. Revenues from these customers amount to 42% (63%) of net sales.

One effect of the detailed review of the company's agreements with customers that was conducted in connection with the transition to IFRS 15 is that there has been a reclassification in respect of Support and Maintenance. Revenues from Support and Maintenance are reported in Services, which resulted in a reclassification of the values for 2016 between Licenses and Services to the order of SEK 7.8 million.

PARENT COMPANY - TOTAL OPERATION IN ACCORDANCE WITH RFR 2

	ROYALTIES		LICENSES		SERVICES		PRODUCTS		TOTAL
	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016
External sales	11,320	55,219	34,014	17,277	14,849	10,201	8,552	7,758	68,735	90,455

The parent company's revenues from external customers in Sweden amount to SEK 6.0 million (43.9) and revenues from external customers in other countries amount to SEK 62.7 million (46.6), of which revenues from the US account for SEK 14.7 million (16.0) and Asia SEK 42.1 million (20.8).

Services includes Support and Maintenance.

NOTE 3 - COSTS ALLOCATED PER TYPE

	2017	2016
Employee benefit expenses	40,166	31,808
Depreciation and write-downs	5,834	1,826
Development costs	7,896	6,085
Consultancy costs	7,065	6,017
Other external expenses 1)	14,015	12,155
Total	74,976	57,891

¹⁾ This item includes exchange rate gains/losses.

NOTE 4 - EMPLOYEES AND PERSONNEL EXPENSES

Gender balance in group	2017		2016
	Men	Women	Men	Women
Precise Biometrics AB, Sweden	24	6	20	6
Precise Biometrics, Inc., USA	4	1	0	0
	28	7	20	6
Gender balance in corporate management			2017	2016
Proportion of women
Board of directors			33%	33%
CEO and leading executives			0%	0%
Salaries and remuneration are allocated as follows:			2017	2016
Board and CEO, Sweden
Salaries and other remuneration			4,321	4,416
Pension expenses			510	473
Payroll overhead, including payroll tax			1,482	1,500
Total			6,313	6,389
Others, Sweden
Salaries and other remuneration			21,929	16,895
Pension expenses			3,987	2,977
Payroll overhead, including payroll tax			6,723	6,068
Total			32,639	25,939
TOTAL, SWEDEN			38,952	32,328
Others, US
Salaries and other remuneration			2,947	-
Payroll overhead			607	-
Total			3,554	-
TOTAL			42,506	32,328

NOTE 5 - REMUNERATION TO LEADING EXECUTIVES

Principles

Remuneration is paid to the Chairman of the Board and board members in accordance with the decision of the AGM. Until Stefan K. Persson takes up the post of CEO, Torgny Hellström will serve as acting Chairman of the Board and receive remuneration for this.

Remuneration to the CEO and other leading executives consists of their basic salary, flexible remuneration, pension benefits and other benefits. Håkan Persson stood down as CEO on 01/15/2018 and Stefan K. Persson will take up the post of new CEO at the latest on August 1, 2018. In addition to the six-month period of notice, severance pay for six months is also paid if notice is served by the company.

Other leading executives are those persons who together with the CEO constitute corporate management. There was an average of five (four) leading executives during the year. For the composition of corporate management, see the section entitled 'Management' in the annual report.

The distribution between basic salary and flexible remuneration shall be in proportion to the executive's level of responsibility and authority. For the CEO, flexible remuneration is set at a maximum of 75 % of basic salary. For other leading executives, flexible remuneration is a maximum of 50 % of basic salary.

REMUNERATION AND OTHER BENEFITS IN 2017

	BASIC SALARY/ BOARD REMUN.	COMMITTEE FEE	FLEXIBLE REMUNERATION	OTHER BENEFITS	PENSION EXPENSES	TOTAL
Torgny Hellström, Chairman of the Board	545	60	-	-	-	605
Matts Lilja, board member	190	25	-	-	-	215
Mats Lindoff, board member	190	25	-	-	-	215
Torbjörn Clementz, board member	190	70	-	-	-	260
Synnöve Trygg, board member	190	35	-	-	-	225
Anna Almlöf, board member	190	25	-	-	-	215
Håkan Persson, CEO	2,040	-	546	0	510	3,096
Other leading executives, 5 persons	4,349	-	842	57	854	6,102
Total	7,884	240	1,388	57	1,364	10,933

REMUNERATION AND OTHER BENEFITS IN 2016

BASIC SALARY/ BOARD REMUN.	COMMITTEE FEE	FLEXIBLE	OTHER BENEFITS	PENSION EXPENSES	TOTAL
524	60	-	-	-	584
185	25	-	-	-	210
185	25	-	-	-	210
186	59	-	-	-	245
127	23	-	-	-	150
127	17	-	-	-	143
58	8	-	-	-	66
73	10	-	-	-	83
1,890	-	781	53	473	3,197
3,965	-	949	58	771	5,743
7,319	227	1,730	111	1,244	10,632
			REMUNERATION

1) Took up post at the AGM in 2016

2) Stood down at the AGM in 2016

The amounts in the table are exclusive of payroll overhead. Payment of remuneration to the board takes place monthly from May 2003 at 1/12 of the remuneration decided by the AGM. As from April 23, 2013, payment of remuneration to the committee took place monthly at 1/12 of the remuneration decided by the AGM. Remuneration paid has been reported as an expense. The above remuneration refers to expenses that have affected net profit/ loss for the year.

The group only has defined-contribution pension plans. Pension expenses refer to the expenses that have affected net profit/loss for the year.

Flexible remuneration

Flexible remuneration for the CEO and leading executives is based on group earnings and individual targets. These targets are set by the board for the CEO, and by the board and the CEO for leading executives. The maximum amount for flexible remuneration that may be paid to the CEO is 75% of basic salary. For other leading executives the flexible remuneration can amount to a maximum of 50 per cent of basic salary. In 2017, flexible remuneration to leading executives was between 18-27% (25-30).

Other benefits

Other benefits consist of benefits for cars and insurance.

Share-based compensation

An option program was issued in 2014 in which a total of 2,610,000 options were subscribed by employees, of which the CEO had 1,000,000 options and other group executives 700,000 options. Subscription to shares through the exercising of the stock options was possible during the period July 1-December 31, 2017, with each option providing a right to subscribe to one share for SEK 2.50. As the market price during the subscription period was lower than the subscription price, no shares were subscribed. For further details about the option program, refer to the annual reports issued for the years 2014 to 2016.

A new option program was issued in 2017 in which a total of 3,230,000 options were subscribed by employees, of which the CEO had 1,000,000 options and other group executives 1,500,000 options. Precise Biometrics received an infusion of SEK 193,800 into liquid assets. The subscription of shares with utilization of subscription options can take place during the period June 1-June 30, 2020 at a price of SEK 5.40. At full utilization of the subscription options, the share capital will increase by SEK 96,900, which corresponds to approximately 0.9% of the company's current share capital. Payments received by Precise Biometrics through the transfers have been reported in additional paid-in capital. After the balance sheet date, the options subscribed by the CEO were bought back at the acquisition value. This took place in connection with Håkan Persson standing down as CEO.

Precise Biometrics currently has an ongoing option program. Of the 3,230,000 outstanding options, it was not possible to utilize any of the options (0 options) during the year.

The nominal value of one share is SEK 0.03.

The weighted average actual value for options that were allocated in 2017 was established with the help of an external valuer and the Black & Scholes valuation model and amounts to SEK 0.06 per option. Important input data in the model are the volume-weighted average share price during the period May 17, 2017 to May 31, 2017 of SEK 2.70, the above redemption price, volatility of approximately 40%, an expected option term of approximately 2.8 years and an annual riskfree interest rate of 0.53%. The volatility measured as a standard deviation for expected return on share price is based on a statistical analysis of daily share prices over the last 7 years.

No cost has been reported in the income statement since the allocated options have been paid for by employees.

The subscription price corresponded to 200% of the volume-weighted average price at the time of valuation.

Pensions

The retirement age for the CEO is 65. Pension premiums shall amount to a maximum of 25% of the fixed salary from the parent company. For other leading executives the retirement age is also 65. According to the pension agreement, the pension premium is calculated in accordance with a scale based on age and salary. For the highest current age interval, the premium totals 6 % of the pension-based salary up to 7.5 base amounts, 39% of the pension-based salary between 7.5 and 20 base amounts and 21% of the pension-based salary for salaries over 20 base amounts.

For further information on accounting, see Note 1 in the "Pensions" section.

Severance pay

There is a mutual period of six months' notice for the company and the CEO. Severance pay of six monthly salaries will also be paid if the CEO is given notice by the company. A severance payment of six monthly salaries will be paid to the former CEO during 2018. A period of notice of 3-6 months is applicable for the company and other leading executives. No severance pay is paid for other leading executives.

Change in control

There are no agreements between the company and its employees, with the exception of the employment contracts commented on above, under which compensation must be paid to employees if their employment is terminated as a result of a public takeover bid.

Preparation and decision-making process

The compensation committee is assigned to consider issues related to salaries, pension conditions, incentive plans and other terms and conditions of employment for the executive. In 2017 the committee focused primarily on remuneration to the CEO and leading executives, including incentive plans. The board makes decisions on remuneration to the CEO, based on the recommendations of the compensation committee within the framework of guidelines decided at the AGM. Remuneration to other leading executives has been decided by the CEO following consultation with the compensation committee and the board. At the AGM in 2017 guidelines were adopted for the determination of salaries and other remuneration to the CEO and other leading executives.

NOTE 6 - AUDITORS' REMUNERATION

2017	2016
906	894
78	129
139	2
200	-
1,323	1,024
54	-
54	-
1,377	1,024

NOTE 7 - OPERATIONAL LEASING AGREEMENTS

	2017	2016
Leasing costs during the year	2,244	1,698
Total	2,244	1,698
Nominal value of agreed future leasing charges:
Due for payment within 1 year	1,939	1,697
Due for payment after 1 year, but within 5 years	3,750	5,231
Due for payment after 5 years	-	-
Total	5,690	6,928

Operational leasing agreements mainly refer to office rent.

NOTE 8 - FINANCIAL INCOME AND EXPENSES

	2017	2016
Interest income	15	2
Total	15	2
Interest expenses	10	13
Exchange rate losses	1,669	-
Total	1,679	13

NOTE 9 - INCOME TAX AND DEFERRED TAX ASSETS

Tax expense for the year	2017	2016
Change in deferred tax	-7,094	13,200
Tax expense	-7,094	13,200
Reconciliation of effective tax	2017	2016
Profit/loss before tax	-10,337	17,993
Tax calculated as per national tax rates applicable for profit in the respective countries	2,274	-3,958
Tax effect of non-deductible expenses/non-taxable revenues	-19	-131
Tax effect of items reported in equity	16	607
Increase/decrease in deferred tax asset	-6,600	13,200
Utilization of tax loss carryforwards not previously considered	-	3,482
Tax loss carryforwards for which deferred tax asset not reported	-2,765	-
Tax expense	-7,094	13,200

Tax on group profit before tax differs from the theoretical amount that would have resulted from a weighted average tax rate in the consolidated companies as above.

The parent company has a deferred tax asset in respect of the future utilization of tax loss carryforwards amounting to SEK 6,600 thousands (13,200). The company has carried out a new assessment in respect of the calculation of the deferred tax asset and bases the calculation on a cautious assessment of future foreseeable taxable earnings.

Deferred tax assets	2017	2016
Tax loss carryforwards	6,106	13,200
Reported value	6,106	13,200
Specification of change in deferred tax asset:	2017	2016
Opening reported value	13,200	-
Change in deferred tax	-6,600	13,200
Change in temporary differences reported in the income statement	-494	-
Closing reported value of deferred tax asset	6,106	13,200

There are tax loss carryforwards for which deferred tax assets have not been reported in the balance sheet amounting to SEK 633,431 thousands (593,072), of which SEK 29,338 thousands relates to Precise Biometrics, Inc., USA with a time limit of 20 years. A loss carryforward equivalent to SEK 125 thousands falls due in 2020, and a deficit of SEK 4,940 thousands in 2021. There is no further time limitation for the utilization of tax loss carryforwards.

The deferred tax asset of SEK 6,600 thousands has been assessed as being possible to offset with a reported temporary difference of SEK -494 thousands.

NOTE 10 - EARNINGS PER SHARE

Before dilution

Earnings per share before dilution are calculated by dividing earnings attributable to parent company owners by a weighted average number of outstanding common shares during the period, excluding repurchased shares of the parent company.

	2017	2016
Profit/loss attributable to parent company shareholders (SEK thousands)	-17,431	31,193
Weighted average number of outstanding common shares (thousands)	360,231	345,960
Earnings per share before dilution (SEK per share), remaining operation	-0.06	0.11
Earnings per share before dilution (SEK per share), total operation	-0.05	0.09

Earnings per share after dilution

To calculate profit/loss per share after dilution, the weighted average number of outstanding common shares is adjusted for the dilution effect of all potential ordinary shares. The parent company only has one category of potential ordinary shares with a dilution effect, i.e. share options.

For share options a calculation is made for the number of shares that could have been purchased at real value (calculated as the average market price for the parent company shares), for an amount corresponding to the monetary value of the subscription rights linked to the outstanding share options.

The number of shares as per the above is compared with the number of shares that would have been issued on the assumption that the share options were utilized. If all outstanding subscription option programs were redeemed in their entirety the maximum dilution would amount to 5,000,000 shares.

Since the profit/loss attributable to the limited liability company is negative for 2017, outstanding stock options have not been considered in the calculation below for 2017.

	2017	2016
Earnings attributable to parent company shareholders	-17,431	31,193
Weighted average number of outstanding common shares (thousands)	360,231	345,960
Weighted average number of common shares for calculation of earnings per share after dilution (thousands)	360,231	346,843
Earnings per share after dilution (SEK per share), remaining operation	-0.06	0.11
Earnings per share after dilution (SEK per share), total operation	-0.05	0.09

NOTE 11 - RISK FACTORS

Precise Biometrics is exposed to a number of risks that arise primarily in connection with the company's buying and selling foreign currency, as changes in exchange rates affect the company's earnings and cash flows. The company is also exposed to credit risk, liquidity risk and capital risk.

The board adopts policies for risk management, which are set out in the company's Economic and Finance Policy.

Currency exposure risk

Precise Biometrics' currency exposure includes both transaction and translation exposure. Transaction exposure arises because sales and purchases take place in different currencies. The company is exposed to currency risks through its business, as a significant proportion of revenues are generated in foreign currencies, primarily USD, while the majority of the company's expenses are in Swedish kronor. This means that changes in exchange rates affect the company's earnings and cash flows. In order to reduce exposure, a policy has been adopted that allows hedging in accordance with a predetermined model which involves a hedging of forecast net flow to the order of approximately 50 per cent. Before hedging takes place, the costs of this shall also be taken into account. Translation exposure is normally not hedged. In 2017, hedging activities were carried out via forward contracts. Forward contracts are valued at fair value via the income statement. See also Note 19 in the notes for the group.

Sensitivity analysis

If SEK had weakened/strengthened by 10% in relation to USD and all other variables had remained constant, earnings for the year for 2017 would have been approximately SEK 4,500 thousands higher/lower. The corresponding effect on equity calculated as 10% of Precise Biometrics Inc.'s equity corresponds to SEK 2,980 thousands.

Capital risk

The company has a capital risk if the company does not generate a profit and an underlying cash flow, but is dependent on new capital from shareholders or taking out loans. This risk is monitored continuously through the company's internal controls and reporting, as well as the limits defined by the board. Nor is there any guarantee that new capital can be acquired if the need should arise, or that such capital can be acquired on favorable terms.

Credit risk

The risk that the company's customers fail to pay accounts receivable is a customer credit risk. In order to limit this, the company applies a credit policy and outstanding accounts receivable are monitored very closely on an ongoing basis. In the event of uncertainties regarding credit ratings, payment in advance shall be required and no new orders shall be delivered if a customer has significant overdue accounts receivable. The company is of the opinion that there is no concentration of credit risk in any individual customer or counterparty.

Liquidity risk

The board and the executive monitor the liquidity situation closely in order to make sure that adequate liquidity is available to meet the needs of operating activities.

Forecasting problems

The company operates in a rapidly changing market. The market for products in the Fingerprint Technology business area is in an early stage of development and revenues are to a large extent royalties based on customer usage. The company has long sales processes and the advanced issue or postponement of an order can have a significant impact on net sales and earnings, which makes forecasting very difficult.

Cash flow

The company strives to minimize the time capital is tied up, primarily in accounts receivable. To minimize the possible impact of capital being tied up, the company works actively to follow up on outstanding accounts receivable, and also worked in the now divested Mobile Smart Card Solutions business area to minimize inventory through forecasting and production planning.

NOTE 12 - INTANGIBLE ASSETS

CAPITALIZED DEVELOPMENT EXPENSES	12/31/2017	12/31/2016
Opening acquisition value	36,033	31,193
Additions during the year	8,501	4,840
Assets held for sale	-5,533	-
Closing acquisition value	39,001	36,033
Opening accumulated amortization	-23,349	-18,321
Amortization for the year	-3,180	-5,028
Assets held for sale	4,233	-
Closing accumulated amortization	-22,296	-23,349
Opening accumulated write-downs	-2,249	-1,720
Write-downs for the year	-	-529
Closing accumulated write-downs	-2,249	-2,249
Planned residual value	14,456	10,436
PATENTS	12/31/2017	12/31/2016
Opening acquisition value	11,563	11,563
Business combination	1,138	-
Closing acquisition value	12,701	11,563
Opening accumulated amortization	-11,563	-11,563
Amortization for the year	-70	-
Closing accumulated amortization	-11,633	-11,563
Planned residual value	1,068	0
CAPITALIZED DATA EXPENSES	12/31/2017	12/31/2016
Opening acquisition value	4,214	4,214
Additions during the year	396	-
Closing acquisition value	4,610	4,214
Opening accumulated amortization	-4,214	-4,214
Amortization for the year	-	-
Closing accumulated amortization	-4,214	-4,214
Planned residual value	396	0
GOODWILL	12/31/2017	12/31/2016
Opening acquisition value	-	-
Business combination	23,425	-
Closing acquisition value	23,425	-

OTHER INTANGIBLE ASSETS (DATABASE AND CUSTOMER RELATIONS)	12/31/2017	12/31/2016
Opening acquisition value	-	-
Business combination	6,637	-
Closing acquisition value	6,637	-
Opening accumulated amortization	-	-
Amortization for the year	-677	-
Closing accumulated amortization	-677	-
Planned residual value	5,961	-
TOTAL PLANNED RESIDUAL VALUE	45,306	10,436

When calculating useful value, future cash flows were discounted at a rate of 25% before tax. Amortization of capitalized development expenses and acquired intangible assets is included in the item Cost of goods sold.

The amount for this year's amortization of capitalized development expenses includes amortization of SEK 660 thousands belonging to the Mobile Smart Card Solutions business area.

Impairment test of goodwill

Every year the group investigates whether there is a need to write down goodwill. Goodwill and intangible assets with an indeterminate useful life have been allocated to the cash-generating unit (CGU) that is the company as a whole. The recoverable value for the CGU has been determined by calculating the utility value, which requires certain assumptions to be made with regard to, among other things, sales and gross margin. These calculations are based on cash flow forecasts, which are based on financial forecasts estimated by management for the next five years.

The discount rate has been defined based on a calculated "Weighted Average Cost of Capital" (WACC) before tax with an average in the CGU of 25% before tax.

Sensitivity analysis

A sensitivity analysis was conducted, the result of which is that if the WACC is 30% instead, the recoverable value will fall by 20%. If EBITA is assumed to be 20% lower than the company's expectations, the recoverable value would fall by 31%. If sales growth is assumed to be 5% points lower than the company's expectations, the recoverable value would fall by 56%. None of these hypothetical assumptions would result in a need to write down.

NOTE 13 - FIXED ASSETS

EQUIPMENT AND TOOLS	12/31/2017	12/31/2016
Opening acquisition value	12,981	12,553
Additions during the year	605	427
Business combination	119	-
Assets held for sale	-7,715	-
Closing acquisition value	5,991	12,981
Opening accumulated depreciation	-10,850	-9,575
Depreciation for the year	-792	-1,275
Sales/disposals	-	-
Assets held for sale	7,453	-
Closing accumulated depreciation	-4,189	-10,850
Opening accumulated write-downs	-846	-846
Write-downs for the year	-	-
Closing accumulated write-downs	-846	-846
Planned residual value	956	1,285

Depreciation is included in the items Selling expenses, Administration expenses and R&D expenses in the income statement. The amount for this year's depreciation includes depreciation of SEK 470 thousands belonging to the Mobile Smart Card Solutions business area.

NOTE 14 - INVENTORIES

	12/31/2017	12/31/2016
Components	-	610
Goods for resale	-	1,580
Total	-	2,190

The income statement for 2016 includes a write-down of inventories of SEK 4,643 thousands, which is included in the profit/loss from the discontinued operation.

NOTE 15 - ACCOUNTS RECEIVABLE

	12/31/2017	12/31/2016
Accounts receivable	13,518	19,008
Reserve for impairment of receivables	-412	-576
Total	13,106	18,432

As of December 31, 2017 accounts receivable amounting to SEK 6,098 thousands (720) were due. There is a write-down for accounts receivable amounting to SEK 412 thousands (576), but apart from these there are not considered to be any write-down requirements for accounts receivable. These relate to a number of independent customers who previously have not had any payment difficulties.

The aging analysis of all accounts receivable is shown below:	12/31/2017	12/31/2016
Not due	7,007	17,303
Less than 3 months	5,497	659
3 to 6 months	859	303
Of which written down	-261	-
More than 6 months	154	743
Of which written down	-151	-576
Total	13,106	18,432

The maximum exposure for credit risk on the balance sheet date is the actual value for every category of receivables. The group has no collateral as security.

The reported amounts for each currency for the group's accounts receivable are as follows:	12/31/2017	12/31/2016
SEK	1,029	290
USD	1,318	2,130
EUR	166	-52

NOTE 16 - PREPAID EXPENSES AND ACCRUED INCOME

	12/31/2017	12/31/2016
Prepaid insurance	274	53
Accrued income1)	1,413	10,796
Prepaid pension premiums	43	256
Prepaid patent charges	424	319
Other items	1,115	746
Total	3,269	12,169

1) Accrued revenues relate to reported revenues for royalties that had not been invoiced as of the balance sheet date as the base data for revenue recognition is received after the balance sheet date.

NOTE 17 - OTHER PROVISIONS

WARRANTY PROVISIONS	12/31/2017	12/31/2016
As of January 1, 2017	208	308
Release of warranty reserve	-10	-100
As of December 31, 2017	198	208

Provisions have been made for expected warranty claims in respect of products sold in the Mobile Smart Card Solutions business segment.

NOTE 18 - ACCRUED EXPENSES AND PREPAID INCOME

	12/31/2017	12/31/2016
Prepaid income	21,961	14,749
Accrued vacation pay	3,255	2,286
Payroll overhead and other taxes	1,559	1,223
Other accrued expenses	11,086	8,840
Total	37,860	27,098

NOTE 19 - FINANCIAL INSTRUMENTS

	12/31/2017		12/31/2016
	Fair value	Book value	Fair value	Book value
Financial assets
Loans receivable and accounts receivable
Accrued income	1,413	1,413	10,796	10,796
Accounts receivable	13,106	13,106	18,432	18,432
Other receivables	2,358	2,358	2,631	2,631
Liquid assets	116,955	116,955	135,753	135,753
Total financial assets	133,833	133,833	167,613	167,613
Financial liabilities
Financial liabilities at real value via the income statement
Derivatives	620	620	-	-
Financial liabilities valued at the accrued cost of acquisition
Accounts payable	3,349	3,349	4,599	4,599
Other liabilities	2,405	2,405	1,181	1,181
Other accrued expenses	10,466	10,466	8,840	8,840
Total financial liabilities	16,840	16,840	14,620	14,620

The balance sheet item liquid assets only includes bank balances at both the beginning and end of the year.

NOTE 20 - ASSETS HELD FOR SALE

On June 21, 2017 Precise Biometrics announced that the company had concluded an agreement with IDENTOS GmbH on the takeover of the Mobile Smart Card Solutions business area, which includes the business operation involving smart card readers under the Tactivo brand. Identos took over the development of new smart card readers under the Tactivo brand, patents, trade mark rights, manufacturing, sales and customer support on January 1, 2018.

As of June 30, 2017 assets belonging to Mobile Smart Card Solutions have been reclassified and recorded as assets held for sale and the profit/loss from the business area as the profit/loss from a discontinued operation.

The recorded sale includes sale of stock to IDENTOS corresponding to a value of SEK 2.2 million.

Income statement (SEK thousand)	2017	2016
Sales	13,203	13,924
Expenses	-7,940	-21,326
Profit/loss before tax from discontinued operation	5,263	-7,402
Balance sheet (SEK thousand)	12/31/2017
Capitalized development expenses	1,301
Tools	261
Total assets held for sale	1,562

In 2016 there were write-downs of inventories of SEK 4,643 thousands, intangible assets of SEK 529 thousands and accounts receivable of SEK 167 thousands. There was no equivalent write-down in 2017.

NOTE 21 - BUSINESS COMBINATIONS

Below is a description of the business combination completed during the year.

On February 9, 2017 Precise Biometrics AB acquired the assets and liabilities of NexID Biometrics Inc. With this acquisition, Precise Biometrics is extending its software offering to include liveness detection, which further improves the security of fingerprint recognition. The acquisition reinforces the company's position as the leader in the field of fingerprint software and creates further opportunities for growth in the rapidly expanding market for fingerprint technology.

NexID Biometrics had three employees at the time of the acquisition. NexID's net sales in the fiscal year that ended on December 31, 2016 amounted to SEK 2.2 million. The acquired assets are included in the group as of February 9, 2017. The acquisition affected the group's net sales by SEK 3.3 million and the operating profit/loss by SEK -2.8 million. Costs in connection with the acquisition affected the group's profit/loss in 2016 to the order of SEK -1.1 million.

The purchase price amounted to SEK 31,360 thousand and was paid in cash. The goodwill that arose in connection with the acquisition relates to the company's strong position in the field of liveness detection.

Acquisition analysis		SEK thousand
Impact on liquid assets
Purchase price		31,360
Fair value of identifiable assets in NexID on the acquisition date
Intangible assets		7,776
- of which patents	1,138
- of which software	1,619
- of which database	4,276
- of which customer relations	743
Tangible assets		119
Inventories		40
Total assets		7,935
Goodwill		23,425
Purchase price		31,360

NOTE 22 - IMPORTANT EVENTS SINCE THE END OF THE YEAR

After the end of the year it was announced that Precise BioMatch Embedded is being used in the first pilot project in the USA with dual-interface biometric payment cards, which is being carried out by Visa and Mountain America Credit Union. An extended licensing agreement was also signed with Crossmatch, a supplier of biometric identity solutions. The disposal of the Mobile Smart Card Solutions business area was completed as planned as of January 1, 2018.

After the end of the year, Stefan K. Persson was appointed new CEO instead of Håkan Persson. Stefan K. Persson is currently Executive Vice President BO Home in the Bang & Olufsen Group and will take up his new post no later than August 1, 2018.

PARENT COMPANY'S INCOME STATEMENT

SEK thousands

	Note	2017	2016
Net sales	2,8,22	68,735	90,455
Cost of goods and services sold	2,22	-14,061	-12,810
Gross profit		54,674	77,645
Selling expenses		-30,025	-18,530
Administration expenses		-14,140	-14,090
R&D expenses		-26,398	-26,152
Other operating income/expenses		-5,487	6,976
	2,3,4,5,6,8,22	-76,049	-51,796
Operating profit/loss		-21,375	25,849
Profit/loss from participations in group companies	9	10,700	-5,800
Interest income	10	9	340
Interest expenses	10	-1,799	-7
		8,910	-5,467
Profit/loss before tax		-12,465	20,381
Tax	7	-6,600	13,200
Profit/loss for the year		-19,065	33,581

PARENT COMPANY'S STATEMENT OF COMPREHENSIVE INCOME

Profit/loss for the year	-19,065	33,581
Other comprehensive income for the year	-19,065	33,581

PARENT COMPANY'S BALANCE SHEET

SEK thousands

ASSETS	Note	12/31/2017	12/31/2016
Fixed assets
Intangible assets	11,22,23	45,433	10,436
Fixed assets	12,22,23	1,037	1,285
Financial assets	7,13	9,819	30,689
Acquisitions in progress	13	-	1,100
Total fixed assets		56,289	43,509
Current assets
Inventories	14,23	0	1,576
Accounts receivable	15,21	11,133	16,173
Other receivables	21	2,340	2,008
Prepaid expenses and accrued income	16,21	3,186	12,162
Liquid assets	21	115,283	120,796
Total current assets		131,942	152,715
TOTAL ASSETS		188,231	196,225
EQUITY & LIABILITIES
EQUITY
Share capital	17	10,807	10,807
Statutory reserve		1,445	1,445
Reserve for development expenses		12,022	4,840
Total restricted equity		24,274	17,092
Share premium reserve		73,738	73,838
Retained earnings		64,297	37,597
Profit/loss for the year		-19,065	33,581
Total non-restricted equity		118,969	145,016
Total equity		143,243	162,108
Provisions
Other provisions	18	103	103
Total provisions		103	103
Current liabilities
Accounts payable	21	3,156	4,548
Debts to group companies		1,775	1,775
Other current liabilities	21	2,405	939
Accrued expenses and prepaid income	19,21	37,548	26,751
Total current liabilities		44,885	34,014
TOTAL EQUITY AND LIABILITIES		188,231	196,225

PARENT COMPANY'S CASH FLOW STATEMENT

SEK thousands

	Note	2017	2016
Cash flow from operating activities
Operating profit/loss		-21,375	25,849
Adjustments for items not included in cash flow		6,918	6,831
Net financial items	10	-1,790	333
Cash flow from operating activities before change in working capital		-16,247	33,013
Cash flow from changes in working capital
Change in inventories		1,576	4,170
Change in current receivables		39,736	-22,863
Change in provisions		-	25
Change in current liabilities		11,248	14,860
		52,561	-3,808
Cash flow from operating activities		36,314	29,204
Company acquisitions	23	-32,431	-
Investment in intangible assets		-8,897	-4,840
Acquisitions of fixed assets		-499	-427
Cash flow from investing activities		-41,827	-5,268
New share issue		-	50,000
Cash flow from financing activities		-	50,000
Net cash flow for the year		-5,513	73,936
Liquid assets at beginning of year		120,796	46,860
Liquid assets at end of year1)		115,283	120,796

Adjustments for items not included in cash flow consist of depreciation and write-downs.

There are no interest-bearing liabilities in either 2017 or 2016, so there is no need to specify a change between the years.

1) The balance sheet item liquid assets only includes bank balances at both the beginning and end of the year.

CHANGE IN EQUITY THE PARENT COMPANY

SEK thousands

	RESTRICTED EQUITY			UNRESTRICTED EQUITY
	Share capital	Statutory reserve	Reserve for develop ment expenses	Share premium reserve	Retained earn ings	Total equity
Opening balance as of January 1, 2016	10,359	1,445	-	27,044	42,437	81,285
Comprehensive income
Profit/loss for the year	-	-	-	-	33,581	33,581
Other comprehensive income	-	-	-	-	-	-
Total comprehensive income	-	-	-	-	33,581	33,581
Transactions with shareholders
New share issue1)	448	-	-	46,794	-	47,241
Capitalized development expenses	-	-	4,840	-	-4,840	-
Total transactions with shareholders	448	-	4,840	46,794	-4,840	47,241
Closing balance as of December 31, 2016	10,807	1,445	4,840	73,838	71,178	162,108
Opening balance as of January 1, 2017	10,807	1,445	4,840	73,838	71,178	162,108
Comprehensive income
Profit/loss for the year	-	-	-	-	-19,065	-19,065
Other comprehensive income	-	-	-	-	-	-
Total comprehensive income	-	-	-	-	-19,065	-19,065
Transactions with shareholders
New share issue2)	-	-	-	-100	-	-100
Capitalized development expenses	-	-	8,501	-	-8,501	0
Release as a consequence of amortization of development expenses for the year	-	-	-1,319	-	1,319	0
Issue of subscription rights	-	-	-	-	300	300
Total transactions with shareholders	-	0	7,181	-100	-6,882	200
Closing balance as of 31 December 2017	10,807	1,445	12,022	73,738	45,232	143,243

1) New share issue expenses amount to SEK 2,759 thousand.

2) New share issue expenses amount to SEK 100 thousand.

CHANGE IN EQUITY THE PARENT COMPANY NOTES, PARENT COMPANY

• NOTE 1 GENERAL ACCOUNTING POLICIES
• NOTE 2 COSTS ALLOCATED PER TYPE
• NOTE 3 EMPLOYEES AND PERSONNEL EXPENSES
• NOTE 4 REMUNERATION TO LEADING EXECUTIVES
• NOTE 5 AUDITORS' REMUNERATION
• NOTE 6 OPERATIONAL LEASING AGREEMENTS
• NOTE 7 INCOME TAX AND DEFERRED ASSETS
• NOTE 8 PURCHASES AND SALES BETWEEN COMPANIES IN THE GROUP
• NOTE 9 PROFIT/LOSS FROM PARTICIPATIONS IN GROUP COMPANIES
• NOTE 10 FINANCIAL INCOME AND EXPENSES
• NOTE 11 INTANGIBLE ASSETS
• NOTE 12 FIXED ASSETS
• NOTE 13 FINANCIAL ASSETS
• NOTE 14 INVENTORIES
• NOTE 15 ACCOUNTS RECEIVABLE
• NOTE 16 PREPAID EXPENSES AND ACCRUED INCOME
• NOTE 17 EQUITY
• NOTE 18 OTHER PROVISIONS
• NOTE 19 ACCRUED EXPENSES AND PREPAID INCOME
• NOTE 20 RELATED PARTY TRANSACTIONS
• NOTE 21 FINANCIAL INSTRUMENTS
• NOTE 22 ASSETS HELD FOR SALE
• NOTE 23 BUSINESS COMBINATIONS
• NOTE 24- PROPOSED DISTRIBUTION OF EARNINGS

NOTE 1 - GENERAL ACCOUNTING POLICIES

GENERAL

The parent company applies the same accounting policies as the group except in the cases specified in the section entitled 'The parent company's accounting policies'.

THE PARENT COMPANY'S ACCOUNTING POLICIES

The parent company's financial statements have been prepared in accordance with the Swedish Annual Accounts Act and the Swedish Annual Reporting Board's recommendation RFR 2, Accounting for Legal Entities. This means that the parent company, in its financial statements, applies all of the EU-approved IFRS and statements as far as is possible within the framework of the Swedish Annual Accounts Act and with due regard to the relationship between accounting and taxation.

The parent company is reported in accordance with RFR2, which means that the effect of the discontinued operation is reported in a note.

The recognition and measurement policies applied in the Annual Report for 2016 have also been used in this annual report.

Intangible assets

The value of the goodwill arising in connection with the acquisition of NexID Biometrics Inc. is written off over the estimated useful life, which is ten years.

Financial assets

Shares and participations in subsidiaries are reported at the acquisition value, after deductions for depreciation. The acquisition value is included in acquisition-related costs and, where appropriate, supplementary purchase prices. Dividends received are reported as financial revenues. Dividends that exceed the subsidiary's comprehensive income for the period, or that result in the book value of the holding's net assets in the consolidated financial statements being less than the book value of the participations, are an indication that there is a writedown requirement.

When there is an indication that shares and participations in a subsidiary have diminished in value, an estimate is made of the recovery value. A write-down is reported if this is lower than the reported value. Write-downs are reported in the item Results from participations in group companies.

Acquisition costs related to the acquisition of NexID Biometrics Inc. have been capitalized in the parent company and increased the amount of goodwill. This item was recorded as an expense in the group.

NOTE 2 - COSTS ALLOCATED PER TYPE

	2017	2016
Employee benefit expenses	36,612	31,808
Costs of purchasing and handling commercial goods	7,890	7,255
Depreciation and write-downs	6,918	6,831
Development costs	8,865	6,693
Consultancy costs	7,006	5,841
Other external expenses1)	22,819	6,178
Total	90,110	64,606

1) This item includes exchange rate gains/losses.

NOTE 3 - EMPLOYEES AND PERSONNEL EXPENSES

Gender balance	2017		2016
	Men	Women	Men	Women
Precise Biometrics AB, Sweden	24	6	20	6
	24	6	20	6
Gender balance in corporate management			2017	2016
Proportion of women
Board of directors			33%	33%
CEO and leading executives			0%	0%
Salaries and remuneration are allocated as follows:			2017	2016
Board and CEO, Sweden
Salaries and other remuneration			4,321	4,416
Pension expenses			510	473
Payroll overhead, including payroll tax			1,482	1,500
Total			6,313	6,389
Others, Sweden
Salaries and other remuneration			21,929	16,895
Pension expenses			3,987	2,977
Payroll overhead, including payroll tax			6,723	6,068
Total			32,639	25,939
TOTAL			38,952	32,328

NOTE 4 - REMUNERATION TO LEADING EXECUTIVES

Principles

Remuneration is paid to the Chairman of the Board and board members in accordance with the decision of the AGM. Until Stefan K. Persson takes up the post of CEO, Torgny Hellström will serve as acting Chairman of the Board and receive remuneration for this.

Remuneration to the CEO and other leading executives consists of their basic salary, flexible remuneration and pension benefits. Håkan Persson stood down as CEO on 01/15/2018 and Stefan K. Persson will take up the post of new CEO at the latest on August 1, 2018. In addition to the six-month period of notice, severance pay for six months is also paid if notice is served by the company.

Other leading executives refers to the people, who together with the CEO, make up group management. There was an average of five (four) leading executives during the year. For the composition of corporate management, see the section entitled 'Management' in the annual report.

The distribution between basic salary and flexible remuneration shall be in proportion to the executive's level of responsibility and authority. For the CEO, flexible remuneration is set at a maximum of 75% of basic salary. For other leading executives, flexible remuneration is a maximum of 50% of basic salary.

For additional information, see Note 5 in the notes for the group.

NOTE 5 - AUDITORS' REMUNERATION

2017	2016
906	794
78	129
139	2
200	-
1,323	925
54	-
54	-
1,377	925

NOTE 6 - OPERATIONAL LEASING AGREEMENTS

	2017	2016
Leasing costs during the year	2,147	1,685
Total	2,147	1,685
Nominal value of agreed future leasing charges:
Due for payment within 1 year	1,786	1,697
Due for payment after 1 year, but within 5 years	3,444	5,231
Due for payment after 5 years	-	-
Total	5,231	6,928

Operational leasing agreements mainly refer to office rent.

NOTE 7 - INCOME TAX AND DEFERRED TAX

Tax expense for the year	2017	2016
Change in deferred tax	-6,600	13,200
Tax expense	-6,600	13,200
Reconciliation of effective tax	2017	2016
Profit/loss before tax	-12,465	20,381
Tax calculated as per national tax rates applicable for profit in the respective countries	2,742	-4,484
Tax effect of non-deductible expenses/non-taxable revenues	2,316	-1,407
Tax effect of items reported in equity	16	607
Increase/decrease in deferred tax asset	-6,600	13,200
Utilization of tax loss carryforwards not previously considered	-	5,281
Tax loss carryforwards for which deferred tax asset not reported	- 5,074	-
Tax expense	-6,600	13,200

The parent company has a deferred tax asset in respect of the future utilization of tax loss carryforwards amounting to SEK 6,600 thousands (13,200). The company has carried out a new assessment in respect of the calculation of the deferred tax asset and bases the calculation on a cautious assessment of future foreseeable taxable earnings. There are no temporary differences to take into consideration in the parent company.

Deferred tax assets	2017	2016
Tax loss carryforwards	6,600	13,200
Reported value	6,600	-
Specification of change in deferred tax asset:	2017	2016
Opening reported value	13,200	-
Change in deferred tax asset	-6,600	13,200
Closing reported value of deferred tax asset	6,600	13,200

There are tax loss carryforwards for which deferred tax assets have not been reported in the balance sheet amounting to SEK 604,093 thousands (551,026). There is no time limitation for the utilization of tax loss carryforwards.

NOTE 8 - PURCHASES AND SALES BETWEEN COMPANIES IN THE GROUP

Parent company sales to other group companies amounted to SEK 0.2 million (1.6). Purchases from group companies amounted to SEK 10.9 million (1.7).

Internal pricing between the parent company and foreign subsidiaries takes place on the basis of the Transactional Net Margin Method and the profit level is determined in accordance with the Return on Sales, which was approximately 2% (2) for 2017. Internal pricing between Swedish companies takes place according to market conditions.

NOTE 9 - PROFIT/LOSS FROM PARTICIPATIONS IN GROUP COMPANIES

	2017	2016
Reversal/Write-down of receivables from Precise Biometrics, Inc.	10,700	-5,800
Total	10,700	-5,800

NOTE 10 - FINANCIAL INCOME AND EXPENSES

	2017	2016
Interest income	9	340
Total	9	340
Interest expenses	10	7
Exchange rate losses	1,789	-
Total	1,799	7

NOTE 11 - INTANGIBLE ASSETS

CAPITALIZED DEVELOPMENT EXPENSES	12/31/2017	12/31/2016
Opening acquisition value	33,719	28,878
Additions during the year	8,501	4,840
Closing acquisition value	42,220	33,719
Opening accumulated amortization	-21,035	-16,007
Amortization for the year	-3,180	-5,028
Closing accumulated amortization	-24,215	-21,035
Opening accumulated write-downs	-2,248	-1,719
Write-downs for the year	-	-529
Closing accumulated write-downs	-2,248	-2,248
Planned residual value	15,757	10,436
PATENTS	12/31/2017	12/31/2016
Opening acquisition value	8,721	8,721
Business combination	1,138	-
Closing acquisition value	9,859	8,721
Opening accumulated amortization	-8,721	-8,721
Amortization for the year	-70	-
Closing accumulated amortization	-8,791	-8,721
Planned residual value	1,069	0
CAPITALIZED DATA EXPENSES	12/31/2017	12/31/2016
Opening acquisition value	972	972
Additions during the year	396	-
Closing acquisition value	1,368	972
Opening accumulated amortization	-972	-972
Amortization for the year	-	-
Closing accumulated amortization	-972	-972
Planned residual value	396	0
GOODWILL	12/31/2017	12/31/2016
Opening acquisition value	-	-
Business combination	24,496	-
Closing acquisition value	24,496	-
Opening accumulated amortization	-	-
Amortization for the year	-2,246	-
Closing accumulated amortization	-2,246	-
Planned residual value	22,250	-

OTHER INTANGIBLE ASSETS (DATABASE AND CUSTOMER RELATIONS)	12/31/2017	12/31/2016
Opening acquisition value	-	-
Business combination	6,637	-
Closing acquisition value	6,637	-
Opening accumulated amortization	-	-
Amortization for the year	-677	-
Closing accumulated amortization	-677	-
Planned residual value	5,961	-
TOTAL PLANNED RESIDUAL VALUE	45,433	10,436

Intangible assets belonging to the discontinued operation are reported in Note 22.

Amortization of capitalized development expenses and acquired intangible assets is included in the item Cost of goods sold. For the impairment test of goodwill, see Note 12 in the notes for the group.

NOTE 12 - FIXED ASSETS

Equipment and tools	12/31/2017	12/31/2016
Opening acquisition value	11,576	11,148
Additions during the year	499	427
Closing acquisition value	12,075	11,575
Opening accumulated depreciation	-9,445	-8,170
Depreciation for the year	-747	-1,275
Closing accumulated depreciation	-10,192	-9,445
Opening accumulated write-downs	-846	-846
Closing accumulated write-downs	-846	-846
Planned residual value	1,037	1,285

Tangible assets belonging to the discontinued operation are reported in Note 22.

Depreciation is included in the items Selling expenses, Administration expenses and R&D expenses in the income statement.

NOTE 13 - FINANCIAL ASSETS

PARTICIPATIONS IN SUBSIDIARIES	12/31/2017	12/31/2016
Precise Biometrics Services AB
Corp. ID no. 556582-9347, reg. office: Lund municipality, County of Skåne.
Number of shares	1,000	1,000
Share of equity	100%	100%
Equity on balance sheet date	2,136	1,830
Profit/loss for the year	8	-6
Opening book value	100	100
Shareholder contributions	300	-
Closing book value	400	100
Precise Biometrics, Inc.
Potsdam, New York, USA
Number of shares	10	10
Share of equity	100%	100%
Equity on balance sheet date	-29,800	-40,518
Profit/loss for the year	7,121	-2,301
Opening book value	958	958
Closing book value	958	958
Total	1,358	1,058
LONG-TERM RECEIVABLES FROM GROUP COMPANIES	12/31/2017	12/31/2016
As of January 1	16,430	9,077
Transfer of current group receivables/liabilities	-25,269	13,153
Reversal/Write-down of group receivable	10,700	-5,800
Total	1,861	16,430
Deferred tax asset in accordance with Note 7	6,600	13,200
Total financial assets	9,819	30,689
ACQUISITIONS IN PROGRESS	12/31/2017	12/31/2016
Acquisition costs as of 12/31/2016 related to the ongoing acquisition of NexID Biometrics, USA.	-	1,100
The acquisition was completed in February 2017.

NOTE 14 - INVENTORIES

	12/31/2017	12/31/2016
Components	-	610
Goods for resale	-	966
Total	-	1,576

The income statement for 2016 includes a write-down of inventories of SEK 2,071 thousands, which is included in the line Cost of goods and services sold.

NOTE 15 - ACCOUNTS RECEIVABLE

	12/31/2017	12/31/2016
Accounts receivable	11,394	16,582
Reserve for impairment of receivables	-261	-409
Total	11,133	16,173

As of December 31, 2017 accounts receivable amounting to SEK 5,628 thousands (325) were due. There is a write-down for accounts receivable amounting to SEK 261 thousands (409), but apart from these there are not considered to be any write-down requirements for accounts receivable. These relate to a number of independent customers who previously have not had any payment difficulties.

The aging analysis of all accounts receivable is shown below:	12/31/2017	12/31/2016
Not due	5,505	15,848
Less than 3 months	5,145	441
3 to 6 months	744	293
Of which written down	-261	-
More than 6 months	-	-
Of which written down	-	-409
Total	11,133	16,173

The maximum exposure for credit risk on the balance sheet date is the actual value for every category of receivables. The parent company has no collateral as security.

NOTE 16 - PREPAID EXPENSES AND ACCRUED INCOME

	12/31/2017	12/31/2016
Prepaid insurance	274	53
Accrued income1)	1,413	10,796
Prepaid pension premiums	43	256
Prepaid patent charges	424	319
Other items	1,032	739
Total	3,186	12,162

1) Accrued revenues relate to reported revenues for royalties that had not been invoiced as of the balance sheet date as the base data for revenue recognition is received after the balance sheet date.

NOTE 17 - EQUITY

	NUMBER OF SHARES
As of December 31, 2016	360,231,467
As of December 31, 2017	360,231,467

Warrants to employees

The program initiated in 2014 involved the issuing of warrants, which were transferred to the employees at market rates in accordance with the Black & Scholes valuation model. A total of 2,610,000 options were subscribed, and subscription to shares through the exercising of the warrants was possible during the period July 1-December 31, 2017, with each option providing a right to subscribe to one share for SEK 2.50. As the market price during the subscription period was lower than the subscription price, no shares were subscribed.

A new option program was issued in 2017 in which a total of 3,230,000 options were subscribed by employees, of which the CEO had 1,000,000 options and other group executives 1,500,000 options. Precise Biometrics received an infusion of SEK 193,800 into liquid assets. The subscription of shares with utilization of warrants can take place during the period June 1-June 30, 2020 at a price of SEK 5.40. At full utilization of the warrants, the share capital will increase by SEK 96,900, which corresponds to approximately 0.9 % of the company's current share capital. Payments received by Precise Biometrics through the transfers have been reported in additional paid-in capital.

The nominal value of one share is SEK 0.03. Share capital was increased by SEK 447,761 in 2016. After the increase, share capital amounts to SEK 10,806,944.

NOTE 18 - OTHER PROVISIONS

Warranty provisions	12/31/2017	12/31/2016
As of January 1, 2017	103	78
Change in warranty reserve during the year	-	25
As of December 31, 2017	103	103

Provisions have been made for expected warranty claims in respect of products sold in the Mobile Smart Card Solutions business area.

NOTE 19 - ACCRUED EXPENSES AND PREPAID INCOME

	12/31/2017	12/31/2016
Prepaid income	21,961	14,749
Accrued vacation pay	3,255	2,286
Payroll overhead and other taxes	1,559	1,223
Other accrued expenses	10,774	8,494
Total	37,548	26,751

NOTE 20 - RELATED PARTY TRANSACTIONS

During 2017, there were no related party transactions either started or completed apart from business transactions with subsidiaries and salary-related remuneration to leading executives and board members.

NOTE 21 - FINANCIAL INSTRUMENTS

	12/31/2017		12/31/2016
	Fair value	Book value	Fair value	Book value
Financial assets
Loans receivable and accounts receivable
Accrued income	1,413	1,413	10,796	10,796
Accounts receivable	11,133	11,133	16,173	16,173
Other receivables	2,340	2,340	2,008	2,008
Liquid assets	115,283	115,283	120,796	120,796
Total financial assets	130,170	130,170	149,773	149,773
Financial liabilities
Financial liabilities at fair value via the income statement
Derivatives	620	620	-	-
Financial liabilities valued at the accrued cost of acquisition.
Accounts payable	3,156	3,156	4,548	4,548
Other liabilities	2,405	2,405	939	939
Other accrued expenses	10,155	10,155	8,494	8,494
Total financial liabilities	16,366	16,366	13,981	13,981

The balance sheet item liquid assets only includes bank balances at both the beginning and end of the year.

NOTE 22 - ASSETS HELD FOR SALE

On June 21, 2017 Precise Biometrics announced that the company had concluded an agreement with IDENTOS GmbH on the takeover of the Mobile Smart Card Solutions business area, which includes the business operation involving smart card readers under the Tactivo brand. Identos took over the development of new smart card readers under the Tactivo brand, patents, trademark rights, manufacturing, sales and customer support on January 1, 2018.

The Mobile Smart Card Solutions business area is included in the income statement and balance sheet reported for the parent company as described below.

Income statement (SEK thousand)	2017	2016
Sales	8,552	7,156
Expenses	-10,663	-12,239
Profit/loss before tax from discontinued operation	-2,111	-5,083
Balance sheet (SEK thousand)	12/31/2017
Capitalized development expenses	1,301
Tools	261
Total assets held for sale	1,562

In 2016 there were write-downs of inventories of SEK 2,071 thousands and intangible assets of SEK 529 thousands. There was no equivalent writedown in 2017.

NOTE 23 - BUSINESS COMBINATIONS

Below is a description of the business combination completed during the year.

On February 9, 2017 Precise Biometrics AB acquired the assets and liabilities of NexID Biometrics Inc. With this acquisition, Precise Biometrics is extending its software offering to include liveness detection, which further improves the security of fingerprint recognition. The acquisition reinforces the company's position as the leader in the field of fingerprint software and creates further opportunities for growth in the rapidly expanding market for fingerprint technology.

The purchase price amounted to SEK 31,360 thousand and was paid in cash. The goodwill that arose in connection with the acquisition relates to the company's strong position in the field of liveness detection.

The assets and liabilities from the acquisition are predominantly recorded (98%) in the parent company's balance sheet. Depreciation of identifiable fixed assets takes place on a straight-line basis over between 5 and 15 years. Acquisition costs totaling SEK 1,071 thousand have been capitalized in the parent company, and goodwill in the parent company has therefore increased to SEK 24,496 thousand. Goodwill for the parent company is written off over ten years in accordance with its expected useful life.

Acquisition analysis		SEK thousand
Impact on liquid assets
Purchase price including acquisition costs		32,431
Fair value of identifiable assets in NexID on the acquisition date
Intangible assets		7,776
- of which patents	1,138
- of which software	1,619
- of which database	4,276
- of which customer relations	743
Tangible assets		119
Inventories		40
Total assets		7,935
Goodwill		24,496
Purchase price		32,431

NOTE 24- PROPOSED DISTRIBUTION OF EARNINGS

The following non-restricted funds in the parent company are at the disposal of the AGM:

Total non-restricted equity	118,969,781
Profit for the year, SEK	-19,065,110
Retained earnings, SEK	64,296,977
Share premium reserve, SEK	73,737,914

The board proposes that the AGM should not issue a dividend for the fiscal year 2017.

Total non-restricted equity	118,969,781
Carried forward to the new accounts	118,969,781
Total dividend from retained earnings, SEK	-

ASSURANCE

The board of directors and the CEO give their assurance that the consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and give a fair view of the group's financial position and results.

The Annual Report has been prepared in accordance with generally accepted accounting principles and gives a fair view of the parent company's financial position and results.

The Administration Report for the group and the parent company gives a fair view of the group's and the parent company's activities, financial position and results, and describes the essential risks and uncertainty factors faced by the parent company and the companies in the group.

The income statements and balance sheets, including the consolidated financial statements, will be presented for the approval of the Annual General Meeting on May 16, 2018.

Lund, April 3, 2018

Torgny Hellström Torbjörn Clementz Chairman of the Board Board member

Synnöve Trygg Mats Lindoff

Anna Almlöf Matts Lilja

Göran Thuresson

Acting CEO

Our auditor's report was submitted on April 3, 2018

Ernst & Young AB

Johan Thuresson Authorized Public Accountant

Board member Board member

Board member Board member

AUDITOR'S REPORT

To the general meeting of the shareholders of Precise Biometrics AB, corporate identity number 556545-6596

REPORT ON THE ANNUAL ACCOUNTS AND CONSOLIDATED ACCOUNTS

Opinions

We have audited the annual accounts and consolidated accounts of Precise Biometrics AB (publ) for the year 2017. The annual accounts and consolidated accounts of the company are included on pages 32-84 in this document.

In our opinion, the annual accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of the parent company as of 31 December 2017 and its financial performance and cash flow for the year then ended in accordance with the Annual Accounts Act. The consolidated accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of the group as of 31 December 2017 and their financial performance and cash flow for the year then ended in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU, and the Annual Accounts Act. The statutory administration report is consistent with the other parts of the annual accounts and consolidated accounts.

Key Audit Matters

Key audit matters of the audit are those matters that, in our professional judgment, were of most significance in our audit of the annual accounts and consolidated accounts of the current period. These matters were addressed in the context of our audit of, and in forming our opinion thereon, the annual accounts and consolidated accounts as a whole, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

Revenue recognition

Description

As per the company's statement of comprehensive income, the sales revenue for the year 2017 totals SEK 61, 0 million for the group and SEK 68, 7 million for the parent company. Revenues consist of license fees, royalties, consulting services, support & maintenance and product sales. Revenues from the sale of goods are recognized upon delivery in accordance with the terms of delivery. Revenues accumulated from consulting services are recognized in the period during which the services are performed. Revenues accumulated from Support & Maintenance are recognized in accordance to the duration of the agreement. Revenue accumulated from license fees are recognized based on licensing agreements, and revenue accumulated from royalties is recognized in the period where customers report the use of licenses. The revenue recognition relating to licenses and royalties therefore, requires a managerial decision as to which period it should be recognized in. This means that the revenue recognition includes an essential amount of assessment entries, making it a particularly significant area of the audit.

A description of accounting principles as well as significant estimates and assessments for accounting purposes can be found in note 1. Note 2 shows how the company's revenues are distributed between royalties, licenses, services and products. Note 20 for the Group, as well as Note 22 for the Parent Company, describes the turnover on discontinued operations.

We therefore recommend that the general meeting of shareholders adopts the income statement and balance sheet for the parent company and the group.

Our opinions in this report on the annual accounts and consolidated accounts are consistent with the content of the additional report that has been submitted to the parent company's audit committee in accordance with the Audit Regulation (537/2014) Article 11.

Basis for Opinions

We conducted our audit in accordance with International Standards on Auditing (ISA) and generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor's Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have otherwise fulfilled our ethical responsibilities in accordance with these requirements. This includes that, based on the best of our knowledge and belief, no prohibited services referred to in the Audit Regulation (537/2014) Article 5.1 have been provided to the audited company or, where applicable, its parent company or its controlled companies within the EU.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions.

We have fulfilled the responsibilities described in the Auditor's responsibilities for the audit of the financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements.

How our audit addressed this key audit matter

The process for revenue recognition has been evaluated and tested in our audit. We have, amongst other things, performed an analytical procedure, reviewed contracts, made payment checks on income and received third party confirmation, as well as reviewed accruals against underlying documentation. In addition to this, we have also examined whether the information disclosed in the financial statements is adequate.

86 | Auditor's report

Capitalized development costs

Description

As per the company's statement of financial position as at 31 December 2017, the capitalized development costs, including discontinued operations, totals SEK 15,8 million for the group. Capitalized development costs amount to SEK 15,8 million for the parent company as per the company's statement of financial position as at 31 December 2017. Development expenditure is recognized as an asset in the statement of financial position if the product or process is technically and commercially viable, and if the company has sufficient resources to complete the development and thereby can use or sell the intangible asset. The company regularly tests if events or changes in circumstance indicate that impairment is needed. Tests are conducted by assessing the project with respect to future cash flows. Projects that won't provide future economic benefits to the company are written down. Forecasts of future cash flows are based on estimates of future revenues. The initial recognition of capitalized development costs and the impairment tests performed are based on estimates by the management, making the capitalized development costs a particularly significant area of the audit. Please see note 1 for a description of accounting principles and important estimates and assessments for accounting purposes. Note 12 for the group and note 11 for the parent company, "Capitalized Development Costs", show reported capitalized development costs, acquisitions for the year, depreciation and write-downs. Note 20 for the group and note 22 for the parent company are disclosed for discontinued operations.

Deferred tax assets

Description

As per the company's statement of financial position as at 31 December 2017, the deferred tax assets totals SEK 6,1 million for the group and SEK 6,6 million for the parent company and is attributable to the company's tax deficit. The company recognizes deferred tax assets in respect of tax loss to the extent that the management believes it probable that deductions can be offset against future taxable profits. The valuation of deferred tax assets is based on the management's assessment of the company's future tax revenue, making the recognition of deferred tax assets a particularly significant area of the audit. Please see note 1 for a description of accounting principles as well as significant estimates and assessments for accounting purposes. The group's tax situation can be found in note 9 and for the parent company in note 7.

Acquisition of assets and liabilities of NexID Biometrics Inc.

Description

In 2017, Precise Biometrics AB acquired assets and liabilities of NexID Biometrics Inc. The acquisition price amounted to SEK 31.4 million in the group and SEK 32.4 million, including acquisition costs, in the parent Company. The acquisition is identified as a business combination and an acquisition analysis has been prepared by the company. Of the acquisition price, SEK 31.2 million relates to intangible fixed assets, of which goodwill amounts to SEK 23.4 million. For the parent company, SEK 32.3 million relates to intangible fixed assets, of which goodwill amounts to SEK 24.5 million.

The accounts of the acquisition have required significant estimates of the company. The main assessments relate to the allocation of the purchase price to acquired assets and liabilities. In preparing the acquisition analysis, the company has made several assumptions regarding, for example, future cash flows, growth, discount rate and choice of model for valuation. The accounts of the acquisition is a particularly important area in auditing as significant assumptions are required by the company and entail significant estimates.

A description of accounting principles as well as significant estimates and estimates for accounting purposes are set out in note 1. The company's information about the acquisition is stated in note 21 for the group and note 23 for the parent company.

How our audit addressed this key audit matter

I vår revision har vi utvärderat och testat bolagets process för att bedöma vilka utgifter som uppfyller kriterierna för redovisning som balanserade utvecklingsutgifter. Vi har även utvärderat och testat bolagets process för bedömning av om indikation på nedskrivningsbehov föreligger samt upprätta nedskrivningstest, bland annat genom att granska rimligheten i antaganden om framtida intäkter. Vi har granskat lämnade upplysningar i årsredovisningen.

How our audit addressed this key audit matter

In our review, we have examined the company's forecasts of future tax revenues, among other things, by challenging the assumptions in the forecast and by comparison with historical results. We have also examined the size of the tax deficits compared to the supporting evidence. We have reviewed given information in the annual report.

How our audit addressed this key audit matter

In our review, we evaluated and audited the company's processes for preparing the acquisition analysis including evaluating the reasonableness of future cash flows and growth assumptions. Based on our valuation specialists, we have examined the company's models and methods for conducting acquisition analysis and the reasonableness of the valuation model, as well as assumptions, including discount rates and future cash flows, as well as the estimated useful lives of the assets. We have also reviewed the information provided in the annual report.

Auditor's report | 87

Other Information than the annual accounts and consolidated accounts

This document also contains other information than the annual accounts and consolidated accounts and is found on pages 1-31 and pages 96-104. The Board of Directors and the Managing Director are responsible for this other information.

Our opinion on the annual accounts and consolidated accounts does not cover this other information and we do not express any form of assurance conclusion regarding this other information.

In connection with our audit of the annual accounts and consolidated accounts, our responsibility is to read the information identified above and consider whether the information is materially inconsistent with the annual accounts and consolidated accounts. In this procedure we also take into account our knowledge otherwise obtained in the audit and assess whether the information otherwise appears to be materially misstated.

If we, based on the work performed concerning this information, conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Board of Directors and the Managing Director

The Board of Directors and the Managing Director are responsible for the preparation of the annual accounts and consolidated accounts and that they give a fair presentation in accordance with the Annual Accounts Act and, concerning the consolidated accounts, in accordance with IFRS as adopted by the EU. The Board of Directors and the Managing Director are also responsible for such internal control as they determine is necessary to enable the preparation of annual accounts and consolidated accounts that are free from material misstatement, whether due to fraud or error.

In preparing the annual accounts and consolidated accounts, The Board of Directors and the Managing Director are responsible for the assessment of the company's and the group's ability to continue as a going concern. They disclose, as applicable, matters related to going concern and using the going concern basis of accounting. The going concern basis of accounting is however not applied if the Board of Directors and the Managing Director intends to liquidate the company, to cease operations, or has no realistic alternative but to do so.

Auditor's responsibility

Our objectives are to obtain reasonable assurance about whether the annual accounts and consolidated accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinions. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and generally accepted auditing standards in Sweden will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual accounts and consolidated accounts.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the annual accounts and consolidated accounts, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of the company's internal control relevant to our audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors and the Managing Director.
• Conclude on the appropriateness of the Board of Directors' and the Managing Director's use of the going concern basis of accounting in preparing the annual accounts and consolidated accounts. We also draw a conclusion, based on the audit evidence obtained, as to whether any material uncertainty exists related to events or conditions that may cast significant doubt on the company's and the group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the annual accounts and consolidated accounts or, if such disclosures are inadequate, to modify our opinion about the annual accounts and consolidated accounts. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause a company and a group to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the annual accounts and consolidated accounts, including the disclosures, and whether the annual accounts and consolidated accounts represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient and appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated accounts. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our opinions.

We must inform the Board of Directors of, among other matters, the planned scope and timing of the audit. We must also inform of significant audit findings during our audit, including any significant deficiencies in internal control that we identified.

We must also provide the Board of Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Board of Directors, we determine those matters that were of most significance in the audit of the annual accounts and consolidated accounts, including the most important assessed risks for material misstatement, and are therefore the key audit matters. We describe these matters in the auditor's report unless law or regulation precludes disclosure about the matter.

REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS

Opinions

In addition to our audit of the annual accounts and consolidated accounts, we have also audited the administration of the Board of Directors and the Managing Director of Precise Biometrics AB (publ) for the year 2017 and the proposed appropriations of the company's profit or loss.

We recommend to the general meeting of shareholders that the profit be appropriated in accordance with the proposal in the statutory administration report and that the members of the Board of Directors and the Managing Director be discharged from liability for the financial year.

Basis for opinions

We conducted the audit in accordance with generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor's Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have otherwise fulfilled our ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions.

Responsibilities of the Board of Directors and the Managing Director

The Board of Directors is responsible for the proposal for appropriations of the company's profit or loss. At the proposal of a dividend, this includes an assessment of whether the dividend is justifiable considering the requirements which the company's and the group's type of operations, size and risks place on the size of the parent company's and the group's equity, consolidation requirements, liquidity and position in general.

The Board of Directors is responsible for the company's organization and the administration of the company's affairs. This includes among other things continuous assessment of the company's and the group's financial situation and ensuring that the company's organization is designed so that the accounting, management of assets and the company's financial affairs otherwise are controlled in a reassuring manner. The Managing Director shall manage the ongoing administration according to the Board of Directors' guidelines and instructions and among other matters take measures that are necessary to fulfill the company's accounting in accordance with law and handle the management of assets in a reassuring manner.

Auditor's responsibility

Our objective concerning the audit of the administration, and thereby our opinion about discharge from liability, is to obtain audit evidence to assess with a reasonable degree of assurance whether any member of the Board of Directors or the Managing Director in any material respect:

• has undertaken any action or been guilty of any omission which can give rise to liability to the company, or
• in any other way has acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association.
• •

Our objective concerning the audit of the proposed appropriations of the company's profit or loss, and thereby our opinion about this, is to assess with reasonable degree of assurance whether the proposal is in accordance with the Companies Act.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with generally accepted auditing standards in Sweden will always detect actions or omissions that can give rise to liability to the company, or that the proposed appropriations of the company's profit or loss are not in accordance with the Companies Act.

As part of an audit in accordance with generally accepted auditing standards in Sweden, we exercise professional judgment and maintain professional skepticism throughout the audit. The examination of the administration and the proposed appropriations of the company's profit or loss is based primarily on the audit of the accounts. Additional audit procedures performed are based on our professional judgment with starting point in risk and materiality. This means that we focus the examination on such actions, areas and relationships that are material for the operations and where deviations and violations would have particular importance for the company's situation. We examine and test decisions undertaken, support for decisions, actions taken and other circumstances that are relevant to our opinion concerning discharge from liability. As a basis for our opinion on the Board of Directors' proposed appropriations of the company's profit or loss we examined whether the proposal is in accordance with the Companies Act.

Ernst & Young AB, Box 7850, 103 99 Stockholm, was appointed auditor of Precise Biometrics AB (publ) by the general meeting of the shareholders on the 16 May 2017 and has been the company's auditor since the 27 April 2015.

Malmö 3 April, 2018 Ernst & Young AB

Johan Thuresson Authorized Public Accountant

CORPORATE GOVERNANCE REPORT 2017

The Corporate Governance Report provides a general description of how Precise Biometrics works, how the company's decision-making functions, and how the company applies the Swedish Corporate Governance Code ("the Code"). Certain disclosures in accordance with Chapter 6, Section 6 of the Swedish Annual Accounts Act can be found in the Administration Report on pages 32-41 in the Annual Report.

CONTROL OF PRECISE BIOMETRICS

Corporate governance is the system through which the owners, directly or indirectly, govern and control a company. In a limited liability company like Precise Biometrics, governance, control and management are allocated between the shareholders, auditors, board of directors and the CEO in accordance with current legislation, regulations and instructions. The governance of Precise Biometrics is based on the Swedish Companies Act, the company's articles of association, the Nasdaq Stockholm rules for issuers, the Code, and internal control documents such as the financial policy and information policy, see website under Investors/Corporate Governance.

The board of directors of Precise Biometrics is responsible for implementing appropriate corporate governance and reviews this annually together with leading executives. The Corporate Governance Report describes how Precise Biometrics was governed during 2017.

DEVIATIONS FROM THE CODE

During the fiscal year 2017 all of the rules in the Code were observed, with one exception. Because of the existence of insider information in the company, in June 2017 the board was unable to make a decision on allocation in the incentive program that was adopted at the AGM in 2017, which should have taken place in accordance with the terms of the program. The allocation decision therefore had to be deferred until September 2017, which means that the earning period in the program will be a little less than three years.

ARTICLES OF ASSOCIATION

The company's articles of association contain no restrictions on the number of votes that each shareholder may cast at a shareholders' general meeting. The company's articles of association contain no special provisions concerning the appointment or dismissal of board members, or concerning amendments to the articles of association.

ANNUAL GENERAL MEETING

The AGM is Precise Biometrics' highest ranking decision-making body and the forum through which shareholders can exercise their influence over the company. At the AGM, shareholders exercise their right to vote by appointing board members and external auditors, deciding on the adoption of the income statement and balance sheet, express an opinion on the discharge from liability for board members and the CEO in relation to the company, determine principles for how the nomination committee is to be elected, and establish guidelines for remuneration to leading executives. Shareholders also have the opportunity at the AGM to ask questions concerning the company and normally all the members of the board, the group executive team and the auditors must be present to answer such questions.

Precise Biometrics' AGM 2017 was held at the company's head office in Lund, Sweden on May 16, 2017. The AGM adopted the accounts for 2016 and granted the board of directors and the CEO discharge from liability for the fiscal year 2016. In addition to mandatory matters, as set out in the articles of association, the following decisions were made:

• Torgny Hellström, Torbjörn Clementz, Matts Lilja, Mats Lindoff, Synnöve Trygg and Anna Almlöf were re-elected as board members. Torgny Hellström was re-elected as Chairman of the Board.
• The accounting firm Ernst & Young AB was re-elected as the company's auditor for a mandate period of one year, with authorized public accountant Johan Thuresson as lead auditor.
• No dividend was paid for the fiscal year 2016.
• The level of the board fee and committee fee was confirmed, as were guidelines for remuneration to leading executives, the essential content of which is that remuneration and terms of employment shall be in line with the market and competitive.
• The board was authorized, as in previous years, to make a decision on the new issue of a maximum of 36,023,146 shares and/or convertibles, with or without departure from the preferential rights of shareholders, for the purpose of enabling the company to receive a capital infusion from new owners, which are considered to be strategically important from an operational, financial, structural or other perspective.

For further information on the decisions taken at the AGM 2017, please refer to the company's website under Investors/Corporate Governance/ Annual General Meeting.

Precise Biometrics' AGM 2018 will take place on May 16 at 4:00 pm at Mobilvägen 10 in Lund, Sweden. Shareholders who wish to participate in the meeting must be registered in the company's share register no later than May 10, 2018, and applications to participate in the meeting must be submitted as indicated in the notice.

NOMINATION COMMITTEE

According to the principles for the organization of the nomination committee adopted at the AGM 2017, the nomination committee shall consist of representatives of two to three of the company's largest shareholders as of August 30, 2017 and the Chairman of the Board. If any of these shareholders should forgo the opportunity to appoint a representative, the shareholder with the next largest holding shall be consulted.

The nomination committee prior to the AGM 2017 consisted of Hans Ek (SEB Fonder), Carina Lundberg Markow (Folksam and KPA) and Torgny Hellström (Chairman of the Board). The nomination committee's motivating statement before the AGM 2017 stated that the nomination committee had, in preparing its proposal for the board, applied rule 4.1 in the Code as a diversity policy. The aim of the policy is that the board have an appropriate composition with due reference to the company's operations, stage of development and situation in general, characterized by versatility and breadth with regard to competence, experience and background, and that the aim should be to have an even gender balance. The AGM 2017 decided to appoint new board members in accordance with the nominations committee's proposal, which resulted in the current board, which the nomination committee considered to have a generally appropriate composition with reference to the diversity policy and the company's operations, stage of development and situation in general. Six members were elected at the AGM 2017, two of them women and four men.

The nomination committee prior to the AGM 2018 consists of Hans Ek (SEB Fonder), Torgils Knutsson Bonde and Torgny Hellström (Chairman of the Board). In addition to the Chairman of the Board, the members represent the two largest shareholders in the company as of August 30, 2017 who have agreed to participate in the nomination committee.

The nomination committee is assigned to submit proposals at the AGM to the Chairman and other board members, including a motivating statement concerning the proposals, propose remuneration for board members and auditors, propose compensation for committee work where appropriate, and submit a proposal for a person to chair the AGM. In addition the nomination committee shall also express an opinion on the independence of the board members in relation to the company and major shareholders.

BOARD OF DIRECTORS

The board is responsible for the company's organization and the administration of the company's affairs, and is tasked with managing the compa-

TORGNY HELLSTRÖM TORBJÖRN CLEMENTZ SYNNÖVE TRYGG

POSITION	Chairman	Board member	Board member
YEAR OF SELECTION	2013	2009	2016
YEAR OF BIRTH	1958	1961	1959
TRAINING	LL.B.	MBA	MBA
OTHER ASSIGNMENTS	Chairman of the Board at MagComp AB, board member at DDM Holding AG, Switzerland and True Heading AB (publ).	Board member at Sport och Rehab kliniken in Ängelholm	Board member at companies including Intrum Justitia AB, Landshypotek Bank AB and Volvo Finans AB
CURRENT POSITION	Founder and senior management consultant at Ruddex International AB	Own consultancy business
PREVIOUS ASSIGNMENTS	CEO and other leading positions within Anoto Group, Vice Presi dent at Ericsson, leading positions at Ericsson, IBM Europe and IBM Nordic legal departments	CFO at Kärhs, CFO at One Nordic AB, CFO and Vice President at BE Group	CEO at, among others, SEB Kort AB
SHARES IN PRECISE BIOMETRICS	50,000	59,555	0
ATTENDANCE/BOARD MEETINGS	12/12	10/12	11/12
COMMITTEE WORK	Audit committee & Compensation committee	Audit committee	Audit committee
ATTENDANCE/COMMITTEE MEETINGS	8/8 & 6/6	6/8	8/8
INDEPENDENT OF THE COMPANY AND ITS MANAGEMENT AND MAJOR SHAREHOLDERS	Yes	Yes	Yes

ny's affairs on behalf of the owners in such a way that the owners' interest in a good, long-term return on capital invested is satisfied in the best possible way. The board is responsible for ensuring that the company's organization is appropriate and that the business is run in accordance with the Swedish Companies Act, the articles of association, the Code, other applicable laws and regulations, and the board's rules of procedure.

The board follows written rules of procedure that are adopted every year. The rules of procedure include instructions for the Company's president, the assignments incumbent on the chairman, the agenda of board meetings, and decision-making procedures. In accordance with the rules of procedure, eight ordinary board meetings shall be held in addition to the statutory board meeting. The board meets according to an annual schedule adopted in advance. In addition to these, the board convenes whenever necessary. In 2017, the board held 12 board meetings at which minutes were taken.

The Chairman organizes and leads the work of the board. Issues dealt with during the year included the company's strategy and long-term focus, organization, corporate governance, financing, and interim and year-end reports. The board conducted an evaluation of the board in which members submitted in writing their views on the board and the work of the board. The results were discussed in individual meetings between each board member and the Chairman of the Board, and jointly with the entire board. The Chairman of the Board presented the results of the board evaluation to the nomination committee.

The CEO keeps the board of directors up-to-date at all times on the development of the business. In addition to the ordinary meetings, the Chairman and other directors have been in continuous contact with leading executives in the company, primarily the CEO and the CFO. In addition to meetings where minutes were taken, the board has received monthly updates on the company's financial results and position.

ANNA ALMLÖF	MATTS LILJA	MATS LINDOFF
Board member	Board member	Board member
2016	2013	2014
1967	1965	1961
MBA	Technical college graduate	M.Sc.
Board member at Lagercrantz Group	Board member at Blinkfyrar AB and Svensk skogsdata	Board member at Enea and Combain.
Vice President Services HIAB	CEO of Blink Services	Consultant in own company, Lindoff Technology AB.
Senior Vice President of Strategy, Marketing and Services and member of group executive at Gunnebo AB. Various positions at Ericsson, includ ing Head of Product Management at Ericsson Global Services	CEO at Strainlabs AB, Ammeraal Beltech, ISG Systems AB, Opax A/S and Opax AB. Business Developer at SAAB Security	CTO at Sony Ericsson, CEO at C Technologies, Head of Product Development at Ericsson
0	15,000	0
12/12	12/12	12/12
Compensation committee	Compensation committee	Compensation committee
6/6	4/6	6/6
Yes	Yes	Yes

Precise Biometrics' board of directors shall, in accordance with the articles of association, consist of a minimum of three, and a maximum of seven members. Since the AGM 2017 the board has consisted of six members: Torgny Hellström (Chairman), Torbjörn Clementz, Matts Lilja, Mats Lindoff, Synnöve Trygg and Anna Almlöf. All board members are independent in relation to Precise Biometrics and corporate management, and also to larger shareholders. At the time of the submission of the annual report, none of the board members in the company have a direct or indirect holding in the company that represents at least one tenth of the voting rights for all shares in the company. The table below sets out the age, education and other assignments of board members, together with their holding of financial instruments in the company.

The table below also reports the attendance of members at board and committee meetings for elections, etc., as well as their independence.

AUDIT COMMITTEE

The audit committee's undertaking is to support the board in its work to fulfill its responsibilities in the areas of auditing, internal control and financial reporting. In addition to this, the work of the audit committee includes supporting the board in the preparation of proposals for the choice of auditor and, when applicable, the procurement of audit services, monitoring the auditor's independence and staying informed about the Swedish Supervisory Board of Public Accountants' quality control of the auditor. In 2017 the committee focused primarily on reporting (quarterly reports, annual financial reporting and internal reporting), business-related risks and internal control. The committee holds meetings two to four times a year and in conjunction with the compilation of each interim report. The committee held eight meetings during the year, of which four were in conjunction with the quarterly reports. The audit committee must meet the company's auditor at least once in every calendar year. Since the AGM 2017 the company's audit committee has consisted of board members Torbjörn Clementz (committee chairman), Torgny Hellström and Synnöve Trygg.

COMPENSATION COMMITTEE

The duties of the compensation committee include issues concerning salaries, pension terms and conditions, incentive plans and other

PATRIK LINDEBERG GÖRAN THURESSON

FREDRIK CLEMENTSON

POSITION	COO	Acting CEO, CFO	R&D Director
EMPLOYED SINCE	2007	2016	2007
YEAR OF BIRTH	1973	1960	1980
TRAINING	M.Sc.	MBA	M.Sc.
PREVIOUS ASSIGNMENTS	VP R&D and CTO at Precise Biometrics, Manager Technical Account Management at Teleca and Obigo	CFO and Group Controller in international groups such as Weidmüller, BE Group Sweden, Schneider Electric, Procordia Food and Securitas	Over ten years' experience at Precise Biometrics as developer, project manager and in sales. Previous experience from roles in development at Obigo and Teleca USA
SHARES IN PRECISE BIOMETRICS	-	-	-
WARRANTS IN PRECISE BIOMETRICS	300,000	300,000	300,000

terms and conditions for the employment of the CEO and other leading executives. In 2017 the committee focused primarily on remuneration to leading executives, including the issue of incentive plans. The committee has also prepared board proposals for guidelines for remuneration to leading executives, which can be found in the Administration Report. The committee held six meetings during the year. Since the AGM 2017 the company's compensation committee has consisted of board members Torgny Hellström (committee chairman), Mats Lindoff, Matts Lilja and Anna Almlöf.

GROUP EXECUTIVE TEAM

Precise Biometrics' group executive team is based at the headquarters in Lund, Sweden. At the end of 2017 the group executive team consisted of the CEO, CFO, COO, R&D Director, Corporate Marketing Manager and Senior Sales Director. The composition of the group ensures short decision-making channels. The group held formal weekly meetings during the year and a strategy and budget meeting. The table below provides a more detailed presentation of the group management team.

AUDITORS

At the AGM 2017 Ernst & Young AB (EY), with Johan Thuresson as lead auditor, was elected to be Precise Biometrics' auditor for the period until the AGM 2018. The auditors undertake assignments for other listed companies, but not to such an extent that the time required is not allocated for Precise Biometrics. None of the auditors has any assignments that would question their independence. As part of his audit assignment, Johan Thuresson participated in one board meeting and three audit committee meetings, and has been in regular contact with the CEO, the CFO and the Chairman of the Board.

Information on remuneration to the auditors, both for the parent company and the group, can be found in Note 6 in the group's notes and in Note 5 in the parent company's notes.

DANIEL EDLUND FREDRIK SJÖHOLM

Corporate Marketing Manager	Senior Sales Director
2014	2016
1979	1970
MBA	MBA
Management positions in the ICT industry as Director of Communi cations, Marketing and Account Manager at Huawei Technologies Nordics, AxiCom Cohn & Wolfe, and Porter Novelli	Many years' experience from senior positions in sales and business development at technology compa nies such as Cybercom, ENEA, Sony Ericsson and Telelogic
25,000	-
300,000	300,000

INTERNAL CONTROL AND RISK MANAGEMENT IN RESPECT OF FINANCIAL REPORTING

In accordance with both the Swedish Companies Act and the Code, the board is responsible for ensuring that the company maintains a good level of internal control and is regularly informed of and evaluates how the company's system for internal control is working. The report has been limited to include only the internal control of financial reporting.

The company's organization and the way the business is run form an important platform for internal control. All areas of responsibility and employees have clearly defined roles. The most important policy documents are documented in the form of policies and instructions, and have been adopted by the boards and are revised annually. These documents are primarily the economic and finance policy, the Code of Conduct, the communication policy, the insider trading policy, the IT policy, the sustainability policy, the equality and diversity plan and the working environment policy.

Control environment

Operational decisions are made by the group executive, while decisions on strategy, focus, acquisitions and general financial matters are made by the board. Internal control is designed to work in this organization. The basis of internal control in respect of financial reporting consists of the general control environment comprising an organization, decision-making paths, authorizations and responsibilities that have been documented and communicated. The company's control environment also consists of collaboration between the group executive, the board and the compensation and audit committees. In order to create and maintain a functional control environment the board has prepared several important documents for the financial reporting. These documents consist of, among other things, the rules of procedure as applied by the board and instructions for the CEO. The CEO is responsible for ensuring that the guidelines adopted by the board are followed in daily operational work. The CEO briefs the board on a fixed regular basis at board meetings and through monthly reports. The company follows well-defined procedures in relation to annual and monthly financial reporting. The closing financial statements are presented to the board according to a predetermined template.

The company's auditors report at least once every fiscal year to the board and at least twice to the audit committee. An examination of internal control was performed within the framework of the external audit. The lead auditor also maintains regular contact with the Chairman of the Board.

Risk assessment

The group executive and the board carry out an assessment on an ongoing basis of the extent of the company's risk management, in particular in respect of financial reporting. The company pays special attention to risks in the financial statements, i.e., whether there are any accounting errors and the way in which assets and liabilities are valued. The management of internal transactions within the group can also be subject to risks. These risks are considered, however, to be of minor importance in that the company has a well-defined monthly financial reporting process and established follow-up procedures and policies.

Control activities

To guarantee that the financial reporting process at all times presents a fair and true view, a number of control activities have been integrated, and these involve various parts of the organization. The company has a limited number of people who are company signatories, and an appropriate set of attestation rules has been produced and is updated as required. Manual inspections are carried out to prevent errors in financial reporting. These inspections are also integrated into accounting and other IT systems. The regular audit involves an evaluation of those controls that the auditor considers reliable. Any observations following this examination are reported to both the group executive and the board.

Information and communication

Precise Biometrics has defined how information and communication in respect of financial reporting shall take place in an effective, correct way. The communication policy drawn up aims to promote the correctness of the company's communication, both externally and internally.

External information and communication take place in accordance with the EU's Market Abuse Regulation, Swedish law, the stock exchange's Rule Book for Issuers and the Code. The company issues interim financial statements for the business three times a year, as of March 31, June 30 and September 30. The company also reports on the year-end financial statements as of December 31 in its year-end report. All documents, press releases and presentations in connection with reports are available on the company's website.

The board receives monthly reports from the CEO and the CFO about the company's financial position, development and projects in progress. The company continuously informs staff of updates to accounting policies, policies and other changes in reporting requirements.

Follow-up

The board and the audit committee continually assess the information submitted by the group executive. The company's financial situation is reviewed at every board meeting and through monthly reports. Budget comparisons and forecasts, including analysis of any deviations, are described in the monthly reports. The board examines interim and year-end financial statements before they are published. Every year the board evaluates both its own work and that of the CEO.

Internal audits

Precise Biometrics has well-prepared governance and internal control systems, compliance with which is followed up regularly at various levels within the company. Precise Biometrics is a relatively small company with a limited number of employees and clients. In view of this, the board has decided that there is not currently a need to set up a special audit function. This assessment is reviewed annually by the board.

THIS IS A TRANSLATION FROM THE SWEDISH ORIGINAL

AUDITOR'S REPORT ON THE CORPORATE GOVERNANCE STATEMENT

To the general meeting of the shareholders of Precise Biometrics AB, corporate identity number 556545-6596

Engagement and responsibility

It is the Board of Directors who is responsible for the corporate governance statement for the year 2017 on pages 89-94 and that it has been prepared in accordance with the Annual Accounts Act.

The scope of the audit

Our examination has been conducted in accordance with FAR's auditing standard RevU 16 The auditor's examination of the corporate governance statement. This means that our examination of the corporate governance statement is different and substantially less in scope than an audit conducted in accordance with International Standards on Auditing and generally accepted auditing standards in Sweden. We believe that the examination has provided us with sufficient basis for our opinions.

Opinions

A corporate governance statement has been prepared. Disclosures in accordance with chapter 6 section 6 the second paragraph points 2-6 the Annual Accounts Act and chapter 7 section 31 the second paragraph the same law are consistent with the annual accounts and the consolidated accounts and are in accordance with the Annual Accounts Act.

Lund the 3rd of April 2018

Ernst & Young AB

Johan Thuresson Authorized Public Accountant

FINANCIAL GLOSSARY

NET SALES GROWTH

Percentage change compared with the corresponding period in the previous year.

GROSS MARGIN

Gross profit/loss divided by net sales.

OPERATING PROFIT/LOSS

Profit/loss before financial net and tax.

OPERATING PROFIT/LOSS, TOTAL OPERATION

Operating profit/loss plus profit/loss after tax from discontinued operation.

OPERATING EXPENSES

Operating expenses excluding cost of goods sold.

EBITDA

Profit/loss before financial net and depreciation.

This key figure shows the group's profit/loss before depreciation/ amortization of capitalized assets.

OPERATING MARGIN

Operating profit/loss divided by net sales.

CASH FLOW, TOTAL OPERATION

Cash flow from operating activities after changes in working capital.

WORKING CAPITAL, TOTAL OPERATION

Current assets minus current liabilities.

CAPITAL EMPLOYED, TOTAL OPERATION

Total assets less non-interest-bearing liabilities and provisions.

EQUITY, TOTAL OPERATION

Equity at the end of the period.

AVERAGE EQUITY, TOTAL OPERATION

The average equity was calculated as equity for the last four quarters divided by four.

LIQUIDITY RATIO, TOTAL OPERATION

Current assets excluding inventories divided by current liabilities.

This key figure shows the group's ability to pay in the short term.

EQUITY/ASSETS RATIO, TOTAL OPERATION

Equity divided by total assets on the balance sheet date.

This key figure shows what proportion of assets is funded by equity. This measure can be of interest when assessing the group's ability to pay in the long term.

RETURN ON EQUITY, TOTAL OPERATION

Profit/loss after tax divided by average equity.

This key figure shows the operation's return on shareholders' capital invested and is thus a measure of how profitable the group is. Investors can compare this measure with the current bank interest rate or return from alternative investments. The measure can also be used to compare profitability between companies in the same industry.

EARNINGS PER SHARE, REMAINING OPERATION, BEFORE DILUTION

Profit/loss for the period from remaining operation divided by average number of shares.

EARNINGS PER SHARE, REMAINING OPERATION, AFTER DILUTION

Profit/loss for the period from remaining operation divided by weighted average number of shares.

EARNINGS PER SHARE, TOTAL OPERATION, BEFORE DILUTION

Profit/loss for the period from total operation divided by average number of shares.

EARNINGS PER SHARE, TOTAL OPERATION, AFTER DILUTION

Profit/loss for the period from total operation divided by weighted average number of shares.

EQUITY PER SHARE, TOTAL OPERATION

Equity on the balance sheet date divided by the number of shares on the balance sheet date.

ANNUAL GENERAL MEETING

The annual general meeting for Precise Biometrics AB (publ) will be held on May 16, 2018 at 4:00 pm at Precise Biometrics' headquarters in Lund, Mobilvägen 10.

Shareholders wishing to participate in the annual general meeting must be registered in the share register kept by Euroclear Sweden AB on Wednesday, May 9, 2018 and must also notify their participation to Precise Biometrics AB no later than Wednesday, May 9 at 4:00 pm.

REGISTRATION IN THE SHARE REGISTER

Shareholders who have their shares registered through a bank or in the name of an authorized agent must, in order to participate in the meeting, temporarily register their shares in their own name in the share register kept by Euroclear Sweden AB no later than Wednesday, May 9, 2018. Shareholders must inform the administrator in good time.

REGISTERING TO ATTEND THE AGM

Shareholders must notify their intention to attend the AGM no later than May 9, 2018 at 4:00 pm. Registration may take place by post or email: Email: arsstamma2018@precisebiometrics.com Mail: Precise Biometrics AB, "Årsstämma", Mobilvägen 10, SE-223 62 Lund

APPLICATIONS MUST INCLUDE:

Name Social security number/Corp ID number Address Phone number Number of shares Assistants, if appropriate

REPRESENTATIVES

Shareholders who are represented by an agent must issue a power of attorney to the agent. If powers of attorney are issued by legal entities, a copy of the registration certificate (or if such a document does not exist, a similar document) for the legal entity must be enclosed. The document must not be more than one year old. These documents must be in the possession of Precise Biometrics no later than May 9, 2018.

INVESTOR CONTACT

Torgny Hellström, Chairman of the Board Tel.: +46 733 451300 Email: investor@precisebiometrics.com

FINANCIAL CALENDAR

INTERIM REPORT, FIRST QUARTER 2018

May 15, 2018 (8:00 am)

ANNUAL GENERAL MEETING

May 16, 2018 (4:00 pm)

INTERIM REPORT, SECOND QUARTER 2018

August 15, 2018 (8:00 am)

INTERIM REPORT, THIRD QUARTER 2018

November 13, 2018 (8:00 am)

YEAR-END REPORT 2018

February 13, 2019 (8:00 am)

Financial reports are published in Swedish and English at precisebiometrics.com

CONTACT

Precise Biometrics AB Mobilvägen 10 223 62 Lund Sweden + 46 46 31 11 00

INVESTOR CONTACT

Torgny Hellström, Chairman of the Board Tel.: +46 733 451300 Email: investor@precisebiometrics.com

THE SHARE & SHAREHOLDERS

HISTORY

Precise Biometrics' share was listed on the Stockholm Stock Exchange on October 3, 2000 at a quotation price of SEK 63.19.

As of December 29, 2017 the company had 360,231,467 shares listed on the Small Cap list of the Nasdaq OMX Nordic. A standard trading unit is one share. The short name is PREC and the ISIN code is SE0001823303.

SHARE PRICE DEVELOPMENT

In 2017 there was a total turnover of 952,044,828 PREC shares, i.e., an average turnover of 3,793,007 shares per day of trading. The closing price on December 29, 2017 was SEK 1.32. During the year the share price fluctuated from SEK 1.25 to 4.15.

OWNERSHIP

The number of shareholders at the end of the year was 24,268 (27,325). Foreign shareholders accounted for 12.3 per cent (15.6). See table for shareholder statistics as of December 29, 2017.

OPTION PROGRAM

An option program was started in 2017 for all employees. Subscription options have been transferred to the employees at market rates as part of the program. The allocated volume was contained within an authorization for a maximum of 5,000,000 subscription options issued at the Annual General Meeting in 2017.

The market value has been established by an external valuer using the Black & Scholes model. At the time of the valuation the share price was SEK 1.94, which is based on the volume-weighted average share price during the period August 17 to 30, 2017.

The subscription price was set to SEK 5.40. Shares may be subscribed to through the exercise of subscription options during the period June 1- 30, 2020.

A total of 3,230,000 were subscribed to by employees in 2017, which provided Precise Biometrics with liquid assets in an amount of SEK 193,800. After the balance sheet date, the options subscribed by the CEO were bought back. This took place in connection with Håkan Persson standing down as CEO.

See also Note 17 in the notes for the parent company.

SHAREHOLDER INFORMATION

Previously published annual reports, interim reports and other information can be found at www.precisebiometrics.com. It is also possible to order information by calling +46 46 31 11 00.

Questions may be addressed directly to the company via email: investor@precisebiometrics.com.

SHARE CAPITAL DEVELOPMENT IN THE LAST TEN YEARS

	INCREASE IN	TOTAL NUMBER	INCREASE IN	TOTAL SHARE	NOMINAL
	NO. OF SHARES	OF SHARES	SHARE CAPITAL, SEK	CAPITAL, SEK	AMOUNT, SEK
2007 - New issue 1)	4,000,000	101,220,600	1,600,000	40,488,240	0.40
2009 - New issue 2)	33,740,200	134,960,800	13,496,080	53,984,320	0.40
2011 - New issue 3)	53,984,320	188,945,120	21,593,728	75,578,048	0.40
2012 - New issue 4)	75,578,048	264,523,168	30,231,219	105,809,267	0.40
2012 - Reduction of share capital 5)	-	264,523,168	-31,742,780	74,066,487	0.28
2013 - New issue 6)	58,782,926	323,306,094	16,459,219	90,525,706	0.28
2013 - New issue 7)	22,000,000	345,306,094	6,160,000	96,685,706	0.28
2015 - Reduction of share capital 8)	22,000,000	345,306,094	-86,326,523	10,359,183	0.03
2016 - New issue 9)	14,925,373	360,231,467	447,761	10,806,944	0.03
2017 -	-	360,231,467	-	10,806,944	0.03

1) Non-cash issue for acquisition of 8 per cent of Smart Unicorn Solutions.

2) Issue with preferential rights to existing shareholders. The subscription rate amounted to SEK 1.60 and Precise Biometrics received an issue amount of SEK 54 million.

3) Issue with preferential rights to existing shareholders. The subscription rate amounted to SEK 1.00 and Precise Biometrics received an issue amount of SEK 54 million.

4) Issue with preferential rights to existing shareholders. The subscription rate amounted to SEK 0.72 and Precise Biometrics received an issue amount of SEK 54.4 million.

5) Reduction of share capital. The AGM decided, in accordance with the board's proposal, that the company's share capital should be reduced by SEK 31,742,780.16 to cover losses. The reduction represents a reduction in the nominal value of the shares by SEK 0.12 from SEK 0.40 to SEK 0.28. 6) Issue with preferential rights to existing shareholders. The subscription rate amounted to SEK 0.93 and Precise Biometrics received an issue amount of SEK 54.7 million.

7) Special issue of 22 million shares. The subscription rate amounted to SEK 3.90 and Precise Biometrics received an issue amount of SEK 85.8 million.

8) Reduction of share capital. The AGM decided, in accordance with the board's proposal, that the company's share capital should be reduced from SEK 96.7 million to SEK 10.4 million. The reduction represents a fall in the nominal value of the shares by SEK 0.25 from SEK 0.28 to SEK 0.03.

9) Special issue of 14.9 million shares. The subscription rate amounted to SEK 3.35 and Precise Biometrics received an issue amount of SEK 47.2 million.

SHAREHOLDER STATISTICS

SHAREHOLDER REGISTER

	NUMBER OF SHARES	NO. IN % OF CAPITAL STOCK AND VOTES
Avanza Pension Försäkring AB	27,708,809	7.7%
Nordnet Pensionsförsäkring AB	8,379,467	2.3%
Swedbank Försäkring	4,743,061	1.3%
Bengt Andersson and company	4,439,577	1.2%
Emil Natchev and company	2,650,000	0.7%
Skandinaviska Enskilda Banken S.A	2,667,933	0.7%
SEB Fonder&Liv	2,388,306	0.7%
Bank of New York Mellon, UK	2,235,734	0.6%
Nils Arvidsson and company	1,988,149	0.6%
Per Magnusson	1,800,000	0.5%
Others	301,230,431	83.7%
Total	360,231,467	100.0%

ALLOCATION OF SHAREHOLDERS

	NUMBER OF SHARES	NO. IN %
Foreign owners	44,187,748	12.3%
Swedish owners	316,043,719	87.7%
of which
Institutions	64,189,113	17.8%
Unit trusts	1,246,521	0.3%
Private persons	250,608,085	64.5%

ALLOCATION OF SHARES

	NO. IN %
10 largest shareholders	16.3%
20 largest shareholders	19.5%
50 largest shareholders	27.3%
100 largest shareholders	34.0%

SHAREHOLDER STATISTICS (NUMBER OF SHARES OWNED)

	NO. OF SHAREHOLDERS	NO. IN %	NUMBER OF	PROPORTION OF
			SHARES	VOTES
1-2,000	12,808	52.8%	9,341,289	2.6%
2,001-10,000	7,120	29.3%	38,069,473	10.6%
10,001-1,000,000	4,308	17.8%	228,604,619	63.4%
1,000,001 -	32	0.1%	84,216,086	23.4%
Total	24,268	100.0%	360,231,467	100.0%

GEOGRAPHIC DISTRIBUTION OF SHAREHOLDINGS IN PER CENT

	SHARE
Sweden	87.7%
Denmark	5.5%
Luxembourg	1.3%
Great Britain	1.0%
Switzerland	0.9%
Finland	0.8%
Norway	0.8%
Belgium	0.7%
Estonia	0.2%
China	0.2%
USA	0.2%
Others	0.7%
	100.0%

Source: EuroClear as of December 31, 2017