U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2003
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
For the Transition Period from _________ to __________
Commission file number 1-13463
BIO-KEY INTERNATIONAL, INC.
---------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
MINNESOTA 41-1741861
----------------------------------- ---------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation of Organization) Identification Number)
1285 CORPORATE CENTER DRIVE
SUITE # 175, EAGAN, MN 55121
----------------------------
(Address of Principal Executive Offices)
(651) 687-0414
--------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date : There were 19,074,936
issued and outstanding shares of the registrant's common stock, par value $.01
per share, as of November 12, 2003.
Transitional Small Business Disclosure Format (check one): Yes [ ] No[ X ]
BIO-KEY INTERNATIONAL, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance sheets as of December 31, 2002 and September 30, 2003
(unaudited)................................................1
Statements of operations for the three months ended
September 30, 2003 and 2002, nine months ended
September 30, 2003 and 2002, and January 7, 1993 (date of
inception) through September 30, 2003
(unaudited)...............................................2
Statements of cash flows for the nine months ended September 30,
2002 and 2003, and January 7, 1993 (date of inception)
through September 30, 2003 (unaudited)....................3
Notes to financial statements..................................5
Item 2 - Management's Discussion and Analysis...........................12
Item 3 - Controls and Procedures........................................18
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings............................................18
Item 2 - Changes in Securities........................................18
Item 3 - Defaults Upon Senior Securities..............................19
Item 6 - Exhibits and Reports on Form 8-K.............................19
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIO-key International, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS
December 31, September 30,
2002 2003
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 16,748 $ 58,774
Accounts Receivable 67,998 147,378
Prepaid expenses 50,897 118,183
------------ ------------
Total current assets 135,643 324,335
EQUIPMENT AND FURNITURE AND FIXTURES - AT COST,
Less accumulated depreciation -- 38,573
OTHER ASSETS 121,991 144,703
------------ ------------
$ 257,634 $ 507,611
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of long-term obligations $ 6,507,286 $ 9,075,170
Advances from shareholder -- 38,532
Accounts payable 354,694 219,918
Accrued liabilities 572,701 1,109,126
Deferred revenue -- 10,000
------------ ------------
Total current liabilities 7,434,681 10,452,746
LONG-TERM OBLIGATIONS, net of discount less current maturities -- --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock - authorized, 5,000,000 shares
of $ .01 par value (liquidation preference of
$100 per share):Series B 9% Convertible;
issued and outstanding, 18,430 and 11,930 shares,
respectively 184 119
Common stock - authorized, 60,000,000 shares
of $.01 par value; issued and outstanding, 14,377,406
and 17,020,776 shares, respectively 143,774 170,208
Additional contributed capital 16,284,399 16,590,140
Deficit accumulated during the development stage (23,605,404) (26,705,602)
------------ ------------
(7,177,047) (9,945,135)
------------ ------------
$ 257,634 $ 507,611
============ ============
See accompanying notes to financial statements.
1
BIO-key International, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF OPERATIONS
(Unaudited)
January 7,
1993 (date
of inception)
Three months Nine months through
ended September 30, ended September 30, September 30,
-------------------------- -------------------------- ------------
2002 2003 2002 2003 2003
------------ ------------ ------------ ------------ ------------
Revenues
Product sales $ 1,425 $ 987 $ 2,424 $ 7,817 $ 590,955
Licensing fees 33,375 141,000 90,860 171,000 399,860
Reimbursed research
and development -- -- -- -- 284,506
Technical support
and other services -- 5,000 -- 8,694 459,364
------------ ------------ ------------ ------------ ------------
34,800 146,987 93,284 187,511 1,734,685
Costs and other expenses
Cost of product sales 1,200 2,641 2,320 6,644 1,746,259
Cost of technical support
and other services -- -- -- 1,694 239,011
Selling, general
and administrative 527,704 511,297 1,525,462 1,548,743 14,906,205
Research, development
and engineering 253,473 246,523 819,554 721,399 7,612,037
------------ ------------ ------------ ------------ ------------
782,377 760,461 2,347,336 2,278,480 24,503,512
------------ ------------ ------------ ------------ ------------
Operating loss (747,577) (613,474) (2,254,052) (2,090,969) (22,768,827)
Other income (deductions)
Interest expense (270,669) (317,609) (882,046) (911,864) (3,403,944)
Sundry 351 1,766 1,314 2,745 513,004
------------ ------------ ------------ ------------ ------------
(270,318) (315,843) (880,732) (909,119) (2,890,940)
------------ ------------ ------------ ------------ ------------
Loss before extraordinary gain (1,017,895) (929,317) (3,134,784) (3,000,088) (25,659,767)
Extraordinary gain - troubled
payable reduction -- -- -- -- 300,250
------------ ------------ ------------ ------------ ------------
NET LOSS $ (1,017,895) $ (929,317) $ (3,134,784) $ (3,000,088) $(25,359,517)
============ ============ ============ ============ ============
Net loss $ (1,017,895) $ (929,317) $ (3,134,784) $ (3,000,088) $(25,359,517)
Convertible preferred stock
dividends and accretion -- (5,130) (96,435) (88,392) (1,452,660)
------------ ------------ ------------ ------------ ------------
Loss applicable to common
Stockholders $ (1,017,895) $ (934,447) $ (3,231,219) $ (3,088,480) $(26,812,177)
============ ============ ============ ============ ============
Basic and diluted loss per share
Net loss before extraordinary gain $ (.08) $ (.06) $ (.24) $ (.20) $ (3.20)
Extraordinary gain -- -- -- -- .04
------------ ------------ ------------ ------------ -------------
Net loss (.08) (.06) (.24) (.20) ( 3.16)
Convertible preferred stock
dividends and accretion -- -- (.01) -- (.18)
------------ ------------ ------------ ------------ ------------
Loss per common share $ (.08) $ (.06) $ (.25) $ (.20) $ ( 3.34)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding 13,305,343 16,389,475 12,801,284 15,222,172 8,017,589
============ ============ ============ ============ ============
See accompanying notes to financial statements
2
BIO-key International, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS
(Unaudited)
January 7,
1993 (date
of inception)
Nine months through
ended September 30, September 30,
------------------------------- ------------
2002 2003 2003
------------ ------------ ------------
Cash flows from operating activities
Net loss $(3,134,784) $(3,000,088) $(25,359,517)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation -- 38,819 281,732
Amortization
Unearned compensation -- -- 193,333
Deferred financing costs -- -- 426,397
Discounts on convertible debt
related to warrants and
beneficial conversion features 523,502 415,634 1,700,246
Write-down of inventory -- -- 916,015
Write-down of deferred
financing costs -- -- 132,977
Gain on sale of
Inter-Con/PC stock -- -- (190,000)
Revenues realized due to offset
of billings against a stock repurchase -- -- (170,174)
Acquired research and development -- -- 117,000
Options and warrants issued for
services and other 383,194 156,000 1,942,554
Other -- -- 34,684
Change in assets and liabilities:
Accounts receivable (48,400) (79,380) (147,378)
Inventories -- -- (916,015)
Prepaid expenses and other 106,713 8,714 (42,183)
Accounts payable (17,930) (134,776) 219,918
Accrued liabilities 372,824 536,425 2,621,199
Unearned Income -- 10,000 10,000
------------ ------------ ------------
Net cash used in operations (1,814,881) (2,048,652) (18,229,212)
Cash flows from investing activities
Capital expenditures -- (77,392) (320,305)
Proceeds from sales
of Inter-Con/PC stock -- -- 190,000
Other (13,197) (22,712) (62,803)
------------ ------------ ------------
Net cash used in
investing activities (13,197) (100,104) (193,108)
Cash flows from financing activities
Net borrowings under
short-term borrowing
agreements 382,000 -- 3,003,000
Issuance of convertible
bridge note -- -- 2,005,000
Issuance of convertible
debentures and long-term notes 1,080,000 2,152,250 4,992,250
Advances from shareholders -- 38,532 38,532
Issuance of warrants and discount on
convertible debentures -- -- 830,000
See accompanying notes to financial statements.
3
Financing costs (50,000) -- (418,377)
Exercise of stock options and warrants -- -- 190,799
Sales of common stock -- -- 7,093,832
Sale of preferred stock and assigned
value of warrant -- -- 884,058
Redemption of common stock -- -- (138,000)
------------ ------------ ------------
Net cash provided by
financing activities 1,412,000 2,190,782 18,481,094
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents (416,078) 42,026 58,774
Cash and cash equivalents,
beginning of period 514,970 16,748 --
------------ ------------ ------------
Cash and cash equivalents,
end of period $ 98,892 $ 58,774 $ 58,774
============ ============ ============
See accompanying notes to financial statements.
4
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002, and September 30, 2003 (Unaudited)
1. Unaudited Statements
The accompanying unaudited interim financial statements have
been prepared by BIO-key International, Inc. (the Company) in
accordance with accounting principles generally accepted in the
United States, pursuant to the rules and regulations of the
Securities and Exchange Commission. Pursuant to such rules and
regulations, certain financial information and footnote
disclosures normally included in the financial statements have
been condensed or omitted.
In the opinion of management, the accompanying unaudited interim
financial statements contain all necessary adjustments,
consisting only of those of a recurring nature, and disclosures
to present fairly the financial position and the results of its
operations and cash flows for the periods presented. It is
suggested that these interim financial statements are read in
conjunction with the financial statements and the related notes
thereto included in the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2002.
2. Liquidity and Capital Resource Matters
Broad commercial acceptance of the Company's technology is
critical to the Company's success and ability to generate
revenues. The Company has had no significant revenues to date,
and has accumulated losses since inception of approximately
$25,360,000 of which approximately $3,000,000 was incurred
during 2003. As of September 30, 2003 there was a stockholders'
deficit of approximately $9,945,000.
The Company is in need of substantial additional capital. The
Company is currently considering various alternatives related to
raising additional capital including continued funding from an
investment group and new funding from other sources. No
assurance can be given that any form of additional financing
will be available on terms acceptable to the Company, that
adequate financing will be obtained to meet its needs, or that
such financing would not be dilutive to existing shareholders.
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States, which contemplate continuation of the Company as
a going concern. The matters described in the preceding
paragraphs raise substantial doubt about the Company's ability
to continue as a going concern. Recoverability of a major
portion of the recorded asset amounts shown in the accompanying
5
balance sheet is dependent upon the Company advancing beyond the
development stage, which in turn is dependent upon the Company's
ability to obtain additional financing, meet its financing
requirements on a continuing basis, and succeed in its future
operations. The accompanying financial statements do not include
any adjustments that might be necessary should the Company be
unable to continue in existence.
3. Loss Per Common Share
Basic loss per share is calculated by dividing the net loss
attributable to common stockholders by the number of weighted
average common shares outstanding. Diluted earnings per share
are calculated by dividing the net loss attributable to common
stockholders by the weighted average common shares, and when
dilutive, by including options, warrants and convertible
securities outstanding using the treasury stock method. There
was no difference between basic and diluted loss per share for
all periods presented, because the impact of including options,
warrants and convertible securities would be antidilutive.
6
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002, and September 30, 2003 (Unaudited)
4. Prepaid Expenses
December 31, September 30,
2002 2003
----------- -------------
Consulting fees and other $ 24,274 $ 65,170
Insurance 26,673 53,013
----------- -------------
$ 50,897 $ 118,183
=========== =============
5. Equipment and Furniture and Fixtures
December 31, September 30,
2002 2003
------------ -------------
Equipment $ 206,363 $ 40,842
Furniture and fixtures 36,550 36,550
------------ -------------
242,913 77,342
Less accumulated depreciation 242,913 38,819
------------ -------------
$ -- $ 38,573
============ =============
6. Other Assets
December 31, September30,
2002 2003
----------- -------------
Deferred offering costs $ 81,900 $ 81,900
Patents pending 40,091 62,803
----------- -----------
$ 121,991 $ 144,703
============ ===========
7
Deferred Offering Costs
In March 2002, the Company engaged an investment banking firm to
advise the Company regarding raising additional capital through
the potential future issuance of the Company's equity, debt or
convertible securities. The Company paid a nonrefundable
retainer fee of $50,000, out of pocket expenses of $14,900 and
granted a four year warrant to purchase 25,000 shares of the
Company's common stock at an exercise price of $1.00 per share.
The estimated value of the warrant is $17,000. These deferred
costs shall be offset against any proceeds received from the
sale of additional capital or charged to operations in the
period this engagement terminates.
7. Accrued Liabilities
December 31, September 30,
2002 2003
----------- ------------
Interest $ 537,004 $1,032,800
Compensation 35,555 76,301
Other 142 25
----------- ------------
$ 572,701 $1,109,126
=========== ============
8. Long-term Obligations
As part of the Company's January 2003 funding transaction with
an investor group (the "Investor"), the Investor agreed to
provide additional financing (the Funding Agreement) in
incremental monthly installments during the eleven-month period
commencing January 27, 2003, subject to certain conditions.
Currently, conditions are not being met, however, the Investor
has continued to fund. During the nine months ended September
30, 2003 the Company has received $2,152,250 and issued notes
payable to the Investor. The terms of the notes require the
principal to be repaid on June 30, 2004, interest to be accrued
at 7%, payable in a single payment on June 30, 2004, and provide
for conversion of principal and accrued interest into shares of
the Company's common stock at a conversion price of $0.75 per
share, or shares of Series B Preferred stock at a conversion
price of $100 per share.
8
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and September 30, 2003 (Unaudited)
9. Stockholders Equity
Series B Convertible Preferred Stock Dividends
----------------------------------------------
The Company's series B preferred stock accrues dividends at 9%
payable semi-annually on June 15 and December 15 and on such
date that the preferred stockholder elects to convert preferred
stock to common stock. As of September 30, 2003 cumulative
dividends in arrears were approximately $184,000. All of the
Company's series B preferred stock is convertible into shares of
the Company's common stock.
Options and Warrants
--------------------
The following summarizes option and warrant activity since December 31, 2002:
Number of Shares
------------------------------------------------------------------------
1996 1999 Non-
Plan Plan Plan Warrants Total
--------- ----------- ------------ ----------- --------
Balance, December 31, 2002 390,380 1,836,669 1,963,000 5,857,682 10,047,731
Granted 130,000 150,000 1,110,000 200,000 1,590,000
Cancelled 33,000 510,000 655,000 663,000 1,861,000
--------- ------------ ------------ ------------ ------------
Balance, September 30, 2003 487,380 1,476,669 2,418,000 5,394,682 9,776,731
========= ============= ============= ============= =============
Available for future grants,
September 30, 2003 169,620 523,331 -- -- 692,951
========= ============= ============= ============= =============
Common Stock
------------
On September 23, 2003, the Company issued 200,000 shares of common
stock valued at $76,000 to an investor relations firm in consideration
of services to be rendered pursuant to a six-month consulting
agreement.
9
10. Events Occurring Subsequent to September 30, 2003
During October 2003, the Company and Investor amended the
January 27, 2003 Note Purchase Agreement to provide up to
$2,500,000 of additional financing. Of this amount $602,250 was
advanced in October and November 2003, with the balance to be
funded in incremental monthly installments during the
eleven-month period commencing December 1, 2003, subject to
certain conditions. In connection with the agreement the
Company issued a convertible promissory note due October 31,
2004 in the principal amount of up to $2,500,000 with terms
substantially similar to the January 2003 promissory note.
On October 31, 2003, the Investor amended the 10% secured
convertible note issued in 2001, the zero interest convertible
debenture, the 10% secured convertible notes issued in 2002, and
the 7% convertible notes. The agreement provides that all
principal and interest due under each of these notes shall be due
and payable in a single payment on June 30, 2004.
During October and November 2003, the Investor elected to
convert 7,750 shares of Series B Preferred Stock and $144,666 of
dividends in arrears and accrued interest thereon into 1,795,836
shares of the Company's common stock.
During October 2003, the Company issued 258,324 shares of common
stock upon exercise of options issued to a former director and
executive officer of the Company.
During November 2003, the Company entered into a
twelve-month consulting agreement with a financial advisory
services company requiring a total of $108,000 to be paid in
fees over the term of the agreement.
10
BIO-key International, Inc.
(a corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and September 30, 2003 (Unaudited)
11. Supplementary Disclosures of Cash Flow Information
January 7,
1993 (date of
inception
Nine Months through
Ended September 30, September 30,
------------------------- ----------
2002 2003 2003
------------- ---------- ----------
Cash paid for:
Interest $ -- $ -- $ 28,544
Noncash Financing Activities:
Conversion of short-term notes,
accrued interest and penalties
into long-term notes
and debentures -- -- 4,567,546
Conversion of convertible
debentures, bridge notes, and
accrued interest into common
stock 100,000 -- 2,907,360
Accretion of preferred stock
beneficial conversion feature -- -- 877,000
Issuance of Series B preferred
stock in exchange for Series
A preferred stock and
cumulative dividends in
arrears, thereon -- -- 281,049
Issuance of common stock in
exchange for Series A and Series B
preferred stock and
cumulative dividends in
arrears thereon -- 100,175 156,738
Issuance of preferred stock
effected through
reduction of debt -- -- 350,000
Unearned compensation
reversal related to
employee termination -- -- 227,111
Common stock repurchases
effected through a reduction in
receivable -- -- 170,174
Offset deferred offering costs
against proceeds of
initial public offering,
and other -- -- 159,021
Issuance of warrants for reduction
in payables 32,000 -- 32,000
Issuance of common stock in exchange
For services rendered -- 76,000 76,000
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
The information contained in this Report on Form 10-QSB and in other public
statements by the Company and Company officers include or may contain certain
forward-looking statements. The words "may", "intend", "will", "expect",
"anticipate", "believe", "estimate", "project", and similar expressions used in
this Report are intended to identify forward-looking statements within the
meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the
U.S. Securities Exchange of 1934. You should not place undue reliance on these
forward-looking statements, which speak only as of the date made. We undertake
no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events. You should
also know that such statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions. These factors include, but are
not limited to, the Company's ability to successfully develop and market its
technology and to obtain additional financing, as well as those risks described
in detail in the Company's Annual Report on Form 10-KSB under the caption "Risk
Factors" and other filings with the Securities and Exchange Commission. Should
any of these risks or uncertainties materialize, or should any of our
assumptions prove incorrect, the actual results may differ materially from those
included within the forward-looking statements.
OVERVIEW
The following should be read in conjunction with the financial statements
of the Company included elsewhere herein.
BIO-key International, Inc. (the "Company") develops and markets
proprietary fingerprint identification biometric technology and software
solutions. These solutions are built around the advanced capabilities of the
Company's proprietary patent pending VST(TM) (Vector Segment Technology(TM))
algorithm. The Company has pioneered the development of automated, finger
identification technology that can be used without the aide of non-automated
methods of identification such as a personal identification (PIN), password,
token, smart card, ID card, credit card, passport, drivers license or other form
of possession based or knowledge based identification. This advanced BIO-key(TM)
identification technology improves both the accuracy and speed of finger-based
biometrics and is the only finger identification algorithm that has been
certified by the International Computer Security Association (ICSA).
Over the past three years, recognizing the growth in electronic commerce,
private networks and related security concerns, the Company has actively
positioned its technology for the licensing of a Web based biometric
authentication software solution to e-commerce and other companies conducting
business over the Internet. This integrated solution involves the licensing of
client and server based software to provide for reliable and cost effective user
authentication in connection with the processing of e-commerce transactions or
securing access to private networks. The Company is currently pursuing licenses
and technical support service arrangements with original equipment
12
manufacturers, systems integrators and direct users of its technology to
generate recurring monthly revenue.
The Company has completed the development of its core technology, commenced
the marketing of its technology in late 2002, and expects to continue to
generate revenue from licensing arrangements during 2003. During 2003, the
Company has entered into a number of license agreements and strategic
partnerships with systems integrators, original equipment manufacturers and
network security solutions providers. The foregoing arrangements are expected to
generate significant recurring monthly revenue. The Company is also in
discussions with a number of additional potential licensee and strategic
partnerships.
Although the Company has developed significant identification technology,
it has not gained any meaningful commercial acceptance and the Company has only
generated minimal revenue since inception. The Company's business model,
particularly the Web authentication initiative, represents a novel approach to
Internet and network security which as of the date of this Report has not been
adopted by any company conducting business over the Internet. Although recent
security concerns relating to the identification of individuals has increased
interest in biometrics generally, there can be no assurance that there will be a
demand for such a solution or that the Company will have the financial or other
resources necessary to successfully market such a software solution.
The Company believes its existing financial resources will last through
June 2004. See "Liquidity and Capital Resources" below. Due to this and other
uncertainties, the Company's independent auditors have included an explanatory
paragraph in their opinion for the year ended December 31, 2002 as to the
substantial doubt about the Company's ability to continue as a going concern.
The Company's long-term viability and growth will depend upon the successful
commercialization of its technologies and its ability to obtain adequate
financing, among other matters, as to which there can be no assurance.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED TO
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002
Revenue
-------
The Company generated revenue of approximately $147,000 and $188,000 during
the three and nine month periods ended September 30, 2003 as compared to
approximately $35,000 and $93,000 during the corresponding periods in 2002. The
revenue consists of $141,000 in licensing fees, $5,000 in services and
approximately $1,000 in product sales. The Company expects to generate
significant additional licensing fees during the fourth quarter of 2003 and into
2004 from new and existing customers.
13
Costs of Product Sales and Technical Support
--------------------------------------------
Cost of products and services sold was approximately $2,600 and $8,300
during the three and nine month periods ended September 30, 2003, respectively,
as compared to approximately $1,200 and $2,300 for the corresponding periods in
2002. Of the increase, approximately $4,300 related to cost of products sold for
evaluation and approximately $1,700 related to technical support and other
services. As the Company continues to generate revenue primarily from license
fees and technical service, it expects costs of technical support to increase.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses decreased approximately
$17,000 to approximately $511,000 during the three months ended September 30,
2003 as compared to approximately $528,000 for the corresponding period in 2002.
Of the decrease, approximately $170,000 was due to a decrease in marketing
consulting costs. This amount was offset by approximately $45,000 of additional
marketing costs as the Company focused on marketing its biometric authentication
software solution, approximately $50,000 of additional executive personnel costs
and approximately $58,000 of additional general administrative costs. The
Company expects selling, general and administrative expenses to remain at
current levels or decrease slightly during the remainder of the year.
Selling, general and administrative expenses remained relatively constant
during the nine months ended September 30, 2003 increasing approximately $23,000
to approximately $1,549,000 as compared to approximately $1,525,000 for the
corresponding period in 2002. During this period, the Company incurred an
increase of approximately $152,000 of additional marketing costs as the Company
focused on marketing its Web-based biometric authentication software solution,
approximately $167,000 of additional executive personnel costs, approximately
$108,000 of additional general administrative costs and an approximate $18,000
increase in professional services. These amounts were offset by an approximate
$421,000 decrease in outside consulting costs.
Research, Development, and Engineering Expenses
-----------------------------------------------
Research, development, and engineering expenses also remained relatively
constant at approximately $247,000 during the three months ended September 30,
2003 as compared to approximately $253,000 for the corresponding period in 2002.
General development costs decreased approximately $13,000 and software
subcontract costs decreased approximately $16,000 which was offset by
approximately $23,000 in additional wages for development personnel. The Company
has completed the transition from subcontracting software development to
utilizing its own employees and expects these costs to remain at current levels
through the remainder of the year.
Research, development, and engineering expenses decreased approximately
$99,000 to approximately $721,000 during the nine months ended September 30,
2003 as compared to approximately $820,000 for the corresponding period in 2002.
Of the decrease, approximately $81,000 was due to a decrease in general
14
development expenses and approximately $32,000 was due to a decrease in software
subcontracting costs. These amounts were offset by approximately $14,000 due to
an increase in wages for development personnel.
Other Income and Expense
------------------------
Other expense increased approximately $46,000 to approximately $316,000
during the three months ended September 30, 2003 as compared to approximately
$270,000 for the corresponding period in 2002. The increase was primarily due to
a increase in interest expense due to increased borrowings.
Other expense increased approximately $28,000 to approximately $909,000
during the nine months ended September 30, 2003 as compared to approximately
$881,000 for the corresponding period in 2002. The increase was primarily due to
a increase in interest expense due to increased borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the nine months ended
September 30, 2003 was approximately $2,049,000 compared to approximately
$1,815,000 during the nine months ended September 30, 2002. The primary use of
cash for both years was to fund the net loss. Net cash used in investing
activities for the nine months ended September 30, 2003 was approximately
$100,000 compared to net cash used in investing activities of approximately
$13,000 for the same period in 2002 and consisted of $77,000 of fixed asset
purchases and $23,000 of capitalization of costs associated with the Company's
patent applications. Net cash provided by financing activities during the nine
months ended September 30, 2003 was approximately $2,191,000 compared to
approximately $1,412,000 in the same period in 2002 and consisted primarily of
long-term borrowings during 2003.
Working capital decreased approximately $2,829,000 during the nine months
ended September 30, 2003 to a deficit of approximately $10,128,000 as compared
to a deficit of approximately $7,299,000 as of December 31, 2002. This decrease
is primarily due to an increase of current maturities of long term obligations.
Pursuant to a recapitalization transaction in November, 2001, the Company
obtained $1,065,000 of additional financing and all then existing promissory
notes payable ($3,027,920) to Shaar Fund Ltd. (the "Investor") were cancelled
and converted into a secured convertible promissory note in the principal amount
of $4,092,920 (the "Secured Note"). The Secured Note was originally due
September 30, 2003 (subsequently extended until June 30, 2004), is secured by
substantially all of the Company's assets, including its intellectual property,
accrues interest at the rate of 10% per annum payable at maturity on June 30,
2004, may be prepaid without penalty, and is convertible into shares of common
stock at a conversion price of $.75 per share. The security interest terminates
upon the Company obtaining $5,000,000 of additional equity financing. Pursuant
to the recapitalization transaction, between March and September 2002, the
Investor provided $1,080,000 of additional financing in incremental monthly
installments. All such funding was provided pursuant to secured promissory notes
(collectively, the "Advance Notes") on the terms described above. The full
15
principal amount of the Secured Note and Advance Notes along with accrued
interest of approximately $918,000 is due on the maturity date which was
recently extended to June 30, 2004.
On August 28, 2002, the Company entered into a bridge note agreement with
the Investor pursuant to which it provided $750,000 of additional financing in
incremental monthly installments during the four-month period commencing August
28, 2002 pursuant to the terms of a convertible promissory note (the "August
Note"). The August Note is secured by substantially all of the Company's assets,
including its intellectual property, accrues interest at the rate of 7% per
annum payable on maturity and may be prepaid without penalty. The principal
amount and accrued interest is convertible at the option of the Investor into
either shares of Common Stock at a conversion price of $.75 per share or shares
of Series B Preferred Stock at a conversion price of $100 per share. The full
principal amount of the August Note along with accrued interest of approximately
$51,000 is due on the maturity date which was recently extended to June 30,
2004.
On January 27, 2003, the Company entered into a Note Purchase Agreement
with the Investor to provide up to $2,350,000 of additional financing pursuant
to the terms of a secured promissory note (the "January Note"). Of this amount
$600,000 was advanced at closing, with the balance to be funded in incremental
monthly installments during the nine (9) month period commencing February 1,
2003, provided that certain conditions are satisfied. Currently conditions are
not being met. The January Note is due June 30, 2004, is secured by
substantially all of the Company's assets, including its intellectual property,
accrues interest at the rate of 7% per annum payable on maturity, and may be
prepaid without penalty. The principal amount and accrued interest is
convertible at the option of the Investor into either shares of Common Stock at
a conversion price of $.75 per share or shares of Series B Preferred Stock at a
conversion price of $100 share. In the event the Company completes a private
placement of its equity securities resulting in gross proceeds in excess of
$5,000,000 on or before June 30, 2004, the principal and accrued interest shall
at the option of the Investor, be either converted into such equity securities
or repaid in cash.
Under the Note Purchase Agreement, the Investor agreed to provide up to
$1,750,000 of additional financing in incremental monthly installments during
the nine month period commencing February 1, 2003. Any such funding will be
provided pursuant to a secured promissory note on the terms described above. The
Investor's obligation to provide this financing is conditioned upon:
o The Company being in compliance with all material obligations under
the January 27, 2003 funding agreement between the parties and the
January Note.
o The continued truth and accuracy of the representations and warranties
of the Company set forth in the funding agreement.
o The average closing bid price of the Company's common stock during the
calendar month preceding the advance exceeding $1.00 per share.
Provided the forgoing conditions are satisfied, funds are advanced on the first
day of each month upon receipt of written notice from the Company. Between
February 1, 2003 and the date of this Report, the Company requested and received
advances in the aggregate amount of $1,750,000. The Company has agreed to file a
16
registration statement covering the public resale of the shares of common stock
issuable upon conversion of the Secured Note, Advance Notes, August Note and
January Note.
On or about October 31, 2003, the Company and Investor amended the January
27, 2003 Note Purchase Agreement to provide up to $2,500,000 of additional
financing pursuant to the terms described above. Of this amount, $602,250 was
advanced in October and November 2003, with the balance to be funded in
incremental monthly installments during the eleven (11) month period commencing
December 1, 2003 upon satisfaction of the conditions set forth above. In
connection with the amendment:
o The Company issued a convertible promissory note due October 31, 2004
in the principal amount of up to $2,500,000 with terms substantially
similar to the January Note described above.
o The Investor extended the maturity dates and the scheduled interest
payments of the Secured Note, Advance Notes, August Note and a
$1,000,000 principal amount convertible debenture until June 30, 2004.
Since January 7, 1993 (date of inception), the Company's capital needs have
been principally met through proceeds from the sale of equity and debt
securities.
The Company does not currently maintain a line of credit or term loan with
any commercial bank or other financial institution.
As of the date of this Report, the Company has cash resources of
approximately $600,000. Pursuant to its agreements with the Investor, $1,897,750
of additional financing is available to the Company upon fulfillment of the
conditions described above. Currently, all of the conditions are not being
satisfied. Although the Investor has, in the past, provided financing to the
Company notwithstanding that all of the conditions have not been satisfied,
there can be no assurance that it will continue to do so. The Company currently
requires approximately $210,000 per month to conduct operations. Based on
available cash resources and the existing funding obligations, the Company
believes it can maintain operations at current levels through June 2004. The
Company needs approximately $2,500,000 to continue to operate at current levels
for the next twelve (12) months. Ideally, the Company needs approximately
$3,000,000 to $5,000,000 to execute its business plan and support the growth of
operations through 2004 and to continue product enhancements. The additional
financing is also required to conduct the sales and marketing effort necessary
to engage in significant direct selling and marketing activities.
During 2002 and 2003, the Company has entered into license agreements,
generated a small amount of revenue and believes it will continue to generate
revenue from existing and new relationships during the remainder of 2003 and
into 2004. Anticipated revenues are expected to defray operating expenses and
reduce the amount of required additional financing, but are not expected to be
sufficient for the Company to expand operations.
In addition to generating revenue, the Company is seeking to obtain
additional financing through the issuance of additional debt or equity
17
securities of the Company on a negotiated private placement basis to
institutional and accredited investors. As of the date of the Report, the
Company has not reached a definitive agreement with any potential investor
regarding the specific terms of an investment in the Company. No assurance can
be given that any form of additional financing will be available on terms
acceptable to the Company, that adequate financing will be obtained to meet its
needs, or that such financing would not be dilutive to existing stockholders. If
available financing is insufficient or unavailable or the Company fails to
generate any meaningful revenue, it may be required to further reduce operating
expenses, suspend operations, seek a merger or acquisition candidate or
ultimately liquidate its assets.
ITEM 3. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the Company's "disclosure controls
and procedures" (as such term is defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) was carried
out by the Company under the supervision and with the participation of the
Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO").
Based upon that evaluation, the Company's CEO and CFO concluded that, as of the
end of the period covered by this quarterly report, the Company's disclosure
controls and procedures were effective to provide reasonable assurance that
information the Company is required to disclose in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission
rules and forms. There has been no change in the Company's internal control over
financial reporting identified in connection with that evaluation that occurred
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceeding nor is
it aware of any proceeding contemplated by any governmental authority involving
the Company.
ITEM 2. CHANGES IN SECURITIES
1. Between September 3, 2003 and November 10, 2003, the Company issued an
aggregate of 2,436,945 shares of common stock upon conversion of 9,500 shares of
the Company's Series B 9% Convertible Preferred Stock and $174,725 of dividends
and accrued interest thereon to the Shaar Fund, Ltd. The shares were issued to
one accredited investor in a private placement transaction exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereunder without payment of underwriting discounts or commissions
to any person.
2. On or about September 23, 2003, the Company issued 200,000 shares of
common stock to an investor relations firm in consideration of services
rendered. The shares were issued to one accredited investor in a private
18
placement transaction exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereunder without
payment of underwriting discounts or commissions to any person.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of September 30, 2003, cumulative dividends in arrears on the Company's
Series B 9% Preferred Stock were approximately $184,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
------------------------------------------------------------------------------
Exhibit No. Exhibit Method of Filing
------------------------------------------------------------------------------
3.1 Amended and Restated Articles Incorporated by reference to
of Incorporation Exhibit 3.1 to the Registrant's
Registration Statement on SB-2,
File No. 333-16451 filed
February 14, 1997 (the
"Registration Statement")
------------------------------------------------------------------------------
3.2 Amended and Restated Bylaws Incorporated by reference to
Exhibit 3.2 to the Registration
Statement
------------------------------------------------------------------------------
3.3 Certificate of Amendment to Incorporated by reference to
Amended and Restated Articles Exhibit 3.3 to the Registrant's
of Incorporation Report on Form 10-QSB for the
quarter ended March 31, 1999
------------------------------------------------------------------------------
3.4 Certificate of Designation of Incorporated by reference to
Series A 9% Convertible Exhibit 3.4 to the Registrant's
Preferred Stock Current Report on Form 8-K
dated July 8, 1999
------------------------------------------------------------------------------
3.5 Amended and Restated Incorporated by reference to
Certificate of Designation of Exhibit 3.5 to the Registrant's
Series A 9% Convertible Annual Report on Form 10-KSB
Preferred Stock for the fiscal year ended
December 31, 1999 (the "1999
10-KSB")
------------------------------------------------------------------------------
3.6 Certificate of Designation of Incorporated by reference to
Series B 9% Convertible Exhibit 3.6 to the Registrants
Preferred Stock Current Report on Form 8-K
dated November 26, 2001 (the
"November 20, 2001 8-K")
------------------------------------------------------------------------------
19
------------------------------------------------------------------------------
3.7 Amendment to the Amended and Incorporated by reference to
Restated Articles of Exhibit 3.7 to the Registrant's
Incorporation filed February Registration Statement on Form
28, 2002 SB-2 filed March 27, 2002
------------------------------------------------------------------------------
4.1 Specimen of Common Stock Incorporated by reference to
Certificate Exhibit 4.1 to the Registration
Statement
------------------------------------------------------------------------------
10.1 SAC Technologies, Inc. 1996 Incorporated by reference to
Stock Option Plan Exhibit 10.1 to the
Registration Statement
------------------------------------------------------------------------------
10.2 Employment Agreement by and Incorporated by reference to
between Gary E. Wendt and the Exhibit 10.5 to the
Company dated as of May 10, Registration Statement
1996 (with Non-Competition
Letter effective May 10, 1996
Attached as Exhibit A)
------------------------------------------------------------------------------
10.3 Amendment No. 1 to the SAC Incorporated by reference to
Technologies, Inc. 1996 Stock Exhibit 10.23 to the 1999 10-KSB
Option Plan
------------------------------------------------------------------------------
10.4 SAC Technologies, Inc. 1999 Incorporated by reference to
Stock Option Plan Exhibit 10.24 to the 1999 10-KSB
------------------------------------------------------------------------------
10.5 Employment Agreement dated Incorporated by reference to
November 3, 2000 by and Exhibit 10.25 to the
between the Registrant and Registrant's Quarterly Report
Jeffry R. Brown on Form 10-QSB for quarter
ended September 30, 2000 (the
"September 30, 2000 10-QSB")
------------------------------------------------------------------------------
10.6 Option to Purchase 280,000 Incorporated by reference to
shares of Common Stock issued Exhibit 10.26 to the September
to Jeffry R. Brown 30, 2000 10-QSB
------------------------------------------------------------------------------
10.7 Non-Qualified Stock Option Incorporated by reference to
Agreement Under the Exhibit 10.27 to the September
Registrant's 1999 Stock 30, 2000 10-QSB
Option Plan to purchase
300,000 shares of Common
Stock issued to Jeffry Brown
------------------------------------------------------------------------------
10.8 Consulting Agreement dated Incorporated by reference to
July 1, 2001 by and between Exhibit 10.28 to the June 30,
the Registrant and Barry M. 2001 10-QSB
Wendt
20
------------------------------------------------------------------------------
10.9 Option to purchase 400,000 Incorporated by reference to
shares of common stock issued Exhibit 10.29 to the June 30,
to Jeffrey R. Brown 2001 10-QSB
------------------------------------------------------------------------------
10.10 Funding Agreement by and Incorporated by reference to
between the Registrant and Exhibit 10.31 to the November
The Shaar Fund dated November 20, 2001 8-K
26, 2001
------------------------------------------------------------------------------
10.11 Registration Rights Agreement Incorporated by reference to
by and between The Shaar Fund Exhibit 10.32 to the November
dated November 26, 2001 20, 2001 8-K
------------------------------------------------------------------------------
10.12 Exchange Agreement by and Incorporated by reference to
between the Registrant and Exhibit 10.33 to the November
The Shaar Fund dated November 20, 2001 8-K
26, 2001
------------------------------------------------------------------------------
10.13 Secured Note Due September Incorporated by reference to
30, 2003 Exhibit 10.34 to the November
20, 2001 8-K
------------------------------------------------------------------------------
10.14 Restated 5% Convertible Incorporated by reference to
Debenture Due September 30, Exhibit 10.35 to the November
2003 20, 2001 8-K
------------------------------------------------------------------------------
10.15 No Interest Debenture Due Incorporated by reference to
September 30, 2003 Exhibit 10.36 to the November
20, 2001 8-K
------------------------------------------------------------------------------
10.16 Warrant Incorporated by reference to
Exhibit 10.37 to the November
20, 2001 8-K
------------------------------------------------------------------------------
10.17 Security Interest Provisions Incorporated by reference to
Exhibit 10.38 to the November
20, 2001 8-K
------------------------------------------------------------------------------
10.18 Employment Agreement by and Incorporated by reference to
between the Registrant and Exhibit 10.39 to the November
Mira LaCous dated November 20, 2001 8-K
20, 2001
------------------------------------------------------------------------------
10.19 Option to Purchase 140,000 Incorporated by reference to
Shares of Common Stock issued Exhibit 10.40 to the November
to Mira LaCous 20, 2001 8-K
------------------------------------------------------------------------------
10.20 Option to Purchase 150,000 Incorporated by reference to
Shares of Common Stock issued Exhibit 10.21 to the
to Thomas J. Colatosti. Registrant's Annual Report on
Form 10-KSB for the fiscal year
ended December 31, 2002
------------------------------------------------------------------------------
21
------------------------------------------------------------------------------
10.21 Non-Qualified Stock Option Incorporated by reference to
Agreement under the Exhibit 10.22 to the
Registrant's 1999 Stock Registrant's Annual Report on
Incentive Plan to Purchase Form 10-KSB for the fiscal year
200,000 Shares of Common ended December 31, 2002
Stock issued to Thomas J.
Colatosti
------------------------------------------------------------------------------
10.22 Employment Agreement by and Incorporated by reference to
between the Registrant and Exhibit 10.23 to the
Michael W. DePasquale dated Registrant's Annual Report on
January 3, 2003 Form 10-KSB for the fiscal year
ended December 31, 2002
------------------------------------------------------------------------------
10.23 Option to Purchase 580,000 Incorporated by reference to
Shares of Common Stock issued Exhibit 10.24 to the
to Michael W. DePasquale Registrant's Annual Report on
Form 10-KSB for the fiscal year
ended December 31, 2002
------------------------------------------------------------------------------
10.24 Note Purchase Agreement dated Incorporated by reference to
January 27, 2003 Exhibit 10.25 to the
Registrant's Annual Report on
Form 10-KSB for the fiscal year
ended December 31, 2002
------------------------------------------------------------------------------
10.25 Secured Convertible Incorporated by reference to
Promissory Due June 30,2004 Exhibit 10.26 to the
Registrant's Annual Report on
Form 10-KSB for the fiscal year
ended December 31, 2002
------------------------------------------------------------------------------
10.26 Option to Purchase 200,000 Incorporated by reference to
Shares of Common Stock issued Exhibit 10.27 to the
to Charles P. Romeo Registrant's Annual Report on
Form 10-KSB for the fiscal year
ended December 31, 2002
------------------------------------------------------------------------------
10.27 Amendment No. 1 to Note Filed herewith
Purchase Agreement dated
October 31, 2003
------------------------------------------------------------------------------
10.28 Secured Convertible Filed herewith
Promissory Note due October
31, 2004
------------------------------------------------------------------------------
10.29 Letter of Amendment and Filed herewith
Waiver dated October 31, 2003
------------------------------------------------------------------------------
31.1 Certificate of CEO of Filed herewith
Registrant required by Rule
13a-14(a) under the
Securities Exchange Act of
1934, as amended
------------------------------------------------------------------------------
31.2 Certificate of CFO of Filed herewith
Registrant required by Rule
13a-14(a) under the
Securities Exchange Act of
1934, as amended
------------------------------------------------------------------------------
32.1 Certificate of CEO of Filed herewith
Registrant Pursuant to 18 USC
Section 1350, as Adopted
Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
------------------------------------------------------------------------------
22
------------------------------------------------------------------------------
32.2 Certificate of CFO of Filed herewith
Registrant Pursuant to 18 USC
Section 1350, as Adopted
Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
------------------------------------------------------------------------------
(b) Current Reports on Form 8-K filed during the three month period ended
September 30, 2003:
On October 29, 2003, the Company furnished under Item 7 - "Financial
Statements, Pro Forma Financial Information and Exhibits" and Item 12 - "Results
of Operations and Financial Condition" of Form 8-K, a copy of its earnings press
release that was issued on October 28, 2003.
23
SIGNATURES
In accordance with the requirements of the Securities
Exchange Act of 1934, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BIO-KEY INTERNATIONAL, INC.
Dated: November 14, 2003 /s/ Michael W. DePasquale
-------------------------
Michael W. DePasquale
Chief Executive Officer
Dated: November 14, 2003 /s/ Gary Wendt
---------------------------
Gary Wendt
Chief Financial Officer
24
EXHIBIT INDEX
EXHIBIT NO. REFERENCE
10.27 Amendment No. 1 to Note Purchase
Agreement dated October 31, 2003
10.28 Secured Convertible Promissory Note due
October 31, 2004
10.29 Letter of Amendment and Waiver dated
October 31, 2003
31.1 Certificate of CEO of Registrant
required by Rule 13a-14(a) under the
Securities Exchange Act of 1934, as
amended
31.2 Certificate of CFO of Registrant
required by Rule 13a-14(a) under the
Securities Exchange Act of 1934, as
amended
32.1 Certificate of CEO of Registrant
Pursuant to 18 USC Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certificate of CFO of Registrant
Pursuant to 18 USC Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
25