U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 1-13463
SAC TECHNOLOGIES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1741861
--------------------- --------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
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___
Shares of the Registrant's Common Stock, par value $.01 per share,
outstanding as of November 5, 2001: 11,738,322.
1
SAC TECHNOLOGIES, INC., DBA BIO-KEY INTERNATIONAL
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance sheets as of December 31, 2000 and September 30, 2001........3
Statements of operations for the three months ended
September 30, 2000 and 2001, nine months ended September 30
2000 and 2001, and January 7, 1993 (date of
inception) through September 30, 2001............................4
Statements of cash flows for the nine months ended September 30,
2000 and 2001, and January 7, 1993 (date of inception)
through September 30, 2001.......................................5
Notes to interim financial statements................................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................10
PART II. OTHER INFORMATION
Item 1 - Legal proceedings.............................................15
Item 2 - Changes in Securities and Use of Proceeds.....................15
Item 3 - Defaults Upon Senior Securities...............................15
Item 4 - Submission of Matters to a Vote of Security Holders...........16
Item 5 - Other Events..................................................16
Item 6 - Exhibits and Reports on Form 8-K..............................16
2
SAC Technologies, Inc., dba BIO-Key International
(a Corporation in the Development Stage)
BALANCE SHEETS
December 31, September 30,
2000 2001
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 48,830 $ 58,668
Accounts receivable 9,118 -
Prepaid expenses 21,745 28,404
------------ ------------
Total current assets 79,693 87,072
EQUIPMENT AND FURNITURE AND FIXTURES - AT COST,
less accumulated depreciation 31,942 7,985
OTHER ASSETS 50,595 40,706
------------ ------------
$ 162,230 $ 135,763
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes Payable $ 1,400,000 $ 2,670,000
Convertible Debentures 598,455 458,000
Accounts payable 328,398 332,455
Accrued liabilities 1,121,689 1,742,175
------------ ------------
Total current liabilities 3,448,542 5,202,630
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferredstock - authorized, 5,000,000 shares
of $ .01 par value: 50,000 designated as
Series A 9% Convertible (liquidation
preference of $100 per share); issued and
outstanding, 19,875 199 199
Common stock - authorized, 20,000,000 shares
of $.01 par value; issued and outstanding,
9,966,724 and 11,164,842 shares, respectively 99,667 111,648
Additional contributed capital 13,133,600 13,384,939
Deficit accumulated during the development stage (16,519,778) (18,563,653)
------------ ------------
(3,286,312) (5,066,867)
------------ ------------
$ 162,230 $ 135,763
============ ============
See accompanying notes to interim financial statements.
3
SAC Technologies, Inc., dba BIO-Key International
(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,
----------------------------- ----------------------------- ------------
2000 2001 2000 2001 2001
------------ ------------ ------------ ------------ ------------
Revenues
Product sales $ -- $ -- $ -- $ -- $ 577,384
Licensing fees -- -- -- -- 100,000
Reimbursed research
and development -- -- -- -- 284,506
Technical support
and other services -- -- -- -- 429,885
------------ ------------ ------------ ------------ ------------
-- -- -- -- 1,391,775
Costs and other expenses
Cost of product sales -- -- -- -- 1,736,895
Cost of technical support
and other services -- -- -- -- 237,317
Selling, general
and administrative 524,541 293,021 1,400,389 1,087,599 11,200,268
Research, development
and engineering 312,819 321,720 883,186 776,561 5,634,753
------------ ------------ ------------ ------------ ------------
837,360 614,741 2,283,575 1,864,160 18,809,233
------------ ------------ ------------ ------------ ------------
Operating loss (837,360) (614,741) (2,283,575) (1,864,160) (17,417,458)
Other income (expense)
Interest income and other 51 (205) (716) (6,034) 503,102
Interest expense (37,482) (68,199) (97,852) (173,679) (1,185,198)
------------ ------------ ------------ ------------ ------------
(37,431) (68,404) (98,568) (179,713) (682,096)
------------ ------------ ------------ ------------ ------------
NET LOSS $ (874,791) $ (683,145) $ (2,382,143) $ (2,043,873) $(18,099,554)
============ ============ ============ ============ ============
Loss applicable to
Common shareholders
Net loss $ (874,791) $ (683,145) $ (2,382,143) $ (2,043,873) $(18,099,554)
Series A convertible preferred
stock dividend
and accretion (44,900) - (259,900) (89,438) (738,263)
------------ ------------ ------------ ------------ ------------
Loss applicable to common
stockholders $ (919,691) $ (683,145) $ (2,642,043) $ (2,133,311) $(18,837,817)
============ ============ ============ ============ ============
Basic and diluted loss
Per common share $ (.09) $ (.06) $ (.25) $ (.19) $ (2.71)
Series A convertible preferred
Stock dividend and accretion (.01) - (.02) (.01) (.11)
------------ ------------ ------------ ------------ ------------
Loss per
Common share $ (.10) $ (.06) $ (.27) $ (.20) $ (2.82)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding 9,598,143 10,754,533 9,476,895 10,640,836 6,687,192
============ ============ ============ ============ ============
See accompanying notes to interim financial statements
4
SAC Technologies, Inc., dba BIO-Key International
(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,
---------------------------- ------------
2000 2001 2001
------------ ------------ ------------
Cash flows from operating activities
Net loss $ (2,382,143) $ (2,043,873) $(18,099,554)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation 35,486 23,956 234,927
Amortization
Unearned compensation 72,273 -- 181,809
The intrinsic value of the
beneficial conversion feature
of the convertible debenture -- -- 561,701
Deferred financing costs -- 21,069 447,466
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 purchase -- -- (170,174)
Acquired research and development -- -- 117,000
Options and warrants issued for
services and other 531,165 13,320 1,343,554
Other -- -- 34,684
Change in assets and liabilities:
Accounts receivable 6,231 9,118 --
Inventories 650 -- (916,015)
Prepaid expenses 13,858 (6,659) (28,404)
Accounts payable 40,000 4,057 332,455
Accrued Liabilities 468,151 720,486 1,853,135
------------ ------------ ------------
Net cash used in operations (1,214,329) (1,258,526) (13,248,424)
Cash flows from investing activities
Capital expenditures -- -- (242,913)
Proceeds from sales
of Inter-Con/PC stock -- -- 190,000
Other 4,226 (1,636) (40,707)
------------ ------------ ------------
Net cash provided by (used in)
investing activities 4,226 (1,636) (93,620)
Cash flows from
financing activities
Net proceeds under
short-term borrowing
agreements 700,000 1,270,000 2,903,000
Issuance of convertible
bridge note -- -- 175,000
Issuance of convertible
debenture -- -- 1,775,000
Issuance of warrants and
convertible debentures discount -- -- 830,000
Deferred financing costs -- -- (312,977)
Exercise of stock options -- -- 190,799
Sales of common stock -- -- 7,093,832
Sale of preferred stock and assigned
value of warrant 433,519 -- 884,058
Redemption of common stock -- -- (138,000)
------------ ------------ ------------
Net cash provided by
financing activities 1,133,519 1,270,000 13,400,712
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents (76,584) 9,838 58,668
Cash and cash equivalents,
at beginning of period 101,152 48,830 --
------------ ------------ ------------
Cash and cash equivalents,
at end of period $ 24,568 $ 58,668 $ 58,668
============ ============ ============
Non-cash Financing Transactions:
Conversion of debentures into common stock $ 350,000 $ 150,000 $ 2,042,000
============ ============ ============
See accompanying notes to interim financial statements.
5
SAC Technologies, Inc., dba BIO-Key International
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 2000, and September 30, 2001 (Unaudited)
1. Unaudited Statements
The accompanying unaudited interim financial statements have been
prepared by SAC Technologies, Inc., dba BIO-Key International (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, 2000.
2. Liquidity and Capital Resource Matters
Broad commercial acceptance of the Company's products by customers and
end users is critical to the Company's success and ability to generate
revenues. The Company has limited sales to date, and has accumulated
losses since inception of $18,099,554 of which $683,145 was incurred
during the quarter ended September 30, 2001. The Company believes
operating losses will continue for the foreseeable future.
Between March 31, 2000 and October 18, 2001 the Company has obtained a
series of unsecured short-term loans from the Shaar Fund Ltd, an
international investment fund (the "Fund"), in the aggregate principal
amount of $2,770,000. The loans bear interest at the rate of 10% per
annum and are due on the earlier of December 31, 2001, or the Company
completing a private equity financing resulting in gross proceeds of at
least $5,000,000.
As of the date of this filing, the Company has minimal cash resources
and is in need of substantial additional capital to maintain operations
beyond the fourth quarter of 2001. The Company is seeking to obtain
additional financing through the issuance of debt or equity securities
of the Company on a negotiated private placement basis with
institutional and accredited investors. As of the date of this filing,
the Company has not reached any definitive agreement with any such
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. Management believes it will need
$4,000,000 to $6,000,000 to execute its business plan and support its
operations through the next twelve months.
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
SAC Technologies, Inc., dba BIO-Key International
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 2000, and September 30, 2001 (Unaudited)
4. Prepaid Expenses
December 31, September 30,
2000 2001
---- ----
Insurance $ 15,545 $ 22,682
Rent 5,790 5,722
Other 410 --
----------- -----------
$ 21,745 $ 28,404
=========== ===========
5. Other Assets
December 31, September 30,
2000 2001
---- ----
Deferred financing costs, less
accumulated amortization $ 11,524 $ --
Security deposits 16,123 15,566
Patents pending 22,948 25,140
----------- -----------
$ 50,595 $ 40,706
=========== ===========
6. Accrued Liabilities
December 31, September 30,
2000 2001
---- ----
Compensation $ 85,680 $ 85,680
Interest 256,071 329,751
Shaar Fund Penalty 763,625 1,300,250
Other 16,313 26,494
----------- -----------
$ 1,121,689 $ 1,742,175
=========== ===========
7. Convertible Debentures
In 1998, the Company issued convertible debentures (the "Debenture")
with a face value of $2,500,000 and a stated interest rate of 5% to the
Fund. As of September 30, 2001, the outstanding principal amount under
the Debenture was $458,000 which was due and payable on June 30, 2001.
The Company's failure to make such payment together with all accrued
and unpaid interest constituted an event of default under the
Debenture. The entire principal amount and all accrued and unpaid
interest is immediately due and payable and bears interest at the
default rate of 9% per annum. As of the date of this filing, the Fund
has not demanded repayment of this amount. As of September 30, 2001 the
total amount of unpaid principal and interest due under the Debenture
is approximately $576,000.
The holder of the Debentures periodically has made elections to convert
some of the Debentures into shares of the Company's common stock.
During the three quarters ended September 30, 2001, Debentures totaling
$150,000 were converted into 889,952 shares of common stock.
7
SAC Technologies, Inc., dba BIO-Key International
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 2000, and September 30, 2001 (Unaudited)
8. Stockholders Equity
The following summarizes option and warrant activity since December 31,
2000:
Number of Shares
---------------------------------------------------------------------------------------------
1996 1999 Non-
Plan Plan Plan Warrants Total
--------- --------- --------- --------- ---------
Balance, December 31, 2000 114,380 616,669 1,481,000 1,515,966 3,728,015
Granted -- 300,000 590,000 26,250 916,250
Exercised -- -- -- -- --
Cancelled -- -- -- -- --
--------- --------- --------- --------- ---------
Balance, September 30, 2001 114,380 916,669 2,071,000 1,542,216 4,644,265
--------- --------- --------- --------- ---------
Available for future grants,
September 30, 2001 542,620 1,083,331 -- -- 1,625,951
========= ========= ========= ========= =========
Series A Convertible Preferred Stock
On March 17, 2000 the Company completed a private placement of $675,000
face amount of its Series A Convertible Preferred Stock and a 5-year
warrant to purchase 67,500 shares of Common Stock exercisable at $1.196
per share to the Fund. The Company received net proceeds of $185,000
after giving effect to a 33% discount ($225,000) to the face amount of
the preferred stock, offering costs of $15,000 and the repayment of
$250,000 in notes outstanding to the Fund. On July 9, 1999, the Company
issued $1,312,500 face amount of its Series A Convertible Preferred
Stock realizing gross proceeds of $875,000.
The preferred shares provide for a 9% dividend payable semi-annually in
arrears. At the option of the Company, the dividends are payable in
kind through the issuance of additional shares of Company common stock.
As of September 30, 2001, dividends in arrears totaled approximately
$312,000. The preferred shares are immediately convertible into shares
of common stock at a conversion price equal to the lesser of (a) $1.10
or (b) a 22% discount to the average closing bid prices of the
Company's common stock during the five trading day period prior to
conversion. The preferred shares are redeemable, in whole or in part,
at the option of the Company at 100% of face value ($100 per share)
plus accrued and unpaid dividends.
In connection with these financings, the Company was obligated to file
a registration statement with the SEC covering the resale of the shares
of common stock issuable upon conversion of the preferred shares or the
exercise of the warrant issued to the Fund. As of the date of this
filing the Company has not filed the registration statement, has
accrued a penalty of $1,300,250 related thereto, and the Fund has not
demanded payment of this amount.
8
9. Conversion of Debentures and Preferred Stock into Common Stock
Subsequent to September 30, 2001.
During October 2001, the holder of the Company's Debentures elected to
convert $40,000 of Debentures into 226,886 shares of the Company's
common stock. Also during October 2001, the holder of the Company's
convertible preferred stock elected to convert 862 shares of the
preferred stock and $18,395 of accrued dividends thereon, into 375,687
shares of the Company's common stock.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT
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. When used in this Report or
in such statements, the words "estimate," "project," "intends,"
"expects," "believes" and similar expressions are intended to identify
forward-looking statements regarding events and financial trends which
may affect the Company's future operating results and financial
position. Such statements are not guarantees of future performance and
are subject to risks and uncertainties that could cause the Company's
actual results and financial position to differ materially from those
included within the forward-looking statements. These factors include,
but are not limited to, the Company's ability to successfully develop
its technology to meet or exceed user specifications, 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." Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to publicly release the results of any
revision to these forward-looking statements to reflect events or
circumstances after the date made or to reflect the occurrence of
unanticipated events.
OVERVIEW
The Company is in the business of developing and marketing proprietary
biometric technology and software solutions. Biometric technology, the
science of analyzing specific human characteristics which are unique to
each individual in order to identify a specific person from a broader
population, is an emerging technology. Examples of the unique
biological characteristics that can be used to identify an individual
include fingerprints, iris patterns, hand geometry, voice recognition
and facial structure. Fingerprint analysis is an accurate and reliable
method to distinguish one individual from another and is viewed as less
intrusive than many other biometric identification methods. As a
result, fingerprint analysis has gained the most widespread use for
biometric identification. Biometric technology represents a novel
approach to identity verification which has only been used in limited
applications and has not gained widespread acceptance in any commercial
or consumer markets.
The Company's proprietary biometric technology scans a person's
fingerprint and identifies a person typically within a few seconds
without the use of a password, key card, personal identification number
(PIN) or other identifying data. The Company believes that its
fingerprint identification technology will have a broad range of
possible applications relating to information security and access
control, including:
* Securing Internet sites and Web pages
* Securing access to corporate intranets and extranets
* General access control, i.e., facility access control
Over the past two years, recognizing the growth in electronic commerce,
corporate intranets and ethernets and related security concerns, the
Company has been actively positioning its technology for the licensing
of a Web based biometric authentication software solution to companies
which rely on the Internet to distribute contents, goods or software,
and to corporations to control access to corporate intranets, extranets
or specific applications. This integrated solution will involve the
licensing of client and server based software to provide for reliable
and cost effective user authentication in connection with the
10
processing of e-commerce transactions or securing access to private
networks. This solution is also intended to be available to secure
e-commerce and other general purpose Web site applications. During the
past year, the Company has completed the development of enhanced
software to provide an effective interface between client and
server-based software. The Company's current business plan, which
continues to evolve, consists of a threefold strategy of (i) continued
development of technology; (ii) marketing its technologies through
licensing agreements with OEMs and private labelers addressing
industry-specific applications; and (iii) the development and licensing
of a Web-based biometric authentication software solution to e-commerce
and Internet content companies to secure Web based transactions and to
corporations to secure private networks.
Although the Company has developed significant identification
technology and readers, neither has gained any meaningful commercial
acceptance and the Company has only generated minimal revenue since
inception. The Company does not intend to distribute readers, but
rather intends to license its core technology. The Company's business
model, particularly the Web authentication initiative, represents a
unique approach to Internet security. As of the date of this Report,
the Web authentication initiative has not been adopted by any company
conducting business over the Internet and 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 cash will only last through the mid
fourth quarter 2001. Due to these and other uncertainties, the
Company's independent auditors have included an explanatory paragraph
in their opinion for the year ended December 31, 2000 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.
11
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AS COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2000
Revenues
The Company is a development stage corporation. Accordingly, the
Company does not have significant sales revenue and generated no
revenue during the three and nine month periods ended September 30,
2000 and September 30, 2001. The Company continues to deploy
substantially all human and capital resources to executing its business
plan targeted at Internet, intranet and electronic commerce security.
As a result, the Company's limited resources were used to refine its
technology to develop the applications needed to execute against the
Company's business plan.
Costs and Other Expenses
The Company did not generate any revenue during the nine month periods
ended September 30, 2001 and 2000 and, therefore, did not incur any
cost of sales.
Selling, general and administrative expenses decreased $231,520 to
$293,021 during the three months ended September 30, 2001 as compared
to $524,541 for the corresponding period in 2000. Of the decrease,
$37,125 was due to a decrease of a non-cash accrual of penalties
incurred for failing to file a registration statement for the Company's
Series A Convertible Preferred Stock, $12,993 was due to a reduction in
general and administrative operating costs, $17,820 was due to a
reduction in salaries and wages for administrative personnel, $109,850
was due to a reduction in administrative consulting costs, and $86,422
was due to a reduction in professional services costs. These were
offset by an increase of $32,690 in selling costs as the Company
focused on marketing its web based biometric authentication software
solution. The Company anticipates that selling costs will continue to
increase.
Selling, general and administrative expenses decreased $312,790 to
$1,087,599 during the nine months ended September 30, 2001 as compared
to $1,400,389 for the corresponding period in 2000. Of the decrease,
$73,830 was due to a decrease in salaries and wages for administrative
personnel, $231,672 was due to a reduction in professional services
costs, and $246,380 was due to a reduction in administrative consulting
costs. These were offset by increases of $17,133 in general operating
costs and $137,584 in selling costs as the Company focused on marketing
its web based biometric authentication software solution and $84,375
for non-cash accrual of penalties incurred for failing to file a
registration statement for the Company's Series A Convertible Preferred
Stock.
Research, development, and engineering expenses increased $8,901 to
$321,720 during the three months ended September 30, 2001 as compared
to $312,819 for the corresponding period in 2000. Of the increase,
$3,843 was due to an increase in wages for development personnel and
$14,079 was due to an increase in software sub-contracting costs. These
were offset by a $9,021 reduction in general development costs.
Research, development, and engineering expenses decreased $106,625 to
$776,561 during the nine months ended September 30, 2001 as compared to
$883,186 for the corresponding period in 2000. Of the decrease, $77,664
was due to a reduction in general development costs and $169,139 was
due to a decrease in development personnel. These were offset by an
increase of $140,178 in software sub-contracting costs.
12
Other income and expense increased $30,973 to $68,404 during the three
months ended September 30, 2001 as compared to $37,421 for the
corresponding period in 2000 due primarily to the interest costs
associated with the increase in short term notes payable to the Shaar
Fund, Ltd.
Other income and expense increased $81,145 to $179,713 during the nine
months ended September 30, 2001 as compared to $98,568 for the
corresponding period in 2000 due primarily to the interest costs
associated with the increase in short term notes payable to the Shaar
Fund, Ltd.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the nine months ended
September 30, 2001 was $1,258,526 compared to $1,214,329 during the
nine months ended September 30, 2000. 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, 2001 was $1,636 compared to net
cash provided by investing activities of $4,226 for the same period in
2000. Net cash provided by financing activities during the nine months
ended September 30, 2001 was $1,270,000 compared to $1,133,519 in the
same period in 2000 and consisted of net short term borrowing
activities of $1,270,000 in 2001.
Working capital deficit increased $1,746,709 during the nine months
ended September 30, 2001 to $5,115,558 as compared to $3,368,849 as of
December 31, 2000.
The Company's capital needs have been principally met through proceeds
from the issuance of debt and equity securities.
The Company does not currently maintain a line of credit or term loan
with any commercial bank or other financial institution.
On June 30, 1998, the Company sold to Shaar Fund, Ltd., an
international investment fund and principal stockholder of the Company
(the "Fund") $2,500,000 of 5% Convertible Debenture due June 30, 2001
(the "Convertible Debenture"). The Convertible Debenture is convertible
into shares of the Company's Common Stock at a conversion price equal
to the lesser of (i) $7.15; or (ii) the average closing bid price of
the Company's Common Stock for a five-day period ending the day prior
to the notice of conversion multiplied by a discount factor of 22%.
Interest is payable quarterly in arrears, and at the option of the
Company, is payable in-kind through the issuance of additional shares
of the Company's Common Stock at the conversion price. As of the date
of this filing, $2,082,000 principal amount and $100,000 of accrued
interest due under the Convertible Debenture has been converted into an
aggregate of 3,854,861 shares of Common Stock. The Convertible
Debenture contains certain anti dilution and conversion price
adjustment provisions if certain events occur.
As of the date of this filing, the outstanding principal amount under
the Convertible Debenture is $418,000 which was due and payable on June
30, 2001. The Company's failure to make such payment, together with all
accrued and unpaid interest, constituted an event of default under the
Convertible Debenture. The entire principal amount and all accrued and
unpaid interest is immediately due and payable and bears interest at
the default rate of 9% per annum. As of the date of this filing, the
Fund has not demanded repayment of this amount.
13
On July 9, 1999 the Company completed a private placement of 13,125
shares of its Series A Convertible Preferred Stock and 5-year warrants
to purchase 131,250 shares of Common Stock exercisable at $1.196 per
share to the Fund. The Company realized net proceeds of $700,539 from
the sale of these securities after giving effect to the repayment of
$100,000 note payable to the Fund. On March 17, 2000 the Company
completed a private placement of 6,750 shares of its Series A
Convertible Preferred Stock and 5-year warrants to purchase 67,500
shares of common stock with the Fund. The Company realized net proceeds
of $183,519 after giving effect to the repayment of $250,000 of notes
payable to the Fund.
The preferred shares provide for a 9% dividend payable semi-annually in
arrears. At the option of the Company, the dividends are payable in
kind through the issuance of additional shares of Company common stock.
The preferred shares are immediately convertible into shares of common
stock at a conversion price equal to the lesser of (a) $1.10 or (b) a
22% discount to the average closing bid prices of the Company's common
stock during the five trading day period prior to conversion. The
preferred shares are redeemable, in whole or in part, at the option of
the Company at 100% of face value ($100 per share) plus accrued and
unpaid dividends. The Company is obligated to file a registration
statement with the Securities and Exchange Commission covering the
resale of the shares of common stock issuable upon conversion of the
preferred shares or exercise of the warrants. As of the date of this
filing, the Company has not filed the registration statement, has
accrued penalties of $1,300,250 payable to the Fund and will continue
to accrue a penalty until such a registration statement is filed. The
Fund has not demanded payment of these amounts. As of September 30,
2001 cumulative undeclared dividends were approximately $312,000. As of
the date of this filing, 862 preferred shares ($86,200 face amount)
together with $18,395 of accrued dividends due on such shares has been
converted into an aggregate of 375,687 shares of Common Stock.
Between March 31, 2000 and October 18, 2001, the Company has obtained a
series of unsecured short term loans from the Fund in the aggregate
principal amount of $2,770,000. The loans bear interest at the rate of
10% per annum and are due on the earlier of December 31, 2001 or the
Company completing a private equity financing resulting in gross
proceeds of at least $5,000,000. There can be no assurance that the
Fund will continue to provide any additional loans to the Company.
As of the date of this filing the Company has minimal cash resources
and is in need of substantial additional capital to maintain operations
beyond the fourth quarter of 2001. Management is seeking to obtain
additional financing through the issuance of additional debt or equity
securities of the Company on a negotiated private placement basis to
institutional and accredited investors. In this regard, the Company has
been engaged in discussions with certain investors, however, as of the
date of this filing, the Company has not reached any definitive
agreement with any such investor regarding the specific terms of an
investment in the Company. Given the number of shares of common stock
reserved for issuance upon conversion or exercise, as applicable, of
outstanding options, warrants, preferred stock and the Convertible
Debenture, in order to raise the necessary funds through the issuance
of equity securities or securities convertible into equity securities,
the Company will likely be required to amend its Articles of
Incorporation to authorize the issuance of additional shares of common
stock. This will result in increased costs associated with calling and
convening a shareholder meeting and could delay the timing of any
financing. 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. Management
believes it will need $4,000,000 to $6,000,000 to execute its business
plan and support operations through the next 12 months.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 2001, the Company and Keyware Technologies, Inc. agreed to
settle the breach of contract law suit filed by Keyware against the
Company in November 1999 in Middlesex County, Massachusetts Superior
Court and the Company's breach of contract counterclaim. The suit was
based on alleged breaches of the November 26, 1997 Strategic Alliance
Agreement between the parties. The Company agreed to pay $50,000 to
Keyware during the seven (7) month period commencing September 1, 2001
against Keyware's delivery to the Company of 50,000 copies of its Voice
Guardian software and the execution of a mutual general release.
ITEM 2. CHANGES IN SECURITIES
1. On October 29, 2001, the Company issued options to purchase 200,000
shares of common stock under the Company's 1999 Stock Option Plan at
an exercise price of $.29 per share, the closing market price of the
Company's common stock on the date of grant, to Jeffrey J. May in
connection with his appointment as a Director of the Company.
Options to purchase 50,000 shares vested on the date of grant and
the remainder vest in equal quarterly installments during the three
(3) year period commencing 90 days from the day of grant. The
options terminate on the earlier of seven (7) years from the date of
grant or 90 days after termination as a director, unless such
termination is for cause, in which case, the options expire on the
date of such termination. The options were issued 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 of commissions
to any person.
2. On or about October 11, 2001, the Company issued 226,886 shares of
restricted common stock to the Fund in consideration of the
conversion of $40,000 principal amount due under the Convertible
Debenture. These shares were issued 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.
3. During October, 2001, the Company issued an aggregate of 375,687
shares of restricted common stock to the Fund upon conversion of 862
shares of the Company's Series A Convertible Preferred Stock
together with $18,395 of accrued dividends due on such shares. These
shares were issued 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of the date of this filing, the Company has accrued and unpaid
dividends in arrears on its Series A 9% Convertible Preferred Stock in
the amount of approximately $294,000.
On June 30, 2001, the outstanding principal amount $508,000 and all
accrued and unpaid interest under the Convertible Debenture was due and
payable. The outstanding principal amount and accrued and unpaid
interest continue to accrue interest at the default rate of 9% per
annum. As of the date of this filing, the total amount due and payable
under the Convertible Debenture is approximately $544,175.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER EVENTS
On October 29, 2001, Mr. Barry Wendt resigned his position as chairman
of the Board of Directors. Mr. Wendt continues to serves as a director
of the company. Concurrent with Mr. Wendt's resignation, Mr. Jeffry
Brown was appointed Chairman of the Board of Directors.
On October 29, 2001, Mr. Jeffrey J. May, 41, was appointed to the Board
of Directors of the Company. Since 1997, Mr. May has served as the
President of Gideons Point Capital, a Tonka Bay Minnesota based
financial consulting firm and angel investor focusing on assisting and
investing in start-up technology companies. In 1983, Mr. May co-founded
Advantek, Inc., a manufacturer of equipment and materials which
facilitate the automatic handling of semi-conductors and other
electrical components. The Company was sold in 1993. Mr. May continued
to serve as a director and Vice -President of Operations of Advantek
until 1997. At which time it had over 600 employees and sales in excess
of $100 million. Mr. May earned a Bachelor of Science degree in
Electrical Engineering from the University of Minnesota in 1983.
ITEM 6. EXHIBITS
(a) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: November 9, 2001 SAC Technologies, Inc.
/s/ Jeffry R. Brown
----------------------------------------
Jeffry R. Brown, Chief Executive Officer
/s/ Gary Wendt
----------------------------------------
Gary Wendt, Chief Financial Officer
16