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, 2002
[_] 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 (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 7, 2002: 13,788,262 shares.
BIO-KEY INTERNATIONAL, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance sheets as of December 31, 2001 and September 30, 2002 .... 3
Statements of operations for the three months ended
September 30, 2001 and 2002, nine months ended September 30,
2001 and 2002, and January 7, 1993 (date of
inception) through September 30, 2002 .........................4
Statements of cash flows for the nine months ended September 30,
2001 and 2002, and January 7, 1993 (date of inception)
through September 30, 2002 .......................................5
Notes to financial statements ..............................7
Item 2 - Management's Discussion and Analysis and Plan of Operations...12
Item 3 - Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1 - Legal proceedings...........................................17
Item 2 - Changes in Securities and Use of Proceeds...................17
Item 3 - Defaults Upon Senior Securities.............................18
Item 4 - Submission of Matters to a Vote of Security Holders.........18
Item 5 - Other Events................................................18
Item 6 - Exhibits and Reports on Form 8-K............................19
2
BIO-key International, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS
December 31, September 30,
2001 2002
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 514,970 $ 98,892
Accounts Receivable -- 48,400
Prepaid expenses 206,634 99,920
------------ ------------
Total current assets 721,604 247,212
EQUIPMENT AND FURNITURE AND FIXTURES - AT COST,
less accumulated depreciation -- --
OTHER ASSETS 41,706 121,903
------------ ------------
$ 763,310 $ 369,115
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of long-term obligations $ -- $ 5,618,740
Notes payable -- 382,000
Accounts payable 238,496 220,566
Accrued liabilities 90,575 442,007
------------ ------------
Total current liabilities 329,071 6,663,313
LONG-TERM OBLIGATIONS, net of discount and current maturities 4,331,238 --
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, 21,430
shares as of December 31, 2001 and 20,230 shares
as of September 30, 2002 214 202
Common stock - authorized, 60,000,000 shares
of $.01 par value; issued and outstanding,
12,528,469 and 13,809,767 shares, respectively 125,285 138,098
Additional contributed capital 15,538,025 16,271,715
Deficit accumulated during the development stage (19,560,523) (22,704,213)
------------ ------------
(3,896,999) (6,294,198)
------------ ------------
$ 763,310 $ 369,115
============ ============
See accompanying notes to financial statements.
3
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,
----------------------------- ------------------------------ ------------
2001 2002 2001 2002 2002
------------ ------------ ------------- ------------ ------------
Revenues
Product sales $ -- $ 1,425 $ -- $ 2,424 $ 579,808
Licensing fees -- 33,375 -- 90,860 190,860
Reimbursed research
and development -- -- -- -- 284,506
Technical support
and other services -- -- -- -- 429,885
------------ ------------ ------------- ------------ ------------
-- 34,800 -- 93,284 1,485,059
Costs and other expenses
Cost of product sales -- 1,200 -- 2,320 1,739,215
Cost of technical support
and other services -- -- -- -- 237,317
Selling, general
and administrative 293,021 527,704 1,087,599 1,525,462 12,956,596
Research, development
and engineering 321,720 253,473 776,561 819,554 6,625,679
------------ ------------ ------------- ------------ ------------
614,741 782,377 1,864,160 2,347,336 21,558,807
------------ ------------ ------------- ------------ ------------
Operating loss (614,741) (747,577) (1,864,160) (2,254,052) (20,073,748)
Other income (expense)
Interest income and other (205) 351 (6,034) 1,314 510,451
Interest expense (68,199) (270,669) (173,679) (882,046) (2,211,192)
------------ ------------ ------------- ------------ ------------
(68,404) (270,318) (179,713) (880,732) (1,700,741)
------------ ------------ ------------- ------------ ------------
Loss before extraordinary gain (683,145) (1,017,895) (2,043,873) (3,134,784) (21,774,489)
Extraordinary gain - troubled
payable reduction -- -- -- -- 300,250
------------ ------------ ------------- ------------ ------------
NET LOSS $ (683,145) $ (1,017,895) $ (2,043,873) $ (3,134,784) $(21,474,239)
============ ============ ============= ============ ============
Loss applicable to
common shareholders:
Net loss $ (683,145) $ (1,017,895) $ (2,043,873) $ (3,134,784) $(21,474,239)
Preferred stock dividends
and accretion -- -- (89,438) (96,435) (1,392,173)
------------ ------------ ------------ ------------ ------------
Loss applicable to common
stockholders $ (683,145) $ (1,017,895) $ (2,133,311) $ (3,231,219) $ (22,866,412)
============ ============ ============ ============ ============
Basic and diluted loss
Per common share $ (.06) $ (.08) $ (.19) $ (.24) $ ( 2.95)
Preferred stock dividends
and accretion -- -- (.01) (.01) (.19)
------------ ------------ ------------ ------------ ------------
Loss per
common share $ (.06) $ (.08) $ (.20) $ (.25) $ ( 3.14)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding 10,754,533 13,305,343 10,640,836 12,801,284 7,292,311
============ ============ ============ ============ ============
See accompanying notes to financial statements
4
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,
---------------------------- ------------
2001 2002 2002
------------ ------------ ------------
Cash flows from operating activities
Net loss $ (2,043,873) $(3,134,784) $(21,474,239)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation 23,956 -- 242,913
Amortization:
Unearned compensation -- -- 193,333
Discounts on convertible debt
related to warrants and
beneficial conversion features -- 523,502 1,146,066
Deferred financing costs 21,069 -- 426,397
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 13,320 383,194 1,784,214
Other -- -- 34,684
Change in assets and liabilities:
Accounts receivable 9,118 (48,400) (48,400)
Inventories -- -- (916,015)
Prepaid expenses (6,659) 106,713 (99,921)
Accounts payable 4,057 (17,930) 220,566
Accrued liabilities 720,486 372,824 1,954,080
------------ ------------ ------------
Net cash used in operations (1,258,526) (1,814,881) (15,730,504)
Cash flows from investing activities
Capital expenditures -- -- (242,913)
Proceeds from sales
of Inter-Con/PC stock -- -- 190,000
Other (1,636) (13,197) (54,903)
------------ ------------ ------------
Net cash used in
investing activities (1,636) (13,197) (107,816)
Cash flows from
financing activities
Net borrowings under
short-term borrowing
agreements 1,270,000 382,000 3,385,000
Issuance of convertible
bridge note -- -- 175,000
Issuance of convertible
debentures and long-term notes -- 1,080,000 3,920,000
Issuance of warrants and
convertible debentures -- -- 830,000
5
Deferred financing costs -- (50,000) (362,977)
Exercise of stock options and warrants -- -- 190,799
Sales of common stock -- -- 7,093,832
Sale of preferred stock and assigned
value of warrant -- -- 843,558
Redemption of common stock -- -- (138,000)
------------ ------------ ------------
Net cash provided by
financing activities 1,270,000 1,412,000 15,937,212
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents 9,838 (416,078) 98,892
Cash and cash equivalents,
at beginning of period 48,830 514,970 --
------------ ------------ ------------
Cash and cash equivalents,
at end of period $ 58,668 $ 98,892 $ 98,892
============ ============ ============
See accompanying notes to financial statements.
6
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001, and September 30, 2002 (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, 2001.
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 $21,474,000 of which approximately
$3,135,000 was incurred during 2002. As of September 30, 2002 there
was a stockholders' deficit of approximately $6,294,000.
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 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.
7
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001, and September 30, 2002 (Unaudited)
4. Prepaid Expenses
December 31, September 30,
2001 2002
----------- -----------
Consulting fees $ 188,275 $ --
Insurance 18,359 30,033
Rent and other -- 69,887
----------- -----------
$ 206,634 $ 99,920
=========== ===========
5. Other Assets
December 31, September 30,
2001 2002
----------- -----------
Deferred financing costs $ -- $ 67,000
Patents pending 26,706 39,903
Security deposits 15,000 15,000
----------- -----------
$ 41,706 $ 121,903
=========== ===========
Deferred financing 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 and has been 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.
6. Accrued Liabilities
December 31, September 30,
2001 2002
----------- -----------
Interest $ 42,509 $ 394,661
Compensation 36,699 45,700
Other 11,367 1,646
----------- -----------
$ 90,575 $ 442,007
=========== ===========
7. Long-term Obligations
As part of the Company's November 2001 recapitalization transaction
with an investor group (the Investor), the Investor agreed to provide
additional financing (the Funding Agreement) in incremental monthly
installments during the six-month period commencing March 1, 2002,
subject to certain conditions. In the nine months ended September 30,
2002 the Company has received $1,080,000 and issued notes payable to
the Investor. The terms of the notes require the principal to be
repaid on September 30,2003,interest to be accrued at 10%, payable
semi-annually on April 30 and September 30 commencing September 30,
2002, 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. The Company has not made the scheduled semi-annual
interest payment due September 30, 2002. The Investor has waived this
interest non-payment as a default item.
8
As part of an August 2002 bridge note agreement with the Investor, the
Investor agreed to provide up to $750,000 of additional financing in
incremental monthly installments during the four-month period
commencing August 28, 2002. As of September 30, 2002, the Company has
received $382,000 and issued the corresponding notes payable to the
Investor. The terms of the notes require the principal and accrued 7%
per annum interest to be repaid by February 28, 2003. In the event the
Company completes a private placement of equity securities resulting
in gross proceeds of at least $5,000,000 on or before December 31,
2002 the principal amount and accrued interest due under the note is
convertible at the option of the Investor, into the securities sold in
such transaction at a conversion price equal to the sale price of such
securities. Upon completion of such a transaction, the Investor also
has the right to request repayment of the note. In the event that such
a transaction is not completed by December 31, 2002, the principal
amount and accrued interest is convertible at the option of the
Investor into shares of the Company's series B preferred stock at a
conversion of $100 per share.
9
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001, and September 30, 2001 (Unaudited)
8. Stockholders Equity
Conversion of Debt into Common Stock
All of the Company's notes payable to the Investor are convertible
into shares of the Company's common stock. During the nine-month
period ended September 30, 2002, the Investor elected to convert the
remaining $316,000 principal amount and $6,392 of accrued interest due
under the Company's 5% Convertible Debenture into 803,198 shares of
common stock.
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. As of September 30, 2002
cumulative dividends in arrears were approximately $97,570. All of the
Company's series B preferred stock to the Investor are convertible
into shares of the Company's common stock. During the nine-month
period ended September 30, 2002, the Investor elected to convert 1,200
shares of Series B preferred stock and $8,905 of dividends in arrears
and accrued interest thereon into 478,100 shares of the Company's
common stock.
Options and Warrants
The following summarizes option and warrant activity since December 31,
2001:
Number of Shares
-----------------------------------------------------------
1996 1999 Non-
Plan Plan Plan Warrants Total
--------- --------- --------- --------- ---------
Balance, December 31, 2001 390,380 1,456,669 1,981,000 5,811,898 9,639,947
Granted -- 75,000 -- 218,000 293,000
Cancelled -- 75,000 168,000 -- 243,000
--------- --------- --------- --------- ---------
Balance, June 30, 2002 390,380 1,456,669 1,813,000 6,029,898 9,689,947
Granted -- 380,000 350,000 -- 730,000
Cancelled -- -- -- 172,216 172,216
--------- --------- --------- --------- ---------
Balance, September 30, 2002 390,380 1,836,669 2,163,000 5,857,682 10,247,731
========= ========= ========= ========= =========
Available for future
grants,
September 30, 2002 266,620 163,331 -- -- 429,951
========= ========= ========= ========= =========
9. Events Occurring Subsequent to September 30, 2002
Pursuant to the bridge note agreement with the Investor discussed
in note 7, during October 2002 the Company issued notes payable
in the aggregate principal amount of $160,000.
On November 4, 2002, the Investor elected to convert 800 shares of
Series B Preferred Stock and $7,022 of dividends in arrears and
accrued interest thereon into 293,598 shares of the Company's common
stock.
On November 11, 2002, the Investor elected to convert 200 shares of
Series B Preferred Stock and $1,777 of dividends in arrears and
accrued interest thereon Into 60,173 shares of the Company's common
stock.
10
10. Supplementary Disclosures of Cash Flow Information
January 7,
1993 (date of
inception
Nine months through
Ended September 30, September 30,
------------------------- ----------
2001 2002 2002
------------- ---------- ----------
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 -- 322,392 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
preferred stock and
cumulative dividends in
arrears thereon -- 128,905 160,531
Issuance of warrants or stock
effected through
reduction of debt -- -- 382,000
Unearned compensation
reversal related to
employee termination -- -- 227,111
Common stock repurchases
offset by a reduction in
amounts billed to Jasper
for research and development -- -- 170,174
Offset deferred offering costs
against proceeds of
initial public offering,
and other -- -- 159,021
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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. 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 Sections 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". 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
Historically, BIO-key International, Inc.'s (the "Company") goal was to develop
automated fingerprint identification products which were portable, easily
integrated with existing applications and affordable for mass commercialization
and distribution through Original Equipment Manufacturers ("OEM"s), distributors
and to a lesser degree, system integrators in the computer network, general
access control and other markets. This included the development of proprietary
readers. During 1998 and 1999, the evolution of the Company's technology allowed
it to shift from providing biometric hardware to developing and licensing
biometric identification IT security and identity theft solution software.
These solutions are built around the advanced capabilities of the Company's
proprietary patent pending VST(Vector Segment Technology) 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 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 two 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 has completed the development of its core technology, has commenced
the marketing of its technology and has begun to generate revenue from licensing
arrangements during 2002.
12
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 did not generate any
revenue during 2000 or 2001. 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 only last through
December 2002. 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, 2001 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 assurances.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues
The Company generated approximately $35,000 of revenue during the three months
ended September 30, 2002 consisting of $33,000 from licensing fees and
$2,000 from reader sales. There was no revenue for the same period in 2001.
The Company generated approximately $93,000 of revenue during the nine months
ended September 30, 2002 consisting of $91,000 from licensing fees and
$2,000 from reader sales. There was no revenue for the same period in 2001.
Costs and Other Expenses
Cost of goods sold were approximately $1,000 during the three months ended
September 30, 2002 as compared to $0 for the corresponding period in 2001. There
were no sales in the corresponding period in 2001.
Cost of goods sold were approximately $2,000 during the nine months ended
September 30, 2002 as compared to $0 for the corresponding period in 2001. There
were no sales in the corresponding period in 2001.
Selling, general and administrative expenses increased approximately $235,000 to
approximately $528,000 during the three months ended September 30, 2002 as
compared to approximately $293,000 for the corresponding period in 2001. Of the
increase, approximately $340,000 was due to an increase in marketing costs as
the Company focused on marketing its Web-based biometric authentication software
solution and approximately $74,000 was due to an increase in professional
services costs subsequent to the recapitalization transaction in November 2001
and the filing of a registration statement with the Securities and Exchange
Commission in 2002. These were offset by an approximate $179,000 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.
13
Selling, general and administrative expenses increased approximately $438,000 to
approximately $1,525,000 during the nine months ended September 30, 2002 as
compared to approximately $1,100,000 for the corresponding period in 2001. Of
the increase, approximately $914,000 was due to a increase in marketing costs as
the Company focused on marketing its Web-based biometric authentication software
solution and approximately $145,000 was due to an increase in professional
services costs subsequent to the recapitalization transaction in November 2001
and the filing of a registration statement with the Securities and Exchange
Commission in 2002. These were offset by an approximate $537,000 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, a decrease of
approximately $25,000 due to a reduction in general and administrative operating
costs, and approximately $59,000 was due to a reduction in salaries and wages
for administrative personnel.
Research, development, and engineering expenses decreased approximately $69,000
to approximately $253,000 during the three months ended September 30, 2002 as
compared to approximately $322,000 for the corresponding period in 2001. Of the
decrease, approximately $119,000 was due to a decrease in software
sub-contracting costs. These were offset by an approximate $52,000 increase in
wages for development personnel.
Research, development, and engineering expenses increased approximately $43,000
to approximately $820,000 during the nine months ended September 30, 2002 as
compared to approximately $777,000 for the corresponding period in 2001. Of the
increase, approximately $204,000 was due to a increase in wages for development
personnel and approximately $61,000 was due to an increase in general
development and engineering costs. These were offset by an approximate $222,000
decrease in software sub-contracting costs.
Other income and expense increased approximately $202,000 to approximately
$270,000 during the three months ended September 30, 2002 as compared to
approximately $68,000 for the corresponding period in 2001. The increase was
primarily due to an increase in interest costs associated with the November 2001
recapitalization transaction and new long-term borrowings.
Other income and expense increased approximately $701,000 to approximately
$881,000 during the nine months ended September 30, 2002 as compared to
approximately $180,000 for the corresponding period in 2001. The increase was
primarily due to an increase in interest costs associated with the November 2001
recapitalization transaction and new long-term borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the nine months ended September 30,
2002 was approximately $1,815,000 compared to approximately $1,259,000 during
the nine months ended September 30, 2001. 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, 2002 was approximately $13,000 compared to net cash
used in investing activities of approximately $2,000 for the same period in
2001. Net cash provided by financing activities during the nine months ended
September 30, 2002 was $1,412,000 compared to $1,270,000 in the same period in
2001 and consisted primarily of long-term borrowing activities partially offset
by costs related to capital raising efforts.
Working capital decreased approximately $6,809,000 during the nine months ended
September 30, 2002 to a deficit of approximately $6,416,000 as compared to a
surplus of approximately $393,000 as of December 31, 2001. This decrease is
primarily due to operating losses and approximately $5,619,000 of long-term debt
becoming classified as a current liability due to its maturity date of September
30, 2003.
14
Pursuant to the November 2001 recapitalization transaction with an investment
group (the Investor), the Company obtained $1,065,000 of additional financing
through the issuance in 2001 of a secured convertible promissory note (the
"Secured Note"). All existing promissory notes payable to the Investor together
with all accrued and unpaid interest due thereon ($3,028,000) were cancelled and
converted into the Secured Note. The Secured Note is due September 30, 2003, is
secured by substantially all of the Company's assets, including its intellectual
property, accrues interest at the rate of 10% per annum payable quarterly in
arrears commencing September 30, 2002, may be prepaid without penalty and is
convertible into shares of common stock at a conversion price of $0.75 per
share. The security interest terminates upon the Company obtaining $5,000,000 of
additional equity financing. In this transaction, the Company received net cash
proceeds of $1,024,000 after giving effect to offering costs of $41,000. Accrued
interest of $351,000 was due on September 30, 2002. The Investor has waived the
Company's compliance with this payment date.
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 on the terms described above. Accrued interest of $41,940 was due on
September 30, 2002. The Investor has waived the Company's compliance with this
payment date.
On August 28, 2002, the Company entered into a bridge note agreement with the
Investor to provide up to $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 due February 28, 2003,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. In
the event the Company completes a private placement of equity securities
resulting in gross proceeds of at least $5,000,000, on or before December 31,
2002, the principal amount and accrued interest due under the August Note is
convertible at the option of the Investor, into the securities sold in such
transaction at a conversion price equal to the sale price of such securities.
Upon completion of such a transaction, the Investor also has the right to
request repayment of the August Note. In the event that such a transaction is
not completed by December 31, 2002, the principal amount and accrued interest is
convertible at the option of the Investor into shares of the Company's Series B
Preferred Stock at a conversion of $100 per share.
The Investor's obligation to provide financing under the August Note is
conditioned upon:
- The Company being in compliance with all material obligations under
the August 28, 2002 note purchase agreement
between the parties.
- The continued truth and accuracy of the representations and warranties
of the Company set forth in the funding agreement.
- 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
fifteenth of each Month. As of the date of this report, the Company has received
$542,000 of financing under the August Note.
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.
Primarily all of the Company's interest expense is related to obligations due
the Fund.
As of the date of this report, the Company has minimal cash resources.
Although the Investor has, in the past, provided financing to the
Company notwithstanding that all of the conditions were not satisfied,
there can be no assurance that it will continue to do so. During the past year,
the Company has reduced its administrative expenses such that it currently
requires approximately $180,000 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 December 2002. The
15
Company needs approximately $2,160,000 to continue to operate at current levels
for the next twelve (12) months. Ideally, the Company needs approximately
$5,000,000 to $7,000,000 to execute its business plan and support the growth of
operations through 2003 and to continue product enhancements. The additional
financing is required to conduct the sales and marketing effort necessary to
engage in significant direct selling and marketing activities.
During the nine month period ended September 30, 2002, the Company entered into
license agreements and generated approximately $93,000 of revenue. Management
believes the Company will continue to generate revenue from existing and new
relationships during the remainder of the year. 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 securities of the
Company on a negotiated private placement basis to institutional and accredited
investors. In March 2002, the Company retained a financial advisory firm to
assist the Company in raising the necessary additional capital. The financial
advisory firm has introduced the Company to potential funding sources, however,
as of the date of this report, the Company has not reached any 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
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. There have been no significant changes in
our internal controls or in other factors that could significantly affect
internal controls subsequent to the date we carried out this evaluation.
16
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. During September, 2002, the Company issued an aggregate of 478,100
shares of common stock upon conversion of 1,200 shares of the
Company's Series B 9% Convertible Preferred Stock and $8,905 of
dividends and accrued interest thereon. The 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 of
commissions to any person.
2. On September 5, 2002, 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 $.33 per share, the closing market price of the
Company's stock on the date of grant, to Thomas J. Colatosti in
connection with his appointment as a Director of the Company. See Part
II Item 5 below. The options vest in quarterly installments during the
two (2) year period commencing on the date of grant. The options
terminate on the earlier of seven (7) years from the date of grant or
three (3) months after cessation of service as a director, unless
cessation is for cause, in which case, the options expire on the date
of cessation. 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.
3. On September 4, 2002, the Company issued options to purchase in the
aggregate 180,000 shares of common stock under the Company's 1999
Stock Option Plan at an exercise price of $.31 per share, the closing
market price of the Company's common stock on the date of grant, to
various employees of the Company. The options vest 10% upon 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 of employment 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 or commissions
to any person.
4. On September 5, 2002 the Company issued options to purchase 150,000 shares
of common stock at an exercise price of $.33 per share, the closing market
price of the Company's common stock on the date of grant, to Thomas J.
Colatosti in connection with his consulting arrangement with the Company.
The options vest in equal quarterly installments during a one (1) year
period commencing on the date of grant. The options terminate seven (7)
years from the date of grant unless the consulting agreement with Mr.
Colatosti is terminated 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 or commissions to any person.
5. On November 4, 2002, the Company issued an aggregate of 293,598 shares of
common stock upon conversion of 800 shares of the Company's Series B 9%
Convertible Preferred Stock and $7,022 of dividends and accrued interest
thereon. The 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 of commissions to any person.
6. On November 11, 2002, the Company issued an aggregate of 60,173 shares of
common stock upon conversion of 200 shares of the Company's Series B 9%
Convertible Preferred Stock and $1,777 of dividends and accrued interest
thereon. The 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 of commissions to any persons.
17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of September 30, 2002,the Company has accrued and unpaid
dividends in arrears on its outstanding shares of Series B Convertible
Preferred Stock in the amount of approximately $97,570.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER EVENTS
On September 5, 2002, Mr. Thomas J. Colatosti, was appointed to
the Board of Directors of the Company. In connection with his
appointment to the Board, the Company issued Mr. Colatosti
options under the Company's 1999 Option Plan to purchase
200,000 shares of common stock on the terms described in Item 2
above. The Company also entered into a consulting arrangement
with Mr. Colatosti to provide business development consulting
services to the Company for one (1) year in consideration of a
monthly payment of $4,000 and the issuance of options to
purchase an additional 150,000 shares of Company Common Stock
on the terms described in Item 2 above.
The following is a brief description of the business experience
of Mr. Colatosti.
Thomas J. Colatosti currently serves as the Chief Executive
Officer of American Security Ventures, a Lexington,
Massachusetts based consulting firm he founded which
specializes in providing strategic management consulting
services to emerging and developing companies in the homeland
security industry. From 1999 through June 2002, Mr.
Colatosti served as the Chief Executive Officer of Viisage
Technology, Inc., a publicly traded biometric technology
company focusing on biometric face-recognition technology and
delivering highly secure identification documents and systems.
From 1997 through 1998, Mr. Colatosti served as Viisage's
Chief Operating Officer. Between 1995 and 1997, Mr. Colatosti
served as President and Chief Executive Officer of CIS
Corporation, a higher education industry leader that
designed and implemented integrated and flexible systems
solutions to manage entire university administrative
operations. Prior to CIS, Mr. Colatosti had a 20-year career
with Digital Equipment Corporation. His responsibilities
included Vice President and General Manager of
Digital's $1.2 billion Federal System Division and Vice
President and General Manager of a billion dollar cross-
industry commercial business unit. Mr. Colatosti has spoken
widely on homeland security issues, has appeared on national
media programs such as the Today Show, CNN and
CBS; and has presented at the White House, Congressional
Committee and other Federal agencies on homeland security
issues. Mr. Colatosti earned a Bachelor of Science degree in
Management and Finance as well as a Masters degree in
Business Administration from Suffolk University.
18
ITEM 6. EXHIBITS
(a) Exhibits
99.1 Certificate of CEO of Registrant Pursuant to 18 USC Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certificate of CFO of Registrant Pursuant to 18 USC Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) 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 13, 2002 BIO-Key International, Inc.
/s/ Jeffry R. Brown
----------------------------------------
Jeffry R. Brown, Chief Executive Officer
/s/ Gary Wendt
----------------------------------------
Gary Wendt, Chief Financial Officer
19
CERTIFICATION
I, Jeffry R. Brown, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of BIO-key
International, Inc. (the "registrant")
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/S/ Jeffry R. Brown
-------------------------
Jeffry R. Brown
Chief Executive Officer
CERTIFICATION
I, Gary Wendt, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of BIO-key
International, Inc. (the "registrant")
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /S/ Gary Wendt
--------------
Gary Wendt
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT NO. REFERENCE
----------- ---------
99.1 Certificate of CEO of Registrant Pursuant to 18 USC Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certificate of CFO of Registrant Pursuant to 18 USC Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.