U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
[_] Transition Report Under Section 13 or 15(d)
of the Exchange Act
For the Transition Period
From _________ to __________
Commission file number 1-13463
BIO-KEY INTERNATIONAL, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
MINNESOTA 41-1741861
---------------------------------- --------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation of Organization) Identification Number)
1285 CORPORATE CENTER DRIVE,
SUITE # 175, EAGAN, MN 55121
--------------------------------
(Address of Principal Executive Offices)
(651) 687-0414
--------------
(Issuer's Telephone Number)
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date : There were 14,748,808
issued and outstanding shares of the registrant's common stock, par value $.01
per share, as of May 7, 2003.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
BIO-KEY INTERNATIONAL, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance sheets as of December 31, 2002 and March 31, 2003
(unaudited)..................................................................1
Statements of operations for the three months ended
March 31, 2003 and 2002 and January 7, 1993 (date of
inception) through March 31, 2003 (unaudited)................................2
Statements of cash flows for the three months ended March 31,
2002 and 2003, and January 7, 1993 (date of inception)
through March 31, 2003 (unaudited)...........................................3
Notes to financial statements.............................................................5
Item 2 - Management's Discussion and Analysis..................................................9
Item 3 - Controls and Procedures..............................................................14
PART II. OTHER INFORMATION
Item 1 - Legal proceedings..................................................................14
Item 2 - Changes in Securities and Use of Proceeds..........................................14
Item 3 - Defaults Upon Senior Securities....................................................15
Item 6 - Exhibits and Reports on Form 8-K...................................................15
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIO-key International, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS
December 31, March 31,
2002 2003
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 16,748 $ 339,838
Accounts Receivable 67,998 11,195
Prepaid expenses 50,897 52,366
------------ ------------
Total current assets 135,643 403,399
OTHER ASSETS 121,991 123,962
------------ ------------
$ 257,634 $ 527,361
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of long-term obligations $ 6,507,286 $ 6,645,832
Accounts payable 354,694 245,687
Accrued liabilities 572,701 732,175
------------ ------------
Total current liabilities 7,434,681 7,623,694
LONG-TERM OBLIGATIONS, net of discount, less current maturities -- 980,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock - authorized, 5,000,000 shares of $ .01 par value (liquidation
preference of $100 per share)
Series B 9% Convertible; issued and outstanding, 18,430
shares 184 184
Common stock - authorized, 60,000,000 shares
of $.01 par value; issued and outstanding,
14,377,406 shares 143,774 143,774
Additional contributed capital 16,284,399 16,440,399
Deficit accumulated during the development stage (23,605,404) (24,660,690)
------------ ------------
(7,177,047) (8,076,333)
------------ ------------
$ 257,634 $ 527,361
============ ============
See accompanying notes to financial statements.
1
BIO-key International, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF OPERATIONS
(Unaudited)
January 7,
1993 (date
of inception)
Three months through
ended March 31, March 31,
------------------------------- ------------
2002 2003 2003
------------ ------------ ------------
Revenues
Product sales $ -- $ 2,504 $ 585,642
Licensing fees -- 25,000 253,860
Reimbursed research
and development -- -- 284,506
Technical support
and other services -- -- 450,670
------------ ------------ ------------
-- 27,504 1,574,678
Costs and other expenses
Cost of product sales -- 2,393 1,742,008
Cost of technical support
and other services -- -- 237,317
Selling, general
and administrative 504,731 568,499 13,925,961
Research, development
and engineering 287,462 221,107 7,111,745
------------ ------------ ------------
792,193 791,999 23,017,031
------------ ------------ ------------
Operating loss (792,193) (764,495) (21,442,353)
Other income (deductions)
Interest expense (260,427) (291,345) (2,783,425)
Sundry 1,045 554 510,814
------------ ------------ ------------
(259,382) (290,791) (2,272,611)
------------ ------------ ------------
Loss before extraordinary gain (1,051,575) (1,055,286) (23,714,964)
Extraordinary gain - troubled
payable reduction -- -- 300,250
------------ ------------ ------------
NET LOSS $ (1,051,575) $ (1,055,286) $(23,414,714)
============ ============ ============
Net loss $ (1,051,575) $ (1,055,286) $(23,414,714)
Convertible preferred stock dividends
and accretion -- -- (1,364,268)
------------ ------------ ------------
Loss applicable to common stockholders $ (1,051,575) $ (1,055,286) $ (24,778,982)
============ ============ ============
Basic and diluted loss per share
Net loss before extraordinary gain $ (.08) $ (.07) $ (3.10)
Extraordinary gain -- -- .04
------------ ------------ -------------
Net loss (.08) (.07) ( 3.06)
Convertible preferred stock dividends
and accretion -- -- (.18)
------------ ------------ ------------
Loss per common share $ (.08) $ (.07) $ ( 3.24)
============ ============ ============
Weighted average number of
common shares outstanding 12,621,480 14,377,406 7,644,111
============ ============ ============
See accompanying notes to financial statements
2
BIO-key International, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS
(Unaudited)
January 7,
1993 (date
of inception)
Three months through
ended March 31, March 31,
------------------------------- ------------
2002 2003 2003
------------ ------------ ------------
Cash flows from operating activities
Net loss $ (1,051,575) $(1,055,286) $(23,414,714)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation -- -- 242,913
Amortization
Unearned compensation -- -- 193,333
Deferred financing costs -- -- 426,397
Discounts on convertible debt
related to warrants and
beneficial conversion features 153,954 138,546 1,423,158
Write-down of inventory -- -- 916,015
Write-down of deferred
financing costs -- -- 132,977
Gain on sale of
Inter-Con/PC stock -- -- (190,000)
Revenues realized due to offset
of billings against a stock repurchase -- -- (170,174)
Acquired research and development -- -- 117,000
Options and warrants issued for
services and other 94,397 156,000 1,942,554
Other -- -- 34,684
Change in assets and liabilities:
Accounts receivable -- 56,803 (11,195)
Inventories -- -- (916,015)
Prepaid expenses and other (21,886) (1,469) (52,367)
Accounts payable 142,091 (109,007) 245,687
Accrued liabilities 149,723 159,474 2,244,248
------------ ------------ ------------
Net cash used in operations (533,296) (654,939) (16,835,499)
Cash flows from investing activities
Capital expenditures -- -- 242,913)
Proceeds from sales
of Inter-Con/PC stock -- -- 190,000
Other (255) (1,971) (42,062)
------------ ------------ ------------
Net cash used in
investing activities (255) (1,971) (94,975)
Cash flows from
financing activities
Net borrowings under
short-term borrowing
agreements -- -- 3,003,000
Issuance of convertible
bridge note -- -- 2,005,000
Issuance of convertible
debentures and long-term notes 180,000 980,000 3,820,000
Issuance of warrants and discount on
convertible debentures -- -- 830,000
3
Financing costs (50,000) -- (418,377)
Exercise of stock options and warrants -- -- 190,799
Sales of common stock -- -- 7,093,832
Sale of preferred stock and assigned
value of warrant -- -- 884,058
Redemption of common stock -- -- (138,000)
------------ ------------ ------------
Net cash provided by
financing activities 130,000 980,000 17,270,312
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents (403,551) 323,090 339,838
Cash and cash equivalents,
beginning of period 514,970 16,748 --
------------ ------------ ------------
Cash and cash equivalents,
end of period $ 111,419 $ 339,838 $ 339,838
============ ============ ============
See accompanying notes to financial statements.
4
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002, and March 31, 2003 (Unaudited)
1. Unaudited Statements
The accompanying unaudited interim financial statements have been
prepared by BIO-key International, Inc. (the Company) in accordance
with accounting principles generally accepted in the United States,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Pursuant to such rules and regulations, certain financial
information and footnote disclosures normally included in the financial
statements have been condensed or omitted.
In the opinion of management, the accompanying unaudited interim
financial statements contain all necessary adjustments, consisting only
of those of a recurring nature, and disclosures to present fairly the
financial position and the results of its operations and cash flows for
the periods presented. It is suggested that these interim financial
statements are read in conjunction with the financial statements and
the related notes thereto included in the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2002.
2. Liquidity and Capital Resource Matters
Broad commercial acceptance of the Company's technology is critical to
the Company's success and ability to generate revenues. The Company has
had no significant revenues to date, and has accumulated losses since
inception of approximately $23,414,000 of which approximately
$1,055,000 was incurred during 2003. As of March 31, 2003 there was a
stockholders' deficit of approximately $8,076,000.
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.
5
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002, and March 31, 2003 (Unaudited)
4. Prepaid Expenses
December 31, March 31,
2002 2003
----------- -----------
Consulting fees and other $ 24,274 $ 26,263
Insurance 26,673 26,103
----------- -----------
$ 50,897 $ 52,366
=========== ===========
5. Other Assets
December 31, March 31,
2002 2003
----------- -----------
Deferred offering costs $ 81,900 $ 81,900
Patents pending 40,091 42,062
----------- -----------
$ 121,991 $ 123,962
=========== ===========
Deferred offering costs
In March 2002, the Company engaged an investment banking firm to advise
the Company regarding raising additional capital through the potential
future issuance of the Company's equity, debt or convertible
securities. The Company paid a nonrefundable retainer fee of $50,000
and granted a four year warrant to purchase 25,000 shares of the
Company's common stock at an exercise price of $1.00 per share. The
estimated value of the warrant is $17,000. These deferred costs shall
be offset against any proceeds received from the sale of additional
capital or charged to operations in the period this engagement
terminates.
6. Accrued Liabilities
December 31, March 31,
2002 2003
----------- -----------
Interest $ 537,004 $ 689,803
Compensation 35,555 40,381
Other 142 1,991
----------- -----------
$ 572,701 $ 732,175
=========== ===========
7. Long-term Obligations
As part of the Company's January 2003 funding transaction with an
investor group (the Investor), the Investor agreed to provide
additional financing (the Funding Agreement) in incremental monthly
installments during the eleven-month period commencing January 27,
2003, subject to certain conditions. Currently conditions are not being
met but the Investor has continued to fund. In the three months ended
March 31, 2003 the Company has received $980,000 and issued notes
payable to the Investor. The terms of the notes require the principal
to be repaid on June 30,2004,interest to be accrued at 7%, payable in a
single payment on June 30, 2004, and provide for conversion of
principal and accrued interest into shares of the Company's common
stock at a conversion price of $0.75 per share or shares of Series B
Preferred stock at a conversion price of $100 per share.
6
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and March 31, 2003 (Unaudited)
8. Stockholders Equity
Series B Convertible Preferred Stock Dividends
----------------------------------------------
The Company's series B preferred stock accrues dividends at 9% payable
semi-annually on June 15 and December 15. As of March 31, 2003
cumulative dividends in arrears were approximately $165,000. All of
the Company's series B preferred stock are convertible into shares of
the Company's common stock.
Options and Warrants
--------------------
The following summarizes option and warrant activity since December 31,
2002:
Number of Shares
-----------------------------------------------------------
1996 1999 Non-
Plan Plan Plan Warrants Total
--------- --------- --------- --------- ---------
Balance, December 31, 2002 390,380 1,836,669 2,163,000 5,657,682 10,047,731
Granted -- 50,000 1,110,000 200,000 1,360,000
Cancelled -- 410,000 280,000 193,000 883,000
--------- --------- --------- --------- ---------
Balance, March 31, 2003 390,380 1,476,669 2,993,000 5,664,682 10,524,731
========= ========= ========= ========= =========
Available for future
grants, March 31, 2003 266,620 523,331 -- -- 789,951
========= ========= ========= ========= =========
9. Events Occurring Subsequent to March 31, 2003
Pursuant to the funding agreement with the Investor discussed in note
7, during May 2003 the Company obtained additional financing in the
aggregate principal amount of $190,000.
On May 5, 2003, the Investor elected to convert 950 shares of Series B
Preferred Stock and $13,040 of dividends in arrears and accrued
interest thereon into 371,402 shares of the Company's common stock.
On April 3, 2003, the Company granted an employee of the Company a
three-year option to purchase 100,000 shares of the Company's common
stock at an exercise price of $.38 per share. The option provides for
vesting of 9,090 shares quarterly in equal amounts over a thirty month
period commencing July 7, 2003. The remaining 9,100 shares vest on
January 7, 2006.
7
BIO-key International, Inc.
(a corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and March 31, 2003 (Unaudited)
10. Supplementary Disclosures of Cash Flow Information
January 7,
1993 (date of
inception
Three Months through
Ended March 31, March 31,
------------------------- ----------
2002 2003 2003
------------- ---------- ----------
Cash paid for:
Interest $ -- $ -- $ 28,544
Noncash Financing Activities:
Conversion of short-term notes,
accrued interest and penalties
into long-term notes
and debentures -- -- 4,567,546
Conversion of convertible
debentures, bridge notes, and
accrued interest into common
stock 100,000 -- 2,907,360
Accretion of preferred stock
beneficial conversion feature -- -- 877,000
Issuance of Series B preferred
stock in exchange for Series A
preferred stock and cumulative
dividends in arrears, thereon -- -- 281,049
Issuance of common stock in
exchange for Series A and Series B
preferred stock and
cumulative dividends in
arrears thereon -- -- 56,563
Issuance of preferred stock
effected through
reduction of debt -- -- 350,000
Unearned compensation
reversal related to
employee termination -- -- 227,111
Common stock repurchases
effected through a reduction in
receivable -- -- 170,174
Offset deferred offering costs
against proceeds of
initial public offering,
and other -- -- 159,021
Issuance of warrants for reduction
in payables 32,000 -- 32,000
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
The information contained in this Report on Form 10-QSB and in other
public statements by the Company and Company officers include or may contain
certain forward-looking statements. The words "may", "intend", "will", "expect",
"anticipate", "believe", "estimate", "project", and similar expressions used in
this Report are intended to identify forward-looking statements within the
meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the
U.S. Securities Exchange of 1934. You should not place undue reliance on these
forward-looking statements, which speak only as of the date made. We undertake
no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events. You should
also know that such statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions. These factors include, but are
not limited to, the Company's ability to successfully develop and market its
technology and to obtain additional financing, as well as those risks described
in detail in the Company's Annual Report on Form 10-KSB under the caption "Risk
Factors" and other filings with the Securities and Exchange Commission. Should
any of these risks or uncertainties materialize, or should any of our
assumptions prove incorrect, the actual results may differ materially from those
included within the forward-looking statements.
OVERVIEW
The following should be read in conjunction with the financial
statements of the Company included elsewhere herein.
BIO-key International, Inc. (the "Company") develops and markets
proprietary fingerprint identification biometric technology and software
solutions. These solutions are built around the advanced capabilities of the
Company's proprietary patent pending VST(TM) (Vector Segment Technology(TM))
algorithm. The Company has pioneered the development of automated, finger
identification technology that can be used without the aide of non-automated
methods of identification such as a personal identification (PIN), password,
token, smart card, ID card, credit card, passport, drivers license or other form
of possession based or knowledge based identification. This advanced BIO-key(TM)
identification technology improves both the accuracy and speed of finger-based
biometrics and is the only finger identification algorithm that has been
certified by the International Computer Security Association (ICSA).
Over the past three years, recognizing the growth in electronic
commerce, private networks and related security concerns, the Company has
actively positioned its technology for the licensing of a Web based biometric
authentication software solution to e-commerce and other companies conducting
business over the Internet. This integrated solution involves the licensing of
client and server based software to provide for reliable and cost effective user
authentication in connection with the processing of e-commerce transactions or
securing access to private networks.
9
The Company has completed the development of its core technology,
commenced the marketing of its technology in late 2002, and expects to continue
to generate revenue from licensing arrangements during 2003.
Although the Company has developed significant identification
technology, it has not gained any meaningful commercial acceptance and the
Company has only generated minimal revenue since inception. The Company's
business model, particularly the Web authentication initiative, represents a
novel approach to Internet and network security which as of the date of this
Report has not been adopted by any company conducting business over the
Internet. Although recent security concerns relating to the identification of
individuals has increased interest in biometrics generally, there can be no
assurance that there will be a demand for such a solution or that the Company
will have the financial or other resources necessary to successfully market such
a software solution.
The Company believes its existing financial resources will only last
through December 31, 2003. See "Liquidity and Capital Resources" below. Due to
this and other uncertainties, the Company's independent auditors have included
an explanatory paragraph in their opinion for the year ended December 31, 2002
as to the substantial doubt about the Company's ability to continue as a going
concern. The Company's long-term viability and growth will depend upon the
successful commercialization of its technologies and its ability to obtain
adequate financing, among other matters, as to which there can be no assurances.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
2002
Revenues
The Company generated approximately $28,000 of revenue during the three
months ended March 31, 2003 consisting of $25,000 from licensing fees and
approximately $3,000 from reader sales and professional services. There was no
revenue for the corresponding period in 2002.
Costs and Other Expenses
Cost of goods sold were approximately $2,400 during the three months
ended March 31, 2003 as compared to $0 for the corresponding period in 2002.
10
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased approximately
$63,000 to approximately $568,000 during the three months ended March 31, 2003
as compared to approximately $505,000 for the corresponding period in 2002. Of
the increase, approximately $56,000 was due to an increase in marketing costs as
the Company focused on marketing its Web-based biometric authentication software
solution, approximately $60,000 was due to an increase in executive personnel
costs and approximately $38,000 was due to an increase in general administrative
costs. These were offset by an approximate $85,000 decrease in outside
consulting costs and an approximate $6,000 decrease in professional fees.
Research, Development, and Engineering Expenses
Research, development, and engineering expenses decreased approximately
$66,000 to approximately $221,000 during the three months ended March 31, 2003
as compared to approximately $287,000 for the corresponding period in 2002. Of
the decrease, approximately $55,000 was due to a decrease in wages for
development personnel and approximately $35,000 was due to a decrease in general
development expenses. These were offset by an approximate $24,000 increase in
software subcontracting costs.
Other Income and Expense
Other income and expense increased approximately $31,000 to
approximately $291,000 during the three months ended March 31, 2003 as compared
to approximately $260,000 for the corresponding period in 2002. The increase was
primarily due to an increase in interest expense associated with new long-term
borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the three months ended
March 31, 2003 was approximately $655,000 compared to approximately $533,000
during the three months ended March 31, 2002. The primary use of cash for both
years was to fund the net loss. Net cash used in investing activities for the
three months ended March 31, 2003 was approximately $2,000 compared to net cash
used in investing activities of approximately $300 for the same period in 2002.
Net cash provided by financing activities during the three months ended March
31, 2003 was $980,000 compared to $130,000 in the same period in 2002 and
consisted primarily of long-term borrowing.
Working capital increased approximately $79,000 during the three months
ended March 31, 2003 to a deficit of approximately $7,220,000 as compared to a
deficit of approximately $7,299,000 as of December 31, 2002. This increase is
primarily due to operating losses being offset by approximately $980,000 of new
long-term debt.
Pursuant to a recapitalization transaction in November, 2001, all then
existing promissory notes payable to the Investor together with all accrued and
unpaid interest due thereon ($3,027,920) were cancelled and converted into a
secured convertible promissory note (the
11
"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 semi-annually in arrears
commencing September 30, 2002, may be prepaid without penalty, and is
convertible into shares of common stock at a conversion price of $.75 per share.
The security interest terminates upon the Company obtaining $5,000,000 of
additional equity financing. In this transaction, the Company received net cash
proceeds of $1,024,500 after giving effect to offering costs of $40,500.
Pursuant to the recapitalization transaction, between March and September 2002,
the Investor provided $1,080,000 of additional financing in incremental monthly
installments. All such funding was provided pursuant to secured promissory notes
(collectively, the "Advance Notes") on the terms described above. Accrued
interest of approximately $680,000 on the Secured Note and Advance Notes was due
on April 30, 2003. The Investor has waived the Company's compliance with these
payment dates.
On August 28, 2002, the Company entered into a bridge note agreement
with the Investor pursuant to which it provided $750,000 of additional financing
in incremental monthly installments during the four-month period commencing
August 28, 2002 pursuant to the terms of a convertible promissory note (the
"August Note"). The August Note is secured by substantially all of the Company's
assets, including its intellectual property, accrues interest at the rate of 7%
per annum payable on maturity and may be prepaid without penalty. The principal
amount and accrued interest is convertible at the option of the Investor into
either shares of Common Stock at a conversion price of $.75 per share or shares
of Series B Preferred Stock at a conversion price of $100 per share. The August
Note is due June 30, 2003.
On January 27, 2003, the Company entered into a Note Purchase agreement
with the Investor to provide up to $2,350,000 of additional financing pursuant
to the terms of a secured promissory note (the "January Note"). $600,000 of this
amount was advanced at closing, with the balance to be funded in incremental
monthly installments during the nine (9) month period commencing February 1,
2003, provided that certain conditions are satisfied. Currently conditions are
not being met. The January Note is due June 30, 2004, is secured by
substantially all of the Company's assets, including its intellectual property,
accrues interest at the rate of 7% per annum payable on maturity, and may be
prepaid without penalty. The principal amount and accrued interest is
convertible at the option of the Investor into either shares of Common Stock at
a conversion price of $.75 per share or shares of Series B Preferred Stock at a
conversion price of $100 share. In the event the Company completes a private
placement of its equity securities resulting in gross proceeds in excess of
$5,000,000 on or before June 30, 2004, the principal and accrued interest shall
at the option of the Investor, be either converted into such equity securities
or repaid in cash.
Under the Note Purchase Agreement, the Investor has agreed to provide
up to $1,750,000 of additional financing in incremental monthly installments
during the nine month period commencing February 1, 2003. Any such funding will
be provided pursuant to a secured promissory note on the terms described above.
The Investor's obligation to provide this financing is conditioned upon:
o The Company being in compliance with all material obligations
under the January 27, 2003 funding agreement between the parties
and the January Note.
12
o The continued truth and accuracy of the representations and
warranties of the Company set forth in the funding agreement.
o The average closing bid price of the Company's common stock
during the calendar month preceding the advance exceeding $1.00
per share.
Provided the forgoing conditions are satisfied, funds are advanced on the first
day of each month upon receipt of written notice from the Company. Between
February 1, 2003 and the date of this Report, the Company requested and received
advances in the aggregate amount of $570,000. The Company has agreed to file a
registration statement covering the public resale of the shares of common stock
issuable upon conversion of the Advance Note, August Note and January 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.
As of the date of this Report, the Company had cash resources of
approximately $100,000. Pursuant to its agreement with the Investor, $1,180,000
of additional financing is available to the Company upon fulfillment of the
conditions described above. Currently, all of the conditions are not being
satisified. Although the Investor has, in the past, provided financing to the
Company notwithstanding that all of the conditions have not been satisfied,
there can be no assurance that it will continue to do so. The Company currently
requires approximately $190,000 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, 2003.
The Company needs approximately $2,400,000 to continue to operate at current
levels for the next twelve (12) months. Ideally, the Company needs approximately
$3,000,000 to $5,000,000 to execute its business plan and support the growth of
operations through 2004 and to continue product enhancements. The additional
financing is also required to conduct the sales and marketing effort necessary
to engage in significant direct selling and marketing activities.
During 2002 and 2003, the Company has entered into license agreements,
generated a small amount of revenue and believes it will continue to generate
revenue from existing and new relationships during 2003. 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. As of the date of the Report, the
Company has not reached a definitive agreement with any potential investor
regarding the specific terms of an investment in the Company. No assurance can
be given that any form of additional financing will be available on terms
acceptable to the Company, that adequate
13
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.
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. On or about May 5, 2003, the Company issued 371,402 shares of common stock
upon conversion of 950 shares of the Company's Series B 9% Convertible Preferred
Stock and $13,041 of dividends and accrued interest thereon. The shares were
issued in a private placement transaction exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereunder without payment of underwriting discounts or commissions to any
person.
2. During March and April, 2003, the Company issued options to purchase an
aggregate of 150,000 shares of common stock under the Company's 1999 Stock
Option Plan at exercise prices equal to the closing market price ($.38 and $.35)
of the Company's common stock on the date of grant, to two new employees of the
Company. The options vest in equal quarterly installments during the 30 month
period commencing 90 days from the day of grant. The options terminate on the
earlier of three (3) 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.
14
3. On March 9, 2003, the Company issued options to purchase 300,000 shares of
common stock at an exercise price of $.39 per share, the closing market price of
the Company's common stock on the date of grant, to Randy Fodero in connection
with his commencing employment with the Company. The options vest in equal
quarterly installments during the 30 month period commencing 90 days from the
day of grant. The options terminate on the earlier of three (3) 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of March 31, 2003, cumulative dividends in arrears on the Company's
Series B 9% Preferred Stock were approximately $165,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
-------------------- -------------------------------------------- -----------------------------------------------
Exhibit No. Exhibit Method of Filing
-------------------- -------------------------------------------- -----------------------------------------------
3.1 Amended and Restated Articles of Incorporated by reference to Exhibit 3.1 to
Incorporation the Registrant's Registration Statement on
SB-2, File No. 333-16451 filed February 14,
1997 (the "Registration Statement")
-------------------- -------------------------------------------- -----------------------------------------------
3.2 Amended and Restated Bylaws Incorporated by reference to Exhibit 3.2 to
the Registration Statement
-------------------- -------------------------------------------- -----------------------------------------------
3.3 Certificate of Amendment to Amended and Incorporated by reference to Exhibit 3.3 to
Restated Articles of Incorporation the Registrant's Report on Form 10-QSB for
the quarter ended March 31, 1999
-------------------- -------------------------------------------- -----------------------------------------------
3.4 Certificate of Designation of Series A 9% Incorporated by reference to Exhibit 3.4 to
Convertible Preferred Stock the Registrant's Current Report on Form 8-K
dated July 8, 1999
-------------------- -------------------------------------------- -----------------------------------------------
3.5 Amended and Restated Certificate of Incorporated by reference to Exhibit 3.5 to
Designation of Series A 9% Convertible the Registrant's Annual Report on Form 10-KSB
Preferred Stock for the fiscal year ended December 31, 1999
(the "1999 10-KSB")
-------------------- -------------------------------------------- -----------------------------------------------
15
-------------------- -------------------------------------------- -----------------------------------------------
3.6 Certificate of Designation of Series B 9% Incorporated by reference to Exhibit 3.6 to
Convertible Preferred Stock the Registrants Current Report on Form 8-K
dated November 26, 2001 (the "November 20,
2001 8-K")
-------------------- -------------------------------------------- -----------------------------------------------
3.7 Amendment to the Amended and Restated Incorporated by reference to Exhibit 3.7 to
Articles of Incorporation filed February the Registrant's Registration Statement on
28, 2002 Form SB-2 filed March 27, 2002
-------------------- -------------------------------------------- -----------------------------------------------
4.1 Specimen of Common Stock Certificate Incorporated by reference to Exhibit 4.1 to
the Registration Statement
-------------------- -------------------------------------------- -----------------------------------------------
10.1 SAC Technologies, Inc. 1996 Stock Option Incorporated by reference to Exhibit 10.1 to
Plan the Registration Statement
-------------------- -------------------------------------------- -----------------------------------------------
10.2 Employment Agreement by and between Gary Incorporated by reference to Exhibit 10.5 to
E. Wendt and the Company dated as of May the Registration
Statement 10, 1996 (with Non-Competition Letter effective
May 10, 1996 Attached as Exhibit
A)
-------------------- -------------------------------------------- -----------------------------------------------
10.3 Amendment No. 1 to the SAC Technologies, Incorporated by reference to Exhibit 10.23 to
Inc. 1996 Stock Option Plan the 1999 10-KSB
-------------------- -------------------------------------------- -----------------------------------------------
10.4 SAC Technologies, Inc. 1999 Stock Option Incorporated by reference to Exhibit 10.24 to
Plan the 1999 10-KSB
-------------------- -------------------------------------------- -----------------------------------------------
10.5 Employment Agreement dated November 3, Incorporated by reference to Exhibit 10.25 to
2000 by and between the Registrant and the Registrant's Quarterly Report on Form
Jeffry R. Brown 10-QSB for quarter ended September 30, 2000
(the "September 30, 2000 10-QSB")
-------------------- -------------------------------------------- -----------------------------------------------
10.6 Option to Purchase 280,000 shares of Incorporated by reference to Exhibit 10.26 to
Common Stock issued to Jeffry R. Brown the September 30, 2000 10-QSB
-------------------- -------------------------------------------- -----------------------------------------------
10.7 Non-Qualified Stock Option Agreement Under Incorporated by reference to Exhibit 10.27 to
the Registrant's 1999 Stock Option Plan to the September 30, 2000 10-QSB
purchase 300,000 shares of Common Stock
issued to Jeffry Brown
-------------------- -------------------------------------------- -----------------------------------------------
16
-------------------- -------------------------------------------- -----------------------------------------------
10.8 Consulting Agreement dated July 1, 2001 by Incorporated by reference to Exhibit 10.28 to
and between the Registrant and Barry M. the June 30, 2001 10-QSB
Wendt
-------------------- -------------------------------------------- -----------------------------------------------
10.9 Option to purchase 400,000 shares of Incorporated by reference to Exhibit 10.29 to
common stock issued to Jeffrey R. Brown the June 30, 2001 10-QSB
-------------------- -------------------------------------------- -----------------------------------------------
10.10 Employment Agreement dated August 1, 2001 Incorporated by reference to Exhibit 10.30 to
by and between the Registrant and H. the June 30, 2001 10-QSB
Donald Rosacker II
-------------------- -------------------------------------------- -----------------------------------------------
10.11 Funding Agreement by and between the Incorporated by reference to Exhibit 10.31 to
Registrant and The Shaar Fund dated the November 20, 2001 8-K
November 26, 2001
-------------------- -------------------------------------------- -----------------------------------------------
10.12 Registration Rights Agreement by and Incorporated by reference to Exhibit 10.32 to
between The Shaar Fund dated November 26, the November 20, 2001 8-K
2001
-------------------- -------------------------------------------- -----------------------------------------------
10.13 Exchange Agreement by and between the Incorporated by reference to Exhibit 10.33 to
Registrant and The Shaar Fund dated the November 20, 2001 8-K
November 26, 2001
-------------------- -------------------------------------------- -----------------------------------------------
10.14 Secured Note Due September 30, 2003 Incorporated by reference to Exhibit 10.34 to
the November 20, 2001 8-K
-------------------- -------------------------------------------- -----------------------------------------------
10.15 Restated 5% Convertible Debenture Due Incorporated by reference to Exhibit 10.35 to
September 30, 2003 the November 20, 2001 8-K
-------------------- -------------------------------------------- -----------------------------------------------
10.16 No Interest Debenture Due September 30, Incorporated by reference to Exhibit 10.36 to
2003 the November 20, 2001 8-K
-------------------- -------------------------------------------- -----------------------------------------------
10.17 Warrant Incorporated by reference to Exhibit 10.37 to
the November 20, 2001 8-K
-------------------- -------------------------------------------- -----------------------------------------------
10.18 Security Interest Provisions Incorporated by reference to Exhibit 10.38 to
the November 20, 2001 8-K
-------------------- -------------------------------------------- -----------------------------------------------
10.19 Employment Agreement by and between the Incorporated by reference to Exhibit 10.39 to
Registrant and Mira LaCous dated November the November 20, 2001 8-K
20, 2001
-------------------- -------------------------------------------- -----------------------------------------------
10.20 Option to Purchase 140,000 Shares of Incorporated by reference to Exhibit 10.40 to
Common Stock issued to Mira LaCous the November 20, 2001 8-K
-------------------- -------------------------------------------- -----------------------------------------------
17
-------------------- -------------------------------------------- -----------------------------------------------
10.21 Option to Purchase 150,000 Shares of Incorporated by reference to Exhibit 10.21 to
Common Stock issued to Thomas J. Colatosti. the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2002
-------------------- -------------------------------------------- -----------------------------------------------
10.22 Non-Qualified Stock Option Agreement under Incorporated by reference to Exhibit 10.22 to
the Registrant's 1999 Stock Incentive Plan the Registrant's Annual Report on Form 10-KSB
to Purchase 200,000 Shares of Common Stock for the fiscal year ended December 31, 2002
issued to Thomas J. Colatosti
-------------------- -------------------------------------------- -----------------------------------------------
10.23 Employment Agreement by and between the Incorporated by reference to Exhibit 10.23 to
Registrant and Michael W. DePasquale dated the Registrant's Annual Report on Form 10-KSB
January 3, 2003 for the fiscal year ended December 31, 2002
-------------------- -------------------------------------------- -----------------------------------------------
10.24 Option to Purchase 580,000 Shares of Incorporated by reference to Exhibit 10.24 to
Common Stock issued to Michael W. the Registrant's Annual Report on Form 10-KSB
DePasquale for the fiscal year ended December 31, 2002
-------------------- -------------------------------------------- -----------------------------------------------
10.25 Note Purchase Agreement dated January 27, Incorporated by reference to Exhibit 10.25 to
2003 the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2002
-------------------- -------------------------------------------- -----------------------------------------------
10.26 Secured Convertible Promissory Due June Incorporated by reference to Exhibit 10.26 to
30,2004 the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2002
-------------------- -------------------------------------------- -----------------------------------------------
10.27 Option to Purchase 200,000 Shares of Incorporated by reference to Exhibit 10.27 to
Common Stock issued to Charles P. Romeo the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2002
-------------------- -------------------------------------------- -----------------------------------------------
99.1 Certificate of CEO of Registrant Pursuant Filed herewith
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 Filed herewith
to 18 USC Section 1350, as Adopted
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
-------------------- -------------------------------------------- -----------------------------------------------
(b) Current Reports on Form 8-K filed during the three month period ended March
31, 2003: None
18
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BIO-Key International, Inc.
Dated: May 14, 2003 /s/ Michael W. DePasquale
---------------------------
Michael W. DePasquale
Chief Executive Officer
Dated: May 14, 2003 /s/ Gary Wendt
---------------------------
Gary Wendt
Chief Financial Officer
19
CERTIFICATION
I, Michael W. DePasquale, 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: May 14, 2003 /s/ Michael W. DePasquale
----------------------------
Michael W. DePasquale
Chief Executive Officer
20
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: May 14, 2003 /s/ Gary Wendt
-----------------------------
Gary Wendt
Chief Financial Officer
21
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.
22