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 JUNE 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 August 2, 2002: 13,331,667 shares.
BIO-KEY INTERNATIONAL, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance sheets as of December 31, 2001 and June 30, 2002 ......... 3
Statements of operations for the three months ended
June 30, 2001 and 2002, six months ended June 30,
2001 and 2002, and January 7, 1993 (date of
inception) through June 30, 2002 .............................4
Statements of cash flows for the six months ended June 30,
2001 and 2002, and January 7, 1993 (date of inception)
through June 30, 2002..............................................5
Notes to financial statements ..............................7
Item 2 - Management's Discussion and Analysis and Plan of Operations...11
PART II. OTHER INFORMATION
Item 1 - Legal proceedings...........................................15
Item 2 - Changes in Securities and Use of Proceeds...................15
Item 3 - Defaults Upon Senior Securities.............................15
Item 4 - Submission of Matters to a Vote of Security Holders.........15
Item 5 - Other Events................................................15
Item 6 - Exhibits and Reports on Form 8-K............................16
2
BIO-key International, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS
December 31, June 30,
2001 2002
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 514,970 $ 44,929
Accounts Receivable -- 40,025
Prepaid expenses 206,634 141,231
------------ ------------
Total current assets 721,604 226,185
EQUIPMENT AND FURNITURE AND FIXTURES - AT COST,
less accumulated depreciation -- --
OTHER ASSETS 41,706 115,105
------------ ------------
$ 763,310 $ 341,290
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 238,496 $ 311,884
Accrued liabilities 90,575 304,912
------------ ------------
Total current liabilities 329,071 616,796
LONG-TERM OBLIGATIONS, net of discount 4,331,238 5,195,194
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 June 30, 2002 214 214
Common stock - authorized, 60,000,000 shares
of $.01 par value; issued and outstanding,
12,528,469 and 13,331,667 shares, respectively 125,285 133,317
Additional contributed capital 15,538,025 16,073,181
Deficit accumulated during the development stage (19,560,523) (21,677,412)
------------ ------------
(3,896,999) (5,470,700)
------------ ------------
$ 763,310 $ 341,290
============ ============
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 Six months through
ended June 30, ended June 30, June 30,
----------------------------- ------------------------------ ------------
2001 2002 2001 2002 2002
------------ ------------ ------------- ------------ ------------
Revenues
Product sales $ -- $ 999 $ -- $ 999 $ 578,383
Licensing fees -- 57,485 -- 57,485 157,485
Reimbursed research
and development -- -- -- -- 284,506
Technical support
and other services -- -- -- -- 429,885
------------ ------------ ------------- ------------ ------------
-- 58,484 -- 58,484 1,450,259
Costs and other expenses
Cost of product sales -- 1,120 -- 1,120 1,738,015
Cost of technical support
and other services -- -- -- -- 237,317
Selling, general
and administrative 380,152 493,027 794,578 997,758 12,428,892
Research, development
and engineering 175,473 278,619 454,841 566,081 6,372,206
------------ ------------ ------------- ------------ ------------
555,625 772,766 1,249,419 1,564,959 20,776,430
------------ ------------ ------------- ------------ ------------
Operating loss (555,625) (714,282) (1,249,419) (1,506,475) (19,326,171)
Other income (expense)
Interest income and other 7 (81) (5,829) 963 510,100
Interest expense (57,375) (350,951) (105,480) (611,377) (1,940,523)
------------ ------------ ------------- ------------ ------------
(57,368) (351,032) (111,309) (610,414) (1,430,423)
------------ ------------ ------------- ------------ ------------
Loss before extraordinary gain (612,993) (1,065,314) (1,360,728) (2,116,889) (20,756,594)
Extraordinary gain - troubled
payable reduction -- -- -- -- 300,250
------------ ------------ ------------- ------------ ------------
NET LOSS $ (612,993) $ (1,065,314) $ (1,360,728) $ (2,116,889) $(20,456,344)
============ ============ ============= ============ ============
Loss applicable to
common shareholders
Net loss $ (612,993) $ (1,065,314) $ (1,360,728) $ (2,116,889) $(20,456,344)
Preferred stock dividends
and accretion (89,438) (96,435) (89,438) (96,435) (1,295,738)
------------ ------------ ------------ ------------ ------------
Loss applicable to common
stockholders $ (702,431) $ (1,161,749) $ (1,450,166) $ (2,213,324) $ (21,752,082)
============ ============ ============ ============ ============
Basic and diluted loss
Per common share $ (.06) $ (.08) $ (.13) $ (.17) $ ( 2.87)
Preferred stock dividends
and accretion (.01) (.01) (.01) (.01) (.18)
------------ ------------ ------------ ------------ ------------
Loss per
common share $ (.07) $ (.09) $ (.14) $ (.18) $ ( 3.05)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding 10,398,801 12,592,744 10,340,442 12,546,486 7,132,520
============ ============ ============ ============ ============
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)
Six months through
ended June 30, June 30,
---------------------------- ------------
2001 2002 2002
------------ ------------ ------------
Cash flows from operating activities
Net loss $ (1,360,728) $(2,116,889) $(20,456,344)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation 15,971 -- 242,913
Amortization:
Unearned compensation -- -- 193,333
Intrinsic value of the
beneficial conversion feature
of the convertible debenture -- 384,956 1,007,520
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 13,320 188,796 1,589,816
Other -- -- 34,684
Change in assets and liabilities:
Accounts receivable 7,768 (40,025) (40,025)
Inventories -- -- (916,015)
Prepaid expenses (11,856) 65,403 (141,231)
Accounts payable 12,220 73,388 311,884
Accrued liabilities 470,799 235,729 1,816,985
------------ ------------ ------------
Net cash used in operations (831,437) (1,208,642) (15,124,265)
Cash flows from investing activities
Capital expenditures -- -- (242,913)
Proceeds from sales
of Inter-Con/PC stock -- -- 190,000
Other (1,009) (6,399) (48,105)
------------ ------------ ------------
Net cash used in
investing activities (1,009) (6,399) (101,018)
Cash flows from
financing activities
Net borrowings under
short-term borrowing
agreements 850,000 -- 3,003,000
Issuance of convertible
bridge note -- -- 175,000
Issuance of convertible
debentures and long-term notes -- 795,000 3,635,000
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 850,000 745,000 15,270,212
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents 17,554 (470,041) 44,929
Cash and cash equivalents,
at beginning of period 48,830 514,970 --
------------ ------------ ------------
Cash and cash equivalents,
at end of period $ 66,384 $ 44,929 $ 44,929
============ ============ ============
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 June 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 20,456,000 of which approximately
2,117,000 was incurred during 2002. As of June 30, 2002 there was a
stockholders' deficit of approximately 5,471,000.
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 June 30, 2002 (Unaudited)
4. Prepaid Expenses
December 31, June 30,
2001 2002
----------- -----------
Consulting fees $ 188,275 $ 99,675
Insurance 18,359 41,407
Rent and other -- 149
----------- -----------
$ 206,634 $ 141,231
=========== ===========
5. Other Assets
December 31, June 30,
2001 2002
----------- -----------
Deferred financing costs $ -- $ 67,000
Patents pending 26,706 33,105
Security deposits 15,000 15,000
----------- -----------
$ 41,706 $ 115,105
=========== ===========
Deferred financing costs
In March 2002, the company engaged an investment banking firm to
advise the Company regarding rasing additional capital through the
potential future issuance of the Company's equity, debt or convertible
securities. The firm will be 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, June 30,
2001 2002
----------- -----------
Interest $ 42,509 $ 262,538
Compensation 36,699 39,897
Other 11,367 2,477
----------- -----------
$ 90,575 $ 304,912
=========== ===========
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 six months ended June 30, 2002
the Company has received $795,000 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.
8
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001, and June 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 six-month
period ended June 30, 2002, the Investor elected to convert $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 June 30, 2002
cumulative dividends in arrears were approximately $106,000.
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
--------- --------- --------- --------- ---------
Available for future
grants,
June 30, 2002 266,620 543,331 -- -- 809,951
========= ========= ========= ========= =========
9. Events Occurring Subsequent to June 30, 2002
Pursuant to the Funding Agreement with the Investor discussed in Note
7 during July and August, 2002 the Company has issued a series of
notes payable in the aggregate principal amount of $195,000.
In July 2002, the Company granted a warrant to an investor relations
firm to purchase 200,000 shares of the Company's common stock at an
exercise price of $0.45 per share. The warrant is immediately
exercisable and expires in three years.
9
Supplementary Disclosures of Cash Flow Information
January 7,
1993 (date of
inception
Six months through
Ended June 30, June 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 Series A
preferred stock and
cumulative dividends in
arrears, thereon -- -- 24,922
Issuance of warrants or stock
effected through
reduction of debt -- 32,000 382,000
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
10
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 sucessfully 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, actual results may differ materially from
those included within the forward-looking statement.
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.
11
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
August 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 SIX MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THREE MONTHS AND
SIX MONTHS ENDED JUNE 30, 2001
Revenues
The Company generated approximately $58,000 of revenue during the three months
ended June 30, 2002 consisting of $57,000 from licensing fees and
$1,000 from reader sales. There was no revenue for the
same period in 2001.
The Company generated approximately $58,000 of revenue during the six months
ended June 30, 2002 consisting of $57,000 from licensing fees and approximately
$1,000 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 June
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 $1,000 during the six months ended June
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 $113,000 to
approximately $493,000 during the three months ended June 30, 2002 as compared
to approximately $380,000 for the corresponding period in 2001. Of the increase,
approximately $327,000 was due to a increase in marketing costs as the Company
focused on marketing its Web-based biometric authentication software solution
and approximately $4,000 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, and approximately $39,000 was
due to a reduction in salaries and wages for administrative personnel.
12
Selling, general and administrative expenses increased approximately $203,000 to
approximately $998,000 during the six months ended June 30, 2002 as compared to
approximately $795,000 for the corresponding period in 2001. Of the increase,
approximately $574,000 was due to a increase in marketing costs as the Company
focused on marketing its Web-based biometric authentication software solution
and approximately $72,000 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 $358,000 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
$28,000 due to a reduction in general and administrative operating costs, and
approximately $57,000 was due to a reduction in salaries and wages for
administrative personnel.
Research, development, and engineering expenses increased approximately $104,000
to approximately $279,000 during the three months ended June 30, 2002 as
compared to approximately $175,000 for the corresponding period in 2001. Of the
increase, approximately $75,000 was due to a increase in wages for development
personnel and approximately $43,000 was due to an increase in general
development and engineering costs. These were offset by an approximate $14,000
decrease in software sub-contracting costs.
Research, development, and engineering expenses increased approximately
$111,000 to approximately $566,000 during the six months ended June 30, 2002
as compared to approximately $455,000 for the corresponding period in 2001.
Of the increase, approximately $156,000 was due to a increase in wages for
development personnel and approximately $57,000 was due to an increase in
general development and engineering costs. These were offset by an
approximate $102,000 decrease in software sub-contracting costs.
Other income and expense increased approximately $294,000 to approximately
$351,000 during the three months ended June 30, 2002 as compared to
approximately $57,000 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 $500,000 to approximately
$611,000 during the six months ended June 30, 2002 as compared to approximately
$111,000 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 six months ended June 30, 2002
was approximately $1,209,000 compared to approximately $831,000 during the six
months ended June 30, 2001. The primary use of cash for both years was to fund
the net loss. Net cash used in investing activities for the six months ended
June 30, 2002 was approximately $6,000 compared to net cash used in investing
activities of approximately $1,000 for the same period in 2001. Net cash
provided by financing activities during the six months ended June 30, 2002 was
$745,000 compared to $850,000 in the same period in 2001 and consisted primarily
of long-term borrowing activities of $795,000 partially offset by costs related
to capital raising efforts.
Working capital decreased approximately $784,000 during the six months ended
June 30, 2002 to a deficit of approximately $391,000 as compared to a surplus of
approximately $393,000 as of December 31, 2001. This decrease is primarily due
to operating losses, offset by long-term borrowings.
13
Pursuant to the November 2001 recapitalization transaction with an investment
fund (the Fund), 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 Fund 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.
The Fund has agreed to provide up to $1,080,000 of additional financing in
incremental monthly installments during the six-month period commencing March 1,
2002. Any such funding will be provided pursuant to a secured promissory note
on the terms described above. The Fund's obligation to provide this financing
is conditioned upon:
- The Company being in compliance with all material obligations under
the November 26, 2001 funding agreement between the parties, the
Secured Note and debentures issued to the Fund pursuant thereto, and
the other agreements 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 upon ten (10)
business days written notice from the Company which notice shall be delivered
not earlier than the first business day of the month of the requested advance.
Between January 1, 2002 and the date of this report, the Company has obtained
advances in the aggregate principal amount of $990,000. After the final advance
has been made, the Company has agreed to file a registration statement covering
the public resale of the shares of common stock issuable upon conversion of the
secured promissory notes issued against each advance.
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 Fund 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 August 2002. The
14
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 three month period ended June 30, 2002, the Company entered into
license agreements and generated $58,000 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.
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 July 16, 2002 the Company issued a three-year warrant to purchase
200,000 shares of the common stock to CEOCAST, Inc., an investor
relations firm, at an exercise price of $.45 per share, the closing
market price of the Company's common stock on the date of grant. The
warrant is immediately exercisable and was 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. On or about June 30, 2002, the Company issued an aggregate of 646,458
shares of common stock upon conversion of $216,000 principal amount
and $6,392 of accrued interest due under the Company's 5% Convertible
Debenture. 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.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER EVENTS
None
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: August 13, 2002 BIO-Key International, Inc.
/s/ Jeffry R. Brown
----------------------------------------
Jeffry R. Brown, Chief Executive Officer
/s/ Gary Wendt
----------------------------------------
Gary Wendt, Chief Financial Officer
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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.