10QSB 1 0001.txt FORM 10-QSB FOR 2ND QUARTER SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (X) QUARTERY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 1, 2000 Commission File Number 0-11447 DATAKEY, INC. (Exact name of small business issuer as specified in its charter) MINNESOTA 41-1291472 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 407 WEST TRAVELERS TRAIL, BURNSVILLE, MN 55337 Issuer's telephone number: (612) 890-6850 (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares outstanding of the issuer's common equity, as of August 15, 2000, is 8,204,379. Transitional Small Business Disclosure Format (check One): Yes No X PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
July 1, December 31, 2000 1999 ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,516,208 $ 344,922 Trade receivables, less allowance for doubtful accounts of $26,000 1,642,495 1,474,480 Inventories 1,903,532 1,328,991 Prepaid and other 95,612 29,981 ------------ ------------ Total current assets 7,157,847 3,178,374 ------------ ------------ OTHER ASSETS Prepaid licenses and patents at cost less amortization 520,420 668,036 of $519,603 and $364,832 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost Production tooling 1,299,313 1,306,260 Equipment 2,851,142 2,768,214 Furniture and fixtures 317,102 317,103 Leasehold improvements 278,371 278,371 ------------ ------------ 4,745,928 4,669,948 Less accumulated depreciation (4,099,760) (3,917,996) ------------ ------------ 646,168 751,952 ------------ ------------ $ 8,324,435 $ 4,598,362 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 639,043 $ 803,887 Accrued compensation 312,878 197,335 Accrued expenses-other 38,802 97,144 ------------ ------------ Total current liabilities 990,723 1,098,366 ------------ ------------ SHAREHOLDERS' EQUITY Convertible preferred stock, voting, stated value $2.50 per share; authorized 400,000 shares; issued and outstanding 150,000 375,000 375,000 Common stock, par value $.05 per share; authorized 20,000,000 shares; issued and outstanding 8,204,379 in 2000 and 6,322,285 in 1999 410,219 316,114 Additional paid-in capital 13,674,445 8,501,543 Accumulated deficit (7,125,952) (5,692,661) ------------ ------------ 7,333,712 3,499,996 ------------ ------------ $ 8,324,435 $ 4,598,362 ============ ============
See Notes to Consolidated Financial Statements 2 DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended July 1, July 3, July 1, July 3, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Revenue $ 1,836,700 $ 1,154,008 $ 3,610,077 $ 2,513,990 Cost of goods sold 895,749 708,203 1,983,429 1,502,192 ----------- ----------- ----------- ----------- Gross Profit 940,951 445,805 1,626,648 1,011,798 Operating expenses: Research, development and engineering 635,494 563,775 1,269,343 1,040,957 Marketing and sales 775,604 546,543 1,315,788 1,135,952 General and administrative 315,602 238,329 572,659 468,810 ----------- ----------- ----------- ----------- Total operating expenses 1,726,700 1,348,647 3,157,790 2,645,719 ----------- ----------- ----------- ----------- Operating loss (785,749) (902,842) (1,531,142) (1,633,921) Interest income (expense) 60,727 (4,277) 97,857 342 ----------- ----------- ----------- ----------- Loss before income taxes (725,022) (907,119) (1,433,285) (1,633,579) Income tax expense 0 0 0 0 ----------- ----------- ----------- ----------- Net loss ($ 725,022) ($ 907,119) ($1,433,285) ($1,633,579) =========== =========== =========== =========== Net loss attributable to common stockholders: Net loss (725,022) (907,119) (1,433,285) (1,633,579) Preferred stock dividends 0 (23,436) 0 (47,786) ----------- ----------- ----------- ----------- Net loss attributable to common stockholders ($ 725,022) ($ 930,555) ($1,433,285) ($1,681,365) =========== =========== =========== =========== Basic and diluted loss per share ($ 0.09) ($ 0.29) ($ 0.19) ($ 0.53) =========== =========== =========== =========== Weighted average number of common shares outstanding 8,110,533 3,188,299 7,705,281 3,138,137 =========== =========== =========== ===========
See Notes to Consolidated Financial Statements 3 DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended Six Months Ended July 1, July 3, July 1, July 3, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ($ 725,022) ($ 907,119) ($1,433,285) ($1,633,579) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 100,154 114,169 181,764 221,382 Amortization 99,220 13,350 154,771 34,493 Change in assets and liabilities (Increase) decrease: Trade receivables (468,737) (7,092) (168,015) 187,094 Inventories (521,858) (333,168) (574,541) (439,197) Prepaid expenses and other (90,752) 58,783 (65,631) 12,275 Prepaid license fees and patent (2,167) (5,557) (7,155) (12,977) Increase (decrease) in: Accounts payable (36,548) 243,200 (164,844) 228,838 Accrued expenses 17,448 (62,430) 57,201 42,113 Accrued severance 0 (32,550) 0 (10,687) ----------- ----------- ----------- ----------- Net cash used in operating activities (1,628,262) (918,414) (2,019,735) (1,370,245) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (10,564) (71,501) (75,980) (107,030) ----------- ----------- ----------- ----------- Net cash used in investing activities (10,564) (71,501) (75,980) (107,030) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of common stock 238,993 1,218,823 5,267,001 1,247,823 ----------- ----------- ----------- ----------- Net cash provided by financing activities 238,993 1,218,823 5,267,001 1,247,823 ----------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents (1,399,833) 228,908 3,171,286 (229,452) CASH AND CASH EQUIVALENTS Beginning 4,916,041 395,467 344,922 853,827 ----------- ----------- ----------- ----------- Ending 3,516,208 624,375 3,516,208 624,375 =========== =========== =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Preferred stock dividend accrual 0 23,436 0 39,596 Preferred stock dividend converted to common stock 0 0 0 8,190 Conversion of preferred stock to common 0 0 0 151,520 ----------- ----------- ----------- ----------- 0 23,436 0 191,116 =========== =========== =========== ===========
See Notes to Consolidated Financial Statements 4 DATAKEY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GENERAL In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly Datakey's financial position as of July 1, 2000, and December 31, 1999, and results of its operations and cash flows for the three-month and six-month periods ended July 1, 2000, and July 3, 1999. The adjustments that have been made are of a normal recurring nature. The accounting policies followed by the Company are set forth in Note 1 to the Company's financial statements in the 2000 Datakey, Inc. Annual Report and in Form 10-KSB for the year ended December 31, 1999. OPERATING SEGMENTS The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, for the year ended December 31, 1998. This statement requires public enterprises to report selected information about operating segments in annual and interim reports issued to shareholders. The adoption of this statement had no impact on the Company's financial condition or results of operations. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. The Company has two reportable segments: Electronic Products (EP) and Integrated Systems Solutions (ISS). The Electronic Products segment produces and markets proprietary memory keys, cards, and custom-shaped tokens and systems that utilize these products that serve as a convenient way to carry electronic information. The Integrated Systems Solutions segment produces and markets products for the information security market, which enable user identification and authentication, secure data exchange, and information validation. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. There are no intersegment transactions. The Company evaluates performance based on operating earnings of the respective segments.
Three Months Ended July 1, 2000 Six Months Ended July 1, 2000 --------------------------------------------- ---------------------------------------------- EP ISS UNALLOCATED TOTAL EP ISS UNALLOCATED TOTAL ---------- --------- -------- ---------- ---------- ---------- -------- ----------- Revenue............... $ 897,188 $ 939,512 $ - $1,836,700 $2,211,770 $1,398,307 $ - $ 3,610,077 Interest income - - 60,727 60,727 - - 97,857 97,857 (expense)............. Depreciation and 72,303 127,071 - 199,374 126,503 210,032 - 336,535 amortization.......... Segment profit (loss). (72,320) (713,429) 60,727 (725,022) (29,949) (1,501,193) 97,857 (1,433,285) -------- ---------- ------------- ----------- --------- -------- ------------- ------------- Three Months Ended July 3, 1999 Six Months Ended July 3, 1999 --------------------------------------------- ---------------------------------------------- EP ISS UNALLOCATED TOTAL EP ISS UNALLOCATED TOTAL ---------- --------- -------- ---------- ---------- ---------- -------- ----------- Revenue............... $1,051,462 $ 102,546 $ - $1,154,008 $2,268,171 $ 245,819 $ - $ 2,513,990 Interest - - (4,277) (4,277) - - 342 342 income(expense)....... Depreciation and 100,205 27,314 - 127,519 193,177 62,698 - 255,875 amortization.......... Segment profit (loss). (51,666) (855,453) (4,277) (907,119) 104,089 (1,737,668) 342 (1,633,579) ---------- --------- -------- ---------- ---------- ---------- -------- -----------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION DATAKEY, INC. AND SUBSIDIARY RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS REVENUE - Revenue for the three-month period ended July 1, 2000, increased by $683,000, or 59 percent, and increased by $1,096,000 or 44% in the six-month period ended July 1, 2000 as compared to the same periods in 1999. The increase in revenue is due to a significant increase in revenue in the Company's ISS business unit as customers and licensees are increasingly accepting the Company's product offering. Revenue in the EP business segment is somewhat soft with a reduction of $154,000 in the three-month period and $56,000 in the six-month period ending July 1, 2000 as compared to the same periods in 1999. The decline in revenue is due to a reduction in component orders from a few of the Company's major customers. The Company has introduced system level products for the EP unit which management expects to revitalize revenue growth. GROSS PROFIT MARGIN - Gross profit as a percentage of revenue increased to 51 percent in the three-month period ended July 1, 2000, and 45 percent in the six-month period ended July 1, 2000. The increase in margin is due to favorable factory utilization at the higher revenue levels and also a large element of license fee revenue that contains high gross margins. OPERATING EXPENSES - Operating expenses increased by $378,000 or 28 percent, and $512,000 or 19 percent in the three-month and six-month periods, respectively, ended July 1, 2000, when compared to those periods of 1999. The increases are principally related to an increase of $229,000 in the three-month period and $180,000 in the six-month period in sales and marketing expense to continue advertising and promoting the Company's ISS product line. Research and development expense also increased $72,000 in the three-month period and $228,000 in the six-month period, as the Company continued to develop more features and enhancements to its information security products. Other expense increases are primarily increases in rent, corporate insurance, and salaries. INTEREST INCOME - Interest income increased to $61,000 in the three-month periods and $98,000 in the six-month period, ended July 1, 2000, as the Company invested the proceeds from the sale of securities in late 1999 and early 2000 in interest bearing accounts. Interest income is expected to trend down over the balance of 2000 as a portion of the interest bearing accounts will be used to fund the continuing investment in product development and product promotion activities. FINANCIAL CONDITION - The Company experienced a decrease in cash and cash equivalents of $1,400,000 in the three-month period and an increase of $3,171,000 for the six-month period ended July 1, 2000, compared to an increase of $229,000 in the three-month period and a decrease of $229,000 for the six-month period in 1999. The additional increase in cash in the six month period is primarily attributable to the sale of common stock in a private placement during February 2000 and from the sale of securities upon exercise of warrants and stock options during the first and second quarters of 2000. The additional decrease in cash in the second quarter of 2000 was due to a significant increase in accounts receivable related to the ISS business unit and an increase in inventory in anticipation of higher sales in the EP business unit. Datakey's balance sheet reflects $6,167,000 in working capital as of July 1, 2000 and a current assets to current liabilities ratio of 7.22 to 1. The Company believes that its current cash and cash equivalents in addition to its $1 million bank line of credit, renewed in May 2000 will provide sufficient funding for the balance of 2000. CAUTIONARY STATEMENTS The Management's Discussion and Analysis contains certain forward-looking statements relating to the continued acceptance of the Company's ISS products, the implication that the ISS product revenue will continue to increase significantly, and its ability to fund its operations. These statements are subject to certain risks and uncertainties which may cause actual results to differ materially from those projected. These risks and uncertainties include: (i) a reduction in the market acceptance and demand for the Company's ISS products; (ii) the success of current pilot programs and customer demand to convert to production programs; (iii) the introduction of competitive information security products; and (iv) the ability of the Company to attain profitability and positive cash flows by significantly increasing ISS product revenues while controlling expenses. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On June 8, 2000, the Company sold 80,000 shares of common stock for $100,000 upon the exercise of a warrant held by an investor who acquired the warrant in connection with a private placement completed on October 29, 1999. The Company relied upon Section 4(2) of the Securities Act, which provides an exemption for transactions not involving a public offering. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS The Company held its Annual Meeting on Wednesday, May 31, 2000. Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees as listed in the Company's proxy statement, and all nominees were elected. By 6,710,030 votes in favor, with 14,103 votes opposed, and 23,005 votes abstaining, the shareholders set the number of directors to be elected at five (5). The following persons were elected to serve as directors of the Company, by the votes indicated, until the next annual meeting of shareholders: NUMBER OF NUMBER OF VOTES NOMINEE VOTES FOR WITHHELD Terrence W. Glarner 6,726,813 20,325 Thomas R. King 6,725,413 21,725 Gary R. Holland 6,724,313 22,825 Eugene W. Courtney 6,726,813 20,325 Carl P. Boecher 6,727,913 19,225 The shareholders approved, by 3,421,414 votes for, 578,893 against, 15,235 abstaining, and 2,731,596 broker non-votes, an amendment to the Articles of Incorporation, including an increase of authorized shares from 12,500,000 to 30,000,000 consisting of 20,000,000 common shares, 400,000 preferred shares and 9,600,000 undesignated shares.. The shareholders approved, by 6,081,792 votes for, 638,996 against, 26,350 abstaining, and no broker non-votes, an increase in the shares under the 1997 Stock Option Plan from 800,000 to 1,100,000 The shareholders also ratified the appointment of McGladrey and Pullen, LLP, as independent auditors for the Company for the fiscal year ending December 31, 2000, by 6,705,939 votes in favor, 28,819 opposing and 12,380 abstaining. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits (a) Exhibit 27 Financial Data Schedule (only filed with electronic copy) (b) Reports on Form 8-K None SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated August 15, 2000 Datakey, Inc. By: /s/ Carl P. Boecher Carl P. Boecher President & Chief Executive Officer (Principal Executive Officer) By: /s/ Alan G. Shuler Alan G. Shuler Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) Datakey, Inc. EXHIBIT INDEX TO FORM 10-QSB FOR QUARTER ENDED JULY 1, 2000 EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule