-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LnNuA2sg4y80z9ZBqUa8xGW0swMogYdgXJkL+FuoYcshd94ZFNwRmxBYR0rpxB1m ZNQtBNZwMkgyqJpLzNDWgw== 0000914190-99-000386.txt : 19991117 0000914190-99-000386.hdr.sgml : 19991117 ACCESSION NUMBER: 0000914190-99-000386 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATAKEY INC CENTRAL INDEX KEY: 0000704914 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 411291472 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-11447 FILM NUMBER: 99759142 BUSINESS ADDRESS: STREET 1: 407 W TRAVELERS TRAIL CITY: BURNSVILLE STATE: MN ZIP: 55337 BUSINESS PHONE: 6128906850 MAIL ADDRESS: STREET 1: 407 WEST TRAVELERS TRAIL CITY: BURNSVILLE STATE: MN ZIP: 55337 10QSB 1 FORM 10-QSB FOR 3RD QUARTER 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 October 2, 1999 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 November 16, 1999, are 5,791,772. 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
October 2, December 31, 1999 1998 ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 19,835 $ 853,827 Trade receivables, less allowance for doubtful accounts of $26,000 and $30,000 827,907 859,636 Inventories 1,474,430 1,007,948 Prepaid and other 61,439 56,237 ----------- ----------- Total current assets 2,383,611 2,777,648 ----------- ----------- OTHER ASSETS Prepaid licenses at cost less amortization 537,701 554,425 of $122,626 and $95,705 Patents at cost, less amortization of $163,754 and $133,818 101,939 120,056 ----------- ----------- 639,640 674,481 ----------- ----------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost Production tooling 1,284,503 1,251,857 Equipment 2,781,451 3,012,184 Furniture and fixtures 304,853 304,853 Leasehold improvements 290,623 286,916 ----------- ----------- 4,661,430 4,855,810 Less accumulated depreciation (3,815,712) (3,771,659) ----------- ----------- 845,718 1,084,151 ----------- ----------- $ 3,868,969 $ 4,536,280 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 651,173 $ 435,873 Notes payable 15,766 0 Accrued severance obligation 0 10,687 Accrued expenses 394,344 218,186 Accrued dividends 130,055 67,023 ----------- ----------- Total current liabilities 1,191,338 731,769 ----------- ----------- SHAREHOLDERS' EQUITY Convertible preferred stock, voting, stated value $2.50 per share; authorized 400,000 shares; issued and outstanding 150,000 shares 375,000 375,000 Convertible preferred stock series A, voting, 8% cumulative, stated value $15.80 per share; authorized 150,000 shares; issued and outstanding 74,367 in 1999 and 100,000 shares in 1998 1,174,999 1,326,519 Common stock, par value $.05 per share; authorized 10,000,000 shares; issued and outstanding 3,651,772 in 1999 and 3,045,704 in 1998 182,589 152,285 Additional paid-in capital 6,154,243 4,793,665 Accumulated deficit (5,209,200) (2,842,958) ----------- ----------- 2,677,631 3,804,511 ----------- ----------- $ 3,868,969 $ 4,536,280 =========== ===========
See Notes to Consolidated Financial Statements DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended October 2, October 3, October 2, October 3, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenue $ 1,486,879 $ 1,373,713 $ 4,000,869 $ 4,599,898 Cost of goods sold 948,225 859,035 2,450,417 2,798,535 ----------- ----------- ----------- ----------- Gross Profit 538,654 514,678 1,550,452 1,801,363 Operating expenses: Research, development and engineering 501,204 401,615 1,542,161 1,213,577 Marketing and sales 475,943 500,050 1,611,895 1,478,726 General and administrative 224,406 205,066 693,216 627,911 ----------- ----------- ----------- ----------- Total operating expenses 1,201,553 1,106,731 3,847,272 3,320,214 ----------- ----------- ----------- ----------- Operating loss (662,899) (592,053) (2,296,820) (1,518,851) Interest income 1,457 15,504 1,799 39,888 ----------- ----------- ----------- ----------- Loss before income taxes (661,442) (576,549) (2,295,021) (1,478,963) Income tax expense 0 0 0 0 ----------- ----------- ----------- ----------- Net loss (661,442) (576,549) (2,295,021) (1,478,963) Net loss attributable to common stockholders: Net loss (661,442) (576,549) (2,295,021) (1,478,963) Preferred stock dividends (23,436) (31,599) (71,221) (442,398) ----------- ----------- ----------- ----------- Net loss attributable to common stockholders ($ 684,878) ($ 608,148) ($2,366,242) ($1,921,361) ----------- ----------- ----------- ----------- Basic and diluted loss per share ($ 0.19) ($ 0.21) ($ 0.72) ($ 0.66) ----------- ----------- ----------- ----------- Weighted average number of common shares outstanding 3,651,772 2,949,066 3,308,103 2,918,782 ----------- ----------- ----------- -----------
See Notes to Consolidated Financial Statements DATAKEY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended Nine Months Ended October 2, October 3, October 2, October 3, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ($ 661,442) ($ 576,549) ($2,295,021) ($1,478,963) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 114,975 135,617 336,357 387,734 Amortization 22,364 12,097 56,857 35,075 Loss on sale of fixed assets 31,812 0 31,812 0 Change in assets and liabilities (Increase) decrease: Trade receivables (155,365) 181,466 31,729 (231,829) Inventories (27,285) 38,920 (466,482) (37,983) Prepaid expenses and other (17,477) 14,467 (5,202) (7,009) Increase (decrease) in: Accounts payable (13,538) (95,128) 215,300 140,196 Accrued expenses 134,045 171,732 176,158 83,462 Accrued severance 0 (41,500) (10,687) (149,772) ----------- ----------- ----------- ----------- Net cash used in operating activities (571,911) (158,878) (1,929,179) (1,259,089) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of tooling and equipment (57,706) (33,463) (164,736) (91,607) Proceeds from sale of fixed assets 35,000 0 35,000 0 License and patent costs (9,038) (15,460) (22,015) (47,932) ----------- ----------- ----------- ----------- Net cash used in investing activities (31,744) (48,923) (151,751) (139,539) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of preferred stock 0 0 0 1,426,222 Increase in notes payable 15,766 0 15,766 0 Net proceeds (offering costs) from issuance of common stock (16,651) 17,232 1,231,172 225,146 ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities (885) 17,232 1,246,938 1,651,368 ----------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents (604,540) (190,569) (833,992) 252,740 CASH AND CASH EQUIVALENTS Beginning 624,375 1,748,701 853,827 1,305,392 ----------- ----------- ----------- ----------- Ending 19,835 1,558,132 19,835 1,558,132 ----------- ----------- ----------- ----------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Preferred stock dividend accrual 23,436 31,599 63,032 47,398 Preferred stock dividend converted to common stock 0 0 8,190 0 Decrease in obligation recorded in connection with prepaid license fees 0 (439,000) 0 (439,000) Conversion of preferred stock to common 0 0 151,520 0 ----------- ----------- ----------- ----------- 23,436 (407,401) 222,742 (391,602) ----------- ----------- ----------- -----------
See Notes to Consolidated Financial Statements 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 October 2, 1999, and December 31, 1998, and results of its operations and cash flows for the three-month and nine-month periods ended October 2, 1999, and October 3, 1998. 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 1998 Datakey, Inc. Annual Report and in Form 10-KSB for the year ended December 31, 1998. PRIVATE COMMON STOCK FINANCING - RECENT EVENTS The Company completed, in October 1999, a $1.5 million private equity financing with 28 accredited investors. Each investor paid $1.25 per common share, with each share accompanied by a ten-year warrant to purchase one common share for $1.25. A portion of the proceeds was used to pay off the bank credit line and to provide working capital. 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 other custom-shaped tokens 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 October 2, 1999 Nine Months Ended October 2, 1999 --------------------------------------------- ---------------------------------------------- EP ISS UNALLOCATED TOTAL EP ISS UNALLOCATED TOTAL -------- ---------- ------------- ----------- --------- -------- ------------- ------------- Revenue............... $1,302,606 $ 184,273 $ - $1,486,879 $3,570,777 $430,092 $ - $4,000,869 Interest income (expense)............. - - 1,457 1,457 - - 1,799 1,799 Depreciation and amortization.......... 101,610 35,756 - 137,366 297,007 98,454 - 395,461 Segment profit (loss). 25,160 (688,059) 1,457 (661,442) 121,200 (2,418,020) 1,799 (2,295,021) -------- ---------- ------------- ----------- --------- -------- ------------- ------------- Three Months Ended October 3, 1998 Nine Months Ended October 3, 1998 --------------------------------------------- ---------------------------------------------- -------- ---------- ------------- ----------- --------- -------- ------------- ------------- EP ISS UNALLOCATED TOTAL EP ISS UNALLOCATED TOTAL -------- ---------- ------------- ----------- --------- -------- ------------- ------------- Revenue............... $1,161,314 $ 212,399 $ - $1,373,713 $4,224,244 $375,654 $ - $ 4,599,898 Interest income(expense)....... - - 20,260 20,260 - - 44,647 44,647 Depreciation and amortization.......... 118,888 23,871 - 142,759 351,191 69,511 - 420,702 Segment profit (loss). 88,956 (685,765) 20,260 (576,549) 626,362 (2,149,972) 44,647 (1,478,963)
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 October 2, 1999, increased by $113,000, or 8 percent, compared to the same period in 1998. The increase in revenue is due both to resumption in shipments to Electronic Products (EP) customers during the quarter who had stopped shipments in the second quarter, and an increase in shipments to Information Security Systems (ISS) customers. Two major EP customers resumed shipments during the quarter and have recently indicated their requirements for the year may exceed the total for 1998. Additionally, other EP customers are expected to increase shipments during the fourth quarter of 1999, and the Company expects to secure several new pilot programs in the ISS business units, as well as convert a few pilot programs to production deployment phase during the balance of 1999. Should the Company be successful in arranging new ISS pilot programs and production deployments, as management currently expects, revenue for the 1999 fiscal year may equal or exceed that achieved in 1998. The Company continues to expect an operating loss for 1999, however, as the R&D and sales and marketing expenses related to the ISS business unit will substantially exceed its revenue for at least several quarters. GROSS PROFIT MARGIN - Gross profit as a percentage of revenue decreased to 36 percent in the three-month period ended October 2, 1999 compared to 37 percent for the same period in 1998 and remained at 39 percent in the nine-month period ended October 2, 1999. The reduction in margin in the three-month period ended October 2, 1999, is primarily the result of unfavorable product mix. The Company expects the gross profit margin as a percentage of revenue to remain at the current levels, or improve slightly, for the balance of 1999. OPERATING EXPENSES - Operating expenses increased by $95,000 or 9 percent, and $527,000 or 16 percent in the three-month and nine-month periods, ended October 2, 1999, respectively compared to the same periods in 1998. The increases principally relate to a year to date increase of $133,000 in sales and marketing expense to continue advertising and promoting the Company's ISS product line. Research and development expense also increased $100,000 in the three-month period and $329,000 in the nine-month period, as the Company continued to develop more features and enhancements to its information security products. Other expense increases result primarily from general inflationary increases in rent, corporate insurance, and salaries. The Company expects to continue spending on product promotional and product developmental activities at a rate that will trend upward on a quarterly basis. General and administrative expenses are expected to remain at about the level incurred in the third quarter. INTEREST INCOME - Interest income declined from $16,000 to $1,000 in the three-month periods and from $40,000 to $2,000 in the nine-month periods, ended October 2, 1999, compared to 1998 as proceeds from interest bearing accounts were utilized to fund new product development and product promotion activities, and the Company began borrowing on its working capital line of credit. Interest income is expected to increase in the fourth quarter as the Company has invested a portion of the proceeds of its recent private equity placement in an interest-bearing account. FINANCIAL CONDITION - The Company experienced a decrease in cash and cash equivalents of $834,000 for the nine-month period ended October 2, 1999. The decreases in cash in 1999 resulted primarily from an increase in the operating losses in the period. Datakey's balance sheet reflects $1,192,000 in working capital as of October 2, 1999 and a current assets to current liabilities ratio of 2.00 to 1. The Company expects to continue spending on R&D and on marketing and sales activities at an increased amount compared to 1998. Inventory and accounts receivable levels are expected to increase during the balance of 1999 to support the expected ramp-up in revenue from the Company's new information security products. The Company believes that its $1.5 million private equity financing, which closed in late October 1999, in addition to its $1 million bank line of credit, renewed in April 1999 for an additional year, will be sufficient to fund its operation until at least mid 2000. Beyond that point, the Company's need for additional financing depends largely on its success in selling more pilot units to customers and converting ISS customers from the pilot to the production phase. There is no assurance that a significant increase in ISS sales will occur or that any necessary capital will be available on terms satisfactory to the Company, or at all. YEAR 2000 - The Company began addressing the Year 2000 issue in 1997 using a multi-step approach, including inventory and assessment, remediation and testing, and contingency planning. The Company, with the assistance of outside consultants, began by analyzing and testing its major internal software programs to determine the level of compliance with the changeover in Year 2000. At this point, the Company believes all "mission critical" systems are materially compliant. The Company is currently seeking assurances from key suppliers and customers regarding their Year 2000 readiness. The Company has not yet completed this part of the assessment phase and cannot predict the outcomes of other companies' remediation efforts. The Company currently plans to substantially complete its Year 2000 compliance efforts by November 30, 1999. The Company has also formed a team to develop contingency plans in the event certain suppliers are unable to deliver critical parts and components in early 2000. At this time, the Company believes that its most reasonably likely worst case scenario is that the Company could experience delays in delivery of critical parts and supplies and/or key customers could experience a delay in delivery of needed Datakey parts. In the event that either of these scenarios occurs, the Company expects that it would have a material adverse effect on the Company's financial condition and results of operations. The Company estimates that the total cost of efforts, in 1999, to make hardware and software Year 2000 compliant, will be approximately $20,000. FORWARD-LOOKING STATEMENTS AND RISKS As provided for under the Private Securities Litigation Reform Act of 1995, the Company wishes to caution investors that the following important factors, among others, in some cases have affected and in the future could affect the Company's actual results of operations and cause such results to differ materially from those anticipated in forward-looking statements made in this document. o The expectations that the Company's revenues may equal or exceed those of 1998 due to (i) EP customers increasing shipments during the remainder of 1999; (ii) new pilot programs emerging within the ISS business unit; and (iii) the conversion of current pilot programs to the production deployment phase depends on the new products performing as currently anticipated, market acceptance of the products in general, the potential introduction of competitive products, the sales cycle and timing of commitments from potential customers, in addition to general competitive and market conditions. o The expectation of gross profit margin remaining at current level or improving slightly depends on the Company's ability to control costs as necessary. o The expectation that interest income will increase for the fourth quarter of 1999 depends on the interest rates in the market and other general market conditions, as well as the ability to retain the recently acquired funds in an interest bearing account as long as possible. o The ability of the Company to fund operations as least through mid-2000 depends in large part on the Company's ability to sell more pilot units within its ISS segment and on current ISS customers converting from the pilot to the production phase. o The impact of Year 2000 issues on its business depends on the accuracy, reliability, and effectiveness of the Company's and its suppliers' and customers' assessment and remediation of Year 2000 issues. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On October 29, 1999, the Company issued an aggregate of 1,200,000 shares of common stock at $1.25 per share and ten-year warrants to purchase 1,200,000 shares of common stock at $1.25 for gross proceeds of $1,500,000. The shares were sold with the assistance of Miller, Johnson & Kuehn, Incorporated (MJK) to 28 accredited investors. MJK received commissions equal to $144,000 plus accountable expenses as part of the offering, and ten-year warrants to purchase 120,000 shares of Common Stock, with an exercise price of $1.375 per share. Because the offering was not a public offering and was offered only to accredited investors, the Company relied upon Section 4 (6) and Rule 506 of Regulation D of the Securities Act of 1933, as amended, for exemptions from the registration requirements of such Act. The Company will file, by November 30, 1999, a Registration Statement on Form S-3 covering the resale of the shares of Company Common Stock issued in connection with the offering and those shares issuable upon exercise of the agent and investor warrants. On November 11, 1999 the Company issued an aggregate of 940,000 shares of Common Stock to Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P. (the "Special Situations Funds") in exchange for the Special Situations Funds (i) surrendering all outstanding 74,367 shares of the Company's Series A Convertible Preferred Stock (with such shares issuable upon exercise included in the aggregate 940,000), and releasing the Company of any dividend obligations and antidilution adjustments, and (ii) surrendering all warrants held by the Special Situations Funds to the Company, again forfeiting any antidilution or other adjustments that may result due to the October 1999 financing. As additional consideration for the issuance of the Common Stock, the Special Situations Funds executed a waiver of any and all rights they have or might have to bring any action against the Company and its affiliates, whether for damages or equitable remedies, arising out of either their purchase of securities in the May 1998 offering or relating to Datakey's 1999 private offerings of Common Stock and warrants. 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: The Company did not file a Form 8-K during the quarter ended October 2, 1999. Subsequently, the Company filed a Form 8-K dated October 25, 1999, that disclosed the third quarter revenue and loss, and described its need for additional cash, and an additional Form 8-K dated October 29, 1999, that fully described the details of the private placement of common stock and warrants, which was completed on October 29, 1999. 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 November 16, 1999 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 October 2, 1999 EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule EX-27 2 ART 5 FDS FOR 3RD QUARTER FORM 10-Q
5 1 U.S. Dollars 9-MOS DEC-31-1999 JAN-01-1999 OCT-02-1999 1 19,835 0 853,907 26,000 1,474,430 2,383,611 4,661,430 3,815,712 3,868,969 1,191,338 0 0 1,549,999 182,589 945,043 3,868,969 4,000,869 4,000,869 2,450,417 2,450,417 3,847,272 0 0 (2,295,021) 0 (2,295,021) 0 0 0 (2,295,021) (0.72) (0.72)
-----END PRIVACY-ENHANCED MESSAGE-----