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 MARCH 31, 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 May 9, 2002: 12,685,209.
1
BIO-KEY INTERNATIONAL, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance sheets as of December 31, 2001 and March 31, 2002............3
Statements of operations for the three months ended
March 31, 2001 and 2002, and January 7, 1993 (date of
inception) through March 31, 2002................................4
Statements of cash flows for the three months ended March 31, 2001
and 2002, and January 7, 1993 (date of inception)
through March 31, 2002...............................................5
Notes to interim financial statements................................6
Item 2 - Management's Discussion and Analysis and Plan of Operations.....10
PART II. OTHER INFORMATION
Item 1 - Legal proceedings.............................................18
Item 2 - Changes in Securities and Use of Proceeds.....................18
Item 3 - Defaults Upon Senior Securities...............................18
Item 4 - Submission of Matters to a Vote of Security Holders...........18
Item 5 - Other Events..................................................18
Item 6 - Exhibits and Reports on Form 8-K..............................18
2
BIO-Key International, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS
December 31, March 31,
2001 2002
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 514,970 $ 111,419
Prepaid expenses 206,634 228,520
------------ ------------
Total current assets 721,604 339,939
EQUIPMENT AND FURNITURE AND FIXTURES - AT COST,
less accumulated depreciation -- --
OTHER ASSETS 41,706 108,961
------------ ------------
$ 763,310 $ 448,900
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 238,496 $ 380,587
Accrued liabilities 90,575 225,298
------------ ------------
Total current liabilities 329,071 605,885
LONG-TERM OBLIGATIONS, net of discount 4,331,238 4,565,192
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 March 31, 2002 214 214
Common stock - authorized, 60,000,000 shares
of $.01 par value; issued and outstanding,
12,528,469 and 12,685,209 shares, respectively 125,285 126,852
Additional contributed capital 15,538,025 15,762,855
Deficit accumulated during the development stage (19,560,523) (20,612,098)
------------ ------------
(3,896,999) (4,722,177)
------------ ------------
$ 763,310 $ 448,900
============ ============
See accompanying notes to interim 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 through
ended March 31, March 31,
----------------------------- ------------
2001 2002 2002
------------ ------------ ------------
Revenues
Product sales $ -- $ -- $ 577,384
Licensing fees -- -- 100,000
Reimbursed research
and development -- -- 284,506
Technical support
and other services -- -- 429,885
------------ ------------ ------------
-- -- 1,391,775
Costs and other expenses
Cost of product sales -- -- 1,736,895
Cost of technical support
and other services -- -- 237,317
Selling, general
and administrative 414,426 504,731 11,935,865
Research, development
and engineering 279,367 287,462 6,093,587
------------ ------------ ------------
693,793 792,193 20,003,664
------------ ------------ ------------
Operating loss (693,793) (792,193) (18,611,889)
Other income (expense)
Interest income and other (5,836) (1,045) 510,181
Interest expense (48,106) 260,427 (1,589,572)
------------ ------------ ------------
(53,942) (259,382) (1,079,391)
------------ ------------ ------------
Loss before extraordinary gain $ (747,735) (1,051,575) (19,691,280)
Extraordinary gain - troubled
payable reduction -- -- 300,250
------------ ------------ ------------
NET LOSS $ (747,735) $ (1,051,575) $(19,391,030)
============ ============ ============
Loss applicable to
common shareholders
Net loss $ (747,735) $ (1,051,575) $(19,391,030)
Preferred stock dividends
and accretion -- -- (1,199,303)
------------ ------------ ------------
Loss applicable to common
stockholders $ (747,735) $ (1,051,575) $(20,590,333)
============ ============ ============
Basic and diluted loss
Per common share $ (.07) $ (.08) $ (2.77)
Preferred stock dividends
and accretion (.00) -- (.17)
------------ ------------ ------------
Loss per
common share $ (.07) $ (.08) $ (2.94)
============ ============ ============
Weighted average number of
common shares outstanding 10,282,083 12,500,228 6,985,121
============ ============ ============
See accompanying notes to interim financial statements
4
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,
---------------------------- ------------
2001 2002 2002
------------ ------------ ------------
Cash flows from operating activities
Net loss $ (747,735) $(1,051,575) $(19,391,030)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation 7,986 -- 242,913
Amortization
Unearned compensation -- -- 193,333
The intrinsic value of the
beneficial conversion feature
of the convertible debenture -- 153,954 776,518
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 94,397 1,495,417
Other -- -- 34,684
Change in assets and liabilities:
Accounts receivable 2,522 -- --
Inventories -- -- (916,015)
Prepaid expenses 13,036 (21,886) (228,520)
Accounts payable (20,589) 142,091 380,587
Accrued Liabilities 242,343 149,723 1,730,979
------------ ------------ ------------
Net cash used in operations (468,048) (533,296) (14,448,919)
Cash flows from investing activities
Capital expenditures -- -- (242,913)
Proceeds from sales
of Inter-Con/PC stock -- -- 190,000
Other (2,132) (255) (41,961)
------------ ------------ ------------
Net cash used in
investing activities (2,132) (255) (94,874)
Cash flows from
financing activities
Net borrowings under
short-term borrowing
agreements 500,000 -- 3,003,000
Issuance of convertible
bridge note -- -- 175,000
Issuance of convertible
Debentures and Long-Term notes -- 180,000 3,020,000
Issuance of warrants and
convertible debentures discount -- -- 830,000
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 500,000 130,000 14,655,212
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents 29,820 (403,551) 111,419
Cash and cash equivalents,
at beginning of period 48,830 514,970 --
------------ ------------ ------------
Cash and cash equivalents,
at end of period $ 78,650 $ 111,419 $ 111,419
============ ============ ============
See accompanying notes to interim financial statements.
5
BIO-Key International, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 2001, and March 31, 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 19,391,000 of which approximately 1,052,000
was incurred during 2002. As of March 31, 2002 there was a
stockholders' deficit of approximately 4,722,000.
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.
6
BIO-Key International, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 2001, and March 31, 2002 (Unaudited)
4. Prepaid Expenses
December 31, March 31,
2001 2002
---- ----
Consulting fees $ 188,275 $ 199,350
Insurance 18,359 17,811
Rent and other -- 11,359
----------- -----------
$ 206,634 $ 228,520
=========== ===========
5. Other Assets
December 31, March 31,
2001 2002
---- ----
Deferred financing costs $ -- $ 67,000
Patents pending 26,706 26,961
Security deposits 15,000 15,000
----------- -----------
$ 41,706 $ 108,961
=========== ===========
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 warrant to purchase 25,000 shares of the
Company's common stock at an exercise price of $1.00 per share through
the next four years. The estimated value of the warrant is $17,000.
6. Accrued Liabilities
December 31, March 31,
2001 2002
---- ----
Interest $ 42,509 $ 148,982
Compensation 36,699 40,733
Other 11,367 35,583
----------- -----------
$ 90,575 $ 225,298
=========== ===========
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
up to $1,080,000 of additional financing (The Funding Agreement) in
incremental monthly installments during the six-month period commencing
March 1, 2002, subject to certain conditions. In March 2002, the
Company received $180,000 and issued a note payable to the Investor.
The terms of the note 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 provides for
conversion of principal and accrued interest into shares of the
Company's common stock at a conversion price of $0.75 per share.
7
BIO-Key International, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 2001, and March 31, 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 three-month period
ended March 31, 2002, the Investor elected to convert $100,000 of debt
into 156,740 shares of common stock.
Increase in Number of Authorized Shares of Common Stock
In February 2002, the Company's shareholders approved an amendment to
its articles of incorporation which increased the number of authorized
shares of common stock from 20,000,000 to 60,000,000.
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, March 31, 2002 390,380 1,456,669 1,813,000 6,029,898 9,689,947
---------- ---------- ---------- ---------- ----------
Available for future
grants,
March 31, 2002 266,620 543,331 -- -- 809,951
========== ========== ========== ========== ==========
9. Events Occurring Subsequent to March 31, 2002
In April and May 2002 and pursuant to the Funding Agreement with the
Investor discussed in Note 7, the Company has issued a series of notes
payable totaling $430,000.
8
BIO-Key International, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 2001, and March 31, 2001 (Unaudited)
10. Supplementary Disclosures of Cash Flow Information
January 7,
1993 (date of
inception)
Three months through
Ended March 31, March 31,
---------------------------- ------------
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 -- 100,000 2,684,968
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
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
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"
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.
PLAN OF OPERATION
The Company is in the business of developing and marketing proprietary
biometric technology and software solutions. Biometric technology, the
science of analyzing specific human characteristics which are unique to
each individual in order to identify a specific person from a broader
population, is an emerging technology. Examples of the unique
biological characteristics that can be used to identify an individual
include fingerprints, iris patterns, hand geometry, voice recognition
and facial structure. Fingerprint analysis is an accurate and reliable
method to distinguish one individual from another and is viewed as less
intrusive than many other biometric identification methods. As a
result, fingerprint analysis has gained the most widespread use for
biometric identification. Biometric technology represents a novel
approach to identity verification which has only been used in limited
applications and has not gained widespread acceptance in any commercial
or consumer markets.
The Company has pioneered the development of high performance
one-against-many, 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 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 expects to generate
revenue from licensing arrangements during 2002.
10
Although the Company has developed significant identification
technology, it has not gained a 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. 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. 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.
MARKET OVERVIEW
Although recent security concerns relating to identification of
individuals has resulted in an increased interest in biometrics
generally, biometric technology has not gained widespread commercial
acceptance. Biometric based solutions compete with more traditional
security methods such as keys, cards, personal identification numbers
and security personnel, as well as competing biometric technologies
including voice, face, iris, hand geometry and blood vessel
recognition. The market for business-to-business and
business-to-consumer transactions is substantial and continues to grow.
Such transactions are subject to fraud based on unauthorized persons
gaining access to confidential information. The Company believes that
its biometric technology provides a more reliable method for confirming
the identity of persons in remote locations than existing traditional
methods.
Biometric technology is a novel approach to facility and digital
security. Acceptance of biometrics as an alternative to traditional
security methods depends upon a number of factors including:
* The reliability of biometric solutions
* Public perception regarding privacy concerns
* Costs involved in adopting and integrating biometric
solutions
Commercial markets have been slow to accept biometrics as a viable
alternative to traditional security methods. Accordingly, the primary
competition for biometric technology has been the traditional security
methods described above. With respect to competing biometrics, each has
its strength and weaknesses and none has emerged as a market leader.
Fingerprint identification is generally viewed as inexpensive and
non-intrusive, but also as less accurate. Iris scanning is viewed as
extremely accurate, but also as inconvenient to use and expensive.
Facial recognition has recently received substantial attention,
however, it suffers from accuracy limitations. In summary, the market
for biometric technology is undeveloped and evolving.
TECHNOLOGY
The Company has developed proprietary fingerprint identification
technology consisting of the following:
* VST(TM) (Vector Segment Technology), the patent
pending core algorithm which creates a mathematical
representation of a fingerprint based on its
particular characteristics.
* Hardware and software which translates and
standardizes the image of the fingerprint for
computer analysis ("Biometric Solution").
11
* SDK (Developers Tool Kit), a biometric application
development tool which facilitates integration of the
Company's technology for vertical market
applications.
Utilizing these technologies, the Company is continuing to develop
identification products and software solutions which are designed to
assure that only individuals comprising an approved fingerprint in an
online or embedded database are allowed access to an application
through real time authentication with an emphasis on Web based
applications.
Vector Segment Technology. The Company's IT security solutions are
built around its patent pending VST(TM) (Vector Segment Technology)
which processes features of a live fingerprint. These features are
reduced to a mathematical representation unique to the individual. When
a person seeking access to a computer network or restricted area places
his or her finger on a reader, a new mathematical representation is
generated which is compared to an on-line database to determine whether
it matches any mathematical representation on file. If there is a
match, the person is identified and given access to the application,
computer network, Web Site or restricted area. This can be accomplished
without the use of a key, password, user-Id, card, PIN number or token.
The actual fingerprint is not typically stored in the database for
commercial applications.
De-coupling of Technologies. In order to effectuate the Company's
evolution from a hardware provider to a licensor of software solutions,
the Company has modified its core Vector Segment Technology to make it
easily adaptable to scanners other than its proprietary readers. In the
past, the Company's identification algorithm had required the use of
its own high resolution reader technology to provide for reliable
identification applications. The further development of the Vector
Segment Technology has allowed for the de-coupling of the core
identification algorithm from the reader technology allowing the
algorithm to be utilized with lower resolution and lower quality
readers available from other manufacturers. VST has expanded its
hardware independence capabilities with added scanner communications.
The Company's finger identification technology is now completely
hardware independent and can be integrated with virtually any finger
reading devise. Enrollments or capture of an individual's biometric ID
can be done on one type of scanner and looked-up or identified for a
match on another type of scanner. This is a very unique capability in
the biometric market and allows the Company's software to be used and
integrated with almost any finger scanner hardware.
Identification Verses Verification Technology. Management believes that
the Company's Vector Segment Technology is superior to similar
technologies utilized by its competitors. Unlike many of the biometric
technologies currently available, the Company's technology can identify
the fingerprint of an unknown person by searching a database to
determine whether the current scanned mathematical representation
matches any previously stored mathematical representation. Most of the
Company's fingerprint competitors simply verify that the fingerprint
image of a known person matches a previously stored copy or model of
that individual's fingerprint. By their very nature, such verification
systems require an additional item of data such as a PIN number or
access card to initially identify the user. Verification systems,
therefore, do not eliminate the need for cumbersome access cards, keys
or PIN numbers and the administrative costs associated with the
distribution and replacement of such data. By contrast, the Company's
identification technology typically does not require any identifying
data other than a person's fingerprint. Based on the foregoing, the
Company believes that its identification technology provides it with a
meaningful competitive advantage in the marketplace. On April 27, 1998,
the Company's SACcat(TM) product earned the International Computer
Association's first and only fingerprint biometric identification
certification.
CURRENT OFFERINGS
The following is a description of the status of each of the Company's
current offerings.
SDK. The Company's SDK, a software developers toolkit, will be BioAPI
compliant and can be deployed in both Internet and non-Internet
applications (single PC or local area network). The BioAPI is a
consortium of companies, including Intel and Hewlet Packard, seeking to
establish a standard in the biometric market. The BIO-key SDK also
supports a fuller, lower level control interface that may offer some
integrators more control over their application interface.
12
WEB-key(TM). WEB-key is a biometric identification/authentication
solution designed to secure Web based applications through the use of a
Web-based browser plug-in and a server side plug-in. WEB-key is
designed to provide security and identification assuring that a remote
user is in fact who they say they are without the need of a password,
PIN, or smart card. WEB-key protects personal information such as
credit card, address, account numbers and other private data by only
disseminating such information upon the authorization of the owner of
such information as determined by such person's fingerprint.
BUSINESS STRATEGY
The Company's initial goal was to develop automated fingerprint
identification products which were portable, easily integrated with
existing applications and affordable for mass commercialization and
distribution through OEMs, distributors and to a lesser degree, system
integrators in the computer network, general access control and other
markets. This included the development of readers. During 1998 and 1999
the Company pursued an OEM licensing program and in 2000 the Company
developed WEB-key an integrated Web based biometric authentication
system.
The Company's current business plan, which continues to evolve,
consists of a threefold strategy of:
* continued development of technology
* licensing its core technology to OEMs, system
integrators, Internet service providers and software
application developers addressing industry-specific
applications
* licensing its Web-based biometric authentication
software solution to e-commerce and Internet content
companies to secure Web based transactions and
corporations to secure private networks.
Although the Company has developed significant core identification
technology and readers, neither has gained any meaningful commercial
acceptance, the Company has only generated minimal revenue since
inception and it has not entered into any significant licensing
arrangements. In addition, the Company's business model, particularly
the Web authentication initiative, represents a unique approach to
Internet security, requires the distribution and use of additional
peripheral hardware, namely an optical reader, and the integration of
client and server software. It has not been adopted by any company that
conducts business over the Internet. There can be no assurance that
there will be a demand for such a solution or that the Company will
have the financial, marketing and human resources necessary to
successfully market such a software solution.
Technology Development. Although management believes that the Company's
identification technology is one of the most advanced and
discriminating fingerprint technologies available on the market today,
the markets in which the Company competes are characterized by rapid
technological change and evolving standards. In order to maintain its
position in the market, the Company will continue to upgrade and refine
its existing technologies. During 2002, the Company will continue to
focus on enhancing its identification technology for large databases,
Web based server authentication applications, including porting to
multiple platforms, and peer group reader technology. Successful
development of this solution will require additional financing to which
there can be no assurance.
WEB BASED BIOMETRIC AUTHENTICATION SOLUTION (WEB-KEY(TM)).
The Company's primary initiative is the licensing of WEB-key(TM), its
Web-based, Internet ready three tiered Internet application
architecture software security solution. The Company licenses
WEB-key(TM) as an integrated solution for securing e-commerce,
e-business, and web-based transaction applications, or as a systems
developer kit (SDK) for integration into other applications.
This initiative has involved transitioning the Company's technology to
focus on identification applications for large databases and Web based
server authentication applications, including porting to multiple
platforms and peer group reader technology. These efforts have resulted
in the de-coupling of the core identification algorithm from the reader
technology providing for the algorithm to be utilized with other
readers available from other manufacturers. The Company believes that
the versatility provided by the de-coupling of the identification
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algorithm and reader technology will facilitate the pursuit of
licensing Web based server authentication applications. Successful
execution of this initiative has also required the development of
enhanced software to provide an effective interface between client and
server-based software. The Company continues to refine this software.
The Web-based server authentication application is an integrated
solution involving the distribution of readers and the licensing of
client and server based software to provide for reliable and cost
effective user authentication in connection with the processing of
transactions over the Internet. This solution is also intended to
secure other Internet applications such as restricting access to
specific Web pages, specific information contained on a Web-site or
specific applications. The Company believes it has the opportunity to
be the first supplier of a reliable high performance electronic
identification and authorization solution which operates effectively
without the aid of a personal identification number or password
supplied by the user.
Architecture. WEB-key provides an easy-to-use, high-performance and
secure method for granting users access via the Internet to proprietary
information residing on remote servers.
WEB-key consists of three basic components:
* a finger print scanner
* Vector Segment Technology processing software tightly
and securely integrated with a web browser
* an identification database residing on a web server.
The user simply logs-on a computer or application residing on a
computer using their fingerprint in lieu of a PIN number, password,
user name or smart card. WEB-key begins by processing a raster scan
image which is enhanced using WEB-key software integrated into the web
browser. The image enhancing employs a variety of proprietary
techniques to improve accuracy and protect against spoofing. The
WEB-key software then converts the enhanced image into a unique
mathematical representation of the fingerprint using Vector Segment
Technology. An encrypted print model is generated for transmission
across the Internet to the central WEB-key registry. The WEB-key web
server de-encrypts the mathematical model which operates as an index
key for searching the database for a match. The web server matches the
Vector Segment Technology BIO-key against a database of registered
users to obtain a match. If a match is found, the user is allowed
access to the protected content on a connected web server.
WEB-key provides a reliable and secure user authentication solution.
WEB-key takes advantage of new security features in Microsoft's
Internet Explorer versions 5.5 SP2 and 6.0, in addition to 1024 bit
enhanced encryption capabilities integrated with public/private key
pairs. WEB-key has also been integrated with Oracle9IRAC, which offers
advanced speed, scalability, and reliance to WEB-key's database tier.
Additional tools and software based on VST technology are under
development.
Potential Market. The growth of electronic fingerprint identification
will be driven by the need for secure access to private applications
and proprietary databases residing on both private and public network
infrastructures. The scope of these opportunities include:
* corporations that increasingly rely upon the exchange
and distribution of proprietary information among
staff using intranet or other private networks
* business-to-business e-commerce among trading
partners which share confidential information on a
secure basis
* business-to-consumer e-commerce where the e-commerce
service provider wants to restrict access to paying
subscribers
Although electronic commerce has many benefits, the geographical
separation of buyers from sellers creates a significant problem arising
from the opportunity for fraud. Firewall and encryption software
address important aspects of security but do not address the fraud
problem inherent in the potential anonymity of a remote user. Corporate
intranets are an equally attractive and compelling market. Corporations
increasingly rely upon intranet infrastructure for the dissemination of
proprietary business data throughout an organization. Since access
rights to different classes of data vary among employees, password
identification and authorization is integral to all corporate networks.
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The current solution to these issues is the association of passwords
and PIN numbers with individuals. This solution requires employees or
users to remember or retain a growing number of keys cards, passwords
and PIN numbers and employers or Internet companies to periodically
change passwords and PIN numbers to maintain their integrity. Since
such information can be stolen or shared, they provide no assurance
that the user is actually who they claim to be. WEB-key has been
designed to address each of these concerns.
The Company believes that replacement of traditional passwords presents
a substantial market opportunity. Hamburg & Quist reports that
approximately 150 million people use passwords to identify themselves
to computer networks and the Internet and that 35%-40% of all calls
received by IT help desks involve password issues at a cost of $100 per
person per year resulting in enterprise spending of $60 billion on
password maintenance. The Company's technology could virtually replace
and eliminate the need for passwords at an estimated cost of
approximately $20 per person per year while providing a higher
assurance of identity security and user convenience. Government,
aviation/transportation and enterprise security present significant
additional opportunities.
MARKETING AND DISTRIBUTION
The Company's marketing and distribution efforts consist of:
* Development of strategic alliances with technology
leaders
* General promotion of biometric technology and the
Company's offerings
* Direct technology licensing efforts to, among others,
OEMs, application developers and operators of private
network.
The Company's current marketing efforts are conducted primarily through
direct selling efforts of its Chief Executive Officer, President and
other marketing personnel to OEMs, application developers and operators
of private networks.
The Company attends and actively participates in various product
conferences and conventions in the technology and security industries
to generate market awareness of biometric technology generally and the
Company's offerings specifically. In this connection, in October 2000,
the Company began a collaborative presentation effort with Intel
Corporation whereby the Company and Intel created a proof-of-concept
demonstration of the Company's WEB-key product. The demonstration was
created across the Intel IA32 and Itanium family processor products and
was first presented at the Intel Developer Forum (IDF) in February
2001. Proof of concept was presented at WinHec in Anaheim, California
on March 25-27, 2001 and RSA in San Francisco, California during April
2001. Intel continues to showcase the Company's biometric IT security
solution as a lead application for Intel's next generation Itanium
Internet/e-business server and as a solution working with Oracle 9i and
Oracles database. Additionally the WEB-key product has been presented
in alliance with and part of Intel's exhibit at the Oracle Open World
in Berlin and San Francisco. Although the Company intends to
participate in events and other conferences with Intel, there can be no
assurances that Intel will continue to allow the Company to participate
with it at any such events or conferences.
From these efforts, the Company has been aggressively marketing its
WEB-key and SDK technology to leads generated from these shows, has
entered into evaluation license agreements and expects to begin to
generate revenues from these private sector activities later this year.
The Company has also entered into alliances and/or joint sales and
marketing agreements with Oracle, Intel, and Siebel Systems to develop
and implement new security systems utilizing the Company's technology
for the Federal Government. The events of September 11th have
heightened the need for securing data dissemination throughout and
between government agencies and automating the positive identification
of personnel. The Company believes that its finger identification
technology coupled with the capabilities of its alliance partners are
the most advanced solutions capable of meeting these needs.
The Company is targeting both Internet infrastructure companies and
large portal providers as licensees of its WEB-Key solution. On the
Internet infrastructure side, the Company is currently seeking to
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partner with Internet server manufacturers, providers of database and
data warehouse engine software, horizontally positioned application
engines, firewall solution providers and peripheral equipment
manufacturers. On the portal side, the Company is currently targeting
financial service providers such as credit and debit card authorization
and issuing institutions, Internet retailers, business-to-business
application service providers (ASPs) and corporate intranets.
RESEARCH AND DEVELOPMENT
During fiscal years ended December 31, 2000 and 2001 the Company spent
approximately $1,136,000 and $948,000, respectively, on research and
development. These costs were principally funded through outside
sources of equity and debt financing. During 2002, the Company's
research and development effort will be focused on the continued
evolution of its Web-based authentication solution and furthering the
VST algorithm and SDK.
EMPLOYEES AND CONSULTANTS
The Company currently employs twelve (12) individuals on a full-time
basis; six (6) in engineering, research and development, three (3) in
finance and administration and three (3) in sales and marketing. The
Company also utilizes four (4) consultants who provide marketing,
engineering and management services to the Company. The Company
anticipates retaining additional marketing personnel within the next
twelve (12) months to execute its business plan.
See the section below captioned "LIQUIDITY AND CAPITAL RESOURCES" for a
discussion of the Company's financial resources and requirements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AS COMPARED TO THREE MONTH ENDED MARCH 31,
2001
Revenues
The Company does not have significant sales revenue and generated no
revenue during the three-month periods ended March 31, 2001 and March
31, 2002. The Company continues to deploy substantially all human and
capital resources to executing its business plan targeted at Internet,
intranet and electronic commerce security. As a result, the Company's
limited resources were used to refine its technology to develop the
applications needed to execute against the Company's business plan.
Costs and Other Expenses
The Company did not generate any revenue during the three-month periods
ended March 31, 2002 and 2001 and, therefore, did not incur any cost of
sales.
Selling, general and administrative expenses increased $90,305 to
$504,731 during the three months ended March 31, 2002 as compared to
$414,426 for the corresponding period in 2001. Of the increase,
approximately $247,000 was due to a increase in marketing costs as the
Company focused on marketing its Web-based biometric authentication
software solution and approximately $68,000 was due to an increase in
professional services costs subsequent to the recapitalization
transaction in November 2001. 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, a decrease of approximately $27,000 due to
a reduction in general and administrative operating costs, and
approximately $19,000 was due to a reduction in salaries and wages for
administrative personnel.
Research, development, and engineering expenses increased $8,095 to
$287,462 during the three months ended March 31, 2002 as compared to
$279,367 for the corresponding period in 2001. Of the increase,
approximately $81,000 was due to a increase in wages for development
personnel and approximately $15,000 was due to an increase in general
development and engineering costs. These were offset by an approximate
$88,000 decrease in software sub-contracting costs.
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Other income and expense increased $205,440 to $259,382 during the
three months ended March 31, 2002 as compared to $53,942 for the
corresponding period in 2001. The increase was primarily due to an
increase in interest costs associated with the November 2001
restructuring transaction, and new long-term borrowings of $180,000 in
March 2002.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the three months ended
March 31, 2002 was $533,296 compared to $468,048 during the three
months ended March 31, 2001. 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, 2002 was $255 compared to net cash used in
investing activities of $2,132 for the same period in 2001. Net cash
provided by financing activities during the three months ended March
31, 2002 was $130,000 compared to $500,000 in the same period in 2001
and consisted primarily of long-term borrowing activities of $180,000
partially offset by costs related to capital raising efforts.
Working capital decreased $658,479 during the three months ended March
31, 2002 to a deficit of $265,946 as compared to a surplus of $392,533
as of December 31, 2001. This decrease is primarily due to operating
losses.
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 ($3,027,920) 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 $40,000.
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.
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Between March 13, 2002 and May 10, 2002 the company has obtained
advances in the aggregate principal amount of $610,000. 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.
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
and is in need of substantial additional capital to maintain operations
beyond August 2002. In this connection the Company has engaged a
financial advisor to assist the company in raising additional capital.
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. Management believes it will need $5,000,000 to $7,000,000
to execute its business plan and support operations through 2003.
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
On March 22, 2002, the Company issued a four-year warrant to purchase
25,000 shares of common stock to Punk, Ziegel & Company, L.P., a
financial advisory firm, at an exercise price of $1.00 per share. 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.
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) Reports on Form 8-K
None.
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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: May 14, 2002 BIO-Key International, Inc.
/s/ Jeffry R. Brown
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Jeffry R. Brown, Chief Executive Officer
/s/ Gary Wendt
----------------------------------------
Gary Wendt, Chief Financial Officer
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