U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file number 1-13463
-----------------------------------
SAC TECHNOLOGIES, 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)
4444 West 76th Street, Suite 600, Edina, MN 55435
-------------------------------------------------
(Address of principal executive offices)
(612) 835-7080
--------------
(Issuer's telephone number)
----------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes _X_ No___
Shares of the Registrant's Common Stock, par value $.01 per share,
outstanding as of August 8, 1999: 8,599,751.
<PAGE>
SAC TECHNOLOGIES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance sheets as of December 31, 1998 and June 30, 1999...........3
Statements of operations and other comprehensive income for
the three and six months ended June 30, 1998 and 1999,
and January 7, 1993 (date of inception)
through June 30, 1999........................................4
Statements of cash flows for the three and six months ended
June 30, 1998 and 1999, and January 7, 1993 (date of
inception) through June 30, 1999.............................5
Notes to interim financial statements..............................6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................12
PART II. OTHER INFORMATION
Item 1 - Legal proceedings..........................................20
Item 2 - Changes in securities......................................20
Item 3 - Defaults upon senior securities............................20
Item 4 - Submission of matters to a vote of security holders........20
Item 5 - Other events...............................................20
Item 6 - Exhibits and reports on Form 8-K...........................20
2
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,063,616 $ 131,580
Accounts receivable, less allowance for doubtful receivables of
$158,000 and $143,000, respectively 44,702 259,948
Inventories 410,287 329,760
Prepaid expenses 121,875 81,076
------------ ------------
Total current assets 1,640,480 802,364
EQUIPMENT, FURNITURE AND FIXTURES - AT COST, less
accumulated depreciation 135,469 111,907
OTHER ASSETS (note 4) 383,695 1,041,518
------------ ------------
$ 2,159,644 $ 1,955,789
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Convertible debentures, less discount of $291,024 and $80,000
(note 7) $ 2,208,976 $ 1,395,000
Note payable (note 7) -- 100,000
Accounts payable 280,879 279,475
Accrued liabilities (note 5) 198,738 263,144
Deferred revenues (note 6) 27,665 177,665
------------ ------------
Total current liabilities 2,716,258 2,215,284
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT) (note 8)
Preferred stock- authorized, 5,000,000 shares of $.01 par
value; issued and outstanding, none -- --
Common stock - authorized, 20,000,000 shares of $.01 par
value; issued and outstanding, 7,510,867 and 8,599,751
shares, respectively 75,109 85,999
Additional contributed capital 8,960,135 9,959,826
Deficit accumulated during the development stage (9,534,968) (11,205,320)
Accumulated other comprehensive income (note 4) -- 900,000
Unearned compensation (56,890) --
------------ ------------
(556,614) (259,495)
------------ ------------
$ 2,159,644 $ 1,955,789
============ ============
</TABLE>
See accompanying notes to interim financial statements
3
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
January 7,
1993 (date of
Three months ended Six months ended inception)
Junr 30, June 30, through
----------------------------- ----------------------------- June 30,
1998 1999 1998 1999 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues
Product sales $ 275,771 $ 14,738 $ 281,592 $ 39,525 $ 558,939
Licensing fees -- -- -- 100,000 100,000
Reimbursed research and development 10,200 -- 10,200 -- 284,506
Technical support and other services 7,750 -- 7,750 -- 429,885
------------ ------------ ------------ ------------ ------------
293,721 14,738 299,542 139,525 1,373,330
Costs and other expenses
Cost of product sales 529,777 75,276 560,513 112,702 1,397,004
Cost of technical support and other services 1,846 -- 1,846 -- 237,317
Selling, general and administrative 1,337,010 580,134 1,880,706 1,068,033 7,176,369
Research ,development and engineering 380,568 206,811 994,619 469,786 3,335,042
------------ ------------ ------------ ------------ ------------
2,249,201 862,221 3,437,684 1,650,521 12,145,732
------------ ------------ ------------ ------------ ------------
Operating loss (1,955,480) (847,483) (3,138,142) (1,510,996) (10,772,402)
Other income (expense)
Interest and other income 13,210 7,847 44,848 105,548 406,063
Interest expense -- (92,230) -- (264,904) (800,884)
------------ ------------ ------------ ------------ ------------
13,210 (84,383) 44,848 (159,356) (394,821)
------------ ------------ ------------ ------------ ------------
NET LOSS (1,942,270) (931,866) (3,093,294) (1,670,352) (11,167,223)
------------ ------------ ------------ ------------ ------------
Other comprehensive income
Unrealized gain on available-for-sale securities -- 900,000 -- 900,000 900,000
------------ ------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ (1,942,270) $ (31,866) $ (3,093,294) $ (770,352) $(10,267,223)
============ ============ ============ ============ ============
Basic and diluted net loss per common share $ (.26) $ (.12) $ (.41) $ (.21) $ (1.99)
============ ============ ============ ============ ============
Weighted average number of shares outstanding 7,490,897 8,086,718 7,478,545 7,810,041 5,616,510
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to interim financial statements.
4
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
January 7,
Three months Six months 1993 (date
ended June 30, ended June 30, of inception)
--------------------------- --------------------------- through June
1998 1999 1998 1999 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Increae (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (1,942,270) $ (931,866) $ (3,093,294) $ (1,670,352) $(11,167,223)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 15,000 21,000 28,500 26,000 131,006
Amortization
Deferred financing costs -- 267,400 -- 340,577 425,144
Unearned compensation 27,616 6,336 55,416 13,971 181,810
Interest expense amortization for the intrinsic value
of the beneficial conversion feature of the
convertible debenture (note 7) -- -- -- 124,624 525,000
Allowance for uncollectible receivables -- (15,000) -- (15,000) 143,000
Write-down of inventory 200,000 -- 200,000 -- 600,000
Revenues realized due to offset of billings against a
stock repurchase -- -- -- -- (170,174)
Options issued for license rights -- -- 200,000 -- 200,000
Option issued in connection with distribution agreement 352,650 -- 352,650 -- 352,650
Acquired research and development -- -- -- -- 117,000
Warrants issued for services and other 304,000 -- 304,000 -- 197,000
Contribution of services -- -- -- -- 11,250
Other -- -- -- -- 23,434
Change in assets and liabilities:
Accounts receivable 11,302 36,264 (1,435) (200,246) (402,948)
Inventories (111,299) 62,113 (445,671) 80,527 (929,760)
Prepaid expense (60,209) 22,481 (53,501) 40,799 (81,076)
Accounts payable 116,084 40,488 109,101 (1,404) 279,475
Accrued liabilities (131,472) 68,062 (117,737) 64,406 301,769
Deferred revenue -- -- -- 150,000 150,000
------------ ------------ ------------ ------------ ------------
723,672 509,144 631,323 624,254 2,054,580
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (1,218,598) (422,722) (2,461,971) (1,046,098) (9,112,643)
Cash flows from investing activities
Capital expenditures (4,191) (2,438) (24,153) (2,438) (242,913)
Security deposits -- -- -- -- (12,984)
Patents and trademarks -- -- -- -- (4,534)
------------ ------------ ------------ ------------ ------------
Net cash used for investing activities (4,191) (2,438) (24,153) (2,438) (260,431)
Cash flows from financing activities
Restricted cash (2,320,000) -- (2,320,000) -- --
Net proceeds (payments) under short-term borrowing
agreements -- 100,000 -- 100,000 (17,000)
Issuance of convertible bridge notes -- -- -- -- 175,000
Issuance of convertible debentures 2,030,000 -- 2,030,000 -- 1,775,000
Issuance of warrants and convertible debentures
discount 470,000 -- 470,000 -- 750,000
Deferred financing costs (180,000) (12,000) (180,000) (12,000) (324,977)
Exercise of stock options 70,031 -- 105,396 28,500 190,799
Sales of common stock -- -- -- -- 7,093,832
Redemption of common stock -- -- -- -- (138,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 70,031 88,000 105,396 116,500 9,504,654
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (1,152,758) (337,160) (2,380,728) (932,036) 131,580
Cash and cash equivalents, at beginning of period 2,123,783 468,740 3,351,753 1,063,616 --
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, at end of period $ 971,025 $ 131,580 $ 971,025 $ 131,580 $ 131,580
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to interim financial statements.
5
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and June 30, 1998 and 1999 (Unaudited)
1. Unaudited Statements
The accompanying unaudited interim financial statements have been
prepared by SAC Technologies, Inc. (the "Company") in accordance with
generally accepted accounting principles, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). 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 be read in conjunction with the financial statements and the
related notes thereto included in the Company's Annual Report on Form
10-KSB/A for the fiscal year ended December 31, 1998.
2. Liquidity Matters
Broad commercial acceptance of the Company's products by customers and
end users is critical to the Company's success and ability to generate
revenues. The Company has limited sales to date, and has accumulated
losses since inception of $11,167,223, of which $931,866 was incurred
during the quarter ended June 30, 1999. The Company believes operating
losses will continue for the foreseeable future.
As Discussed at Item 2 "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's common
stock was delisted from the NASDAQ SmallCap Market as of May 24, 1999.
The Company's stock currently trades on the OTC Electronic Bulletin
Board and the Company remains subject to the reporting requirements of
the Securities and Exchange Act of 1934 as amended (the "Exchange
Act"), and accordingly, will continue to timely file quarterly, annual
and all other required reports under the Exchange Act with the SEC. On
July 9, 1999 the Company received $712,500 in net proceeds through a
private placement of $1,312,500 of its Series A Convertible Preferred
Stock. See footnote 8 below.
The Company believes its existing cash will not be adequate to fund the
expansion and distribution of its product offerings, and it will need
to raise additional funds to support operations. Based on the Company's
current cash burn rate, the Company believes its existing cash will
only last until September 1999. Based on current plans the Company
estimates it needs approximately $3,000,000 to $4,000,000 to support
operations through June 30, 2000. This may involve the issuance of
additional debt or equity securities which will likely result in
additional dilution to the Company's existing stockholders which could
be substantial. No assurance can be given that any additional financing
will be available on terms acceptable to the Company if at all or that
adequate financing will ultimately be obtained to meet its needs.
On August 2, 1999, the Company signed a Letter of Intent to acquire
Aultimate Technology Marketing, Inc. (ATM). The terms of the proposal
call for the Company to acquire ATM in a merger or exchange of shares
whereby the Company would acquire all the assets and assume all the
liabilities of ATM. The proposed merger is subject to completion of
satisfactory due diligence, negotiation and execution of a mutually
satisfactory definitive agreement containing such representations,
warranties, indemnification, terms and conditions that are customary
for a transaction of this type, and obtaining necessary shareholder and
board approvals.
6
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and June 30, 1998 and 1999 (Unaudited)
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, options and warrants
outstanding using the treasury stock method. There was no difference
between basic and diluted loss per share for all periods presented as
the impact would have been antidilutive.
4. Other Assets
December 31, June 30,
1998 1999
(Unaudited)
------------ ------------
Investment in Inter-Con P/C, Inc. $ -- $ 900,000
Deferred financing costs, less accumulate
amortization of $46,800 and $168,000 233,200 112,000
Deferred offering costs 132,977 12,000
Security deposits 12,984 12,984
Patents 4,534 4,534
------------ ------------
$ 383,695 $ 1,041,518
============ ============
As previously reported, during October 1996, the Company contributed
certain technology (Technology) to Inter-Con P/C, Inc. (Inter-Con) in
exchange for an initial fifty-percent equity ownership in Inter-Con.
The costs associated with the development of the Technology were
expensed as research and development costs as the Technology had not
reached technological feasibility and proven marketability as of the
date of transfer. Accordingly, the Company's capitalized cost basis in
the Technology as of the date of contribution was $0. Therefore, the
investment in Inter-Con was carried at $0. Since October 1996,
Inter-Con has not reported a profit. The Company has continued to carry
the investment in Inter-Con at $0.
During June 1999, Inter-Con completed a reverse merger with a public
shell. It's shares are traded on the OTC Electronic Bulletin Board.
The Company's equity ownership in Inter-Con as of the date of this
filing consists of 600,000 shares of Inter-Con common stock. Such
common stock is restricted pursuant to SEC Rule 144. Assuming all of
the conditions of Rule 144 are met and subject to the volume
limitations of Rule 144, the shares will be eligible for public resale
during June 2000.
As a result of Inter-Con's shares, becoming eligible for public
trading, the Company will report it's investment in Inter-Con pursuant
to Statement of Financial Accounting Standards No. 115 -- "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS 115).
SFAS 115 requires classification of debt and equity securities into one
of the following three categories: trading securities,
available-for-sale securities and held-to-maturity securities. Trading
securities are measured at fair value, with unrealized holding gains
and losses included in earnings. Available-for-sale securities are
measured at fair value, with net unrealized gains and losses reported
as a component of accumulated other comprehensive losses in
stockholders' equity. Held-to-maturity securities are carried at
amortized cost. Gains and losses are recognized using the specified
identification method.
The Company's investment in Inter-Con is classified as an
available-for-sale security. Pursuant to SFAS 115, the $900,000
assigned market value of the investment as of June 30, 1999 was based
on the closing market price as of June 30, 1999 with no discount for
the restriction on transfer imposed by applicable Securities laws, the
limited public market of Inter-Con's stock, and the large block nature
of the investment. The Company will adjust it's investment in Inter-Con
each reporting period with any change being reported within
"accumulated other comprehensive income" which is a component of
stockholders' equity on the balance sheet.
Additionally, pursuant to Statement of Financial Accounting Standards
No. 130 - "Reporting Comprehensive Income" the net change in the
investment will also be disclosed on the face of the statement of
operations as "other comprehensive income." For the three and six month
period ended June 30, 1999, $900,000 was reported in the statement of
operations as other comprehensive income in connection with this
investment.
The current value assigned to this investment may fluctuate
significantly in the future due to Inter-Con's results of operations,
market conditions, and various other matters outside of the control of
the Company.
7
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and June 30, 1998 and 1999 (Unaudited)
5. Accrued Liabilities
December 31, June 30,
1998 1999
(Unaudited)
------------ ------------
Compensation $ 106,241 $ 65,802
Interest 62,500 116,380
Other 29,997 80,962
------------ ------------
$ 198,738 $ 263,144
============ ============
6. Deferred Revenue
Included in deferred revenue is $100,000 of deferred licensing fees and
$50,000 of non-refundable prepaid royalty fees relating to current
licensing agreements. These revenues will be recognized in future
periods once revenue recognition criteria is met.
7. Convertible Debenture
On June 30, 1998, the Company sold to the Fund $2,500,000 of 5%
(effective rate of 16%) convertible debentures due June 30, 2001 (the
"Debentures"), and detachable warrants. The Debentures are currently
convertible into shares of the Company's common stock at a conversion
price equal to the lesser of (a) $7.15 (110% of the closing bid price
of the common stock on June 29, 1998) or (b) the average closing bid
price for the five-day trading period ending the day prior to the
notice of conversion multiplied by a discount factor equal to 22%. The
Debentures are redeemable at the option of the Company under certain
circumstances. At the option of the Company, the interest is payable in
kind through the issuance of additional shares of the Company's common
stock. The Debenture agreement contains certain dilution and conversion
price adjustment provisions if certain events occur, as defined. In the
event of redemption, the Company is subject to certain repayment costs
equal to 24% of the principal amount repaid.
Under the terms of the Debenture, the Company was required to maintain
its listing on the NASDAQ SmallCap Market. As discussed at Note 2, the
Company's common stock was delisted from the NASDAQ SmallCap Market as
of May 24, 1999, which constituted an event of default under the
Debenture. The Company filed a registration statement (which was
declared effective by the SEC on May 3, 1999) covering the resale of
the shares of common stock underlying the Debentures and the detachable
warrants. Since the registration statement was filed late, the Company
was subject to late filing penalties. On or about July 9, 1999 the Fund
permanently waived the event of default under the Debenture caused by
the delisting of the Company's shares from the NASDAQ SmallCap Market
and all penalties associated with the late filing of the registration
statement.
8
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and June 30, 1998 and 1999 (Unaudited)
7. Convertible Debenture-Continued
On May 11, 1999, the holder of the Debenture converted an aggregate of
$1,025,000 of principal into 1,062,884 shares of common stock. As a
result of this conversion, the Company has reduced the indebtedness due
under the Debenture to $1,475,000.
8. Stockholders' Equity
On May 7, 1999 the Company's shareholders approved a resolution to
amend the Company's Articles of Incorporation to authorize 5,000,000
shares of preferred stock, which may be issued by the Company in the
future in series with such rights, preferences and designation as
determined by the Board of Directors without further shareholder
action. As of June 30, 1999, no shares of preferred stock were issued
or outstanding.
On July 9, 1999 the Company completed a private placement of $1,312,500
of its Series A Convertible Preferred Stock and a 5-year warrant to
purchase 131,250 shares of Common Stock exercisable at $1.196 per share
to the Fund. The Company received net proceeds of $712,500 after giving
effect to a 33% discount to the face amount of the preferred stock,
$62,500 of offering costs and repayment of a $100,000 note to the Fund.
The preferred shares provide for a 9% dividend payable semi-annually in
arrears. At the option of the Company, the dividends are payable in
kind through the issuance of additional shares of the Company's common
stock. The preferred shares are immediately convertible into shares of
common stock at a conversion price equal to the lesser of (a) 110% of
the closing bid price of the Company's common stock on July 8, 1999 or
(b) a 22% discount to the average closing bid prices of the Company's
common stock during the five trading days prior to conversion. The
preferred shares are redeemable, in whole or in part, at the option of
the Company at 100% of face value ($100 per share). The Company is
obligated to file a registration statement with the SEC covering the
resale of the shares of common stock issuable upon conversion of the
preferred shares or the exercise of the warrant by no later than
September 7, 1999 and have such registration statement declared
effective by December 6, 1999.
9
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and June 30, 1998 and 1999 (Unaudited)
8. Stockholders' Equity (Continued)
The following summarizes option activity since December 31, 1998
(Unaudited):
Number
------------------------
Date of Grant, Non-plan
Exercise Options
or 1996 And
Expiration Plan Warrants
--------------- ----------- ----------
Balance, December 31, 1998 -- 474,334 498,000
Options exercised 1/12/99-1/26/99 (26,000) --
Warrant granted 7/9/99 -- 131,250
----------- ----------
448,334 629,250
=========== ==========
9. Related Party Transactions
Included in accounts receivable as of December 31, 1998 and June 30,
1999 were $135,958 and $174,396 of amounts due from Jasper Consulting,
Inc. No revenues were recognized from transactions with Jasper
Consulting, Inc. during the three and six months ended June 30, 1999.
During the three and six months ended June 30, 1998, $183,476, and
$262,929 of revenues were recognized from transactions with ATM and
Jasper Consulting, Inc.
10. Other
On August 8, 1999 the Company gave notice to its Minnesota landlord it
would be moving to new facilities. The Company intends to sublease the
premises. There are approximately three years left on this lease (total
commitment of approximately $80,000). If the Company is not successful
in subleasing this premises, it will be liable for the lease payments.
The Company does not believe there will be any significant loss on any
sublease. Therefore, no accrual has been recorded as of the date of
these financial statements to cover any potential loss on this lease.
On July 21, 1999 the Company signed a 5 year lease for new Minnesota
facilities. The terms of the lease call for payments over the five year
term ranging from $2,814 to $3,610 a month plus common area costs.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. When used in this Report or in such
statements, the words "estimate," "project," "intends," "expects," "believes"
and similar expressions are intended to identify forward-looking statements
regarding events and financial trends which may affect the Company's future
operating results and financial position. Such statements are not guarantees of
future performance and are subject to risks and uncertainties that could cause
the Company's actual results and financial position to differ materially from
those included within the forward-looking statements. Such factors are described
in detail in the Company's Annual Report on Form 10-KSB/A under the caption
"RISK FACTORS." Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. The Company
undertakes no obligation to publicly release the results of any revision to
these forward-looking statements to reflect events or circumstances after the
date made or to reflect the occurrence of unanticipated events.
OVERVIEW
The Company is a technology company involved in developing biometric
technology and applications. Specifically, the Company develops and markets
fingerprint identification technology for use in general commercial markets. The
Company has focused on the general access control and information resource and
network access control markets. The Company's current product offerings and
related technology have been developed as security solutions for original
equipment manufacturers (OEM), distributors and system integrators. Although the
Company intends to continue to enhance these current offerings, and develop
others, the Company does not intend to create "off the shelf" products for mass
commercialization.
The Company markets its products and technology through license
agreements with OEMs, distributors and system integrators. The Company also
intends to and has sold master distribution rights agreements for development of
certain OEM and application development potential in selected territories. For
OEM licenses, the Company generally supplies the technology and "serialized
chips" to the OEM. For system integrator applications, the Company supplies a
completed unit. While it has internally assembled completed units in the past,
the Company does not intend to do so in the future. It is exploring subcontract
manufacturing arrangements.
The Company is primarily dependent upon others to develop end-user
applications for its technology and products. There can be no assurance that
such applications will be developed by others in a manner acceptable to
potential end users or that it will occur during a period of time for which the
Company has access to adequate capital to fund its business.
12
<PAGE>
The Company's success is dependent upon, among other things, reducing
the cost of its products to an acceptable level to earn gross margin on sales.
In connection with this objective, the Company is exploring the purchase of
certain technology it believes will reduce the cost and size of it's products,
and it is exploring subcontract manufacturing arrangements. In addition, the
Company will continue to be dependent upon others to incorporate certain
licensed technologies with the Company's offerings. No assurance can be given
that the Company will be able to reduce it's costs to generate adequate gross
margin dollars; that the technologies to be incorporated into it's products will
be incorporated and performed in a manner acceptable to potential OEM's, system
integrators, distributors or their end users; that it will be timely implemented
or that the end product's cost will be acceptable to the marketplace.
The Company is considered a development stage enterprise for accounting
purposes. Broad commercial acceptance of the Company's products by customers and
end users is critical to the Company's success and ability to generate revenues.
The Company has limited sales to date, has substantial accumulated losses since
inception and believes operating losses will continue for the foreseeable
future.
13
<PAGE>
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED TO JUNE 30, 1999
Revenues
Total revenues decreased $278,983 during the three months ended June
30, 1999 to $14,738 as compared to $293,721 for the same period in 1998. Total
revenues decreased $160,017 during the six months ended June 30, 1999 to
$139,525 as compared to $299,542 for the same period in 1998.
Revenues from product sales decreased $261,033 during the three
months ended June 30, 1999 to $14,738 as compared to $275,771 for the same
period in 1998. Revenues from product sales decreased $242,067 for the six
months ended June 30, 1999 to $39,525 as compared to $281,592 for the same
period in 1998. The decreases were primarily due to sales of SACcat units in
1998 to ATM without a comparable transaction in 1999. The SACcat units sold in
1999 consisted primarily of sales under licensing agreements which were signed
during the first quarter of 1999 and to a lesser extent, unit sales of SACMan
Developer Toolkit Systems to entities developing or intending to develop
applications which may utilize the Company's products and/or technology.
Revenues from licensing fees increased $100,000 during the six months
ended June 30, 1999 to $100,000 as compared to $0 for the same period in 1998.
These revenues were generated from a licensing program implemented by the
Company pursuant to which it has entered into licensing agreements with various
OEM's who intend to incorporated the Company's technologies into their
offerings. There can be no assurance that the Company will have the marketing or
financial resources to enter into any additional licensing agreements or that
any such agreements will generate any meaningful revenue or earnings for the
Company in future periods.
The Company has delayed the launch of its SACSecure level 1 until the
fourth quarter of 1999. The Company is continuing to work on level 2 and level
3, which will be offered as upgrades to level 1. There can be no assurance that
the Company will have the marketing or financial resources to complete the
upgrade in a timely manner or that if completed, will generate any meaningful
revenue or earnings.
14
<PAGE>
Costs and Other Expenses
Cost of product sales exceeded revenues from product sales by $60,538
during the three months ended June 30, 1999 and $73,177 during the six months
ended June 30, 1999 as compared to $254,006 during the three months ended June
30,1998 and $278,921 during the six months ended June 30, 1998. For the three
and six months ended June 30, 1999 $47,435 was related to product that was
shipped to Jasper Consulting, Inc. for which the related revenues are being
recorded on a cash basis due to uncertainty of collection. For the three and six
months ended June 30, 1998, $200,000 of the negative gross margin related to a
write down of inventory to its net realizable value. The remainder of the
negative gross margins for all periods is attributed to costs associated with
the production of a limited amount of units. The Company is exploring means to
reduce its current product costs including purchasing certain imaging technology
to replace certain of its current optics components and subcontract
manufacturing arrangements. No assurance can be given that the above objective
will be achieved or if achieved, whether it will result in a reduction of
product costs that will lead to the Company generating positive gross margins or
becoming profitable.
Selling, general and administrative expenses decreased $756,876 to
$580,134 during the three months ended June 30, 1999 and decreased $812,673 to
$1,068,033 during the six months ended June 30, 1999 as compared to the three
and six months ended June 30, 1998. Of the decreases for the three and six
months ended June 30, 1999, $144,592 and $205,420, respectively, related to a
reduction in total personnel and salaries, $656,650 and $690,650, respectively,
was principally due to non-cash charges related to estimated fair market value
of warrants issued during 1998 and $20,759 and $20,680, respectively was
principally due to a decrease in sales and marketing initiatives. This was
partially offset by increases in professional fees of $128,407 and $162,430,
respectively, which was primarily due to additional costs associated with the
filing of the registration statement for the debenture and on going financing
initiatives during the quarter.
In May 1999, the Company began to implement a cost reduction plan. The
plan called for reductions in the area of salaries, personnel and facility space
requirements. The Company is also reviewing other areas within the organization
to reduce costs. If the Company does enter into a definitive agreement with, and
completes the acquisition of ATM, the Company anticipates that personnel and
other costs would increase.
Research, development and engineering expenses decreased $173,757 to
$206,811 during the three months ended June 30, 1999 and decreased $524,833 to
$469,786 during the six months ended June 30, 1999 as compared to the three and
six months ended June 30, 1998. Of the decrease for the three and six months
ended June 30, 1999, $200,000 was related to a non-cash charge for the estimated
fair market value of an option granted to an entity with which the Company
entered into a license agreement in 1998 and $173,250 and $360,750,
respectively, related to licensing and integration costs associated with
technologies the Company plans to incorporate into its SACcat product. The
Company is disputing fulfillment of the terms of the contracts by
15
<PAGE>
certain of the licensors. If the Company does not fulfill the purchase
requirements called for in the contracts then the Company could potentially lose
its exclusivity or use of these technologies.
Interest and other income decreased $13,210 to $7,847 during the three
months ended June 30, 1999 and increased $60,700 to $105,548 for the six months
ended June 30, 1999 as compared to the three and six months ended June 30, 1998.
The decrease for the three months period was due to the decrease in the balances
of the certificates of deposits. Of the increase for the six month period,
$90,000 was proceeds from the sale of 600,000 shares of Inter-Con P/C to a
shareholder of the Company.
Interest expense increased $92,230 during the three months ended June
30, 1999 and increased $264,904 for the six months ended June 30, 1999 as
compared to $0 in the corresponding periods in 1998. Of the increase $0 and
$124,624, respectively, was due to non-cash charges - for the intrinsic value of
the beneficial conversion feature of the Convertible Debenture, $69,600 and
$86,400, respectively, was due to the amortization of fair market value of the
warrants that where issued to the Shaar Fund.
Other comprehensive income increased $900,000 during the three and six
months ended June 30, 1999. See Item 1. footnote 4 of the Notes to Interim
Financial Statements for more information.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the six months ended June
30, 1999 was $1,046,098 and was principally due to operating losses. Net cash
used for investing activities during the same period was $2,438. Net cash
provided by financing activities during the same period was $116,500 and was
principally cash from a short term note payable to the Shaar Fund an
international investment fund (the "Fund") for $100,000 and $28,500 received
from employee stock option exercises.
Working capital decreased $337,142 during the six months ended June 30,
1999 to ($1,412,920) as compared to ($1,075,778) as of December 31, 1998. This
decrease is principally due to operating losses.
See Note 8 to the interim financial statements for information
regarding stock option transactions.
Since January 7, 1993 (date of inception), the Company's capital needs
have been principally met as follows: (i) a May 1996 sale of $200,000 of
convertible bridge notes and warrants to purchase 50,000 shares of common stock
which were converted to Common Stock during mid-1996; (ii) a July 1996 $700,000
private placement of Common Stock; (iii) a February 1997 initial public offering
of 2,420,000 shares of Common Stock at $3.00 per share which resulted in net
proceeds of $6,220,331, after deduction of offering expenses; (iv) a June 1998
$2,500,000 private offering of a convertible debenture and detachable warrants;
and (v) a July 1999 $1,312,500 private placement of it's Series A Convertible
Preferred Stock and a warrant.
The Company does not currently maintain a line of credit or term loan
with any commercial bank or other financial institution.
16
<PAGE>
On June 30, 1998, the Company sold to the Fund a $2,500,000 5%
Convertible Debenture due June 30, 2001 (the "Debenture"). The Debenture
required the Company to maintain its listing on the NASDAQ SmallCap Market. The
Company's common stock was delisted from the NASDAQ SmallCap Market on May 24,
1999 which constituted an event of default under the Debenture. The Company
filed a registration statement (which was declared effective by the SEC on May
3, 1999) covering the resale of the shares of common stock underlying the
Debenture and the detachable warrants. Since the registration statement was
filed late, the Company was subject to late filing penalties. Simultaneous with
the issuance of the preferred shares described below, the Fund permanently
waived the event of default caused by the delisting of the Company's shares from
the NASDAQ SmallCap Market and all penalties associated with the late filing of
the registration statement.
In February 1999, the Company enhanced its liquidity through the sale
of 600,000 shares of common stock of Inter-Con to a shareholder of Inter-Con for
gross proceeds of $90,000.
Since May 11, 1999, the Fund has converted an aggregate of $1,025,000
principal amount of the Convertible Debenture. As a result of these conversions,
the Company has reduced the indebtedness due under the Convertible Debenture to
$1,475,000.
On July 9, 1999, the Company completed a private placement of
$1,312,500 of its Series A Convertible Preferred Stock and a 5-year warrant to
purchase 131,250 shares of Common Stock exercisable at $1.196 per share to the
Fund. The Company received net proceeds of $712,500 after giving effect to a 33%
discount to the face amount of the preferred stock, $62,500 of offering costs
and repayment of a $100,000 note to the Fund. The preferred shares provide for a
9% dividend payable semi-annually in arrears. At the option of the Company, the
dividends are payable in kind through the issuance of additional shares of the
Company's common stock. The preferred shares are immediately convertible into
shares of common stock at a conversion price equal to the lesser of (a) 110% of
the closing bid price of the Company's common stock on July 8, 1999 or (b) a 22%
discount to the average closing bid prices of the Company's common stock during
the five trading days prior to conversion. The preferred shares are redeemable,
in whole or in part, at the option of the Company at 100% of face value ($100
per share). The Company is obligated to file a registration statement with the
SEC covering the resale of the shares of common stock issuable upon conversion
of the preferred shares or exercise of the warrant by no later than September 7,
1999 and have such registration statement declared effective by December 6,
1999. Failure to meet such deadlines will result in substantial monetary
penalties.
17
<PAGE>
The Company believes its existing cash will not be adequate to fund the
expansion and distribution of its product offerings, and it will need to raise
additional funds to support operations. Based on the Company's current cash burn
rate, the Company believes its existing cash will only last until September
1999. Based on current plans the Company estimates it needs approximately
$3,000,000 to $4,000,000 to support operations through June 30, 2000. This may
involve the issuance of additional debt or equity securities which will likely
result in additional dilution to the Company's existing stockholders which could
be substantial. No assurance can be given that any additional financing will be
available on terms acceptable to the Company if at all or that adequate
financing will ultimately be obtained to meet its needs.
OTHER
On August 2, 1999, the Company signed a Letter of Intent to acquire
Aultimate Technology Marketing, Inc. (ATM) a Minnesota based company. The terms
of the proposal call for the Company to acquire ATM in a merger or exchange of
shares whereby the Company would acquire all the assets and assume all the
liabilities of ATM. The proposed merger is subject to completion of due
diligence, negotiation and execution of a mutually satisfactory definitive
agreement containing such representations, warranties, indemnification, terms
and conditions that are customary for a transaction of this type, and obtaining
necessary shareholder and board approvals.
In April, 1999 Mr. Rick Fiskum resigned as an officer and director of
the Company.
YEAR 2000
The Company is currently working to minimize the potential impact of
the Year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year, which could result in miscalculation or system failures.
The Company has tested each of its products and believes that all are Year 2000
compliant. The Company has evaluating all software used by the Company for
internal operations and has determined that it is year 2000 compliant. The costs
of addressing potential problems have not and are not expected to have a
material adverse impact on the Company's financial position, results of
operations or cash flows in future periods.
18
<PAGE>
The Company is, however, at risk that its customers, strategic partners
or vendors are unable to resolve any Year 2000 processing issues in a timely
manner. If such entities are required to expend funds to remedy such problems,
it could delay the integration of the Company's technology into the technologies
of such other entities, or reduce or eliminate potential sales of products
incorporating the Company's technology. This could result in a material adverse
effect on the Company's financial condition and results of operation. In this
regard, the Company has contacted its customers, strategic partners and
suppliers to identify any Year 2000 problems, which might impact the Company.
The Company has only received responses from three of six such strategic
partners, which stated that they believe that their products are Year 2000
compliant.
The Company has not yet developed a comprehensive contingency plan to
address the situations that may result if it or any of its strategic partners,
OEM's, or distributors are unable to achieve Year 2000 readiness. The Company
intends to devise contingency plans by late 1999 to mitigate any adverse effects
on the conduct of the Company's business. There can be no assurance that any
contingency plans developed by the Company will prevent any negative impact to
the Company's financial condition or results of operation.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the legal proceedings
described in the Company's Form 10-KSB/A.
ITEM 2. CHANGES IN SECURITIES
Sale of Unregistered Securities
On July 9, 1999, the Company issued 13,125 shares of the Company's
newly-designated Series A 9% Convertible Preferred Stock together with
five year warrants to purchase 131,250 shares of common stock at an
exercise price of $1.196 per share to one (1) institutional accredited
investor raising gross proceeds of $875,000. These securities were
issued directly by the Company without payment of any commission in a
private placement transaction exempt from the registration requirements
of the Securities Act of 1933, as amended, pursuant to section 4(2)
thereof.
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 AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Exhibit
----------- -------
27 Financial Data Schedule
20
<PAGE>
(b) Reports on Form 8-K
1. The Company filed a Form 8-K under Item 5 dated May
24, 1999 reporting the delisting of the Company's
common stock from the NASDAQ SmallCap Market.
2. The Company filed a Form 8-K under Item 5 dated July
9, 1999 reporting the completion of a private
placement of 13,125 shares of the Company's Series A
9% Convertible Preferred Stock and 131,250 common
stock purchase warrants.
21
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: August 16, 1999 SAC Technologies, Inc.
/s/ Barry Wendt
--------------
Barry Wendt, Chief Executive Officer
/s/ Gary Wendt
--------------
Gary Wendt, Chief Financial Officer
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<PERIOD-END> JUN-30-1999
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