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, 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 May 24, 1999: 8,599,751.
<PAGE>
SAC TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
<S> <C>
Balance sheets as of December 31, 1998 and March 31, 1999 3
Statements of operations for the three months ended March 31, 1998 and
1999, and January 7, 1993 (date of inception) through
March 31, 1999 4
Statements of cash flows for the three months ended March 31, 1998 and
1999, and January 7, 1993 (date of inception) through
March 31, 1999 5
Notes to interim financial statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 1 - Legal proceedings 13
Item 2 - Changes in securities and use of proceeds 13
Item 3 - Defaults upon senior securities 13
Item 4 - Submission of matters to a vote of security holders 13
Item 5 - Other events 13
Item 6 - Exhibits and reports on Form 8-K 13
</TABLE>
2
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
ASSETS
December 31, March 31,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,063,616 $ 468,740
Accounts receivable, less allowance for
doubtful receivables of $158,000 (note 9) 44,702 281,212
Inventories 410,287 391,873
Prepaid expenses 121,875 103,557
------------ ------------
Total current assets 1,640,480 1,245,382
EQUIPMENT AND FURNITURE AND FIXTURES - AT COST, less
accumulated depreciation 135,469 130,469
OTHER ASSETS (note 4) 383,695 327,318
------------ ------------
$ 2,159,644 $ 1,703,169
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Convertible debentures, less discount of $291,024 and $149,600 (note 7) $ 2,208,976 $ 2,350,400
Accounts payable 280,879 238,987
Accrued liabilities (note 5) 198,738 195,082
Deferred revenues (note 6) 27,665 177,665
------------ ------------
Total current liabilities 2,716,258 2,962,134
Commitments and contigencies -- --
STOCKHOLDERS' EQUITY (DEFICIT) (note 8)
Common stock - authorized, 20,000,000 shares of $.01 par value; issued and
outstanding, 7,510,867 and 7,536,867 shares,
respectively 75,109 75,369
Additional contributed capital 8,960,135 8,988,375
Deficit accumulated during the development stage (9,534,968) (10,273,454)
Unearned compensation (56,890) (49,255)
------------ ------------
(556,614) (1,258,965)
------------ ------------
$ 2,159,644 $ 1,703,169
============ ============
</TABLE>
See accompanying notes to interim financial statements.
3
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
January 7,
1993 (date
of inception)
Three months through
ended March 31, March 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Product sales $ 5,821 $ 24,787 $ 544,201
Licensing fees -- 100,000 100,000
Reimbursed research and development -- -- 284,506
Technical support and other services -- -- 429,885
------------ ------------ ------------
5,821 124,787 1,358,592
Costs and other expenses
Cost of product sales 30,736 37,426 1,321,728
Cost of technical support and other services -- -- 237,317
Selling, general and administrative 543,696 487,899 6,596,235
Research and development 614,051 262,975 3,128,231
------------ ------------ ------------
1,188,483 788,300 11,283,511
------------ ------------ ------------
Operating loss (1,182,662) (663,513) (9,924,919)
Other income (expense)
Interest and other income 31,638 97,701 398,216
Interest expense (172,674) (708,654)
------------ ------------ ------------
31,638 (74,973) (310,438)
------------ ------------ ------------
NET LOSS $ (1,151,024) $ (738,486) $(10,235,357)
============ ============ ============
Basic and diluted loss per common share $ (.15) $ (.10) $ (1.86)
============ ============ ============
Weighted average number of shares outstanding 7,466,056 7,530,289 5,517,701
============ ============ ============
</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,
1993 (date
of inception)
Three months through
ended March 31, March 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $(1,151,024) $ (738,486) $(10,235,357)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 13,500 5,000 110,006
Amortization
Deferred financing costs - 40,200 124,767
Unearned compensation 27,800 7,635 175,474
Interest expense amortization for the intrinsic value of the
beneficial conversion feature of the convertible debenture
(note) - 124,624 525,000
Allowance for uncollectible receivables - - 158,000
Write-down of inventory - - 600,000
Revenues realized due to offset of billings against a stock repurchase - - (170,174)
Options issued for license rights 200,000 - 200,000
Options issued in connection with distribution agreement - - 352,650
Acquired research and development - - 117,000
Warrants issued for services and other - - 197,000
Contribution of services - - 11,250
Other - - 23,434
Change in assets and liabilities:
Accounts receivable (12,737) (236,510) (439,212)
Inventories (334,372) 18,414 (991,873)
Prepaid expenses 6,708 18,318 (103,557)
Accounts payable (6,983) (41,892) 238,987
Accrued liabilities 13,735 (3,656) 233,707
Deferred revenue -- 150,000 150,000
----------- ----------- -----------
(92,349) 82,133 1,512,459
----------- ----------- -----------
Net cash used in operating activities (1,243,373) (656,353) (8,722,898)
Cash flows from investing activities
Capital expenditures (19,962) - (240,475)
Security deposits - - (12,984)
Patents and trademarks - - (4,534)
----------- ----------- -----------
Net cash used for investing activities (19,962) - (257,993)
Cash flows from financing activities
Net borrowings under short-term borrowing agreements - - (117,000)
Issuance of convertible bridge notes - - 175,000
Issuance of convertible debentures - - 1,775,000
Issuance of warrants and convertible debentures discount - - 750,000
Deferred financing costs - 32,977 (280,000)
Exercise of stock options 35,365 28,500 190,799
Sales of common stock - - 7,093,832
Redemption of common stock - - (138,000)
----------- ----------- -----------
Net cash provided by financing activities 35,365 61,477 9,449,631
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (1,227,970) (594,876) 468,740
Cash and cash equivalents, at beginning of period 3,351,753 1,063,616 -
----------- ----------- -----------
Cash and cash equivalents, at end of period $ 2,123,783 $ 468,740 $ 468,740
=========== =========== ===========
</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 March 31, 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. 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 $10,235,357, of which $738,486 was incurred during the
first quarter ended March 31, 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 is not currently in
compliance with certain listing requirements of the NASDAQ SmallCap Market.
If the Company is delisted, in addition to the consequences and associated
risks previously described in the Company's quarterly and annual reports
filed under the Securities Exchange Act of 1934, it would put the Company
in default under the terms of the Company's $2,500,000 convertible
debentures (of which approximately $1,500,000 is currently outstanding) and
could accelerate the repayment thereof. In addition, without considering
the impact of a demand to repay the convertible debentures, 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.
Should the Company's shares be delisted from the SmallCap Market and demand
be made for repayment of the convertible debentures, the Company does not
have the necessary capital to repay the outstanding principal amount due
thereunder. Should demand not be made, the Company's existing cash will
only last until second quarter 1999 based on the Company's current cash
burn rate. Based on current plans and excluding a demand for repayment of
the convertible debentures, the Company estimates it needs approximately
$2,000,000 to $3,000,000 to support operations through March 31, 2000.
Management is in discussions with certain institutional and accredited
investors with respect to an investment in the Company of between $1 and
$3 million to support its operations which may involve the issuance of
additional debt or equity securities. No assurances can be given that any
additional financing will be available on terms acceptable to the Company,
if at all, that adequate financing will ultimately be obtained to meet its
needs, or that such financing would not be dilutive to existing
stockholders.
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.
6
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and March 31, 1999 and 1999 (Unaudited)
4. Other Assets
December 31, March 31,
1998 1999
-------- --------
Deferred financing costs, less accumulated
amortization of $46,800 and $70,200 233,200 209,800
Deferred offering costs $132,977 $100,000
Security deposits 12,984 12,984
Patents 4,534 4,534
-------- --------
$383,695 $327,318
======== ========
5. Accrued Liabilities
December 31, March 31,
1998 1999
-------- --------
Compensation 106,241 72,130
Interest $ 62,500 $ 93,750
Other 29,997 29,202
-------- --------
$198,738 $195,082
======== ========
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 Shaar Fund, Ltd., an international
investment fund, $2,500,000 of 5% (effective rate of 16%) convertible
debentures due June 30, 2001, and detachable warrants. At the Company's
option, an additional $1,000,000 of 5% convertible debentures may be sold
to Shaar Fund, Ltd. if certain targets are met, including certain minimum
share price and trading volume levels for the Company's common stock. As of
the date of this report, none of the targets have been met. No assurances
can be given that the Company will meet targets to be able to exercise the
option on the $1,000,000 of additional convertible debentures discussed
above.
The debentures are currently convertible into shares of the Company's
common stock. The conversion price equals 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 a five-day period ending the day prior to the
notice of conversion multiplied by a discount factor equal to 22%). The
convertible debentures are redeemable at the option of the Company under
certain circumstances. Interest on the convertible debentures is not
convertible.
The Company was obligated to file, and has 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, among other securities. Since the registration
statement was late going effective, the Company is subject to late filing
penalties of approximately $237,000. The Company has negotiated a release
of these penalties. The Convertible debenture agreement contains certain
dilution and conversion price adjustment
7
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and March 31, 1999 and 1999 (Unaudited)
7. Convertible Debenture-Continued
provisions if certain events occur, as defined. In the event of repayment,
the Company is subject to certain repayment costs of up to 24% of the
principal amount repaid. The Company is also required to maintain its
listing on the NASDAQ SmallCap Market. As discussed at Note 2, the Company
is not in compliance with the NASDAQ SmallCap Market listing requirements.
Accordingly, the convertible debentures have been classified as a current
liability in the accompanying financial statements. Additionally, in the
event of a delisting of the Company's common stock, the interest rate for
the debentures will increase from 5% to 9%.
The $525,000 estimated fair value of the debenture conversion feature has
been reflected as a discount to the 5%convertible debentures issued and
will be amortized as additional interest expense principally through
February 26, 1999, the date the debenture holder is able to convert their
debenture at the maximum 22% discount discussed above.
8. Stockholders' Equity
The following summarizes option activity since December 31, 1998:
<TABLE>
<CAPTION>
Number
Date of ------
Grant, Non-plan
Exercise options
or 1996 and Exercise
Expiration Plan warrants Price Vesting Expiration Issued to
---------- ---- -------- ----- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998 - 474,334 498,000 $ - - - -
Option exercises 1/12/99-
1/26/99 (26,000) - - - - -
- - - - - -
------- -------
Balance, March 31,
1999 448,334 498,000
======= =======
</TABLE>
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 the date of this
Report, no shares of preferred stock have been isued.
8
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and March 31, 1999 and 1999 (Unaudited)
9. Related Party Transactions
Included in accounts receivable as of December 31, 1998 and March 31, 1999
were $135,958 of amounts due from Jasper Consulting, Inc. During the three
months ended March 30, 1998 and 1999, no revenues were recognized from
transactions with Jasper Consulting, Inc. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
information regarding the Company's relationship with Jasper Consulting,
Inc.
10. Other
During the quarter the Company cancelled its agreement with the firm that
was hired to help the Company develop a strategic growth plan and enhance
shareholder value.
9
<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-1 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. Even though 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.
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.
The Company is not currently in compliance with certain listing
requirements of the NASDAQ SmallCap Market. If the Company is delisted, in
addition to the consequences and associated risks previously described in
the Company's quarterly and annual reports filed under the Securities
Exchange Act of 1934, it would put the Company in default under the terms
of the Company's $2,500,000 convertible debentures and could accelerate the
repayment of the outstanding indebtedness due there under, thereof.
Additionally, without considering any potential demand for repayment by the
holder of the Company's $2,500,000 convertible debenture, the Company
believes its existing cash will only last until the second quarter of 1999.
Due to these uncertainties the Company's independent auditors included an
explanatory paragraph in their opinion for the year ended December 31, 1998
as to the substantial doubt about the Company's ability to continue as a
going concern. The Company's long-term viability and growth will depend
upon the successful commercialization of its technologies and its ability
to obtain adequate financing, among other matters, as to which there can be
no assurances.
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AS COMPARED TO MARCH 31, 1999
Revenues
Total revenues increased $118,966 during the three months ended March 31,
1999 to $124,787 as compared to $5,821 for the same period in 1998.
Revenues from product sales increased $18,966 during the three months ended
March 31, 1999 to $24,787 as compared to $5,821 for the same period in
1998. These revenues were primarily unit sales of SACcat systems as part of
the liscensing agreements that were signed during the quarter 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 three months
ended March 31, 1999 to $100,000 as compared to $0 for the same period in
1998. These revenues were from a licensing program that the Company
implemented in which it has entered into licensing agreements with various
OEM's pursuant to which the Companys' technologies are incorporated into
the offerings of these OEMs. 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.
During February 1999, the Company signed a one year, renewable
non-exclusive OEM Licensing agreement with Sense Technologies, Inc.
primarily for time clock applications. The agreement provides for a
one-time licensing fee of $100,000 with minimum annual pre-purchase
(non-refundable) royalty of $50,000 payable through November 1999. The
Company is obligated to deliver physical product specification under the
agreement which have been delivered.
During March 1999, the Company signed a one year, renewable non-exclusive
OEM licensing agreement with OPUS Biometric Technologies, Inc. to allow
them the ability to represent, distribute, reproduce and upgrade certain
biometric technologies engineered and owned by SAC Technologies, Inc. in
the Canadian Market. The Agreement calls for a one time licensing fee of
$100,000 with a minimum pre-purchase (non-refundable product inventory of
$45,000. In order to maintain the license, OPUS will be required to
purchase a minimum of $250,000 annually from the Company in product,
licensing fees, maintenance agreements and other services provided by the
Company.
During March 1999, the Company signed a two year, renewable non-exclusive
distribution agreement with Biometric 2000.com to conduct a 60 day pilot
test of the Company's SAC-Remote(TM) OEM Fingerprint Identification System
for embedded facility access control applications. Upon acceptance of the
Company's technology, which requires a successful pilot study, Biometrics
2000.com is to pay a one time licensing fee of $100,000 with a minimum
annual pre-purchase royalty (non-refundable) of $50,000 per year, or
$100,000 over the two years. The terms call for $50,000 upon completion of
the pilot study with six quarterly payments of $25,000. The two year,
renewable, technology manufacturing licensing agreement allows Biometrics
2000.com the ability to reproduce, distribute, export sublicense and
upgrade certain biometric technologies engineered and owned by the Company
for use in Biometrics 2000.com manufactured and purchased equipment,
primarily for the facilities access control market. To date the pilot
program has not yet started.
11
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
Costs and Other Expenses
Cost of product sales exceeded revenues from product sales by $12,639
during the three months ended March 31, 1999 compared to $24,915 during the
three months ended March 31, 1998. This negative gross margin is
attributable 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 some of its
current optics components. 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 $55,797 to $487,899
during the three months ended March 31, 1999 as compared to $543,696 for
the corresponding period in 1998. Of the decrease, $56,342 was due to a
decrease in salaries and wages for sales and administrative personnel,
$20,165 was due to decreased unearned compensation amortization. These
amounts were offset by an increase in professional services of $35,364 and
an increase in selling and marketing of $18,592.
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 with in the
organization to reduct costs. The effect of the reduction in salaries and
personnel will be reflected in the second quareter 1999 numbers. The full
effect of the cost reduction plan should be reflected in the third quarter
of 1999.
Research and development expenses decreased $351,076 to $262,975 during the
three months ended March 31, 1999 as compared to $614,051 for the
corresponding period in 1998. Of the decrease, $200,000 was due to a
non-cash charge related to the estimated fair market value of an option
granted to an entity the Company entered into a license agreement with in
1998.
Interest and other income increased $66,063 to $97,701 during the three
months ended March 31, 1999 as compared to $31,638 in the corresponding
period in 1998. Of the increase, $90,000 was proceeds from the sale of
600,000 shares of Inter-Con P/C to a shareholder. The decrease of $23,937
was due to the decrease in the balance of certificates of deposits.
Interest expense increased $172,674 to $172,674 during the three months
ended March 31, 1999 as compared to $0 in the corresponding period in 1998
due to non-cash charges of $124,624 for the intrinsic value of the
beneficial conversion feature of the Convertible Debenture.
THREE MONTHS ENDED MARCH 31, 1997 AS COMPARED TO MARCH 31, 1998:
Revenues
Total revenues decreased $107,332 during the three months ended March 31,
1998 to $5,821 as compared to $113,153 for the same period in 1997. The
Company currently estimates that revenues for the second quarter ending
June 30, 1998 will be comparable to those of the quarter ended June 30,
1997.
Revenues from product sales decreased $17,894 during the three months ended
March 31, 1998 to $5,821 as compared to $23,715 for the same period in
1997. These revenues were primarily from single 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.
12
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
Revenues from reimbursed research and development decreased $12,000 during
the three months ended March 31, 1998 to $0 as compared to the same period
in 1997. These revenues relate to collection of previously unrecognized
research and development billings to Jasper, recognized on the cash basis
of accounting. No assurances can be given that any additional amounts will
be collected in the future.
Revenues from technical support and other services, which were primarily
from Jasper and Inter-Con, decreased $77,438 to $0 during the three months
ended March 31, 1998. As previously discussed, the technical support
agreement with Inter-Con was mutually terminated effective December 31,
1997. No assurance can be given that any additional technical support or
other revenues will be realized from Jasper in the future, nor is this a
primary focus of the Company.
Effective April 13, 1998, the Company signed a Distribution Agreement with
Aultimate Technology Marketing, Inc. (ATM). The terms of the agreement
provide for the following: the Company provide to ATM, at no charge, 10
SACMan Developer Tool Kit systems; ATM is to purchase 1,000 SACcat units;
ATM is to receive preferential pricing on additional product purchases; ATM
became a distributor of the Company; the Company issued to ATM an option to
acquire up to 100,000 shares of common stock of the Company with an
exercise price per share of $8.46, exercisable for seven years, with 75,000
shares immediately exercisable upon payment for the 1,000 units to be
purchased and an additional 25,000 shares in the event ATM purchases and
makes payment for 1,000 additional units before July 1, 1998; and ATM
issued the Company an option to acquire up to 400,000 shares of the common
stock of ATM at $.25 per share, exercisable for seven years. Due to the
interrelationships of the parties involved, revenues from this transaction
will not be recognized by the Company until ATM resells the product and can
recognize the revenue pursuant to generally accepted accounting principles.
No assurance can be given that the Company will maintain a significant
ownership in ATM, or that any units to be purchased by ATM will be
subsequently paid for, or resold by ATM, among other matters.
During April 1998, the Company shipped 565 units to ATM. See above for
revenue recognition policy regarding sales to ATM.
Costs and Other Expenses
Cost of product sales exceeded revenues from product sales by $24,915
during the three months ended March 31, 1998, principally resulting from
the cost of salaries associated with the production of a limited amount of
units.
Selling, general and administrative expenses increased $181,210 to $543,696
during the three months ended March 31, 1998 as compared to $362,486 for
the same period in 1997. Of the increase, $81,183 was due to additional
salaries and wages for sales and administrative personnel, $23,717 was due
to completion of the installation of the Company's internal computer
network, $19,400 was due to increased unearned compensation amortization,
$16,250 was due to increased advertising and product certification
expenses, and the remainder of the increase was principally due to
increased operating costs.
Research and development expenses increased $517,520 to $614,051 during the
three months ended March 31, 1998 as compared to $96,531 for the same
period in 1997. Of the increase, $200,000 was due to a non-cash charge
related to the estimated fair market value of an option granted to an
entity the Company entered into a license agreement with and $107,500 was
due to license costs associated with technologies the Company plans to
incorporate into its product offerings. The above costs were expensed
because the incorporation of the related technologies had not reached the
stage of "technological feasibility," as defined. The remaining increase is
attributable to increased development activity for the Company
commercialize and evolve certain of its products.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the three months ended March
31, 1999 was ($656,353) and was principally due to operating losses. Net
cash used for investing activities during the same period was $0. Net cash
provided by financing activities during the same period was $61,477 and was
principally from cash received from employee stock option exercises.
Working capital decreased $(740,974) during the three months ended March
31, 1999 to ($1,816,752) 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; and (iv) a June 1998 $2,500,000 private offering of a
convertible debenture and detachable warrants.
The Company does not currently maintain a line of credit or term loan with
any commercial bank or other financial institution.
On June 30, 1998, the Company sold to Shaar Fund, Ltd., an international
investment fund, $2,500,000 of 5% Convertible Debenture due June 30, 2001
(the "Convertible Debenture"). At the Company's option, an additional
$1,000,000 principal amount Convertible Debenture may be sold to Shaar
Fund, Ltd. if certain targets are met, including certain minimum share
price and trading volume levels regarding the Company's Common Stock. As of
the date of this Report, none of these targets have been met. No assurances
can be given that the Company will meet these targets in order to be able
to exercise such option.
The Convertible Debenture is convertible into shares of the Company's
Common Stock at a conversion price equal to the lesser of (i) $7.15; or
(ii) the average closing bid price of the Company's Common Stock for a
five-day period ending the day prior to the notice of conversion multiplied
by a discount factor equal to 22%. The Convertible Debenture is redeemable
at the option of the Company under certain circumstances. Interest on the
Convertible Debenture is not convertible.
The Company was obligated to file, and has filed, a registration statement
which was declared effective by the SEC on May 3, 1999 covering the resale
of the shares of Common Stock issuable upon conversion or exercise, as
applicable, of the Convertible Debenture and the detachable warrants. Since
the registration statement was late going effective, the Company is subject
to late filing penalty of approximately $237,000. The holder of the
convertible debenture has agreed to waive payment of the penalty in
consideration of the Company reducing exercise on a warrant owned by
the holder of the convertible debenture from $7.29 to the closing market
price of the Company's Common Stock on May 21, 1999 for a seven day period.
The terms of the Convertible Debenture provided for the Company to issue
shares of Common Stock, calculated in accordance with the conversion price
then in effect, within three (3) days after receipt of a conversion notice
from the holder of the Convertible Debenture. In the event that the Company
received a conversion notice at a time when the Company's Common Stock was
trading below $6.00 per share, the issuance of such shares and calculation
of the number of shares issuable would be automatically extended for 45
days. Based on the current price of the Company's Common Stock, this
provision would have the effect of delaying the initial conversion of
outstanding indebtedness due under the Convertible Debenture for 45 days.
Since the registration statement covering the resale of the shares issuable
upon conversion of the Convertible Debenture was late in going effective,
and both the Company and the holder of the Convertible Debenture desired to
commence the conversion of the Convertible Debenture as soon as possible,
they agreed to amend the Convertible Debenture to delete this provision
thereby enabling the holder of the Convertible Debenture to immediately
commence the conversion of the outstanding indebtedness thereunder. In this
regard, since May 11, 1999, the holder of the Convertible Debenture 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 approximately
$1,500,000.
The Convertible Debenture agreement contains certain dilution and
conversion price adjustment provisions if certain events occur. In the
event of repayment, the Company is subject to certain repayment costs of up
to 24% of the principal amount repaid. In addition, the Company is required
to meet certain covenants, including the maintenance of its listing in the
NASDAQ SmallCap Market.
On April 15, 1999, the Company appeared at hearing before NASDAQ objecting
to the proposed delisting of its shares. At the hearing, the Company
requested a sixty (60) day exemption from the minimum maintenance standards
in order to obtain compliance. If the Company's plan to achieve compliance
is not accepted by Nasdaq, its shares will likely be delisted from the
Nasdaq SmallCap Market. As of the date of this Report, the Company has not
been notified by Nasdaq of its ruling on this matter and the Company is not
in compliance with the minimum maintenance standards.
14
<PAGE>
A delisting of the Company's securities could significantly impair the
Company's ability to obtain additional financing. The Company estimates it
needs to increase it's net tangible assets as defined by NASDAQ by at least
$3,500,000 to meet the minimum net asset requirement. There can be no
assurance that the Company will be able to meet such requirements or if
met, that its shares will not be delisted from Nasdaq SmallCap Market.
If the Company is delisted from the Nasdaq SmallCap Market, it would be an
event of default under the terms of the Convertible Debenture resulting in
the immediate acceleration of the repayment thereof. The Company does not
have the necessary funds to repay the approximate $1,500,000 of outstanding
indebtedness due under Convertible Debenture. Should demand for repayment
not be made, the Company estimates its existing cash will only last until
second quarter 1999 based on the Company's current cash burn rate.
Management believes it will need $2,000,000 to $3,000,000 to support its
operations through 1999.
In order to address these liquidity issues, the Company has had discussions
with the Shaar Fund regarding the conversion of the remaining indebtedness
due thereunder (approximately $1,500,000) into convertible preferred stock
or common stock. Although the Shaar Fund has indicated that it will
consider converting the remaining amount due under Convertible Debenture
into equity, there can be no assurance that the Company will be successful
in converting the Convertible Debenture, in whole or in part, into
preferred stock or common stock on terms acceptable to the Company.
Management is also evaluating the viability of obtaining additional
financing through the issuance of additional debt or equity securities of
the Company on a negotiated private placement basis to institutional and
accredited investors. In this regard, the Company has been engaged in
discussions with certain investors with respect to a $1 to $3 million
investment, however, as of the date of this Report, the Company has not
reached any definitive agreement with any such investor regarding the
specific terms of an investment in the Company. Management believes the
successful completion of the above initiatives may bring the Company back
into compliance with Nasdaq Smallcap Market maintenance standards. 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. Also, no assurance may be given that the
debenture holder will convert its indebtedness to convertible preferred
stock, or do so without a significant cost to the Company.
The Company has entered into various technology license agreements. The
Company has committed to pay approximately $140,000 to certain of the
licensors of the technology during 1999 and $25,000 in 2000, for the per
unit cost of imbedding such technologies into the Company's products at
agreed upon minimum levels, and for the purchase of inventory from such
companies. In order to maintain exclusivity as it relates to the biometrics
industry for two technology licenses through 2000, the Company is required
to purchase an additional $325,000 and $375,000 of products during 1999 and
2000, respectively.
Jasper has a cross license agreement with the Company for FIDS technology,
and has purchased products and services from the Company over the years.
FIDS technology was previously a significant component of the Company's
product offerings. During 1998, the Company replaced the FIDS technology
with its Vector Segment Technology. The Company is evaluating the impact of
the above on potential required royalty payments to Jasper and each of the
respective parties' defined markets.
15
<PAGE>
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
P/C, FNC. for gross proceeds of $90,000.
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 is currently evaluating all software
used by the Company for internal operations and expects to complete this
process by mid 1999. To date, no material problems have been identified.
Any such software that management determines not to be Year 2000 compliant,
will be exchanged for Year 2000 compliant software as soon as practicable
after such determination. 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.
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, OEMs or distributors are unable to achieve Year 2000 readiness.
The Company intends to devise contingency plans by mid 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.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Changes In Securities. The Company's Board of Directors has adopted and the
Company's shareholders have approved an amendment (the "Amendment") to 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 designations as determined by the Board
of Directors without further shareholder action. The Amendment grants the
Board of Directors the authority to issue shares of Preferred Stock in any
number of series with such rights (including voting and dividends),
preferences and designations as it deems necessary or advisable without any
action by the Company's shareholders.
This will authorize the Company's Board of Directors, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which could adversely effect the voting power or
other rights of the holders of the Company's Common Stock. More
specifically, the Company will be in a position to issue securities which
would grant to the holders thereof preferences or priorities over the
holders of the Company's Common Stock with respect to, among other matters,
liquidation or dividends. This could result in holders of Common Stock
receiving less in the event of a liquidation, dissolution or other winding
up of the Company and reduce the amount of funds, if any, available for
dividends on Common Stock.
In addition, Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change
in control of the Company. This could have the effect of discouraging bids
for the Company even if such bid represents a premium over the Company's
then existing trading price and thereby prevent stockholders from receiving
the maximum value for their shares. For example, preferred stock is
typically utilized in rights plans, commonly referred to as "poison pills,"
which have been utilized to discourage delay or prevent a change in control
transactions.
Issuance of Unregistered Securities. As described elsewhere in this Report,
on May 3, 1999, the Company's registration statement on Form S-3 covering
the public resale of, among other shares, the shares of Common Stock
issuable upon conversion of the Convertible Debenture was declared
effective by the SEC.
In this regard, since May 11, 1999, the holder of the Debenture has
converted an aggregate of $1,025,000 principal amount convertible of the
Debenture into 1,062,884 shares of Common Stock. These shares were issued
pursuant to the exemption from the registration requirements under the
Securities Act provided by Section 3(a) 9 thereof as an exchange with the
Company's existing security holders without payment of fees or commissions
of any kind to any person. As a result of this conversion, the Company has
reduced the indebtedness due under the Convertible Debenture to
approximately $1,500,000. The Company has been advised that the holder of
the Debenture has publicly resold substantially all of these shares under
the registration statement identified above.
17
<PAGE>
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 7, 1999, the Company held a special meeting of shareholders (the
"Meeting"). At the Meeting, the Company's shareholders approved an
amendment to the Company's Amended and Restated Articles of Incorporation
authorizing 5,000,000 shares of preferred stock, $.01 par value per share,
which may be issued in series with such rights, preferences and
designations as determined by the Board of Directors of the Company without
further shareholder action. At the Meeting, 4,557,491 shares were voted for
the amendment, 41,798 shares were voted against the amendment and 11,438
shares abstained.
Item 5. Other Events
Boston Stock Exchange
---------------------
On or about May 12, 1999, the Company was notified that the trading
of its Common Stock was suspended on the Boston Stock Exchange for
failure to maintain compliance with applicable listing standards. The
Boston Stock Exchange has made application to the SEC to delist the
Company's Common Stock to be effective as of on or about June 15,
1999. The Company has objected to the suspension and has been
notified by the Boston Stock Exchange that if the Company attains
compliance with the minimum maintenance standards by June 15, 1999,
it will consider withdrawing its delisting request. In order to
achieve compliance, the Company must maintain minimum net tangible
assets of at least $500,000. As explained in Part I of this Report,
the Company is currently attempting to increase its net tangible
assets. There can be no assurance that the Company will be able to
attain compliance with such standards or if attained, that its shares
wil not be delisted.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Exhibit
----------- -------
3.3 Articles of Amendment to Amended and
Restated Articles of Incorporation
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
18
<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.
SAC Technologies, Inc.
Date: May 24, 1999 /s/ Barry Wendt
-------------------------------------------------
Barry Wendt, Chief Executive Officer
/s/ Gary Wendt
-------------------------------------------------
Gary Wendt, Chief Financial Officer
Exhibit No. Exhibit
----------- -------
3.3 Articles of Amendment to Amended and
Restated Articles of Incorporation
27 Financial Data Schedule
19
EXHIBIT 3.3
EXHIBIT 3.3
ARTICLES OF AMENDMENT
TO THE
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
SAC TECHNOLOGIES, INC.
The undersigned, desiring to amend the Amended and Restated Articles of
Incorporation of SAC Technologies, Inc., a Minnesota corporation, pursuant to
Minnesota Statutes Chapter 302A, DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is SAC Technologies, Inc.
SECOND: The following amendment to the Amended and Restated Articles
of Incorporation of SAC Technologies, Inc. was adopted:
"3.2 The Corporation is authorized to issue capital stock to
the extent of: five million (5,000,000) shares of Preferred
Stock, par value $.01 per share (the "Preferred Stock"). The
board of directors of the Corporation shall have the authority
to issue shares of Preferred Stock in series and to fix by
resolution the designations, powers, preferences, rights and
the qualifications, limitations, or restrictions in respect of
any such series."
THIRD: That the aforesaid amendment has been approved in accordance
with the Minnesota Statutes Chapter 302A.
FOURTH: That this amendment shall become effective upon the filing of
these Articles of Amendment with the Secretary of State of the
State of Minnesota.
I certify that I am authorized to execute this amendment and I further
certify that I understand that by signing this amendment, I am subject to the
penalties of perjury as set forth in section 609.48 as if I had signed this
amendment under oath.
SAC TECHNOLOGIES, INC.
By: /s/ Barry M. Wendt
------------------------------------
Barry M. Wendt
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 468,740
<SECURITIES> 0
<RECEIVABLES> 439,212
<ALLOWANCES> 158,000
<INVENTORY> 391,873
<CURRENT-ASSETS> 1,245,382
<PP&E> 240,475
<DEPRECIATION> 110,006
<TOTAL-ASSETS> 1,703,169
<CURRENT-LIABILITIES> 2,962,134
<BONDS> 0
0
0
<COMMON> 75,369
<OTHER-SE> (1,334,334)
<TOTAL-LIABILITY-AND-EQUITY> 1,703,169
<SALES> 24,787
<TOTAL-REVENUES> 124,787
<CGS> 37,426
<TOTAL-COSTS> 37,426
<OTHER-EXPENSES> 750,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 172,674
<INCOME-PRETAX> (738,486)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (738,486)
<EPS-BASIC> (.10)
<EPS-DILUTED> (.10)
</TABLE>
