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 September 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)
1285 Corporate Center Drive, Suite No. 175 Eagan, MN 55121
----------------------------------------------------------
(Address of principal executive offices)
(877) 732-8737 (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 November 10, 1999: 8,915,355.
<PAGE>
SAC TECHNOLOGIES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance sheets as of December 31, 1998 and September 30, 1999......3
Statements of operations and other comprehensive income for
the three and nine months ended September 30, 1998 and
1999, and January 7, 1993 (date of inception)
through September 30, 1999..................................4
Statements of cash flows for the three and nine months ended
September 30, 1998 and 1999, and January 7, 1993 (date
of inception) through September 30, 1999....................5
Notes to interim financial statements..............................6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................13
PART II. OTHER INFORMATION
Item 1 - Legal proceedings..........................................21
Item 2 - Changes in securities......................................21
Item 3 - Defaults upon senior securities............................21
Item 4 - Submission of matters to a vote of security holders........22
Item 5 - Other events...............................................22
Item 6 - Exhibits and reports on Form 8-K...........................22
2
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents 1,063,616 110,814
Accounts receivable, less allowance for doubtful receivables of
$158,000 and $216,500, respectively (note 9) 44,702 88,617
Inventories 410,287 197,777
Prepaid expenses 121,875 66,862
------------ ------------
Total current assets 1,640,480 464,070
EQUIPMENT, FURNITURE AND FIXTURES - AT COST, less
accumulated depreciation 135,469 101,342
OTHER ASSETS (note 4) 383,695 230,518
------------ ------------
2,159,644 795,930
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Convertible debentures, less discount of $291,024 (note 7) 2,208,976 --
Accounts payable 280,879 171,816
Accrued liabilities (note 5) 198,738 293,728
Deferred revenues (note 6) 27,665 87,665
------------ ------------
Total current liabilities 2,716,258 553,209
COMMITMENTS AND CONTINGENCIES -- --
CONVERTIBLE DEBENTURES, less discount of $70,000 (note 7) -- 1,200,000
STOCKHOLDERS' EQUITY (DEFICIT) (note 8)
Preferred stock- authorized, 5,000,000 shares of $.01 par
Value; issued and outstanding Series A Convertible-
Liquidation preference $100 per share, 0 and 13,125 shares,
respectively -- 746,539
Common stock - authorized, 20,000,000 shares of $.01 par
value; issued and outstanding, 7,510,867 and 8,890,405
shares, respectively 75,109 88,905
Additional contributed capital 8,960,135 10,724,922
Deficit accumulated during the development stage (9,534,968) (12,617,645)
Accumulated other comprehensive income (note 4) -- 100,000
Unearned compensation (56,890) --
------------ ------------
(556,614) (957,279)
------------ ------------
2,159,644 795,930
============ ============
</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 Nine months ended inception)
September 30, September 30, through
------------------------- ------------------------- September 30,
1998 1999 1998 1999 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues
Product sales $ 63,170 $ 1,987 $ 344,762 $ 41,512 $ 560,926
Licensing fees -- -- -- 100,000 100,000
Reimbursed research and development -- -- 10,200 -- 284,506
Technical support and other services -- -- 7,750 -- 429,885
------------ ------------ ------------ ------------ ------------
63,170 1,987 362,712 141,512 1,375,317
Costs and other expenses
Cost of product sales 394,659 162,808 955,172 275,510 1,559,812
Cost of technical support and other services -- -- 1,846 -- 237,317
Selling, general and administrative 608,884 670,794 2,489,590 1,738,827 7,847,163
Research,development and engineering 329,666 241,951 1,324,285 711,737 3,576,993
------------ ------------ ------------ ------------ ------------
1,333,209 1,075,553 4,770,893 2,726,074 13,221,285
------------ ------------ ------------ ------------ ------------
Operating loss (1,270,039) (1,073,566) (4,408,181) (2,584,562) (11,845,968)
Other income (expense)
Interest and other income 36,836 2,598 81,684 108,146 408,661
Interest expense (216,800) (29,789) (216,800) (294,693) (830,673)
------------ ------------ ------------ ------------ ------------
(179,964) (27,191) (135,116) (186,547) (422,012)
------------ ------------ ------------ ------------ ------------
NET LOSS (1,450,003) (1,100,757) (4,543,297) (2,771,109) (12,267,980)
Other comprehensive income
Unrealized gain (loss) on
available-for-sale securities -- (800,000) -- 100,000 100,000
------------ ------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ (1,450,003) $ (1,900,757) $ (4,543,297) (2,671,109) (12,167,980)
============ ============ ============ ============ ============
Net loss applicable to common shareholders
Net loss above (1,450,003) (1,100,757) (4,543,297) (2,771,109) (12,267,980)
Series A Convertible Preferred Stock dividend
and accretion -- (311,568) -- (311,568) (311,568)
------------ ------------ ------------ ------------ ------------
Loss applicable to common stockholders (1,450,003) (1,412,325) (4,543,297) (3,082,677) (12,579,548)
============ ============ ============ ============ ============
Basic and diluted net loss per common share
Net loss (0.19) (0.13) (0.61) (0.34) (2.14)
Series A Convertible preferred stock dividend
and accretion -- (0.03) -- (0.04) (0.06)
------------ ------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (.19) $ (.16) (.61) (.38) (2.20)
============ ============ ============ ============ ============
Weighted average number of shares outstanding 7,510,106 8,640,600 7,488,998 8,089,936 5,730,302
============ ============ ============ ============ ============
</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>
Three months
ended September 30,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (1,450,003) $ (1,100,757)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 12,000 13,002
Amortization
Deferred financing costs 40,200 12,001
Unearned compensation 23,052 --
Interest expense amortization for the
intrinsic value of the beneficial conversion
feature of the convertible debenture (note 7) 200,000 --
Allowance for uncollectible receivables -- 73,500
Write-down of inventory 300,000 105,000
Revenues realized due to offset of billings
against a stock repurchase -- --
Options issued for license rights -- --
Option issued in connection with distribution agreement -- --
Acquired research and development -- --
Warrants issued for services and other (134,500) 164,000
Contribution of services -- --
Other -- --
Change in assets and liabilities:
Accounts receivable (67,433) 97,831
Inventories (2,437) 26,983
Prepaid expense (20,826) 14,215
Accounts payable (176,771) (107,659)
Accrued liabilities 17,688 4,016
Deferred revenue -- (90,000)
------------ ------------
190,973 312,889
------------ ------------
Net cash used in operating activities (1,259,030) (787,868)
Cash flows from investing activities
Capital expenditures (3,632) (2,437)
Security deposits -- (15,000)
Patents and trademarks -- --
------------ ------------
Net cash used for investing activities (3,632) (17,437)
Cash flows from financing activities
Restricted cash 2,320,000 --
Net proceeds (payments) under short-term borrowing agreements -- (100,000)
Issuance of convertible bridge notes -- --
Issuance of convertible debentures -- --
Issuance of warrants and convertible debentures discount -- --
Issuance of preferred stock -- 770,539
Issuance of warrants -- 54,000
Proceeds from sale of warrrants -- 60,000
Deferred financing costs -- --
Exercise of stock options 7,875 --
Sales of common stock -- --
Redemption of common stock -- --
------------ ------------
Net cash provided by financing activities 2,327,875 784,539
------------ ------------
Net increase (decrease) in cash and
cash equivalents 1,065,213 (20,766)
Cash and cash equivalents, at beginning of period 971,025 131,580
------------ ------------
Cash and cash equivalents, at end of period $ 2,036,238 $ 110,814
============ ============
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
January 7,
Nine months 1993 (date
ended September 30, of inception)
---------------------------- through September
1998 1999 1999
------------ ------------ -----------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (4,543,297) $ (2,771,109) $(12,267,980)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 40,500 39,002 144,008
Amortization
Deferred financing costs 40,200 352,578 437,145
Unearned compensation 78,468 13,971 181,810
Interest expense amortization for the
intrinsic value of the beneficial conversion
feature of the convertible debenture (note 7) 200,000 124,624 525,000
Allowance for uncollectible receivables -- 58,500 216,500
Write-down of inventory 500,000 105,000 705,000
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
Acquired research and development -- -- 117,000
Warrants issued for services and other 169,500 164,000 361,000
Contribution of services -- -- 11,250
Other -- -- 23,434
Change in assets and liabilities:
Accounts receivable (68,868) (102,415) (305,117)
Inventories (448,108) 107,510 (902,777)
Prepaid expense (74,327) 55,014 (66,861)
Accounts payable (27,670) (109,063) 171,816
Accrued liabilities (140,049) 68,422 305,785
Deferred revenue -- 60,000 60,000
------------ ------------ ------------
822,296 937,143 2,367,469
------------ ------------ ------------
Net cash used in operating activities (3,721,001) (1,833,966) (9,900,511)
Cash flows from investing activities
Capital expenditures (27,785) (4,875) (245,350)
Security deposits -- (15,000) (27,984)
Patents and trademarks -- -- (4,534)
------------ ------------ ------------
Net cash used for investing activities (27,785) (19,875) (277,868)
Cash flows from financing activities
Restricted cash -- -- --
Net proceeds (payments) under short-term borrowing agreements -- -- (117,000)
Issuance of convertible bridge notes -- -- 175,000
Issuance of convertible debentures 1,775,000 -- 1,775,000
Issuance of warrants and convertible debentures discount 725,000 -- 750,000
Issuance of preferred stock 758,539 770,539
Issuance of warrants 54,000 54,000
Proceeds from sale of warrrants 60,000 60,000
Deferred financing costs (180,000) -- (324,977)
Exercise of stock options 113,271 28,500 190,799
Sales of common stock -- -- 7,093,832
Redemption of common stock -- -- (138,000)
------------ ------------ ------------
Net cash provided by financing activities 2,433,271 901,039 10,289,193
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (1,315,515) (952,802) 110,814
Cash and cash equivalents, at beginning of period 3,351,753 1,063,616 --
------------ ------------ ------------
Cash and cash equivalents, at end of period $ 2,036,238 $ 110,814 $ 110,814
============ ============ ============
</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 September 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 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 $12,267,980, of which
$1,100,757 was incurred during the third quarter ended September 30,
1999. The Company believes operating losses will continue for the
foreseeable future.
As of the date of this report the Company has essentially no cash
from which to fund operations. Accordingly, the Company is in need
of substantial additional capital to sustain operations beyond the
short-term.
6
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and September 30, 1998 and 1999 (Unaudited)
2. Liquidity Matters
Based on current plans the Company estimates it needs approximately
$2,000,000 to $3,000,000 to support operations through Setember 30,
2000. This will likely 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.
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
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ ------------
<S> <C> <C>
Investment in Inter-Con P/C, Inc. $ -- $100,000
Deferred financing costs, less
accumulated amortization of $46,800 and $182,000 233,200 98,000
Deferred offering costs 132,977 --
Security deposits 12,984 27,984
Patents 4,534 4,534
-------- --------
$383,695 $230,518
======== ========
</TABLE>
7
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and September 30, 1998 and 1999 (Unaudited)
4. Other Assets (continued)
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 cost 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 September 30, 1999
consisted of 3,000,000 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
2000.
As a result of Inter-Con's shares, becoming eligible for public
trading, the Company reported 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 Security laws, the limited public market of Inter-Con's
stock, and the large block nature of the investment.
In November, 1999 the Company sold its 3,000,000 shares of Inter-Con
to a shareholder of Inter-Con for $100,000. Since the shares were
sold in November, 1999 for $100,000 the Company adjusted the
assigned market value of these shares down to the $100,000 selling
price. 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 (loss)." For
the three and nine month period ended September 30, 1999, ($800,000)
and $100,000 respectively, was reported in the statement of
operations as other comprehensive income (loss) in connection with
this investment.
8
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and September 30, 1998 and 1999 (Unaudited)
5. Accrued Liabilities
December 31, September 30,
1998 1999
------------- -------------
Compensation $ 106,241 $ 43,667
62,500 136,149
Interest
Dividends payable-preferred
stockholders -- 26,568
Other 29,997 21,344
Settlement -- 66,000
------------- -------------
$ 198,738 $ 293,728
============= =============
6. Deferred Revenue
Included in deferred revenue is $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 "Debenture'), 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 a five-day 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.
Pursuant to the terms of 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.
9
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and September 30, 1998 and 1999 (Unaudited)
7. Convertible Debenture (continued)
During May and September, 1999 the holder of the Debenture converted
$1,230,000 of principal amount into an aggregate of 1,353,538 shares
of common stock. As a result of this conversion, the Company has
reduced the indebtedness due under the Debenture to $1,270,000. The
Company believes that the holder of the Debenture has publicly
resold substantially all of these shares under the registration
statement identified above.
8. Stockholders' Equity
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. The Company received net proceeds of $712,500
after giving effect to a 33% discount to the face amount of the
preferred stock offering costs of $62,500 and after repayment of a
$100,000 note. 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 period 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. As of the date of this report the
Company has not filed the registration statement and could be
subject to substantial late filing penalties.
In accordance with ETIF 98-5 Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable
Conversions the Company has determined the embedded beneficial
conversions feature associated with the convertible preferred stock
instrument and the fair market value of the detachable warrant are
$285,000 and $54,000, respectively.
10
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and September 30, 1998 and 1999 (Unaudited)
8. Stocholders Equity (continued)
Accordingly, the embedded beneficial conversion feature and the
detachable warrants reduced the assigned fair market value of the
preferred stock to $461,539. However, the $285,000 beneficial
conversion feature is analogous to a dividend to the preferred
stockholders and was recognized during the quarter ended September
30, 1999 as a return to preferred stockholders since the preferred
stock can be converted immediately into common stock. The offset to
the dividend was an increase in the value assigned to the preferred
stock bring the total value assigned to $746,539.
The Company also accrued $26,568 in preferred stock dividends
related to the above.
The following summarizes option activity since December 31, 1998:
<TABLE>
<CAPTION>
Number
Date of Grant, -----------------------------------------------------------
Exercise or Non-plan Options
Expiration 1996 Plan 1999 Plan And Warrants
-------------- ----------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 -- 474,334 -- 498,000
Options exercised 1/12/99- (26,000) -- --
1/26/99
Warrant granted 7/9/99 -- -- 131,250
Options and Warrants issued 9/1/99 300,000 -- 200,000
9/2/99 -- 885,548 400,000
9/13/99 -- 40,000
10/9/99 -- -- 100,000
---------------- ------------------- -----------------
748,334 885,548 1,369,250
================ =================== =================
</TABLE>
9. Related Party Transactions
Included in accounts receivable as of December 31, 1998 and
September 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 nine
months ended September 30, 1999. During the three and nine months
ended September 30, 1998, $20,400, and $40,409 of revenues were
recognized from transactions with Jasper Consulting, Inc.
11
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1998, and September 30, 1998 and 1999 (Unaudited)
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 $80,000). If the Company is not
successful in subleasing this premises it will be liable for these
lease payments. The Company does not believe there will be any
significant loss on 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 monthly plus common area
costs.
12
<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, at this time 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,
13
<PAGE>
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 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.
In November, 1999 the Company introduced its 6th generation
ID.ME(TM) reader. The new reader features a variety of improvements over earlier
generation products including a modular casing designed for enhanced user
conveyance. The self-contained ID.Me(TM) computer peripheral easily installs and
plugs into a parallel port interface. The updated operating software includes
significant improvements to the Bio-Key(TM) generating algorithm and reduces
most of the problems associated with earlier generation products such as
unsatisfactory scans due to poor fingerprint quality.
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, believes operating losses will continue for
the foreseeable future and is in need of substantial additional capital to
sustain operations beyond.
14
<PAGE>
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO SEPTEMBER 30, 1999
Revenues
Total revenues decreased $61,183 during the three months ended
September 30, 1999 to $1,987 as compared to $63,170 for the same period in 1998.
Total revenues decreased $221,200 during the nine months ended September 30,
1999 to $141,512 as compared to $362,712 for the same period in 1998.
Revenues from product sales decreased $61,183 during the three
months ended September 30, 1999 to $1,987 as compared to $63,170 for the same
period in 1998. Revenues from product sales decreased $303,250 for the nine
months ended September 30, 1999 to $41,512 as compared to $344,762 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 that 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 nine
months ended September 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.
During October, 1999 the Company signed a Master Distributors
agreement with CompuMark, LLC ("CompuMark"). Under the agreement, CompuMark has
placed an order to purchase 10,000 IDME(TM) units to be delivered over the next
eight months. CompuMark will be paid a commission on any product sold and a
percentage of net revenues derived during the term of this agreement from any on
going or recurring lease,licensing, services and/or transactions fees paid by
customers with respect to use of the product. Either party may terminate this
agreement (1) upon 30 days' written notice if the other party breaches its
obligations under this agreement, or (2) immediately upon delivery of notice if
(i) the breach is of such nature that it cannot be cured (ii) the other party
has voluntarily abandoned the relationships create hereby, (iii) the other party
has been convicted of a criminal offense directly related to the business
conducted by the
15
<PAGE>
other party under this Agreement, or (iv) the other party has impaired the
goodwill associated with the patents, copyrights, trade secrets, trade names,
trademarks, logos or other commercial symbols of the party delivering notice of
termination. There can assurance that the Company will be able to obtain the
funding necesary to deliver the product covered by this agreement on timely and
cost effective manner.
On October 21, 1999 the Company was notified that one of its OEM
Licensors was canceling its licensing agreement and sending back the units that
it purchased. The Company had reflected $28,320 of revenue in a previous quarter
relating to this transaction. The Company has included this amount in its
allowance for doubtful receivables as of September 30, 1999. The Company has
also reversed out the $100,000 licensing fee that was recorded in deferred
revenue in prior quarters.
The Company has delayed the launch of its SACSecure level 1 until
mid 2000. 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.
Costs and Other Expenses
Cost of product sales exceeded revenues from product sales by
$160,821 during the three months ended September 30, 1999 and $233,998 during
the nine months ended September 30, 1999 as compared to $331,489 during the
three months ended September 30,1998 and $610,410 during the nine months ended
September 30, 1998. For the three and nine months ended September 30, 1999 $0
and $47,435 respectively, 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 nine months ended
September 30, 1999, $105,000 of the negative gross margin related to a write
down of inventory to its net realizable value as compared to $300,000 and
$500,000 for the three and nine months ended September 30, 1998. The remainder
of the negative gross margin 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 some 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.
16
<PAGE>
Selling, general and administrative expenses increased $61,910 to
$670,794 during the three months ended September 30, 1999 and decreased $750,763
to $1,738,827 for the nine months ended September 30, 1999 as compared to the
three and nine months ended September 30, 1998. Of the decreases for the three
and nine months ended September 30, 1999, $66,868 and $303,460, respectively,
related to a reduction in total personnel and salaries, $37,127 and $0
respectively, was due to a decrease in professional services, $0 and $283,317,
respectively, was principally due to non-cash charges related to estimated fair
market value of warrants issued during 1998 as compared to 1999, $67,564 and
$88,249, respectively was principally due to a decrease in sales and marketing
initiatives, $19,938 and $45,769, respectively, related to a reduction in
investor and public relations expenses, $7,783 and $64,499, respectively,
related to a decrease in unearned compensation. For the three and nine months
ended September 30, 1999 this was partially offset by an increase in bad debt
expense of $83,660 and an increase of $66,000 which was primarily for cost
associated with the settlement of a wrongful termination lawsuit $126,500 and $0
respectively, principally due to non-cash charges related to estimated fair
market value of warrant issued during September 30, 1999, $0 and $144,164
respectively, which was primarily due to additional costs associated with the
filing of the registration statement for the debenture and on going financing
initiatives.
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. The full effect of the cost reduction plan should
be reflected in the first quarter of 2000.
Research, development and engineering expenses decreased $87,715 to
$241,951 during the three months ended September 30, 1999 and decreased $612,548
to $711,737 for the nine months ended September 30, 1999 as compared to the
three and nine months ended June 30, 1998. Of the decrease for the three and
nine months ended September 30, 1999, $0 and $200,000, respectively, 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,
$130,000 and $490,750, respectively, related to licensing and integration costs
associated with technologies the Company planed to incorporate into its SACcat
product. This was partially offset by $6,992 and $44,874 respectively, increase
in facility lease expense charged to research and development that was not
charged in 1998 and $73,428 of prepaid software licenses that were written-off
during the quarter ended September 30, 1999.The Company is disputing fulfillment
of the terms of the contracts by 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.
Keyware Technologies, Inc., one of the Company's strategic alliances has filed a
suit against the Company for failure to honor it's payment obligations as
stated in the strategic alliance agreement. See Part II Item 1. Legal
proceedings for more information.
Interest and other income decreased $34,238 to $2,598 during the
three months ended September 30, 1999 and increased $26,462 to $108,146 for the
nine months ended September 30, 1999 as compared to the three and nine months
ended September 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 nine month period, $90,000 was proceeds from the sale of 600,000 shares
of Inter-Con P/C.
17
<PAGE>
Interest expense decreased $187,011 to $29,789 during the three
months ended September 30, 1999 and increased $77,893 to $294,693 during the
nine months ended September 30, 1999 as compared to three and nine months ended
September 30, 1998. Of the decrease $200,000 was due to non-cash charges for the
intrinsic value of the beneficial conversion feature of the Convertible
Debenture. This was partially offset by $19,798 of interest expense that was
accrued on the convertible debenture. Of the increase $79,600 was due to the
amortization of fair market value of the warrants that where issued to the Shaar
Fund, $73,669 was due to interest accrued on the Convertible Debenture, this was
partially offset by $75,336 of a decrease in the intrinsic value of the benefial
conversion feature of the Convertible Debenture.
Other comprehensive income decreased $800,000 during the three and
nine months ended September 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 nine months ended
September 30, 1999 was $1,833,966 and was principally due to operating losses.
Net cash used for investing activities during the same period was $19,875. Net
cash provided by financing activities during the same period was $901,039 and
was principally cash from the issuance of convertible preferred stock to the
Shaar Fund an international investment fund (the "Fund") and $60,000 received
from sale of 240,000 warrants.
Working capital increased $986,639 during the nine months ended
September 30, 1999 to $(89,139) as compared to ($1,075,778) as of December 31,
1998. This increase is principally due to the reclassification of the
Convertible Debentures to long term debt.
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 $875,000 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.
On June 30, 1998, the Company sold to the Fund a $2,500,000 5%
Convertible Debenture due June 30, 2001 (the "Debenture").
18
<PAGE>
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.
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
$1,230,000 principal amount of the Convertible Debenture. As a result of these
conversions, the Company has reduced the indebtedness due under the Convertible
Debenture to $1,270,000.
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 agreement 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. The Company has not and will not meet these dealines which may result in
substantial monetary penalties.
In September, 1999 the Company sold warrants to purchase 240,000
shares of the Company's Common Stock for $60,000. The warrants are immediately
exercisable at exercise prices ranging from $0.84 to $0.86. These warrants shall
expires upon the occurrence of the earlier of the following: (a) August 31,
2002, (b) as to all or a portion of the Warrants at the option of the Company,
five (5) business days after the Company notifies the Holder in writing that the
bid price of the Company's stock closed at or above $3.00 per share for ten
consecutive trading days immediately prior to the notice date.
In November, 1999 the Company increased its liquidity through the
sale of 3,000,000 shares of common stock of Inter-Con P/C to a shareholder of
Inter-Con P/C for gross proceeds of $100,000.
As of the date of this report the Company has essentially no cash
from which to fund operations. Accordingly, the Company is currently in need of
substantial additional capital to sustain operations beyond the short-term.
19
<PAGE>
Based on current plans the Company estimates it needs approximately $2 million
to $3 million to support operations through Setember 30, 2000. This will likely
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. The Company intends to
seek additional financing from accredited investors through the issuance of
additional securities. As of the date of this report, the Company has no
committment from any person to provide any such financing.
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 late 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, 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.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about October 21, 1999 the Company settled the wrongful
termination lawsuit brought by two of its former employees in Hennepin County,
Minnesota District Court. The terms of the settlement requires the Company to
pay the plantiffs $66,000 in exchange for their discharging the Company, its
representatives, successors, assigns and all other persons, firms and releasing
the corporations from any and all liability , action, causes of action, claims
that the plantiffs may now have, or ever has had, against the Company.
On or about November 3, 1999, Keyware Technologies, Inc. filed a breach
of contract lawsuit against the Company in the Middlesex County, Massachusetts
Superior Court arising out of a November 26, 1997 strategic alliance agreement.
Keyware is seeking damages of $100,000. The Company is currently evaluating this
matter, has yet to file a responsive pleading and intends to vigorously defend
this matter.
ITEM 2. CHANGES IN SECURITIES
Sale of Unregistered Securities
In September, 1999 the Company sold warrants to purchase 240,000
shares of the Company's Common Stock for $60,000 to accredited investors in a
private placement transaction exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), provided by Section
4(2) thereunder with out payment of underwriting discounts or commissions to any
person. The warrants are immediately exercisable exercise prices ranging from
$0.84 to $0.86. These warrants shall expire upon the occurrence of the earlier
of the following: (a) August 31, 2002, (b) as to all or a portion of warrants at
the option of the Company, (five) 5 business days after the Company notifies the
holders in writing that the bid price of the Company's stock closed at or above
$3.00 per share for ten consecutive trading days immediately prior to the notice
date.
During October 1999, the Company issued an option to Compumark, LLC
to purchase 100,000 shares of Common Stock at an exercise price of $1.00 per
share which vests in ratable monthly installments based upon payments received
by the Company under Master Distributor Agreement entered into between the
parties. These options were issued in a private placement transaction to an
accredited investor in a private placement transaction exempt from the
registration requirements of the Securities Act provided by Section 4(2)
thereunder without payment of underwriting discounts or commissions to any
person.
Suring September 1999, the Company entered into an investment
relations agreement pursuant to which it issued a three-year option to purchase
400,000 shares of Common Stock at an exercise price of $1.00 per share. The
option vests in ratable monthly installments over the two year period commencing
on the date of grant. The unvested portion of the option is subject to
cancellation in the event that the investment relations agreement is terminated.
As of the date of this report, options to purchase 33,340 shares have vested.
These options were issued to an accredited investor in a private placement
transaction exempt from the registration requirements of the Securities Act
provided by Section 4(2) thereunder without payment of underwriting discounts or
commissions to any person.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
21
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER EVENTS
On September 22, 1999, the Company executed an agreement to acquire
Aultimate Technology Marketing, Inc. (ATM) a Minnesota based company. The terms
of the proposal called for the Company to acquire ATM in a merger subject to
completion of due diligence, satisfaction of certain conditions and obtaining
necessary shareholder and board approvals no later than October 31, 1999. Since
certain of the conditions were not satisfied, a closing did not occur and the
agreement expired by its own terms. The Company has determined not to further
pursue the acquisition of ATM at this time.
The Board of Directors is in discussions regarding a management
restructuring which if completed would result in material changes to current
executive management. In this regard, the Company has met with candidates to
serve in various executive management positions or as additional directors for
the Company. Upon completion or termination of these discussions, the Board of
Directors intends to provide notice and hold the Company's annual meeting of
shareholders. The Company has also retained Bruce Nordin to provide executive
management consulting services to the Company on an interim basis.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Exhibit
----------- -------
27 Financial Data Schedule
(b) Reports on Form 8-K
During the period covered by this report the Company
filed a current report on Form 8-K dated July 9, 1999
regarding Item 5.
22
<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: November 22, 1999 SAC Technologies, Inc.
/s/ Barry Wendt
Barry Wendt, Chief Executive Officer
/s/ Gary Wendt
Gary Wendt, Chief Financial Officer
23
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