SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission File Number 0-11447
DATAKEY, INC.
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1291472
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
407 WEST TRAVELERS TRAIL, BURNSVILLE, MN 55337
Issuer's telephone number: (612) 890-6850
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's common equity, as of
November 14, 2000, is 8,269,173.
Transitional Small Business Disclosure Format (check One):
Yes No X
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
------------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $2,663,421 $344,922
Trade receivables, less allowance for
doubtful accounts of $26,000 1,455,806 1,474,480
Inventories 2,203,648 1,328,991
Prepaid expenses and other 50,832 29,981
------------- ------------
Total current assets 6,373,707 3,178,374
------------- ------------
OTHER ASSETS
Prepaid licenses and patents, at cost less amortization 691,428 668,036
of $595,128 and $364,832
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost
Production tooling 1,304,663 1,306,260
Equipment 2,858,656 2,768,214
Furniture and fixtures 319,649 317,103
Leasehold improvements 278,371 278,371
4,761,339 4,669,948
Less accumulated depreciation (4,175,614) (3,917,996)
------------- ------------
585,725 751,952
------------- ------------
$7,650,860 $4,598,362
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $808,147 $803,887
Accrued compensation 433,918 197,335
Accrued expenses-other 197,458 97,144
------------- ------------
Total current liabilities 1,439,523 1,098,366
------------- ------------
SHAREHOLDERS' EQUITY
Convertible preferred stock, voting, stated value
$2.50 per share; authorized 400,000 shares;
issued and outstanding 150,000 375,000 375,000
Common stock, par value $.05 per share;
authorized 20,000,000 shares; issued and outstanding
8,269,073 in 2000 and 6,322,285 in 1999 413,453 316,114
Additional paid-in capital 13,894,512 8,501,543
Accumulated deficit (8,471,628) (5,692,661)
------------- ------------
6,211,337 3,499,996
------------- ------------
$7,650,860 $4,598,362
============ ============
See Notes to Consolidated Financial Statements
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DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $1,616,092 $1,486,879 $5,226,169 $4,000,869
Cost of goods sold 1,058,188 948,225 3,041,617 2,450,417
---------- ---------- ---------- ----------
Gross Profit 557,904 538,654 2,184,552 1,550,452
Operating expenses:
Research, development
and engineering 763,264 501,204 2,032,607 1,542,161
Marketing and sales 890,487 475,943 2,206,275 1,617,895
General and administrative 289,745 224,406 862,404 687,216
---------- ---------- ---------- ----------
Total operating expenses 1,943,496 1,201,553 5,101,286 3,847,272
---------- ---------- ---------- ----------
Operating loss (1,385,592) (662,899) (2,916,734) (2,296,820)
Interest income (expense) 39,915 1,457 137,772 1,799
---------- ---------- ---------- ----------
Loss before
income taxes (1,345,677) (661,442) (2,778,962) (2,295,021)
Income tax expense 0 0 0 0
---------- ---------- ---------- ----------
- - - -
Net loss ($1,345,677) ($661,442) ($2,778,962) ($2,295,021)
Net loss attributable to common stockholders:
Net loss (1,345,677) (661,442) (2,778,962) (2,295,021)
Preferred stock dividends 0 (23,436) 0 (71,221)
---------- ---------- ---------- ----------
Net loss attributable to
common stockholders ($1,345,677) ($684,878) ($2,778,962) ($2,366,242)
=========== =========== =========== ===========
Basic and diluted
loss per share ($0.16) ($0.19) ($0.35) ($0.72)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 8,229,178 3,651,772 7,879,276 3,308,103
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
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DATAKEY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss ($1,345,677) ($661,442) ($2,778,967) ($2,295,021)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 75,854 114,975 257,618 336,357
Amortization 75,525 22,364 230,296 56,857
Loss on sale of fixed assets 0 31,812 0 31,812
Change in assets and liabilities
(Increase) decrease:
Trade receivables 186,689 (155,365) 18,674 31,729
Inventories (300,116) (27,285) (874,657) (466,482)
Prepaid expenses and other 44,780 (17,477) (20,851) (5,202)
Prepaid license fees and patent (246,533) (9,038) (253,688) (22,015)
Increase (decrease) in:
Accounts payable 169,104 (13,538) 4,260 215,300
Accrued expenses 279,696 134,045 336,897 176,158
Accrued severance 0 0 0 (10,687)
Net cash used in
operating activities (1,060,678) (580,949) (3,080,418) (1,951,194)
----------- --------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of fixed assets 0 35,000 0 35,000
Purchase of tooling and equipment (15,411) (57,706) (91,391) (164,736)
-------- -------- -------- ---------
Net cash used in
investing activities (15,411) (22,706) (91,391) (129,736)
-------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable 15,766 15,766
Net proceeds (offering costs)from issuance of
common stock 223,302 (16,651) 5,490,308 1,231,172
------- -------- --------- ---------
Net cash provided by financing activities 223,302 (885) 5,490,308 1,246,938
------- -------- --------- ---------
Increase (decrease) in cash and
cash equivalents (852,787) (604,540) 2,318,499 (833,992)
CASH AND CASH EQUIVALENTS
Beginning 3,516,208 624,375 344,922 853,827
--------- ------- ------- -------
Ending 2,663,421 19,835 2,663,421 19,835
========= ====== ========= ======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Preferred stock dividend accrual 0 23,436 0 63,032
Preferred stock dividend converted to common stock 0 0 0 8,190
Conversion of preferred stock to common 0 0 0 151,520
0 23,436 0 222,742
See Notes to Consolidated Financial Statements
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DATAKEY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary to present fairly Datakey's financial position
as of September 30, 2000, and December 31, 1999, and results of its operations
and cash flows for the three-month and nine-month periods ended September 30,
2000, and October 2, 1999. The adjustments that have been made are of a normal
recurring nature.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's financial statements in the 2000 Datakey, Inc. Annual Report and in
Form 10-KSB for the year ended December 31, 1999.
REVENUE RECOGNITION
In 1999, the staff of the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, (SAB 101) "Revenue Recognition in Financial
Statements". SAB 101 summarizes some of the staff's interpretations of the
application of generally accepted accounting principles to revenue recognition.
The Company will adopt SAB 101 when required in the fourth quarter of 2000.
Management believes the adoption of SAB No. 101 will not have a significant
affect on its financial statements.
OPERATING SEGMENTS
The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, for the year ended December 31, 1998. This statement
requires public enterprises to report selected information about operating
segments in annual and interim reports issued to shareholders. The adoption of
this statement had no impact on the Company's financial condition or results of
operations.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The Company has
two reportable segments: Electronic Products (EP) and Integrated Systems
Solutions (ISS). The Electronic Products segment produces and markets
proprietary memory keys, cards, and custom-shaped tokens and systems that
utilize these products that serve as a convenient way to carry electronic
information. The Integrated Systems Solutions segment produces and markets
products for the information security market, which enable user identification
and authentication, secure data exchange, and information validation.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. There are no intersegment
transactions. The Company evaluates performance based on operating earnings of
the respective segments.
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Three Months Ended September 30, 2000 Nine Months Ended September 30, 2000
-------------------------------------------- ----------------------------------------------
EP ISS UNALLOCATED TOTAL EP ISS UNALLOCATED TOTAL
-------- ---------- -------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............... $773,548 $ 842,544 $ - $1,616,092 $2,985,318 $2,240,851 $ - $ 5,226,169
Interest income
(expense)............. - - 39,915 39,915 - - 137,772 137,772
Depreciation and
amortization.......... 50,129 101,250 - 151,379 176,602 311,312 - 487,914
Segment profit (loss). (294,548)(1,051,129) 39,915 (1,345,677) ( 364,412) (2,552,322) 137,772 (2,778,962)
-------- ---------- -------- ---------- ---------- ---------- -------- -----------
<CAPTION>
Three Months Ended October 2, 1999 Nine Months Ended October 2, 1999
--------------------------------------------- ----------------------------------------------
EP ISS UNALLOCATED TOTAL EP ISS UNALLOCATED TOTAL
-------- ---------- -------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue...............$1,302,606 $ 184,273 $ - $1,486,879 $3,570,777 $ 430,092 $ - $ 4,000,869
Interest income
(expense)............. - - 1,457 1,457 - - 1,799 1,799
Depreciation and
amortization.......... 101,583 35,756 - 137,339 294,760 98,454 - 393,214
Segment profit (loss). 25,160 (688,059) 1,457 (661,442) 121,200 (2,418,020) 1,799 (2,295,021)
-------- ---------- -------- ---------- ---------- ---------- -------- -----------
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
DATAKEY, INC. AND SUBSIDIARY
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
REVENUE - Revenue for the three-month period ended September 30, 2000,
increased by $129,000, or 9 percent, and increased by $1,225,000 or 31% in the
nine-month period ended September 30, 2000 as compared to the same periods in
1999. The increase in revenue is due to a significant increase in revenue in the
Company's ISS business unit, offset by a decline in EP revenue, as customer and
licensee acceptance of the Company's ISS product offering grows.
Revenue in the EP business segment declined $530,000 in the three-month
period and $586,000 in the nine-month period ending September 30, 2000 as
compared to the same periods in 1999. The decline in revenue is due to a
reduction in component orders from a few of the Company's major customers. The
Company has introduced system level products for the EP unit in an attempt to
revitalize revenue growth.
GROSS PROFIT MARGIN - Gross profit as a percentage of revenue decreased
to 35 percent in the three-month period ended September 30, 2000, and increased
to 42 percent in the nine-month period ended September 30, 2000. The decrease in
margin in the three-month period is due to absence of license fee revenue, which
carries a higher gross margin. The increase in margin in the nine-month period
is due to realization of significant license fee revenue in the first two
quarters. The Company continues to work on licensing relationships and expects
licensing fee revenue to make a significant contribution to gross margin,
although not necessarily on a regular quarterly basis.
OPERATING EXPENSES - Operating expenses increased by $742,000, or 62
percent, and $1,254,000, or 33 percent in the three-month and nine-month
periods, respectively, ended September 30, 2000, when compared to those periods
of 1999. The increases are principally related to staffing the rapidly expanding
ISS business unit, opening a European office, and trade shows and other forms of
product promotion expense.
INTEREST INCOME - Interest income increased to $40,000 in the
three-month period and $138,000 in the nine-month period, ended September 30,
2000, as the Company invested the proceeds from the sale of securities in late
1999 and early 2000 in interest bearing accounts. Interest income is expected to
trend down over the balance of 2000 as a portion of the interest bearing
accounts will be used to fund the continuing investment in product development
and product promotion activities.
FINANCIAL CONDITION - The Company experienced a decrease in cash and
cash equivalents of $853,000 in the three-month period and an increase of
$2,318,000 for the nine-month period ended September 30, 2000, compared to a
decrease of $605,000 in the three-month period and a decrease of $834,000 for
the nine-month period in 1999. The additional increase in cash in the nine-month
period is primarily attributable to the sale of common stock in a private
placement during February 2000 and from the sale of securities upon exercise of
warrants and stock options during the first three quarters of 2000. The
additional decrease in cash in the third quarter of 2000 was due to the
operating loss and an increase in inventory in anticipation of higher future
sales in the EP business unit which may or may not be realized.
<PAGE>
Datakey's balance sheet reflects $4,934,000 in working capital as of
September 30, 2000 and a current assets to current liabilities ratio of 4.43 to
1. The Company believes that its current cash and cash equivalents in addition
to its $1 million bank line of credit, renewed in May 2000 will provide
sufficient funding for the balance of 2000. The Company anticipates that it will
be seeking additional private equity capital within six months.
CAUTIONARY STATEMENTS
The Management's Discussion and Analysis contains certain forward-looking
statements relating to the growing acceptance of the Company's ISS product, the
implication that the ISS product revenue will continue to increase
significantly, the expectation that recently-introduced system level products
for the EP unit will revitalize EP revenue growth, that licensing revenue will
contribute significantly to gross margin, and that the Company will be able to
fund its operations for the next six months. These statements are subject to
certain risks and uncertainties which may cause actual results to differ
materially from those projected.
These risks and uncertainties include: (i) that market acceptance and demand for
the Company's ISS products may decrease due to competitive or other general
market conditions; (ii) that the expected success of current pilot programs and
customer demand to convert to production programs may not materialize; (iii) the
introduction of competitive information security products; (iv) that the new EP
products do not perform as expected or do not bring revenue growth, (v) that the
Company may not be successful in developing significant licensing arrangements
to positively impact gross margin, (vi) that the Company may not be able to grow
the ISS business unit fast enough to warrant the substantial product
development, sales and marketing expenditures which may cause the Company to
seek additional capital sooner than expected, and (vii) the ability of the
Company to attain profitability and positive cash flows by significantly
increasing ISS product revenues while controlling expenses. The Company
anticipates that it will be seeking additional private equity capital in the
near future, and there is no guaranty that its fund raising activity will be
successful.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
(a) Exhibit 27 Financial Data Schedule (only filed with electronic copy)
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated November 14, 2000 Datakey, Inc.
By: /s/ Carl P. Boecher
Carl P. Boecher
President & Chief Executive
Officer
(Principal Executive Officer)
By: /s/ Alan G. Shuler
Alan G. Shuler
Vice President & Chief Financial
Officer
(Principal Financial and
Accounting Officer)
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DATAKEY, INC.
EXHIBIT INDEX TO FORM 10-QSB
FOR QUARTER ENDED SEPTEMBER 30, 2000
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
