<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: DECEMBER 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File No. 0-20190
BITWISE DESIGNS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 14-1673067
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
2165 Technology Dr., Schenectady, NY, 12308
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(518) 346-7799
________________________________________________________________________________
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark 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 _____
12,197,130 shares of Common Stock, par value $.001 per share, were
outstanding at February 2, 2000.
Page 1 of 14
<PAGE> 2
BITWISE DESIGNS INCORPORATED
FORM 10-Q
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets -
December 31, 1999 and June 30, 1999 3-4
Consolidated Statements of Operations -
Three and six months ended December 31, 1999
and December 31, 1998 5
Consolidated Statements of Cash Flows -
Six months ended December 31, 1999
and December 31, 1998 6-7
Notes to Consolidated Financial Statements 8-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
PART II OTHER INFORMATION
Item 6 Reports on Form 8-K and exhibits 13
Safe Harbor Statement 13
Year 2000 Update 14
Signatures 14
Page 2 of 14
<PAGE> 3
PART I FINANCIAL INFORMATION
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31, June 30,
1999 1999
(unaudited)
----------- -----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 6,536,138 $ 549,097
Accounts receivable, net of allowance
for doubtful accounts of $491,087 at Dec.,
31, 1999 and $421,018 at June 30, 1999 4,555,550 5,141,178
Due from related parties 62,276 48,094
Inventories:
Finished goods 2,328,234 2,627,195
Purchased components & raw material 485,720 1,197,192
Income taxes receivable 13,009 12,130
Prepaid expenses and other current assets 385,559 282,795
----------- -----------
Total current assets 14,366,486 9,857,681
Property and equipment, net 3,030,740 2,949,458
----------- -----------
Other assets:
Software development costs, net 372,288 129,993
Other assets 39,634 40,624
Deferred financing costs 165,989
Excess of cost over net assets of
acquired companies, net 1,300,596 1,341,239
----------- -----------
Total assets $19,109,744 $14,484,984
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements. share
Page 3 of 14
<PAGE> 4
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY December 31, June 30,
1999 1999
(unaudited)
------------ ------------
Current liabilities:
<S> <C> <C>
Accounts payable $ 1,213,227 $ 3,852,032
Borrowings under lines of credit 1,274,779
Accrued expenses and other liabilities 580,539 1,075,374
Current portion of long-term debt 251,456 23,781
------------ ------------
Total current liabilities 2,045,222 6,225,966
------------ ------------
Convertible notes payable, net of discount 3,570,412
Long-term debt, net of current portion 1,365,506 1,210,712
Deferred grant 900,000 142,189
------------ ------------
Total liabilities 4,310,728 11,149,279
------------ ------------
Shareholders' equity:
Preferred stock -$.10 par value, 5,000,000
shares authorized:
Series A-200 shares issued and outstanding 20 20
Series B-50,000 shares issued and outstanding 5,000
Common stock-$.001 par value; 20,000,000
shares authorized; shares issued:
12,067,475 at Dec. 31, 1999 and
7,410,745 at June 30, 1999 12,067 7,411
Additional paid-in capital 32,533,890 19,846,126
Accumulated deficit (17,675,242) (16,441,133)
------------ ------------
14,875,735 3,412,424
Less cost of common shares in treasury,
28,082 shares (76,719) (76,719)
------------ ------------
Total shareholders' equity 14,799,016 3,335,705
------------ ------------
Total liabilities and shareholders' equity $ 19,109,744 $ 14,484,984
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 4 of 14
<PAGE> 5
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the 3 months ended For the 6 months ended
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
(unaudited) (unaudited) (unaudited) (unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $4,720,317 $5,049,976 $7,792,083 $10,465,503
Cost of goods sold 3,347,884 3,040,423 5,830,207 6,557,726
------------ ------------ ------------ ------------
Gross profit 1,372,433 2,009,553 1,961,876 3,907,777
Selling, general and
administrative expenses 1,372,829 1,820,396 2,810,339 3,907,150
Product development costs 72,015 51,820 136,562 120,098
------------ ------------ ------------ ------------
Operating loss (72,411) 137,337 (985,025) (119,471)
Other income (expense):
Interest expense (124,857) (150,086) (317,836) (300,996)
Interest and other income 34,010 9,110 32,113 69,117
------------ ------------ ------------ ------------
Loss before taxes (163,258) (3,639) (1,270,748) (351,350)
Income tax expense (benefit) (5,335) (4,835)
------------ ------------ ------------ ------------
Net income before minority
interest (163,258) 1,696 (1,270,748) (346,515)
Minority Interest 36,639 36,639
------------ ------------ ------------ ------------
Net income/(loss) ($126,619) $1,696 ($1,234,109) ($346,515)
============ ============ ============ ============
Per share amounts:
Net loss per common
share ($0.01) $0.00 ($0.12) ($0.05)
============ ============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 5 of 14
<PAGE> 6
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the 6 months ended
December 31, December 31,
1999 1998
(unaudited) (unaudited)
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net loss ($1,234,109) ($346,515)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 317,049 313,700
Provision for doubtful accounts 50,017 (127,869)
Non cash S,G&A expenses 105,690
Changes in operating assets and liabilities:
Accts. receivable and
due from related parties 521,429 (1,161,865)
Inventories 1,010,433 1,056,006
Prepaid expenses & other assets (19,136) 26,205
Accounts payable and accrued expenses (3,133,640) (587,775)
Income taxes (879) (4,835)
Other 100 (707)
------------ ------------
Net cash used in operating activities (2,383,046) (833,655)
------------ ------------
Cash flows from investing activities:
Property and equipment expenditures (208,136) (619,625)
Software development costs (306,512) (72,843)
------------ ------------
Net cash used in investing activities (514,648) (692,468)
------------ ------------
Cash flows from financing activities:
Incr/(Decr) borrowings on lines of credit, net (1,274,779) (1,106,877)
Borrowings of long-term debt, net 505,591 509,733
Principle payments on long-term debt (123,122)
Receipt of deferred revenue from economic
development grant 757,811
Payment of deferred offering and financing
costs (14,313)
Exercise of warrants and options 7,078,990
Proceeds from private equity offering, net 1,896,946
Proceeds from investment in subsidiary, net 98,861
Preferred stock dividends (31,250)
Fees related to conversion of debt to equity (10,000)
------------ ------------
Net cash provided by/(used in)
financing activities 8,884,735 (597,144)
------------ ------------
Net incr./(decr.) in cash & cash equivalents 5,987,041 (2,123,267)
Cash and cash equivalents, beginning of year 549,097 4,000,370
------------ ------------
Cash and cash equivalents, end of period $6,536,138 $1,877,103
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 6 of 14
<PAGE> 7
BITWISE DESIGNS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CASH FLOW DISCLOSURES
<TABLE>
<CAPTION>
OTHER SUPPLEMENTAL INFORMATION: For the 6 months ended
December 31, December 31,
1999 1998
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Interest paid $260,469 $206,913
Income taxes paid $0 $0
Additional paid-in capital resulting
from
Issuance of warrants for services $176,789 $23,967
Issuance of common stock
for services $105,690
Conversion of debt to equity, net
financing costs and discount
of unamortized deferred $3,395,707
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 7 of 14
<PAGE> 8
BITWISE DESIGNS, INC.
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements include the accounts of Bitwise
Designs, Inc. and its wholly-owned subsidiaries DJS Marketing Group, Inc. (DJS)
and Authentidate.com, Inc. (the Company). All significant intercompany accounts
and transactions have been eliminated in consolidation. The management of the
Company believes the accompanying unaudited consolidated financial statements
contain all adjustments necessary to fairly present the financial position as of
December 31, 1999 and June 30, 1999 and results of operations and cash flows for
each of the periods presented.
2. During the six months ended December 31, 1999 the Company formed a new
subsidiary, Authentidate.com, Inc. This Company is an Internet services company.
The service allows users to verify the authenticity of digital documents and
images by imbedding an unalterable date and time stamp into digital images. The
Company expects this technology accessed and sold over the Internet to be used
for various items such as legal documents, contracts, notarized e-mail, medical
records and numerous other potential uses etc.
3. The results of operations for the six and three months ended December 31,
1999 and 1998 are not necessarily indicative of the results to be expected for
the full year.
4. Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the annual
consolidated financial statements and notes thereto included in the Company's
Form 10-KSB for the fiscal year ended June 30, 1999.
5. The Company adopted Statement of Financial Accounting Standards Board SFAS
130, "Reporting Comprehensive Income" in fiscal year 1999. There was no
comprehensive income to report, other than net income, for the six and three
months ended December 31, 1999 and 1998.
6. During the six months ended December 31, 1999, 1,702,989 common stock
warrants and 206,477 common stock options were exercised. In addition,
$3,975,000 convertible notes were converted into 1,223,075 common shares. In
October 1999, the Company sold 1,480,000 common shares and 1,480,000 Series B
common stock purchase warrants in a private equity offering for $740,000.
Page 8 of 14
<PAGE> 9
7. The following represents the reconciliation of the basic and diluted earnings
per share amounts for the three and six months ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Three Months Ended Six Months Ended
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income/(loss) ($126,619) $1,696 ($1,234,109) ($346,515)
Weighted average
shares 12,067,475 7,410,745 12,067,475 7,410,745
Basic and diluted EPS ($.01) $.00 ($.12) ($.05)
</TABLE>
The impact of options, warrants and convertible notes was antidilutive
to the calculation of basic and dilutive loss per share and were accordingly
excluded from the calculation.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board also
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (SFAS 133). SFAS 133 establishes a new model for accounting for
derivatives and hedging activities. This statement is effective for fiscal years
beginning July 1, 2000. The adoption of this standard is not expected to have a
significant impact on the Company's consolidated financial statements.
Page 9 of 14
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
ITEM 2. FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
consolidated financial statements and notes contained elsewhere in this Form
10-QSB.
RESULTS OF OPERATIONS
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE THREE AND SIX
MONTHS ENDED DECEMBER 31, 1998.
The Company realized a consolidated net loss of $126,619 ($.01 per
share) and a consolidated net profit of $1,696 ($.00 per share) for the second
quarter ended December 31, 1999 and 1998, respectively. The reduction is
attributable to the Company's new subsidiary Authentidate.com which has not yet
realized any sales but has incurred costs. This subsidiary company is expected
to commence sales during the third quarter ending March 31, 2000.
The second quarter ending December 31, 1999 net loss of $126,619
compares to a net loss of $1,107,490 for the first quarter ending September 30,
1999. The improvement is due to Bitwise and its DocStar product line as Bitwise
realized a pre-tax profit of $30,126 for the second quarter ended December 31,
1999 compared to a pre-tax loss of $1,035,639 for the first quarter ended
September 30, 1998. DJS realized a pre-tax profit of $42,407 and $86,348 for the
quarters ended December 31, 1999 and September 30, 1999, respectively, and
Authentidate.com realized a pre-tax loss of $215,469 and $142,418 for the
quarters ended December 31, 1999 and September 30, 1999, respectively.
The Company realized a consolidated net loss of $1,234,109 ($.12 per
share) and $346,515 ($.05 per share) for the six months ended December 31, 1999
and 1998, respectively. The reasons for the increased loss were lower than
expected sales by Bitwise during the first quarter ended September 30, 1999 and
losses by Authentidate.com.
The Company had consolidated net sales of $4,720,317 and $5,049,976 for
the second quarter ended December 31, 1999 and 1998, respectively. Consolidated
net sales were $7,792,083 and $10,465,503 for the six months ended December 31,
1999 and 1998, respectively. The reason for the sales decline for the quarter
and the six months ended December 31, 1999 compared to same periods in 1998 was
a decline in DocStar sales by Bitwise. The Company's subsidiary DJS realized a
small sales increase for the three and six months ended December 31, 1999,
respectively, compared to the same periods the prior year. The Company's other
subsidiary Authentidate.com had no sales as of December 31, 1999.
Sales for the second quarter ending December 31, 1999 of $4,720,317
exceeded sales for the first quarter ending September 30, 1999 of $3,071,766.
The reason for the sales increase was a significant increase in DocStar sales by
Bitwise during the second quarter compared to the first quarter. DJS also
realized a small sales increase.
Page 10 of 14
<PAGE> 11
Consolidated gross profit for the quarter and six months ended December
31, 1999 was $1,372,433 and $1,961,876, respectively. Consolidated gross profit
for the quarter and six months ended December 31, 1998 was $2,009,553 and
$3,907,777, respectively. This reduction is due to the decrease in DocStar sales
by Bitwise, especially during the first quarter ended September 30, 1999. The
consolidated profit margin was 29.1% and 25.2% for the quarter and six months
ended December 31, 1999, respectively and 39.8% and 37.3% for the quarter and
six months ended December 31, 1998, respectively. Gross profit margin is defined
as gross profit as a percentage of sales. The decrease in gross profit margin is
due to fixed overhead costs representing a larger percentage of sales when sales
decline.
Selling, general and administrative expenses (S,G&A) consist of all
other Company expenses except product development costs and interest. S,G&A
expenses amounted to $1,372,829 and $2,810,339 for the quarter and six months
ended December 31, 1999, respectively and $1,820,396 and $3,907,150 for the
quarter and six months ended December 31, 1998. S,G&A expenses declined as a
result of significant cost cutting on DocStar by Bitwise, which was offset
somewhat by expenses incurred by Authentidate.com and an expense increase by
DJS.
As a percentage of sales, S,G&A costs were 29.1% and 36.1% for the
quarter and six months ended December 31, 1999, respectively and 36.0% and 37.3%
for the quarter and six months ended December 31, 1998, respectively.
The decrease is due to cost cutting by Bitwise.
Interest expense was $124,857 and $317,836 for the quarter and six months ended
December 31, 1999, respectively and $150,086 and $300,996 for the quarter and
six months ended December 31, 1998, respectively. During the second quarter the
convertible note holders converted their notes to common stock resulting in a
decrease in interest expense for the quarter and the remainder of the fiscal
year. Interest rates increased during the six months ended December 31, 1999
compared to the same period last year.
Product development expenses, excluding capitalized costs and including
amortization of capitalized costs, relate to software development for DocStar by
Bitwise and Authentidate.com. These costs increased from $51,820 and $120,098
for the quarter and six months ended December 31, 1998, respectively, to $72,015
and $136,562 for the quarter and six months ended December 31, 1999,
respectively. Bitwise has a policy of capitalizing qualified software
development costs and amortizing those costs over three years as product
development expense.
Page 11 of 14
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds to date have been the issuance
of equity and the incurrence of third party debt. The principal balance of all
long-term debt at December 31, 1999 totaled $1,616,962 of which $1,395,021
relates to a mortgage loan.
During the quarter ended December 31, 1999 the Company's convertible
debt holders requested conversion of approximately $4.0 Million of debt into
approximately 1.2 Million common shares. As a result of this conversion the
Company's interest expense has been reduced significantly. The Company had been
paying $159,000 of interest expense semi-annually on this convertible debt.
The Company's subsidiary DJS has a wholesale line of credit facility
for $625,000 which is supported by a guaranty of $250,000 furnished by one of
DJS's vendors and expressly limited to purchases from this vendor. At December
31, 1999, $353,829 was outstanding. The line is non-interest bearing and payment
terms are net 40. The line is collateralized by all assets of DJS.
In May 1999, the Company's other line of credit for $1,500,000 was
terminated by its lender as a result of the Company not being in compliance with
all of its financial covenants. In October 1999, the Company entered into an
agreement with the lender whereby the Company paid the lender $600,000 and
agreed to pay off the remaining balance, approximately $612,000, in weekly
installments of $11,778 plus interest by September 30, 2000. Interest accrued at
the prime rate plus 4%. The Company paid the line of credit off in full in
December 1999.
In October and November 1999 the Company completed three private equity
offerings for approximately $2,100,000 (approximately $2,000,000 of net
proceeds). The investment was structured as follows. In the first offering the
Company sold 740,000 units for $740,000, each unit consisting of two shares of
common stock and two Series B common stock purchase warrants. Each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $1.375 for five years.
In the second offering the Company sold 50,000 Series B convertible
cumulative preferred shares for $1,250,000. Dividends on the preferred shares
are payable at the rate of 10% per annum, semi-annually. Each of these preferred
shares is convertible into the Company's common stock or is converted into such
number of shares of common as shall equal $25 divided by the conversion price of
$1.875 per share subject to adjustment under certain circumstances.
In November 1999, the Company completed the third offering by selling a
20% interest for $100,000 in a new subsidiary, Authentidate.com, Inc. In
addition, the Purchasers were issued 999,999 Bitwise Series C common stock
warrants. The warrants are divided in three classes of 333,333 warrants per
class which have varying exercise prices starting at $1.50 per common share and
increasing over time up to $3.75 after a Registration Statement
Page 12 of 14
<PAGE> 13
covering the underlying shares is filed, subject to adjustment for stock splits
and corporate reorganizations.
Property, plant and equipment expenditures totaled $208,136 and
capitalized software development expenditures totaled $306,512 for the six
months ended December 31, 1999, respectively. There were no purchase commitments
outstanding or contemplated.
The Company's cash balance at December 31, 1999 was $6,536,138 and
total assets were $19,109,744. Management believes existing cash and short-term
investments should be sufficient to meet the Company's operating requirements
for the next twelve months.
PART II OTHER INFORMATION
Item 6 Reports on Form 8-K
(a) The following Reports on Form 8-K were filed by the Company during the last
quarter:
None
(b) Exhibits
SAFE HARBOR STATEMENT
Certain statements in this Form 10-QSB, including information set forth
under Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 (the Act). The Company
desires to avail itself of certain "safe harbor" provisions of the Act and is
therefore including this special note to enable the Company to do so.
Forward-looking statements in this Form 10-QSB or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ from the future
results, performance (financial or operating) or achievements expressed or
implied by such forward-looking statements. Such future results are based upon
management's best estimates based upon current conditions and the most recent
results of operations. These risks include, but are not limited to risks
associated with the market acceptance of the DocStar product line and
Authentidate service, competition, pricing, technological changes, technological
implementation of the Authentidate service and other risks as discussed in the
Company's filings with the Securities and Exchange Commission, in particular its
Annual Report on Form 10-KSB for the year ended June 30, 1999, and Registration
Statement on Form S-3 declared effective on July 30, 1996 all of which risk
factors could adversely affect the Company's business and the accuracy of the
forward-looking statements contained herein.
Page 13 of 14
<PAGE> 14
YEAR 2000 UPDATE
The Company has experienced no interruptions of its computer systems nor
interruptions from third party suppliers as a result of Y2K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BITWISE DESIGNS INCORPORATED
February 10, 2000 /s/ John T. Botti
DATE JOHN T. BOTTI
PRESIDENT & CHIEF EXECUTIVE OFFICER
/s/ Dennis H. Bunt
DENNIS H. BUNT
CHIEF FINANCIAL OFFICER
Page 14 of 14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,536,138
<SECURITIES> 0
<RECEIVABLES> 5,046,637
<ALLOWANCES> (491,087)
<INVENTORY> 2,813,954
<CURRENT-ASSETS> 14,366,486
<PP&E> 4,324,119
<DEPRECIATION> (1,293,379)
<TOTAL-ASSETS> 19,109,744
<CURRENT-LIABILITIES> 2,045,222
<BONDS> 0
0
5,020
<COMMON> 12,067
<OTHER-SE> 14,781,929
<TOTAL-LIABILITY-AND-EQUITY> 19,109,744
<SALES> 7,792,083
<TOTAL-REVENUES> 7,792,083
<CGS> 5,830,207
<TOTAL-COSTS> 8,777,108
<OTHER-EXPENSES> (32,113)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (317,836)
<INCOME-PRETAX> (1,270,748)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,234,109)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,234,109)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
