UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
Commission File No. 0-28287
BSI2000, INC.
--------------------------------------------------------------
(Exact name of small business issued as specified in its charter)
DELAWARE 84-0418749
------------------------------ --------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
12600 W. COLFAX AVE., SUITE B410, LAKEWOOD, CO 80215
-----------------------------------------------------------------------
(Address of Principal Executive Offices)
(303) 231-9095
---------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equities as of the latest practicable date: AS OF SEPTEMBER 30, 2004, THERE WERE
82,822,537 OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK, $0.001 PAR VALUE.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
BSI2000, INC.
FORM 10-QSB
TABLE OF CONTENTS
-----------------
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.......................3
Balance Sheets .......................................................4
Statements of Operations .............................................5
Statements of Cash Flows .............................................6
Statement of Changes in Stockholders' Deficit ........................7
Notes to Financial Statements.........................................8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........14
ITEM 3. CONTROLS AND PROCEDURES..........................................20
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................22
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS...............22
ITEM 5. OTHER INFORMATION................................................22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................22
SIGNATURE PAGE
2
PART 1
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BSI2000, INC.
CONSOLIDATED FINANCIAL STATEMENT
----------------------------------------------------------------
AS OF SEPTEMBER 30, 2004
INDEX TO FINANCIAL STATEMENTS
-----------------------------
PAGE 4 CONSOLIDATED BALANCE
PAGE 5 CONSOLIDATED STATEMENTS OF OPERATIONS
PAGE 6 CONSOLIDATED STATEMENTS OF CASH FLOWS
PAGE 7 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
PAGES 8-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2004 2003
(unaudited)
ASSETS
- --------------------------------------------------------------------------------------------------
Current assets
Cash and cash equivalents $ 1,831 $ 125,550
Inventories 56,506 35,361
Other current assets 1,877 -
---------------- ----------------
Total current assets 60,214 160,911
---------------- ----------------
Non-current assets
Property and equipment, net 46,010 52,320
Intangible assets 181,110 62,583
Other long-term assets 4,232 4,232
---------------- ----------------
Total non-current assets 231,352 119,135
---------------- ----------------
Total assets $ 291,566 $ 280,046
================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 255,380 $ 196,137
Accrued liabilities 30,570 25,798
Deferred revenue 21,177 -
Convertible notes payable, current portion 247,381 686,395
---------------- ----------------
Total current liabilities 554,508 908,330
---------------- ----------------
Convertible notes payable, less current portion - 180,548
---------------------------------
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, $.001 par value, 20,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $.001 par value, 200,000,000 shares
authorized, 82,822,537 and 53,951,727 shares issued
and outstanding 82,823 53,952
Additional paid-in capital 6,466,265 4,417,505
Accumulated deficit (6,812,030) (5,280,289)
---------------- ----------------
Total stockholders' deficit (262,942) (808,832)
---------------- ----------------
Total liabilities and stockholders' deficit $ 291,566 $ 280,046
================ ================
See notes to consolidated financial statements.
4
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the
Period from
July 30,
1993
For the Nine Months Ended For the Three Months Ended (Inception)
September 30, September 30, through
---------------------------- ------------------------------ September
2004 2003 2004 2003 30, 2004
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------ ------------ ------------- -----------
Revenues $ 4,323 $ 34,290 $ 1,594 $ 29,290 $ 100,053
------------ ------------ ------------ ------------- -----------
Cost of goods sold - 46,475 - 46,475 67,986
------------ ------------ ------------ ------------- ------------
Gross profit 4,323 (12,185) 1,594 (17,185) 32,067
------------ ------------ ------------ ------------- ------------
Operating expenses
Selling expenses 267,749 176,657 86,247 43,721 1,306,722
General and
administrative 718,951 504,145 240,389 201,213 3,303,392
Stock-based compensation
expense - - - - 253,741
Research and development 377,666 345,937 162,612 93,426 1,738,555
------------ ------------ ------------ ------------- ------------
Total operating
expenses 1,364,366 1,026,739 489,248 338,360 6,602,410
------------ ------------ ------------ ------------- ------------
Other income (expense)
Interest expense (25,022) (6,537) (1,197) (5,323) (154,387)
Interest income 253 1,635 251 404 23,296
Financing costs (146,929) (8,619) (46,444) (8,619) (193,872)
Other expense - - - - 83,276
------------ ------------ ------------ ------------- ------------
Total other (expense) (171,698) (13,521) (47,390) (13,538) (241,687)
------------ ------------ ------------ ------------- ------------
Net loss $ (1,531,741) $(1,052,445) $ (535,044) $ (369,083) $ (6,812,030)
============ ============ ============ ============= ============
Basic and diluted weighted
average common shares
outstanding 67,307,009 37,298,926 77,484,570 51,509,417 12,397,984
============ ============ ============ ============= ============
Basic and diluted loss per
common share $ (0.023) $ (0.03) $ (0.007) $ (0.01) $ (0.55)
=============== ============ ============== ============= ============
See notes to consolidated financial statements.
5
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
Accumulated
Deficit
During the Total
Common Stock Additional Development Stockholders'
------------------------ Equity
Shares Amount Paid-in Capital Stage (Deficit)
---------- ---------- --------------- ------------- -------------
Balance - December 31, 2003 53,951,727 $ 53,952 $4,417,505 $(5,280,289) $ (808,832)
Stock issued for debt
conversion 27,880,711 27,881 2,002,250 - 2,030,131
Stock issued for cash 990,099 990 46,510 - 47,500
Net loss - - - (1,531,741) (1,531,741)
---------- ---------- ---------- ---------- ----------
Balance - September 30,
2004 82,822,537 $ 82,823 $6,466,265 $(6,812,030) $ (262,942)
========== ========== ========== =========== ==========
See notes to consolidated financial statements.
6
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Period
from July 30,
1993
(Inception)
Nine Months Ended September 30, through
------------------------------- September 30,
2004 2003 2004
(unaudited) (unaudited) (unaudited)
Cash flows from operating activities
Net loss $ (1,531,741) $ (1,052,445) $ (6,812,030)
------------- ------------- -------------
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation expense 14,445 21,195 118,606
Gain on forgiveness of debt - - (65,485)
Stock based compensation - - 253,741
Changes in assets and liabilities
Accounts receivable - (27,570)
Inventories (21,145) (29,058) (56,506)
Other current assets (1,877) (47,824) (1,877)
Other long-term assets - (22,603) (4,232)
Deferred revenue 21,177 - 21,177
Accounts payable 59,243 53,189 309,443
Accrued liabilities 4,772 (4,094) 84,119
------------- ------------- ------------
76,615 (56,765) 658,986
------------- ------------- ------------
Net cash used in operating activities (1,455,126) (1,109,210) (6,153,044)
------------- ------------- ------------
Cash flows from investing activities
Redemption of certificates of deposit - - 35,000
Purchase of certificate of deposit - - (35,000)
Purchase of fixed assets (8,135) (9,935) (116,262)
Patent application (118,527) - (181,110)
------------- ------------- ------------
Net cash used in investing activities (126,662) (9,935) (297,372)
------------- ------------- ------------
Cash flows from financing activities
Proceeds from issuance of common stock 47,500 349,500 3,324,341
Repayment on long-term debt - - (81,516)
Proceeds from long-term debt - 250,000 919,500
Net proceeds from convertible notes payable 1,410,569 500,000 2,327,512
Repayment on capital lease obligations - - (37,590)
------------ ------------ ------------
Net cash provided by financing activities 1,458,069 1,099,500 6,452,247
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (123,719) (19,645) 1,831
Cash and cash equivalents - beginning of period 125,550 228,617 -
------------ ------------ -----------
Cash and cash equivalents - end of period $ 1,831 $ 208,972 $ 1,831
============ ============ ============
(Continued on following page)
See notes to consolidated financial statements.
7
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued from previous page)
Supplemental disclosure of cash flow information:
The Company did not pay cash for interest expense or income taxes during
the year ended December 31, 2003 or during the nine-month period ended
September 30, 2004. Cash paid for interest expense from Inception (July 30,
1993) through September 30, 2004 was $68,164.
Supplemental disclosure of non-cash activity:
During the nine months ended September 30, 2004, the Company converted
$2,030,131 of notes payable and accrued interest into 27,880,711 shares of
common stock.
During the year ended December 31, 2003, the Company converted $50,000 of
notes payable into 390,625 shares of common stock.
Effective March 31, 2003, the Company entered into a merger agreement,
which has been accounted for as a reverse acquisition. No assets were
acquired. As a result of the merger, there was an increase of 41,363,488
shares of common stock outstanding in the surviving company.
As part of the merger, the Company assumed an existing liability of
$56,825, which has been funded through a note receivable from shareholders
of the Company.
During the year ended December 31, 2002, the Company converted $812,326 of
notes payable and $53,049 of accrued interest into 1,159,426 shares of
common stock.
During the year ended December 31, 2002, the Company converted $25,500 of
accounts payable and accrued liabilities into 25,000 shares of common
stock.
During the year ended December 31, 2001, the Company converted accrued
wages totaling $56,736 into 2,500,000 shares of common stock.
During the year ended December 31, 1999, the Company converted $29,063 from
accounts payable to notes payable.
In September 1998, the Company obtained fixed assets totaling $37,590
through a capital lease. In addition, the Company financed leasehold
improvements in the amount of $16,000 through a note payable.
See notes to consolidated financial statements.
8
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
BSI2000, Inc. was formed on July 30, 1993 and is a value-added reseller ("VAR")
of LaserCard's(R) optical cards and optical card readers. As a VAR, BSI2000,
Inc. develops proprietary hardware and software adapting LaserCard's(R) optical
card technology for specific applications. BSI2000 Inc.'s products are designed
as turnkey solutions for identified commercial and governmental card-based
information needs.
BSI2000, Inc. is a development stage company that has not had any significant
revenue since inception. There is no assurance that the Company will generate
significant revenue or earn a profit in the future.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of
BSI2000, Inc. and its subsidiary, BSI Operating, Inc. (the "Company"). All
intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents. The Company continually
monitors its positions with, and the credit quality of, the financial
institutions with which it invests. Periodically throughout the year, the
Company's cash and cash equivalents exceed federally insured limits.
Inventories
- -----------
Inventories consist of raw materials and are stated at the lower of cost or
market, determined using the first-in, first-out method ("FIFO").
Property and Equipment
- ----------------------
Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets of 5 to 7
years. Leasehold improvements are amortized over a 5 1/2 year period.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
9
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Revenue Recognition
- -------------------
The Company recognizes revenue in compliance with SAB 104, "Revenue Recognition
in Financial Statements." Revenue is recognized when an order has been placed by
the customer, the product has been shipped and collectibility is reasonably
assured. Prices of the products are determined prior to entering into a purchase
agreement. From inception through September 30, 2004, revenues earned
represented sales to distributors of demonstration units of the Company's
products.
Transaction based revenue is recognized as transactions are completed and are
billed monthly based on service agreement rates in effect.
Distribution rights revenue is recognized ratable over the life of each
underlying distribution agreement.
Intangible Assets
- -----------------
Intangibles include trademarks and patents, which are recorded at cost. These
patents are awaiting approval from the U.S. Patent office. Once accepted, the
Company will begin amortization over the life of the patent.
Income Taxes
- ------------
The Company recognizes deferred tax liabilities and assets based on the
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years.
Advertising Costs
- -----------------
The Company expenses advertising costs as incurred.
Software and Research and Development Costs
- -------------------------------------------
Expenditures made for research and development are charged to expense as
incurred.
Costs incurred to date for the development of the Company's products have been
charged to expense as incurred. Future costs may be capitalized to the extent
they meet the requirements of SFAS No. 86 "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed."
Basic and Diluted Earnings Per Common Share
- -------------------------------------------
Basic earnings per share are computed by dividing net income by the number of
weighted average common shares outstanding during the year. Diluted earnings per
share is computed by dividing net income by the number of weighted average
common shares outstanding during the year, including potential common shares,
which consisted of warrants, options and convertible debt.
10
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - GOING CONCERN
- ----------------------
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. The Company has experienced
losses since inception (July 30, 1993) through September 30, 2004 of $6,812,030.
The Company has negative working capital of $494,294 and stockholder's deficit
of $262,942 as of September 30, 2004 and used cash of $1,455,126 in its nine
months 2004 operations.
The extended period over which losses have been experienced is principally
attributable to two factors, lack of capital and the type of potential
customers. Lack of capital has prevented the Company from quickly developing and
aggressively marketing its products. In addition, most of the Company's
potential customers are large corporations or governments. Adopting the
Company's products will in many cases require changing the way business is done.
The Company has made advances in the sales process with several potentially
large customers. Although there are no assurances that the Company will be
successful, in order to fund activities until positive operating cash flow can
be achieved, the Company has implemented the plan described below.
During the first quarter of 2003, the Company signed an agreement to merge with
a small public company (Note 3). The transaction was a reverse acquisition with
the Company as the accounting acquirer. The Company became a wholly owned
subsidiary of the public company, the Company's shareholders became the majority
shareholders of the public company, and the public company changed its name to
"BSI2000, Inc."
On October 31, 2003, the Company entered into an Equity Line of Credit Agreement
with Cornell Capital Partners, LP ("Cornell"). Under this agreement, the Company
may issue and sell to Cornell common stock for a total purchase price of up to
$15 million (Note 4).
On October 8, 2004 the company issued a $1,250,000 convertible debenture to
Cornell Capital Partners, LP (Note 6).
The Company expects that the capital raised in the transactions described above
will be sufficient to fund the Company's activities until positive operating
cash flow is achieved.
NOTE 3 - REVERSE ACQUISITION
- ----------------------------
On March 31, 2003, the reverse triangular merger between the Company and
Knowledge Foundations, Inc. closed. As a result of the closing BSI2000, Inc.
became a 100% owned subsidiary of Knowledge Foundations, Inc. Also as result of
the closing Knowledge Foundations, Inc.'s name changed to BSI2000, Inc. ("new
BSI") and BSI2000, Inc.'s name changed to BSI Operating, Inc. ("old BSI").
Immediately prior to the closing all of Knowledge Foundations, Inc.'s assets and
all but $56,825 of its liabilities (see below) were spun-off to certain of its
shareholders in exchange for 34,105,900 shares of common stock, which were then
canceled. After the spin-off 5,027,818 shares of Knowledge Foundations, Inc.
common stock ("new BSI stock") remained outstanding.
Knowledge Foundations, Inc. ("new BSI") acquired BSI2000, Inc. ("old BSI") by
issuing 45,122,570 of its common shares ("new BSI stock") to stockholders of
BSI2000, Inc. ("old BSI") in exchange for 100% of the outstanding 8,786,900
common shares of BSI2000, Inc. ("old BSI stock").
For financial reporting purposes the transaction has been accounted for as a
re-capitalization of the Company. Accordingly the net increase in the
outstanding shares of 41,363,488 resulting from the above transactions has been
reflected in the financial statements as shares issued in connection with the
re-capitalization of the Company. In recording the re-capitalization transaction
$4,121,307 has been reclassified from common stock to additional paid in
capital.
11
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - REVERSE ACQUISITION (CONTINUED)
- ----------------------------------------
As a result of the accounting method adopted to record the merger, for financial
reporting purposes the historical financial statements of the Company, and only
the historical financial statements of the Company, have become the historical
financial statements of the continuing entity. Historical financial statements
of Knowledge Foundations, Inc. are not presented.
The terms of the merger agreement between the Company and Knowledge Foundations,
Inc. provided that the liabilities of Knowledge Foundations, Inc. at the closing
would not exceed $15,000. However, at the closing Knowledge Foundations, Inc.
had a note payable and accrued interest outstanding in the amount of $56,825. In
order to off set this liability certain shareholders of Knowledge Foundations
Inc. executed a note payable to the Company in the amount of $56,825. The
Knowledge Foundations, Inc. note and accrued interest have been recorded as a
reduction of additional paid in capital. The note receivable from the Knowledge
Foundations, Inc. stockholders has been recorded as an increase to additional
paid in capital.
NOTE 4 - CONVERTIBLE DEBT
- -------------------------
On October 31, 2003, the Company entered into an Equity Line of Credit Agreement
with Cornell. Under this agreement, the Company may issue and sell to Cornell
common stock for a total purchase price of up to $15.0 million. Subject to
certain conditions, the Company is entitled to commence drawing down on the
Equity Line of Credit effective on December 9, 2003, the effective date of the
registration statement filed with The Securities and Exchange commission, and
will continue for two years thereafter. The purchase price for the shares will
be equal to 99% of, or a 1% discount to, the market price, which is defined as
the lowest closing bid price of the common stock during the five trading days
following the notice date. The amount of each advance is subject to an aggregate
maximum advance amount of $210,000, with no advance occurring within seven
trading days of a prior advance. Cornell received 1,875,000 shares of the
Company's common stock as a one-time commitment fee and is entitled to retain a
fee of 4.0% of each advance. In addition, the Company entered into a placement
agent agreement with Newbridge Securities Corporation, a registered
broker-dealer. Pursuant to the placement agent agreement, the Company paid a
one-time placement agent fee of 35,714 shares of common stock equal to
approximately $10,000 based on the Company's stock price on July 7, 2003, the
date the Company agreed to engage the placement agent.
Convertible notes payable consist of the following at September 30, 2004:
Secured promissory note issued to Cornell, due on October 18, 2004 and secured
by substantially all of Company's non-cash assets. The note bears interest at
12% during its term, and bears a default rate of interest of 24% if the note is
not paid when due. Discounts and fees paid to obtain the loan were $17,750, of
which $2,619 is unamortized at September 30, 2004. $ 250,000
Fees and discounts (2,619)
-------------
247,381
Less current portion (247,381)
-------------
$ -
============
NOTE 5-SHAREHOLDERS' EQUITY
- ---------------------------
On September 13, 2004, the Company issued 990,019 shares of common stock under
the Equity Line of Credit Agreement to Cornell Capital for $50,000 cash. Costs
associated with this transaction were $2,500.
During September 2004, the Board of Directors approved an amendment of the
articles of incorporation to increase the authorized number of common shares
from 100,000,000 to 200,000,000.
12
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - SUBSEQUENT EVENTS
- --------------------------
Subsequent to September 30, 2004, the Company converted outstanding debt and
accrued interest of $259,181 into 4,285,831 shares of common stock of the
Company.
On October 8, 2004, the Company issued a 5% convertible debenture in the amount
of $1,250,000 to Cornell Capital Partners, LP ("Cornell") that is due September
8, 2007. The debenture is convertible into the Company's common stock at either
the fixed price of 120% of the Volume Weighted Average price on the closing date
(September 7, 2004) or 80% of the average of the three (3) lowest daily Volume
Weighted Average Price, as reported by Bloomberg, L.P., of the Company's common
stock for the five (5) trading days immediately preceding the conversion date
(date on which the Company receives a notice of conversion from Cornell). The
debenture will automatically convert into the Company's common stock on the
third anniversary of issuance. The Company has the right to redeem the debenture
with three (3) days advance notice any or all of the outstanding debenture
amount at its sole discretion. The redemption price shall be 120% of the face
amount redeemed plus accrued interest. Once the redemption notice has been
given, Cornell may continue to convert the remaining outstanding debenture.
The Company received $500,000 on October 7, 2004, less a 10% fee of $50,000 and
$10,000 for legal costs. The Company will receive $500,000 (net of 10% fee) upon
the filing of a registration statement with the Securities and Exchange
Commission, and $250,000 (net of 10% fee) upon effectiveness of the registration
statement. The Company is required to file the registration statement within 30
days of closing, and shall use its best efforts to ensure that such registration
statement is effective within 90 days of closing. In the event that the
registration statement is not declared effective within 90 days, the Company
shall pay to Cornell a cash amount within three (3) business days of the end of
the month equal to 2% per month of the liquidation value of the debenture
outstanding as liquidated damages.
In the event that the Company exercises it right of redemption as described
above for either all or a portion of the outstanding debenture, Cornell shall
receive for every $100,000 invested a warrant to purchase 50,000 shares of the
Company's common stock. The warrant will have "piggy-back" registration rights
and will survive for two years from closing. The exercise price of the warrant
shall be 120% of the volume weighted average price on the closing date.
13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS FILING CONTAINS
FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS
REGARDING, AMONG OTHER THINGS, (A) THE COMPANY'S PROJECTED SALES AND
PROFITABILITY, (B) THE COMPANY'S GROWTH STRATEGIES, (C) ANTICIPATED TRENDS IN
THE COMPANY'S INDUSTRY, (D) THE COMPANY'S FUTURE FINANCING PLANS, (E) THE
COMPANY'S ANTICIPATED NEEDS FOR WORKING CAPITAL, (F) THE COMPANY'S LACK OF
OPERATIONAL EXPERIENCE, AND (G) THE BENEFITS RELATED TO OWNERSHIP OF THE
COMPANY'S COMMON STOCK. FORWARD-LOOKING STATEMENTS, WHICH INVOLVE ASSUMPTIONS
AND DESCRIBE THE COMPANY'S FUTURE PLANS, STRATEGIES, AND EXPECTATIONS, ARE
GENERALLY IDENTIFIABLE BY USE OF THE WORDS "MAY," "WILL," "SHOULD," "EXPECT,"
"ANTICIPATE," "ESTIMATE," "BELIEVE," "INTEND," OR "PROJECT" OR THE NEGATIVE OF
THESE WORDS OR OTHER VARIATIONS ON THESE WORDS OR COMPARABLE TERMINOLOGY. THIS
INFORMATION MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER
FACTORS THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE, OR
ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM THE FUTURE RESULTS, PERFORMANCE, OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY ANY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS MAY BE FOUND UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS" AS WELL AS IN THIS FILING GENERALLY. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY FROM THOSE DISCUSSED IN FORWARD-LOOKING STATEMENTS AS A RESULT
OF VARIOUS FACTORS, INCLUDING, WITHOUT LIMITATION THE MATTERS DESCRIBED IN THIS
FILING GENERALLY. IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN BE NO
ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FILING WILL IN
FACT OCCUR AS PROJECTED. READERS ARE FURTHER CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS AS THEY SPEAK ONLY OF THE COMPANY'S
VIEWS AS OF THE DATE THE STATEMENT WAS MADE. THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE.
GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. The Company has experienced
losses since inception. The extended period over which losses have been
experienced is principally attributable to two factors, lack of capital and the
type of potential customers. Lack of capital has prevented the Company from
quickly developing and aggressively marketing its products. In addition, most of
the Company's potential customers are large corporations or governments.
Adopting the Company's products will in many cases require changing the way
business is done. These circumstances can result in two years or more elapsing
from initial sales contact to delivery of product. In order to fund activities
until positive operating cash flow is achieved, management recognizes that the
Company must generate revenue from its operations and must raise capital from
the sale of its securities. However, no assurances can be given that the Company
will be successful in these activities. Should any of these events not occur,
the accompanying financial statements will be materially affected.
CRITICAL ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
BSI2000, Inc. and its subsidiary, BSI Operating, Inc. (the "Company"). All
intercompany accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents. The Company continually
monitors its positions with, and the credit quality of, the financial
institutions with which it invests. Periodically throughout the year, the
Company's cash and cash equivalents exceed federally insured limits.
INVENTORIES
Inventories consist of raw materials and are stated at the lower of cost or
market, determined using the first-in, first-out method ("FIFO").
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets of 5 to 7
years. Leasehold improvements are amortized over a 5 1/2 year period.
14
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue in compliance with SAB 104, "Revenue Recognition
in Financial Statements." Revenue is recognized when an order has been placed by
the customer, the product has been shipped and collectibility is reasonably
assured. Prices of the products are determined prior to entering into a purchase
agreement. From inception through September 30, 2004, revenues earned
represented sales to distributors of demonstration units of the Company's
products.
Transaction based revenue is recognized as transactions are completed and are
billed monthly based on service agreement rates in effect.
Distribution rights revenue is recognized ratable over the life of each
underlying distribution agreement.
INTANGIBLE ASSETS
Intangibles include trademarks and patents, which are recorded at cost. These
patents are awaiting approval from the U.S. Patent office. Once accepted, the
Company will begin amortization over the life of the patent.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets based on the
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years.
ADVERTISING COSTS
The Company expenses advertising costs as incurred.
SOFTWARE AND RESEARCH AND DEVELOPMENT COSTS
Expenditures made for research and development are charged to expense as
incurred.
Costs incurred to date for the development of the Company's products have been
charged to expense as incurred. Future costs may be capitalized to the extent
they meet the requirements of SFAS No. 86 "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed."
BASIC AND DILUTED EARNINGS PER COMMON SHARE
Basic earnings per share are computed by dividing net income by the number of
weighted average common shares outstanding during the year. Diluted earnings per
share is computed by dividing net income by the number of weighted average
common shares outstanding during the year, including potential common shares,
which consisted of warrants, options and convertible debt.
15
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2004
COMPARED TO THE SAME PERIOD ENDED SEPTEMBER 30, 2003
OVERALL RESULTS OF OPERATIONS
For the three months ended September 30, 2004, we incurred an overall loss of
($535,044) or ($.007) per share, which was a material increase from the loss of
($369,083) or ($0.01) per share for the comparable period in the prior year.
REVENUE
We had revenues of $1,594 during the three months ended September 30, 2004 as
compared to $29,290 for the comparable period in the prior year. 2004 revenues
represent revenue from distribution rights sold during the second quarter of
2004, which are being recognized ratably over the four-year term of the
underlying agreement. 2003 revenues represent the sale of a pilot unit to The
INS.
OPERATING EXPENSES
Operating expenses for the three months ended September 30, 2004, were $489,248
and represent an increase of $150,888 or a 45% increase in operating expenses of
$338,360 for the comparative period ended September 30, 2003.
The largest component of operating expenses for the periods ended September 30,
2004 and 2003 related to general and administrative expenses. For the period
ended September 30, 2004, general and administrative expense were $240,389, an
increase of $39,176 or nearly a 19% increase in general and administrative
expenses of $201,213 for the comparative period ended September 30, 2003. This
increase is attributable to salary expense of $20,053, contracted services in
the amount of $47,601, a decrease of $42,506 for legal fees, and an increase in
shareholder relations costs of $13,468. The salary increase is due to the
addition of another employee as well as salary increases. The increase in
contracted services is due to the addition of accounting, public relations and
shareholder relations consultants. Shareholder relations costs increased due to
a special shareholders meeting that was held during September 2004.
The Company further had selling expenses for the three months ended September
30, 2004 of $86,247, as compared to $43,721 for the period ended September 30,
2003. The increase in selling expenses is attributable to salary expense of
$7,733, an increase in consulting fees of $5,980, travel and entertainment
expenses of $20,472 and an increase in advertising and tradeshow expenses in the
amount of $2,735. The increase in selling costs is attributable to increased
sales and marketing efforts.
The Company also had research and development expenses of $162,612 for the
quarter ended September 30, 2004, as compared to $93,426 for the period ended
September 30, 2003, an increase of $69,186. This increase is attributable to
salary expense of $9,160, an increase in consulting fees of $52,530, along with
an increase of $10,234 for R&D components. Travel and entertainment decreased
$4,452. The cost increase is attributable to the ongoing development, testing
and certification of the company's products.
OTHER EXPENSES
As to the other income and expenses, the Company had net interest expenses of
$946 for the quarter ended September 30, 2004, as compared to net interest
expense, of $4,919, for the comparative period ended September 30, 2003. The
Company also had financing costs of $46,444 for the three months period ended
September 30, 2004, as compared to $8,619 for the comparable period in 2003. The
financing costs are related to the equity line of credit placed with Cornell
Capital.
16
RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2004
COMPARED TO THE SAME PERIOD ENDED SEPTEMBER 30, 2003
OVERALL RESULTS OF OPERATIONS
For the nine months ended September 30, 2004, we incurred an overall loss of
($1,531,741) or ($.023) per share, which was a material increase from the loss
of ($1,052,445) or ($0.03) per share for the comparable period in the prior
year.
REVENUE
We had revenues of $4,323 during the nine months ended September 30, 2004 as
compared $34,290 for the comparable period in the prior year. 2004 revenues
represent revenue from distribution rights sold during the first six months of
2004, which are being recognized ratably over the four-year term of the
underlying agreement. 2003 revenue represent sales of pilot units to the
Immigration and Naturalization Service.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 2004, were $1,364,366
and represent an increase of $337,627 or a 33% increase in operating expenses of
$1,026,739 for the comparative period ended September 30, 2003.
The largest component of operating expenses for the periods ended September 30,
2004 and 2003 related to general and administrative expenses. For the period
ended September 30, 2004, general and administrative expense were $718,951, an
increase of $214,806 or nearly a 43% increase in general and administrative
expenses of $504,145 for the comparative period ended September 30, 2003. This
increase is attributable to salary expense of $88,998, contracted services in
the amount of $155,674, $20,698 for employee benefits, a $23,651 decrease in
legal fees, office expenses of $13,307 and a decrease in merger costs of
$43,325. The salary increase is due to a bonus payment to an officer of the
company and the addition of another employee. The increase in contracted
services is due to the addition of accounting, public relations and shareholder
relations consultants.
The Company further had selling expenses for the nine months ended September 30,
2004 of $267,749, as compared to $176,657 for the period ended September 30,
2003. The increase in selling expenses is attributable to salary expense of
$20,528, a decrease in consulting fees of $26,850, travel and entertainment
expenses of $66,688 and advertising and tradeshow expenses in the amount of
$11,244. The increase in selling costs is attributable to increased sales and
marketing efforts.
The Company also had research and development expenses of $377,666 for the nine
months ended September 30, 2004, as compared to $345,937 for the period ended
September 30, 2003, an increase of $31,729. This increase is attributable to a
decrease in salary expense of $10,849, an increase in consulting fees of
$26,850, an increase of $18,520 for R&D components, and a decrease in travel and
entertainment of $4,459. The cost increase is attributable to the ongoing
development, testing and certification of the company's products.
OTHER EXPENSES
As to the other income and expenses, the Company had net interest expenses of
$24,769 for the nine months ended September 30, 2004, as compared to net
interest expense of $4,902 for the comparative period ended September 30, 2003.
This increase is attributable to the Equity Line of Credit with Cornell Capital
Partners, LP that was placed during the fourth quarter of 2003. The Company also
had financing costs of $146,929 for the nine months period ended September 30,
2004 as compared to 8,619 for the comparable period in 2003 again related to the
equity line of credit placed with Cornell Capital.
17
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, we had cash of $1,831 and current liabilities of
$554,508. We do not have sufficient cash or other current assets to meet our
current liabilities. In order to meet those obligations, we will need to raise
cash from the sale of securities or from borrowings. Our independent auditors
have added an explanatory paragraph to their audit opinions issued in connection
with the years 2003, 2002 and 2001 financial statements, which states that our
ability to continue as a going concern depends upon our ability to resolve
liquidity problems, principally by obtaining capital, commencing sales and
generating sufficient revenues to become profitable. Our ability to obtain
additional funding will determine our ability to continue as a going concern.
On July 7, 2003, the Company sold $250,000 convertible debentures to Cornell
Capital Partners. Cornell Capital Partners was the purchaser of the convertible
debentures. These debentures accrue interest at a rate of 5% per year and mature
two years from the issuance date. The debentures are convertible at Cornell
Capital Partners' option any time up to maturity at a conversion price equal to
the lower of (i) 120% of the closing bid price of the common stock as of the
closing date or (ii) 80% of the lowest closing bid price of the common stock for
the five trading days immediately preceding the conversion date. At maturity,
the Company has the option to either pay the holder the outstanding principal
balance and accrued interest or to convert the debentures into shares of common
stock at a conversion price equal to the lower of (i) 120% of the closing bid
price of the common stock as of the closing date or (ii) 80% of the lowest
closing bid price of the common stock for the five trading days immediately
preceding the conversion date. The Company has the right to redeem the
debentures upon thirty days notice for 120% of the amount redeemed. Cornell
Capital Partners has converted these convertible debentures into 3,400,183
shares of common stock.
On October 31, 2003, the Company entered into an Equity Line of Credit Agreement
with Cornell Capital Partners. Under this agreement, the Company may issue and
sell to Cornell Capital Partners common stock for a total purchase price of up
to $15.0 million. Subject to certain conditions, the Company will be entitled to
commence drawing down on the Equity Line of Credit when the common stock to be
issued under the Equity Line of Credit is registered with the Securities and
Exchange Commission and the registration statement is declared effective and
will continue for two years thereafter. The purchase price for the shares will
be equal to 99% of, or a 1% discount to, the market price, which is defined as
the lowest closing bid price of the common stock during the five trading days
following the notice date. The amount of each advance is subject to an aggregate
maximum advance amount of $210,000, with no advance occurring within seven
trading days of a prior advance. Cornell Capital Partners received 1,875,000
shares of the Company's common stock as a one-time commitment fee. Cornell
Capital Partners is entitled to retain a fee of 4.0% of each advance. In
addition, the Company entered into a Placement Agent Agreement with Newbridge
Securities Corporation., a registered broker-dealer. Pursuant to the Placement
Agent Agreement, the Company paid a one-time placement agent fee of 35,714
shares of common stock equal to approximately $10,000 based on the Company's
stock price on July 7, 2003, the date the Company agreed to engage the placement
agent.
On September 16, 2003, the Company received the net proceeds of $455,000 from a
$500,000 secured promissory note issued to Cornell Capital Partners. The note is
due on the earlier of 90 days from the date thereof or 60 days after the
Company's registration statement on Form SB-2 is declared effective by the
Securities and Exchange Commission. The note is secured by substantially all of
the Company's non-cash assets. The note bears no interest during its term, but
bears a default rate of interest of 24% if the note is not paid when due. The
Company paid cash fees of $45,000 in connection with the issuance of the note
and also issued 500,000 shares of its common stock to Cornell Capital Partners,
LP as additional consideration in the transaction. Cornell Capital Partners has
converted this debt into 4,776,988 shares of common stock of the Company and
$19,890 of accrued interest related to this debt into 211,734 shares of common
stock
On December 19, 2003, the Company received net proceeds of $170,917 from a
$200,000 secured promissory note issued to Cornell Capital Partners. The note
was due on the earlier of 90 days from the date thereof or 60 days after the
Company's registration statement on Form SB-2 is declared effective by the
Securities and Exchange Commission (December 9, 2003). The note is secured by
substantially all of the Company's non-cash assets. The note bears no interest
during its term, but bears a default rate of interest of 24% if the note is not
paid when due. The Company paid cash fees of $29,083 in connection with the
issuance of the note. The Company has reserved and placed into escrow 3.9
million shares of its common stock as an estimation of the shares necessary to
repay the loan. Cornell Capital Partners subsequently converted this debt into
2,496,878 shares of common stock.
18
On February 4, 2004, the Company received net proceeds of $223,559 from a
$250,000 secured promissory note issued to Cornell Capital Partners. The note is
due on May 12, 2004. The note is secured by substantially all of the Company's
non-cash assets. The note bears no interest during its term, but bears a default
rate of interest of 24% if the note is not paid when due. The Company paid cash
fees of $26,441 in connection with the issuance of the note. Subsequently,
Cornell Capital Partners converted this note into 4,140,867 shares of common
stock.
On March 3, 2004, the Company received net proceeds of $229,524 from a $250,000
secured promissory note issued to Cornell Capital Partners. The note is due on
June 23, 2004. The note is secured by substantially all of the Company's
non-cash assets. The note bears interest of 12% during its term, and bears a
default rate of interest of 24% if the note is not paid when due. The Company
paid cash fees of $20,476 in connection with the issuance of the note. Cornell
Capital Partners subsequently converted this note into 3,246,474 shares of
common stock.
On April 14, 2004, the Company received net proceeds of $229,679 from a $250,000
secured promissory note issued to Cornell Capital Partners. The note is due on
June 21, 2004. The note is secured by substantially all of the Company's
non-cash assets. The note bears no interest during its term, but bears a default
rate of interest of 24% if the note is not paid when due. The Company paid cash
fees of $20,321 in connection with the issuance of the note. The Company has
reserved and placed into escrow 3.0 million shares of its common stock as an
estimation of the shares necessary to repay the loan. Cornell Capital Partners
subsequently converted this note and accrued interest into 3,418,210 shares of
common stock.
On June 8, 2004, the Company received net proceeds of $320,208 from a $350,000
secured promissory note issued to Cornell Capital Partners. The note is due on
September 20, 2004. The note is secured by substantially all of the Company's
non-cash assets. The note bears interest at 12% per annum during its term, and
bears a default rate of interest of 24% if the note is not paid when due. The
Company paid cash fees of $29,792 in connection with the issuance of the note.
Cornell Capital Partners subsequently converted this note and accrued interest
into 6,580,362 shares of common stock.
On June 18, 2004, the Company received net proceeds of $231,935 from a $250,000
secured promissory note issued to Cornell Capital Partners. The note is due on
October 18, 2004. The note is secured by substantially all of the Company's
non-cash assets. The note bears interest at 12% per annum during its term, and
bears a default rate of interest of 24% if the note is not paid when due. The
Company paid cash fees of $18,065 in connection with the issuance of the note.
Cornell Capital Partners subsequently converted this note and accrued interest
into 4,285,831 shares of common stock.
On September 13, 2004, the Company issued 990,019 shares of common stock to
Cornell Capital Partners for $50,000 cash. Costs associated with this
transaction were $2,500.
On October 7, 2004, the Company received $500,000 less a 10% fee of $50,000 and
$10,000 for legal costs. The Company will receive $500,000 (net of 10% fee) upon
the filing of a registration statement with the Securities and Exchange
Commission, and $250,000 (net of 10% fee) upon effectiveness of the registration
statement. The Company is required to file the registration statement within 30
days of closing, and shall use its best efforts to ensure that such registration
statement is effective within 90 days of closing. In the event that the
registration statement is not declared effective within 90 days, the Company
shall pay to Cornell a cash amount within three (3) business days of the end of
the month equal to 2% per month of the liquidation value of the debenture
outstanding as liquidated damages.
On October 8, 2004, the Company issued a 5% convertible debenture in the amount
of $1,250,000 to Cornell Capital Partners that is due September 8, 2007. The
debenture is convertible into the Company's common stock at either the fixed
price of 120% of the Volume Weighted Average price on the closing date
(September 7, 2004) or 80% of the average of the three (3) lowest daily Volume
Weighted Average Price, as reported by Bloomberg, LP, of the Company's common
stock for the five (5) trading days immediately preceding the conversion date
(date on which the Company receives a notice of conversion from Cornell). The
debenture will automatically convert into the Company's common stock on the
third anniversary of issuance. The Company has the right to redeem the debenture
with three (3) days advance notice any or all of the outstanding debenture
amount at its sole discretion. The redemption price shall be 120% of the face
amount redeemed plus accrued interest. Once the redemption notice has been
given, Cornell Capital Partners may continue to convert the remaining
outstanding debenture.
In the event that the company exercises it right of redemption as described
above for either all or a portion of the outstanding debenture, Cornell Capital
Partners shall receive for every $100,000 invested a warrant to purchase 50,000
shares of the Company's common stock. The warrant will have "piggy-back"
registration rights and will survive for two years from closing. The exercise
price of the warrant shall be 120% of the volume weighted average price on the
closing date.
19
CAPITAL RESOURCES
Pursuant to the Equity Line of Credit, BSI may issue and sell to Cornell Capital
Partners common stock for a total purchase price of up to $15.0 million. Subject
to certain conditions, BSI was entitled to commence drawing down on the Equity
Line of Credit on December 9, 2003 when the common stock to be issued under the
Equity Line of Credit was registered with the Securities and Exchange Commission
and will continue for two years thereafter. The purchase price for the shares
will be equal to 99% of, or a 1% discount to, the market price, which is defined
as the lowest closing bid price of the common stock during the five trading days
following the notice date. The amount of each advance is subject to an aggregate
maximum advance amount of $210,000, with no advance occurring within seven
trading days of a prior advance. In addition, in each advance notice BSI shall
establish a minimum acceptable price, whereby the amount requested in the
advance notice shall automatically decrease by 20% for each day of the five
succeeding trading days that the closing bid price is below the minimum
acceptable price. Cornell Capital Partners received 1,875,000 shares of BSI
common stock as a one-time commitment fee. Cornell Capital Partners is entitled
to retain a fee of 4.0% of each advance. In addition, BSI entered into a
placement agent agreement with Newbridge Securities Corporation, a registered
broker-dealer. Pursuant to the placement agent agreement, BSI has paid a
one-time placement agent fee of 35,714 shares of common stock equal to
approximately $10,000 based on BSI's stock price on July 7, 2003, the date BSI
agreed to engage the placement agent.
We cannot predict the actual number of shares of common stock that will be
issued pursuant to the Equity Line of Credit, in part, because the purchase
price of the shares will fluctuate based on prevailing market conditions and we
have not determined the total amount of advances we intend to draw. Pursuant to
our Articles of Incorporation, we are authorized to issue up to 200,000,000
shares of common stock, of which 87,108,368 are outstanding. At a recent price
of $0.06 per share, we would be required to issue at $0.0594 (99% of $0.06),
252,525,252 shares of common stock in order to fully utilize the $15.0 million
available. At our current stock price, we would be required to authorize and
register additional shares of our common stock to fully utilize the amount
available under the Equity Line of Credit. At our current price of $0.06, we
would need to authorize approximately 55,000,000 additional shares to fully
utilize the remaining funds available under the Equity Line of Credit. We would
have to receive the affirmative vote of a majority of our outstanding shares to
approve any increase in authorized shares. Our inability to obtain such approval
would prohibit us from increasing our authorized shares of common stock and from
issuing any additional shares under the Equity Line of Credit or to otherwise
raise capital from the sale of capital stock.
PLAN OF OPERATIONS
The Company continues to rely on funding by Cornell Capital Partners while it
pursues potential sales of its Employee Tracking System and Access Control and
Site Security products to commercial customers located in the United States,
Middle East, South Africa, and Germany.
If a contract is awarded, the Company anticipates that it will need to increase
the size of its staff to approximately 15 to 25 employees and consultants (we
currently have eight full-time employees and three consultants) and will need to
establish and enhance its production capabilities. We expect that these
activities will require additional financing.
If a contract is not awarded, the Company may be required to significantly
reduce its administrative costs, salaries and research and development
activities until such time as a new plan of action can be developed. The new
plan, if required, may include locating additional sources of funding or merger
and acquisition activities.
ITEM 3 CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Company's Chief Executive Officer, after evaluating the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of September 30, 2004 (the "Evaluation Date"), has concluded that, as
of the Evaluation Date, the Company's disclosure controls and procedures were
effective to ensure the timely collection, evaluation and disclosure of
information relating to the Company that would potentially be subject to
disclosure under the Exchange Act and the rules and regulations promulgated
thereunder.
(b) CHANGES IN INTERNAL CONTROLS.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the internal controls subsequent to the
Evaluation Date.
20
PART I
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
The Company currently has a claim against it by a consultant over consideration
with regard to a finder's fee for potential equity financing for Knowledge
Foundations, Inc. The Company believes that neither the merit or future outcome
of such a claim nor potential damages is readily determinable as of September
30, 2004 and therefore has not accrued any liability in the accompanying
financial statements.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the period January 1, 2004 to September 30, 2004 the Company issued the
following unregistered securities:
On February 4, 2004, the Company received net proceeds of $223,559 from a
$250,000 secured promissory note issued to Cornell Capital Partners. The note is
due on May 12, 2004. The note is secured by substantially all of the Company's
non-cash assets. The note bears no interest during its term, but bears a default
rate of interest of 24% if the note is not paid when due. The Company paid cash
fees of $26,441 in connection with the issuance of the note. Subsequently,
Cornell Capital Partners converted this note into 4,140,867 shares of common
stock.
On March 3, 2004, the Company received net proceeds of $229,524 from a $250,000
secured promissory note issued to Cornell Capital Partners. The note is due on
June 23, 2004. The note is secured by substantially all of the Company's
non-cash assets. The note bears interest of 12% during its term, and bears a
default rate of interest of 24% if the note is not paid when due. The Company
paid cash fees of $20,476 in connection with the issuance of the note. Cornell
Capital Partners subsequently converted this note into 3,246,474 shares of
common stock.
On April 14, 2004, the Company received net proceeds of $229,679 from a $250,000
secured promissory note issued to Cornell Capital Partners. The note is due on
June 21, 2004. The note is secured by substantially all of the Company's
non-cash assets. The note bears no interest during its term, but bears a default
rate of interest of 24% if the note is not paid when due. The Company paid cash
fees of $20,321 in connection with the issuance of the note. The Company has
reserved and placed into escrow 3.0 million shares of its common stock as an
estimation of the shares necessary to repay the loan. Cornell Capital Partners
subsequently converted this note and accrued interest into 3,418,210 shares of
common stock.
On June 8, 2004, the Company received net proceeds of $320,208 from a $350,000
secured promissory note issued to Cornell Capital Partners. The note is due on
September 20, 2004. The note is secured by substantially all of the Company's
non-cash assets. The note bears interest at 12% per annum during its term, and
bears a default rate of interest of 24% if the note is not paid when due. The
Company paid cash fees of $29,792 in connection with the issuance of the note.
Cornell Capital Partners subsequently converted this note and accrued interest
into 6,580,362 shares of common stock.
On June 18, 2004, the Company received net proceeds of $231,935 from a $250,000
secured promissory note issued to Cornell Capital Partners. The note is due on
October 18, 2004. The note is secured by substantially all of the Company's
non-cash assets. The note bears interest at 12% per annum during its term, and
bears a default rate of interest of 24% if the note is not paid when due. The
Company paid cash fees of $18,065 in connection with the issuance of the note.
Cornell Capital Partners subsequently converted this note and accrued interest
into 4,285,831 shares of common stock.
On September 13, 2004, the Company issued 990,019 shares of common stock to
Cornell Capital Partners for $50,000 cash. Costs associated with this
transaction were $2,500.
On October 7, 2004, the Company received $500,000 less a 10% fee of $50,000 and
$10,000 for legal costs. The Company will receive $500,000 (net of 10% fee) upon
the filing of a registration statement with the Securities and Exchange
Commission, and $250,000 (net of 10% fee) upon effectiveness of the registration
statement. The Company is required to file the registration statement within 30
days of closing, and shall use its best efforts to ensure that such registration
statement is effective within 90 days of closing. In the event that the
registration statement is not declared effective within 90 days, the Company
shall pay to Cornell a cash amount within three (3) business days of the end of
the month equal to 2% per month of the liquidation value of the debenture
outstanding as liquidated damages.
21
On October 8, 2004, the Company issued a 5% convertible debenture in the amount
of $1,250,000 to Cornell Capital Partners that is due September 8, 2007. The
debenture is convertible into the Company's common stock at either the fixed
price of 120% of the Volume Weighted Average price on the closing date
(September 7, 2004) or 80% of the average of the three (3) lowest daily Volume
Weighted Average Price, as reported by Bloomberg, LP, of the Company's common
stock for the five (5) trading days immediately preceding the conversion date
(date on which the Company receives a notice of conversion from Cornell). The
debenture will automatically convert into the Company's common stock on the
third anniversary of issuance. The Company has the right to redeem the debenture
with three (3) days advance notice any or all of the outstanding debenture
amount at its sole discretion. The redemption price shall be 120% of the face
amount redeemed plus accrued interest. Once the redemption notice has been
given, Cornell Capital Partners may continue to convert the remaining
outstanding debenture.
In the event that the company exercises it right of redemption as described
above for either all or a portion of the outstanding debenture, Cornell Capital
Partners shall receive for every $100,000 invested a warrant to purchase 50,000
shares of the Company's common stock. The warrant will have "piggy-back"
registration rights and will survive for two years from closing. The exercise
price of the warrant shall be 120% of the volume weighted average price on the
closing date.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
The Company held a special shareholders meeting on September 22, 2004. At the
meeting, the shareholders elected three directors, and approved an amendment to
the Company's Certificate of Incorporation to increase the authorized common
stock of the Company to 200,000,000 shares.
ITEM 5 OTHER EVENTS.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS PURSUANT TO REGULATION S-K:
DESIGNATION OF
EXHIBIT AS SET FORTH
IN ITEM 601 OF
REGULATION S-B DESCRIPTION LOCATION
- -------------------- ------------------------------------- ------------------
Certification by Chief Executive Provided herewith
Officer and Principal Accounting
31.1 Officer pursuant to 15 U.S.C. Section
7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Certification by Chief Executive Provided herewith
Officer and Principal Accounting
32.1 Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
b. REPORTS ON FORM 8-K:
None
22
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 13, 2004 By: /s/ Jack Harper
---------------------------------
Jack Harper
President, Chief Executive Officer,
and Principal Accounting Officer
23
EXHIBIT 31.1
OFFICER'S CERTIFICATE
PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002*
I, Jack Harper, President, Chief Executive Officer, and Principal
Accounting Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of BSI2000, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 13, 2004 By: /s/ Jack Harper
-------------------------------------
Jack Harper, President, Chief
Executive Officer, and Principal
Accounting Officer
*The introductory portion of paragraph 4 of the Section 302 certification that
refers to the certifying officers' responsibility for establishing and
maintaining internal control over financial reporting for the company, as well
as paragraph 4(b), have been omitted in accordance with Release No. 33-8238
(June 5, 2003) because the compliance period has been extended for small
business issuers until the first fiscal year ending on or after April 15, 2005.
24
EXHIBIT 32.1
CERTIFICATION OF DISCLOSURE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of BSI2000, Inc. (the "Company")
on Form 10-QSB for the quarter ended September 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"). I, Jack
Harper, President, Chief Executive Officer, and Principal Accounting Officer of
the Company, certify, pursuant to 18 USC section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge
and belief:
(1) I am the certifying Officer and I have reviewed the report being
filed;
(2) Based on my knowledge, the report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the report;
(3) Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects the
financial condition, results of operations and cash flows of the issuer, as of,
and for, the periods presented in the report.
(4) I and the other certifying officers are responsible for establishing
and maintaining disclosure controls and procedures (as such term is defined in
paragraph (c) of this section) for the issuer and have:
i. Designed such disclosure controls and procedures to ensure that
material information relating to the issuer, including its consolidated
subsidiaries, is made know to them by others within those entities,
particularly during the period in which the periodic reports are being
prepared;
ii. Evaluated the effectiveness of the issuer's disclosure controls
and procedures as of a date within 90 days prior to the filing date of the
report ("Evaluation Date"); and
iii. Presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures based on their
evaluation as of the Evaluation Date;
(5) I and the other certifying officers have disclosed, based on their
most recent evaluation, to the issuer's auditors and the audit committee of the
Board of Directors (or persons fulfilling the equivalent function);
i. All significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's ability to
record, process, summarize and report financial data and have identified
for the issuer's auditors any material weaknesses in internal controls;
and
ii. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's internal
controls; and
(6) I and the other certifying officers have indicated in the report
whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their most recent evaluation, including any corrective actions with regard to
significant efficiencies and material weaknesses.
November 13, 2004 By: /s/ Jack Harper
------------------------------------
Jack Harper, President, Chief
Executive Officer, and Principal
Accounting Officer
A signed original of this written statement required by Section 906, or other
document authentications, acknowledging, or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to BSI2000, Inc. and will
be retained by BSI2000, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
25