SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
Securities Exchange Act of 1934
For Period ended June 30, 2004
Commission File Number 0-28287
BSI2000, INC.
(Formerly Knowledge Foundations, Inc.)
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Delaware 84-0418749
- ----------------------------- ----------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
12600 W. Colfax Ave., Suite B410, Lakewood, CO 80215
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(Address of Principal Executive Offices) (Zip Code)
(303) 231-9095
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(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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock at the latest practicable date.
As of August 13, 2004 the registrant had 75,252,076 shares of common stock,
$.001 par value, issued and outstanding.
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
Consolidated Financial Statements
Consolidated Balance Sheets F-1
Consolidated Statements of Operations F-2
Consolidated Statement of Changes in Stockholders' Deficit F-3
Consolidated Statements of Cash Flows F-4
Notes to Consolidated Financial Statements F-6
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
December 31,
June 30, 2004 2003
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 290,113 $ 125,550
Inventories 53,008 35,361
Other current assets 14,706 --
----------- -----------
Total current assets 357,827 160,911
----------- -----------
Non-current assets
Property and equipment, net 47,472 52,320
Intangible assets 155,475 62,583
Other long-term assets 4,232 4,232
----------- -----------
Total non-current assets 207,179 119,135
----------- -----------
Total assets $ 565,006 $ 280,046
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 102,085 $ 196,137
Accrued liabilities 12,489 25,798
Deferred revenue 22,771 --
Convertible notes payable, current portion 613,299 686,395
----------- -----------
Total current liabilities 750,644 908,330
----------- -----------
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, 100,000,000 shares authorized,
74,560,529 and 53,951,727 shares issued and outstanding 74,561 53,952
Additional paid-in capital 6,016,787 4,417,505
Accumulated deficit (6,276,986) (5,280,289)
----------- -----------
Total stockholders' deficit (185,638) (808,832)
----------- -----------
Total liabilities and stockholders' deficit $ 565,006 $ 280,046
=========== ===========
See notes to consolidated financial statements.
F - 1
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Period
from July 30,
For the Six Months Ended For the Three Months Ended 1993
June 30, June 30, (Inception)
------------------------------ ------------------------------ through
2004 2003 2004 2003 June 30, 2004
-------------- ------------- -------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Revenues $ 2,729 $ 5,000 $ 1,479 $ 5,000 $ 98,459
-------------- ------------- -------------- ------------- -------------
Cost of goods sold - - - - 67,986
-------------- ------------- -------------- ------------- -------------
Gross profit - - - - 30,473
-------------- ------------- -------------- ------------- -------------
Operating expenses
Selling expenses 181,502 132,936 94,381 61,715 1,220,475
General and administrative 478,561 302,932 217,610 133,348 3,063,003
Stock-based compensation expense - - - - 253,741
Research and development 215,054 252,511 99,945 103,707 1,575,943
-------------- ------------- -------------- ------------- -------------
Total operating expenses 875,117 688,379 411,936 298,770 6,113,162
-------------- ------------- -------------- ------------- -------------
Other income (expense)
Interest expense (23,825) (1,214) (1,248) (1,214) (153,190)
Interest income 1 1,231 - 871 23,045
Financing costs (100,485) - (65,057) - (147,428)
Other expense - - - - 83,276
-------------- ------------- -------------- ------------- -------------
Total other (expense) (124,309) 17 (66,305) (343) (194,297)
-------------- ------------- -------------- ------------- -------------
Net loss $ (996,697) $ (683,362) $ (476,762) $ (294,113) $ (6,276,986)
============== ============= ============== ============= ============
Basic and diluted weighted
average common shares
outstanding 62,162,308 29,567,626 67,292,455 50,150,388 10,210,202
============== ============= ============== ============= ============
Basic and diluted loss per
common share $ (0.016) $ (0.23) $ (0.007) $ (0.006) $ (0.615)
============== ============= ============== ============= ============
See notes to consolidated financial statements.
F - 2
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
Accumulated
Common Stock Deficit During Total
---------------------------- Additional the Development Stockholders'
Shares Amount Paid-in Capital Stage Equity (Deficit)
---------- ------------- --------------- --------------- ----------------
Balance - December 31, 2003 53,951,727 $ 53,952 $ 4,417,505 $ (5,280,289) $ (808,832)
Stock issued for debt conversion 20,608,802 20,609 1,599,282 - 1,619,891
---------- ------------- ------------- ------------- -------------
Net loss -- -- -- (996,697) (996,697)
Balance - June 30, 2004 74,560,529 $ 74,561 $ 6,016,787 $ (6,276,986) $ (185,638)
========== ============= ============= ============= =============
See notes to consolidated financial statements.
F - 3
BSI2000, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Period
from July 30,
Six Months Ended June 30, 1993 (Inception)
------------------------------ through
2004 2003 June 30, 2004
------------ ------------ --------------
(unaudited) (unaudited) (unaudited)
Cash flows from operating activities
Net loss $ (996,697) $ (683,362) $(6,276,986)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation expense 9,815 14,481 113,976
Gain on forgiveness of debt -- -- (65,485)
Stock based compensation -- -- 253,741
Changes in assets and liabilities
Inventories (17,647) (22,872) (53,008)
Other current assets (14,706) -- (14,706)
Other long-term assets -- -- (4,232)
Deferred revenue 22,771 -- 22,771
Accounts payable (94,052) 110,355 156,148
Accrued liabilities (13,309) 78,319 66,038
----------- ----------- -----------
(107,128) 180,283 475,243
----------- ----------- -----------
Net cash used in operating activities (1,103,825) (503,079) (5,801,743)
----------- ----------- -----------
Cash flows from investing activities
Redemption of certificates of deposit -- -- 35,000
Purchase of certificate of deposit -- -- (35,000)
Purchase of fixed assets (4,967) (9,194) (113,094)
Patent application (92,892) -- (155,475)
----------- ----------- -----------
Net cash used in investing activities (97,859) (9,194) (268,569)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from issuance of common stock -- 134,500 3,276,841
Repayment on long-term debt -- -- (81,516)
Proceeds from long-term debt -- -- 919,500
Net proceeds from convertible notes payable 1,366,247 155,000 2,283,190
Repayment on capital lease obligations -- -- (37,590)
----------- ----------- -----------
Net cash provided by financing activities 1,366,247 289,500 6,360,425
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents 164,563 (222,773) 290,113
Cash and cash equivalents - beginning of period 125,550 228,617 --
----------- ----------- -----------
Cash and cash equivalents - end of period $ 290,113 $ 5,844 $ 290,113
=========== =========== ===========
(Continued on following page.)
See notes to consolidated financial statements.
F - 4
(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 six-month period ended June
30, 2004. Cash paid for interest expense from Inception (July 30, 1993)
through June 30, 2004 was $68,164.
Supplemental disclosure of non-cash activity:
During the six months ended June 30, 2004, the Company converted $1,619,891
of notes payable and accrued interest into 20,608,802 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.
F - 5
BSI2000, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BSI 2000, 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, BSI 2000,
Inc. develops proprietary hardware and software adapting LaserCard's(R) optical
card technology for specific applications. BSI 2000 Inc.'s products are designed
as turnkey solutions for identified commercial and governmental card-based
information needs.
BSI 2000, 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 BSI
2000, 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.
F - 6
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 June 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.
F - 7
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 June 30, 2004 of $6,276,986. The
Company has negative working capital of $392,817 and stockholder's deficit of
$185,638 as of June 30, 2004 and used cash of $1,103,823 in its six 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).
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.
F - 8
NOTE 3 - REVERSE ACQUISITION (CONTINUED)
- ----------------------------------------
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.
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.
F - 9
NOTE 4 - CONVERTIBLE DEBT (CONTINUED)
- -------------------------------------
Convertible notes payable consist of the following at June 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 $16,004 is unamortized at June 30, 2004. $ 250,000
Secured promissory note issued to Cornell, due on September 20, 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 $26,250, of
which $20,697 is unamortized at June 30, 2004. 350,000
Convertible secured promissory note issued to Cornell, due on June 23, 2004 and
secured by substantially all of the 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
$18,750, of which $0 is unamortized at June 30, 2004. Subsequent to June 30,
2004, Cornell converted this debt and accrued interest of $690 into 691,547
shares of common stock of the Company 50,000
-----------
650,000
Fees and discounts (36,701)
-----------
613,299
Less current portion (613,299)
-----------
$ --
============
NOTE 5 - SUBSEQUENT EVENT
- -------------------------
Subsequent to June 30, 2004, the Company converted outstanding debt and accrued
interest of $50,690 into 691,547 shares of common stock of the Company.
On July 27, 2004, the SEC requested of our stock transfer agent information
regarding transfer activity of our common stock from the period April 1, 2003 to
the present, as well as shareholder lists at June 30, 2003 and December 31,
2003, and all correspondence related to BSI2000 from April 1, 2003 to the
present. Our transfer agent is complying with these requests.
F - 10
ITEM 2 MANAGEMENT'S PLAN OF OPERATIONS
RISK FACTORS AND CAUTIONARY STATEMENTS
Cautionary Statement Regarding Forward-Looking Statements
The Company's Form 10-QSB or any other written or oral statements made by or on
behalf of the Company may contain forward-looking statements which reflect the
Company's current views with respect to future events and "anticipate,"
"intends," "estimate," "forecast," "project," and similar expressions identify
forward-looking statements. All statements other than statements of historical
fact are statements that could be deemed forward-looking statements, including
any statements of the plans, strategies and objectives of management for future
operations; any statements concerning proposed new products, services,
developments or industry rankings; any statements regarding future economic
conditions or performance; any statements of belief; and any statements of
assumptions underlying any of the foregoing.
The Company wishes to caution investors that any forward-looking statements made
by or on behalf of the Company are subject to uncertainties and other factors
that could cause actual results to differ materially from such statements. These
uncertainties and other factors include, but are not limited to the Risk Factors
listed below (many of which have been discussed in prior SEC filings by the
Company). Though the Company has attempted to list comprehensively these
important factors, the Company wishes to caution investors that other factors
could in the future prove to be important in affecting the Company's results of
operations. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of each
such factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
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.
-11-
Financial Condition and Results of Operations
- ---------------------------------------------
The following should be read together with the financial statements included in
this report.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2004 TO THE THREE MONTHS ENDED
JUNE 30, 2003
OVERALL RESULTS OF OPERATIONS
For the three months ended June 30, 2004 we incurred an overall loss of
($476,762) or ($.007) per share, which was a material increase from the loss of
($294,113) or ($0.01) per share for the comparable period in the prior year.
REVENUE
We had revenues of $1,479 during the three months ended June 30, 2004 as
compared to $5,000 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.
OPERATING EXPENSES
Operating expenses for the three months ended June 30, 2004, were $411,936 and
represent an increase of $113,166 or a 38% increase in operating expenses of
$298,770 for the comparative period ended June 30, 2003.
The largest component of operating expenses for the periods ended June 30, 2004
and 2003 related to general and administrative expenses. For the period ended
June 30, 2004, general and administrative expense were $217,610, an increase of
$84,262 or nearly a 63% increase in general and administrative expenses of
$133,348 for the comparative period ended June 30, 2003. This increase is
attributable to salary expense of $8,532, contracted services in the amount of
$60,366, $10,036 for employee benefits, $5,328 for legal fees, and a decrease in
merger costs of $3,226. The salary increase is due to the addition of another
employee. The increase in contracted services is due to the addition of public
relations and shareholder relations consultants.
BSI further had selling expenses for the three months ended June 30, 2004 of
$94,381, as compared to $61,715 for the period ended June 30, 2003. The increase
in selling expenses is attributable to salary expense of $5,008, a decrease in
consulting fees of $5,440, travel and entertainment expenses of $25,665 and
advertising and tradeshow expenses in the amount of $4,340. The increase in
selling costs is attributable to increased sales and marketing efforts.
BSI also had research and development expenses of $99,945 for the quarter ended
June 30, 2004, as compared to $103,707 for the period ended June 30, 2003, a
decrease of $3,762. This decrease is attributable to salary expense of $1,923, a
decrease in consulting fees of $10,801, along with an increase of $4,969 for R&D
components. The cost decrease is attributable to replacement of outside
consultants with internal resources, and a reduction in cost of employees.
-12-
OTHER EXPENSES
As to the other income and expenses, the Company had interest expenses of $1,248
for the quarter ended June 30, 2004, as compared to net interest expense, of
$343, for the comparative period ended June 30, 2003. The Company also had
financing costs of $65,057 for the three months period ended June 30, 2004,
related to the equity line of credit placed with Cornell Capital.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2004 TO THE SIX MONTHS ENDED
JUNE 30, 2003
OVERALL RESULTS OF OPERATIONS
For the six months ended June 30, 2004 we incurred an overall loss of ($996,697)
or ($.016) per share, which was a material increase from the loss of ($683,362)
or ($0.02) per share for the comparable period in the prior year.
REVENUE
We had revenues of $2,729 during the six months ended June 30, 2004 as compared
$5,000 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.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 2004, were $875,117 and
represent an increase of $186,738 or a 27% increase in operating expenses of
$688,379 for the comparative period ended June 30, 2003.
The largest component of operating expenses for the periods ended June 30, 2004
and 2003 related to general and administrative expenses. For the period ended
June 30, 2004, general and administrative expense were $478,561, an increase of
$175,629 or nearly a 58% increase in general and administrative expenses of
$302,932 for the comparative period ended June 30, 2003. This increase is
attributable to salary expense of $58,891, contracted services in the amount of
$108,074, $20,705 for employee benefits, $18,857 for legal fees, office expenses
of $8,884 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 legal fees is due to the costs associated with
fundraising, shareholder relations, and public company reporting. The increase
in contracted services is due to the addition of public relations and
shareholder relations consultants.
BSI further had selling expenses for the six months ended June 30, 2004 of
$181,502, as compared to $132,936 for the period ended June 30, 2003. The
increase in selling expenses is attributable to salary expense of $12,794, a
decrease in consulting fees of $32,831, travel and entertainment expenses of
$46,215 and advertising and tradeshow expenses in the amount of $21,892. The
increase in selling costs is attributable to increased sales and marketing
efforts.
BSI also had research and development expenses of $215,054 for the six months
ended June 30, 2004, as compared to $252,511 for the period ended June 30, 2003,
a decrease of $37,457. This decrease is attributable to salary expense of
$20,010, and consulting fees of $25,680, along with an increase of $8,285 for
R&D components. The cost decrease is attributable to replacement of outside
consultants with internal resources, and a reduction in cost of employees.
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OTHER EXPENSES
As to the other income and expenses, the Company had net interest expenses of
$23,824 for the six months ended June 30, 2004, as compared to interest income,
of $17, for the comparative period ended June 30, 2003. This increase is
attributable to the equity line of credit with Cornell Capital that was placed
during the fourth quarter of 2003. The Company also had financing costs of
$100,485 for the six months period ended June 30, 2004 again related to the
equity line of credit placed with Cornell Capital.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, we had cash of $290,113 and current liabilities of
$750,644. 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, BSI sold $250,000 convertible debentures to Cornell Capital
Partners, LP. 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,
BSI 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. BSI has the right to redeem the debentures upon thirty days
notice for 120% of the amount redeemed. Cornell Capital has converted these
convertible debentures into 3,400,183 shares of common stock.
On October 31, 2003, BSI entered into an Equity Line of Credit Agreement with
Cornell Capital Partners. Under this agreement, 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 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 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 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.
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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, LP. The
note is due on the earlier of 90 days from the date thereof or 60 days after
BSI's registration statement on From SB-2 is declared effective by the
Securities and Exchange Commission. The note is secured by substantially all of
BSI'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. BSI 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, BSI 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 BSI's registration
statement on From SB-2 is declared effective by the Securities and Exchange
Commission (December 9, 2003). The note is secured by substantially all of BSI'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. BSI 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 subsequently
converted this debt into 2,496,878 shares of common stock.
On February 4, 2004, BSI 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 BSI'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. BSI paid cash fees of $26,441 in
connection with the issuance of the note. Subsequently, Cornell Capital
converted this note into 4,140,867 shares of common stock.
On March 3, 2004, BSI 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 BSI'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. BSI paid cash fees of $20,476 in
connection with the issuance of the note. Cornell Capital subsequently converted
this note into 3,246,474 shares of common stock.
On April 14, 2004, BSI 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 BSI'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. BSI 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 subsequently converted this
note into 3,418,210 shares of common stock.
On June 8, 2004, BSI 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 BSI'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. BSI paid cash fees of
$29,792 in connection with the issuance of the note.
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On June 18, 2004, BSI 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 BSI'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. BSI paid cash fees of
$18,065 in connection with the issuance of the note.
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. BSI 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 BSI from quickly developing
and aggressively marketing its products. In addition, most of BSI's potential
customers are large corporations or governments. Adopting BSI'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 BSI must generate revenue from its
operations and must raise capital from the sale of its securities. However, no
assurances can be given that BSI will be successful in these activities. Should
any of these events not occur, the accompanying financial statements will be
materially affected.
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 100,000,000
shares of common stock, of which 75,252,076 are outstanding. At a recent price
of $0.10 per share, we would be required to issue at $0.099 (99% of $0.10),
151,515,152 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 $0.10, we
would need to authorize approximately 55,000,000 additional shares to fully
utilize the Equity Line of Credit. We would have to receive the affirmative
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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,
Saudi Arabia, South Africa and Germany.
If a contract is awarded, the Company 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. 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 June 30, 2004 (the "Evaluation Date"), have 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.
PART II 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 June 30,
2004 and therefore has not accrued any liability in the accompanying financial
statements.
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ITEM 2 CHANGES IN SECURITIES.
During the period January 1, 2004 to June 30, 2004 the Company issued the
following unregistered securities:
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
ITEM 5 OTHER EVENTS.
None
ITEM 6 EXHIBITS AND REPORTS ON 8-K.
Exhibits.
Exhibit 31 CEO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32 CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Reports on Form 8-K.
None.
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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: August 13, 2004 By: /s/ Jack Harper
----------------------------------
Jack Harper
President and Chief Executive Officer
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