UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the quarterly period ended March 31, 2006
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the transition period from _________________ to _________________
Commission file number: 001-32706
---------
DYNAMIC BIOMETRIC SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
NEVADA 20-4809793
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1711 W. GREENTREE DR., SUITE 116, TEMPE, AZ 85284
(Address of principal executive offices) (Zip Code)
(480) 705-9110
(Issuer's telephone number)
(former name, former address and fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. [X] Yes [ ]
No
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The number of shares outstanding of the Issuer's common equity as of May
11, 2006 was 11,347,773.
DYNAMIC BIOMETRIC SYSTEMS, INC. AND SUBSIDIARY
----------------------------------------------
INDEX TO THE FORM 10-QSB
FOR THE THREE MONTHS ENDED MARCH 31, 2006
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets as of March 31, 2006 (unaudited) and
December 31, 2005 3
Consolidated Statements of Operations for the three-months ended
March 31, 2006 and 2005 and from inception to March 31, 2006
(unaudited) 4
Consolidated Statements of Cash Flows for the three-months ended
March 31, 2006 and 2005 and from inception to March 31, 2006
(unaudited) 5
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 14
Item 3. Controls and Procedures 20
PART II. OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
SIGNATURES 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DYNAMIC BIOMETRIC SYSTEMS, INC. AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED BALANCE SHEET
(A DEVELOPMENT STAGE COMPANY)
March 31, 2006 Dec. 31, 2005
(unaudited) ---------------
------------
ASSETS
CURRENT ASSETS:
Cash $ 1,494 $ 330
Inventories 33,244 31,884
Prepaid expenses and other current assets 2,834 6,699
------------ ---------------
Total current assets 37,572 38,913
MACHINERY AND EQUIPMENT, net 15,447 18,615
PATENT AND INTELLECTUAL PROPERTY RIGHTS, net 13,494 13,688
LICENSES AND TECHNOLOGY, net 4,000 5,000
OTHER ASSETS, net 775 844
------------ ---------------
$ 71,288 $ 77,060
LIABILITIES AND STOCKHOLDERS DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 90,886 $ 60,130
Due to related parties 166,113 104,721
Note payable to related party 333,550 292,500
Note payable 55,000 55,000
Accrued salaries and payroll taxes 35,367 8,454
Other accrued liabilities 722 112
------------ ---------------
Total current liabilities 681,638 520,917
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' DEFICIT:
Undesignated Preferred stock; 8,000,000 shares authorized, no shares issued and
outstanding - -
Series A Preferred; $1.00 liquidation preference, 2,000,000 shares authorized,
696,096 issued and outstanding 696,096 696,096
Common stock; $.001 par value, 190,000,000 shares authorized, 11,347,773 shares
issued and outstanding 11,348 11,348
Deficit accumulated in the development stage (1,317,794) (1,151,301)
------------ ---------------
Total stockholders' deficit (610,350) (443,857)
------------ ---------------
$ 71,288 $ 77,060
The accompanying notes are an integral part of these consolidated balance
sheets.
3
DYNAMIC BIOMETRIC SYSTEMS, INC. AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(A DEVELOPMENT STAGE COMPANY)
Three months ended Inception to
March 31, March 31,
2006 2005 2006
(unaudited) (unaudited)
------------ ------------------ --------------
REVENUES $ 200 $ - $ 9,879
COSTS OF REVENUES 3,906 41 19,818
GROSS MARGIN/(LOSS) (3,706) (41) (9,939)
------------ ------------------ ------------
OPERATING EXPENSES:
Research and development 41,085 34,483 538,243
Selling and marketing 12,647 18,912 124,211
General and administrative 25,552 22,267 250,478
Legal and professional fees 67,674 35,743 226,405
Depreciation and amortization 4,433 4,634 34,997
Total operating expenses 151,391 116,039 1,174,334
LOSS FROM OPERATIONS (155,097) (116,080) (1,184,273)
OTHER INCOME/(EXPENSE):
Loss on disposal of machinery and equipment - - (2,515)
Interest expense (11,397) (3,897) (44,432)
Interest income - - 350
Total other income/(expense) (11,397) (3,897) (46,597)
------------ ------------------ ------------
NET LOSS $ (166,494) (119,977) (1,230,870)
------------
NET LOSS PER COMMON SHARE:
Basic $ (0.02) $ (0.01) $ (0.13)
Diluted $ (0.02) $ (0.01) $ (0.13)
============ ================== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 11,347,773 11,347,773 10,640,455
Diluted 11,347,773 11,347,773 10,640,455
The accompanying notes are an integral part of these consolidated financial
statements.
4
DYNAMIC BIOMETRIC SYSTEMS, INC. AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(A DEVELOPMENT STAGE COMPANY)
Three months ended Inception to
March 31, March 31,
2006 2005 2006
(unaudited) (unaudited)
------------ ---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (166,494) $ (119,977) $(1,230,870)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 4,433 4,634 35,043
Unearned stock-based fees earned - 25,000 100,000
Loss on disposition of machinery and equipment - - 2,515
Note issued for consulting fees - - 45,823
Common stock issued for consulting services - - 575
Recapitalization as a result of the reverse acquisition - - 944
Changes in assets and liabilities:
Decrease in accounts receivable - 960 -
Increase in inventories (1,360) (3,803) (33,244)
Decrease (increase) in prepaid expenses and other
current assets 3,865 (27,979) (2,834)
Increase in accounts payable 30,755 8,106 90,886
Increase in accrued salaries and payroll taxes 26,913 - 35,367
Increase in other accrued liabilities 610 4,283 33,752
------------ ---------------- ------------
Net cash used in operating activities (101,278) (108,776) (922,043)
CASH FLOWS FROM INVESTING ACTIVITIES:
Organization costs expended - - (1,389)
Purchases of machinery and equipment - (7,642) (45,186)
Purchases of patent and intellectual property rights - (3,312) (14,698)
Purchases of licenses and technology - - (10,000)
Net cash used in investing activities - (10,954) (71,273)
------------ ---------------- ------------
(continued)
5
DYNAMIC BIOMETRIC SYSTEMS, INC. AND SUBSIDIARY
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(A DEVELOPMENT STAGE COMPANY)
(CONTINUED)
Three months ended Inception to
March 31, March 31,
2006 2005 2006
(unaudited) (unaudited)
------------ ---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash - - 4,000
Preferred stock sold - 45,000 515,000
Advances due from (to) related parties 61,392 424 142,260
Borrowings on notes payable to related party 41,050 75,000 333,550
------------ ---------------- ------------
Net cash provided by financing activities 102,442 120,424 994,810
NET INCREASE (DECREASE) IN CASH 1,164 694 1,494
CASH, beginning of period 330 14,867 -
CASH, end of period $ 1,494 $ 15,561 $ 1,494
------------ ---------------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ - $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Note issued for professional fees $ - $ - $ 45,823
Common stock issued for consulting services $ - $ - $ 575
Preferred stock issued as unearned stock-based fees $ - $ - $100,000
Unearned stock-based fees earned $ - $ 25,000 $100,000
The accompanying notes are an integral part of these consolidated financial
statements.
6
DYNAMIC BIOMETRIC SYSTEMS, INC. AND SUBSIDIARY
----------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 2006
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements of Dynamic Biometric Systems,
Inc. (the "Company") have been prepared in accordance with generally accepted
accounting principles ("GAAP") for interim financial information and the
instructions to Form 10-QSB. Accordingly, they do not include all the
information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the results for the
interim period presented have been made. The results for the three months ended
March 31, 2006 may not be indicative of the results for the entire fiscal year.
These financial statements should be read in conjunction with the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2005.
(2) ORGANIZATION AND OPERATIONS
The Company was originally incorporated in Arizona on September 3, 2004 under
the name VT Gaming Services, Inc. The Company was a wholly owned subsidiary of
Visitalk Capital Corporation ("VCC") and formed as part of the implementation of
a confirmed Chapter 11 reorganization plan (the "Visitalk Plan") of
visitalk.com, Inc. ("Visitalk.com"). On December 31, 2004, pursuant to an
Exchange Agreement, the Company acquired all of the outstanding capital stock of
DynaSig Corporation, an Arizona corporation ("DynaSig"), in a tax-free, stock
for stock exchange. In April 2005, the Company adopted its current name of
Dynamic Biometric Systems, Inc.
The Company, through its wholly owned subsidiary DynaSig, develops and sells a
unique, dynamic biometric identification system based on the act or process of
signing a name or other handwriting (a "Dynamic Signature"). Our product, the
DynaSig System, consists of a proprietary, dynamic biometric capture device (the
"Bio-Pen") plus the proprietary registration and authentication software that
compares a Dynamic Signature captured by the Bio-Pen with a reference template.
Our newest product, just introduced, is a secure e-mail attachment application,
called the "Person-to-Person Lockbox" ("Lockbox"). The Lockbox can be used with
any e-mail system and assures the identity of both the sender and receiver. The
Lockbox is easy to create and easy for a recipient to save in its "locked"
state. The Lockbox can hold multiple documents created using different
programs, e.g. a word processing document, a blueprint, and a video file. The
DynaSig System may be also be utilized for electronic document execution and
control, to prevent credit card fraud and identity theft in e-commerce and
Internet financial transactions, and for government and corporate security,
including Internet, device and information access.
7
(3) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, DynaSig. All material inter-company
balances and transactions have been eliminated in consolidation. The
consolidated financial statements have been prepared to give retroactive effect
to June 17, 2003 (date of inception), of the reverse acquisition completed on
December 31, 2004, and represent the operations of DynaSig. As of March 31,
2006, the Company is still in the development stage and will continue in the
development stage until generating revenues from the sales of its products or
services.
RECLASSIFICATION
Certain amounts as of December 31, 2005 have been reclassified to conform to the
current presentation.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of 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.
LOSS PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings per Share, which supersedes APB Opinion No. 15. Basic EPS differs
from primary EPS calculation in that basic EPS does not include any potentially
dilutive securities. Diluted EPS must be disclosed regardless of the dilutive
impact to basic EPS. The diluted EPS includes common shares that would have
been outstanding if convertible debt had been converted into common shares as of
March 31, 2006. Dilutive securities were not considered in the calculation of
diluted EPS for the three months ended March 31, 2006 and 2005 because the
effect of their inclusion would be antidilutive. The following table presents
the computation of basic and diluted loss per share for the three months ended
March 31, 2006 and 2005, respectively:
Weighted
Loss Average shares Per share
========== =============== ===========
2006
- ----
Net loss $(166,494)
Preferred stock dividend (25,746)
Loss to common stockholders $(192,240)
Basic loss per share $(192,240) 11,347,773 $ (0.02)
Effect of dilutive securities N/A
Diluted loss per share $(192,240) 11,347,773 $ (0.02)
8
2005
- ----
Net loss $(119,977)
Preferred stock dividend (22,232)
Loss to common stockholders $(142,209)
Basic loss per share $(142,209) 11,347,773 $ (0.01)
Effect of dilutive securities N/A
Diluted loss per share $(142,209) 11,347,773 $ (0.01)
The following table presents the computation of basic and diluted loss per share
for the period from June 17, 2003 (date of inception) through March 31, 2006.
Weighted
Loss Average shares Per share
========== =============== ===========
Inception to March 31, 2006
- ---------------------------
Net loss $(1,230,870)
Preferred stock dividend (197,661)
Loss to common stockholders $(1,428,531)
Basic loss per share $(1,428,531) 10,640,455 $ (0.13)
Effect of dilutive securities N/A
Diluted loss per share $(1,428,531) 10,640,455 $ (0.13)
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and
changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. SFAS No. 154 also requires that a change in
depreciation, amortization or depletion method for long-lived, non-financial
assets be accounted for as a change in accounting estimate effected by a change
in accounting principle. SFAS No. 154 is effective in fiscal years beginning
after December 15, 2005. The Company has not yet determined the effect of
implementing SFAS No. 154.
(4) DUE TO RELATED PARTIES
Due to related parties is comprised of the following as of March 31, 2006:
Due to Optisense Corporation $ 80,868
Financial consulting fees to VCC 50,000
Accrued interest due to VCC (see Note 5) 35,245
--------
$166,113
9
Optisense Corporation ("Optisense") is 100% owned by Richard C. Kim Ph.D., the
Company's Chief Executive Officer and largest stockholder. The amount due to
Optisense is unchanged from December 31, 2005. Subsequent to March 31, 2006,
Dr. Kim made a $10,000 short-term loan to the Company for general working
capital purposes (see Note 10).
During the three months ended March 31, 2006, the Company incurred additional
financial consulting fees to VCC totaling $50,000 under an advisory agreement
(see Note 8). Subsequent to March 31, 2006, VCC agreed to convert all accrued
interest and a portion of the LOC principal balance into stock.
Contemporaneously, the Company issued a new $50,000 note to VCC for these
financial consulting fees under a new Secured Loan Agreement (see Note 10).
(5) NOTE PAYABLE TO RELATED PARTY
On December 27, 2004, DynaSig entered into a line of credit agreement ("LOC")
with VCC for up to $100,000. In June 2005, the LOC was amended to provide for
increased borrowing of up to $350,000. Any advances under the LOC are
represented by individual notes (the "LOC Notes") which are due on demand and
secured by a lien on all of DynaSig's assets. The LOC Notes and any accrued
interest are convertible into shares of Series A Preferred at a price of $1.00
per share. As of March 31, 2006, principal balance of the LOC Notes totaled
$333,550, and accrued interest totaled $35,245.
Subsequent to March 31, 2006, VCC agreed to convert all accrued interest and a
portion of the LOC principal balance into stock. Contemporaneously, the Company
entered into a new Secured Loan Agreement with VCC which replaces in its
entirety the LOC (see Note 10).
(6) SERIES B OFFERING
On January 10, 2006, the board of directors designated 1,000,000 shares of
Series B 15% Cumulative Convertible Preferred stock ("Series B Preferred").
Shares of the Series B Preferred will be sold for $1.00 per share in an offering
document prepared for that purpose (the "Series B Offering"). All shares of
Series B Preferred sold under the Series B Offering will be newly issued shares
and are being sold by the Company solely to "accredited investors" as defined in
Rule 506 of Regulation D as promulgated under the Securities Act of 1933. New
funds raised under the Series B Offering would be used for general working
capital, marketing, reduction of liabilities, and the acquisition of materials,
components and additional tooling. The Series B Preferred is pari passu with
the Series A Preferred except that each dollar of Series B Preferred and any
accumulated dividends are convertible into two shares of the Company's common
stock, or $.50 per share. Shares of Series B Preferred also automatically
convert at the same time the Series A Preferred converts, if the bid price on an
established market for the Company's common stock is more than $2.10 for 60
consecutive trading days. The Series B Offering has been extended and now
expires on the earlier of the date the Company's common stock is approved for
trading or May 31, 2006.
Under the new Series B Offering, VCC will receive an unaccountable expense
allowance which includes 15,000 shares of Series B Preferred, and a cash payment
of 1 % of the total gross proceeds from the Series B Offering.
10
(7) STOCK PURCHASE WARRANTS
In accordance with the Visitalk Plan, the Company has issued six series of
common stock purchase warrants allowing holders to purchase additional shares of
common stock ("Plan Warrants"). Each Plan Warrant provides for the purchase of
one share of common stock and is callable by the Company for a price of $.0001
per warrant at any time. The Plan Warrants are governed by a Warrant Agreement.
Currently, the Company is acting as the Warrant Agent but has the right to
appoint an alternative Warrant Agent in accordance with the Visitalk Plan. The
board of directors can extend the expiration date of the Plan Warrants or reduce
the exercise price of any warrant on a temporary or permanent basis. The
Company has actually issued 6,785,014 Plan Warrants in each series to 240
claimants under the Visitalk Plan. A summary of the Plan Warrants outstanding
is as follows:
A & B C & D E & F
Warrants Warrants Warrants
Warrants outstanding,
December 31, 2005 13,570,028 13,570,028 13,570,028
Exercise price $ 2.00 $ 3.00 $ 4.00
Expiration date June 17, 2006 Dec. 31, 2006 Dec. 31, 2006
ADJUSTMENT TO PLAN WARRANTS OUTSTANDING
In accordance with the Visitalk Plan, up to 2,050,395 additional Plan Warrants
in each series may be issued to 405 additional claimants, but will only be
issued if such claimants execute an agreement with the Company. This agreement
includes an assignment or release of claims against Visitalk.com as specified in
the Visitalk Plan. As of May 11, 2006, a total of 97 claimants have executed
such agreements and have been issued 342,371 Plan Warrants in each series.
Claimants not returning an executed agreement by June 15, 2006 will forfeit
their rights to receive their respective Plan Warrants.
A & B C & D E & F
Warrants Warrants Warrants
Warrants outstanding, December 31, 2005 13,570,028 13,570,028 13,570,028
Adjustment to Warrants outstanding 684,742 684,742 684,742
---------- ---------- ----------
Warrants outstanding, May 11, 2006 14,254,770 14,254,770 14,254,770
(8) RELATED PARTY
VCC is a Phoenix, Arizona-based investment and consulting company that holds
various interests in companies and provides corporate restructuring and
consulting services. VCC wholly owned the Company at its formation and still
owns 1,050,158 shares of the Company's common stock. Michael S. Williams, a
director of the Company, and Lanny R. Lang, an officer and director of the
Company, are officers and directors of VCC. Mr. Williams and Mr. Lang also
11
jointly own 220,105 shares of the Company's common stock through a limited
liability company not affiliated with VCC, which they received for consulting
provided to DynaSig in 2003. Including these shares, VCC's shares of Series A
Preferred on an as-converted basis, and assuming VCC was to convert its LOC
Notes into common stock, VCC and its affiliates would own approximately 17.1% of
the voting capital stock of the Company as of March 31, 2006.
On December 27, 2004, DynaSig entered into a LOC with VCC for up to $100,000,
which was amended in June 2005 to provide for increased borrowing of up to
$350,000 (see Note 5). Effective December 31, 2004, the Company engaged VCC to
provide financial consulting, audit coordination, capital advisory, and
investment banking services until the Company's common stock is trading. VCC
received 100,000 shares of Series A Preferred for these services. After
completion of the initial services described above, the Company can, at its
option, continue to use VCC's services for a fee of $175 per hour. During the
three months ended March 31, 2006 and 2005, the Company recorded fees to VCC of
$50,000 and $25,000, respectively.
Subsequent to March 31, 2006, VCC agreed to convert all accrued interest and a
portion of the LOC principal balance into stock. Contemporaneously, the Company
entered into a new Secured Loan Agreement which replaces in its entirety the LOC
and issued a new $50,000 note to VCC for its financial consulting fees (see Note
10).
(9) GOING CONCERN AND MANAGEMENT'S PLANS
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
losses in its development stage and has not yet obtained capital needed to
achieve management's plans and support its operations and there is no assurance
that the Company will be able to raise such financing. Future losses are
anticipated and the Company's operations, even if successful, may not result in
cash flow sufficient to finance the continued expansion of its business. The
Company is in the development stage and will require substantial additional
financing to fully implement its plan of operations and emerge from the
development stage. The Company's success is also dependent on Richard C. Kim
Ph.D., the Company's Chief Executive Officer and largest stockholder. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. In view of these matters, realization of a major portion of the
assets is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its financing requirements and the
success of its future operations. The consolidated financial statements do not
include any adjustments that might result from this uncertainty.
The Company intends to raise funding under a Series B Offering (see Note 6). In
addition, subsequent to March 31, 2006, DynaSig entered into a Master Sales
Agreement with Delta Resources, LLC, a Scottsdale, Arizona-based sales agency
("Delta"), as a non-exclusive independent sales agent to solicit orders for the
Company's products (see Note 10). Although no assurances can be given,
management believes that the current funding plan related to the Series B
Offering and the new sales plan with Delta will allow the Company to obtain
sufficient capital for operations, to generate sales, and to continue as a going
concern.
12
(10) SUBSEQUENT EVENTS
BORROWINGS FROM DR. KIM
On April 13, 2006, Dr. Kim made a $10,000 short-term loan to the Company for
general working capital purposes. On May 11, 2006, the Company and Dr. Kim
agreed to convert this loan into a note issued under a new Secured Loan
Agreement (see below).
MASTER SALES AGREEMENT
On May 1, 2006, DynaSig entered into a Master Sales Agreement ("MSA") with Delta
Resources, LLC, a Scottsdale, Arizona-based sales agency ("Delta"), with respect
to the sale of DynaSig's products as set forth in the MSA (the "Products").
Under terms of the MSA, Delta is appointed as DynaSig's non-exclusive
independent sales agent to solicit orders for the Products, on a best efforts
basis and at its own expense. DynaSig shall pay Delta a cash commission
calculated as the difference between the Actual Sales Price and the Delta Floor
Price ("Commission Amount"), as such terms are defined in the MSA. As
additional consideration, the Company will grant Delta warrants to purchase
shares of its common stock ("Commission Warrants"), issued pursuant to a Master
Warrant Agreement. The total number of Commission Warrants to be granted to
Delta for each period will be determined by a calculation whereby the Commission
Amount, if any, will be divided by the market value of the Company's common
stock, determined quarterly by the Company. The Commission Warrants will be for
a term of two years from issuance and the shares of common stock issued to Delta
upon exercise have no registration right other than "piggyback" registration
rights. The MSA may be cancelled by DynaSig without cause with 30 days notice.
Delta has certain rights for 90 days after such cancellation for sales of the
Products that close in that period.
CONVERSION OF DEBT BY VCC
On May 10, 2006, VCC agreed to accept 85,000 newly issued shares of the
Company's Series A Preferred in settlement of accrued interest at that date
totaling $40,795, and LOC Notes in the principal amount of $44,205.
SECURED LOAN AGREEMENT ("SLA")
On May 11, 2006, the Company entered into new Secured Loan Agreements ("SLA")
with VCC and Dr. Kim. The maximum principal amount of notes that may be issued
under the SLA ("SLA Notes") is $500,000 to VCC and $100,000 to Dr. Kim.
Contemporaneously, a new SLA Note for $299,845 was issued to VCC, which repaid
the remaining principal balance of the LOC Notes outstanding as of that date
(see Note 5), and a new SLA Note for $10,000 was issued to Dr. Kim, which repaid
the short-term loan from Dr. Kim discussed above. The Company also issued a new
SLA Note to VCC for $50,000 to pay the financial consulting fees incurred during
the three months ended March 31, 2006 (see Note 4). All SLA Notes are secured,
and the principal and interest, if any, are convertible into Series A Preferred
at $1.00 per share. The SLA Notes are due on October 30, 2006. The interest
rate is set at the time an SLA Note is executed, currently 15% per annum,
payable monthly on the first day of the month. Any advances under the SLA are
solely at VCC's or Dr. Kim's option.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Except for historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.
Forward-looking statements include, but are not limited to, statements regarding
future events, our plans and expectations, financial projections and performance
and acceptance of our products in the marketplace. Our actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
elsewhere in this Form 10-QSB or incorporated herein by reference. See "Factors
Affecting Future Performance" below.
PLAN OF OPERATIONS
We were originally incorporated in Arizona on September 3, 2004 under the name
VT Gaming Services, Inc. We were a wholly owned subsidiary of Visitalk Capital
Corporation ("VCC") and formed as part of the implementation of a confirmed
Chapter 11 reorganization plan (the "Visitalk Plan") of visitalk.com, Inc.
("Visitalk.com"). On December 31, 2004, pursuant to an Exchange Agreement, we
acquired all of the outstanding capital stock of DynaSig Corporation, an Arizona
corporation ("DynaSig"), in a tax-free, stock for stock exchange. In April
2005, we adopted our current name of Dynamic Biometric Systems, Inc.
Through our wholly owned subsidiary DynaSig, we are developing and selling a
unique, dynamic biometric identification system based on the act or process of
signing a name or other handwriting (a "Dynamic Signature"). Our product, the
DynaSig System, consists of a proprietary, dynamic biometric capture device (the
"Bio-Pen") plus the proprietary registration and authentication software that
compares a Dynamic Signature captured by the Bio-Pen with a reference template.
Our newest product, just introduced, is a secure e-mail attachment application,
called the "Person-to-Person Lockbox" ("Lockbox"). The Lockbox can be used with
any e-mail system and assures the identity of both the sender and receiver. The
Lockbox is easy to create and easy for a recipient to save in its "locked"
state. The Lockbox can hold multiple documents created using different
programs, e.g. a word processing document, a blueprint, and a video file. The
DynaSig System may be also be utilized for electronic document execution and
control, to prevent credit card fraud and identity theft in e-commerce and
Internet financial transactions, and for government and corporate security,
including Internet, device and information access.
Our current sales plan is to sell all our products through direct marketing to
individuals and major users, through manufacturer's representatives and through
value added resellers. We believe the best way to promote the DynaSig System
initially, and solicit interest from both major users as well as manufacturer's
representatives and value added resellers, is through displays and
demonstrations at biometric conferences and trade shows, both domestically and
internationally. On May 1, 2006, we entered into an agreement with Delta
Resources, LLC, a Scottsdale, Arizona-based sales agency ("Delta"), with respect
to the sale of our products. Under terms of our agreement, Delta is appointed
as a non-exclusive independent sales agent to solicit orders for our products,
on a best efforts basis and at Delta's own expense. We will pay Delta a cash
commission calculated pursuant to the agreement. Delta may also earn warrants
to purchase shares of our common stock on a quarterly basis determined by the
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cash commission divided by the market value of our common stock. Such warrants
will be for two years from issuance and have limited "piggyback" registration
rights.
Until we successfully sell a number of DynaSig Systems on a regular basis, our
operations will not result in cash flow sufficient to finance the continued
expansion of our new business. A substantial portion of our capital will be
applied to the acquisition of materials, components and additional tooling,
assembly and labor to manufacture our production version of the Bio-Pen and to
expand our sales, marketing and promotional activities. We will require
substantial additional capital for assembly or manufacturing activities, for
purchase of additional components and for marketing and advertising activities.
If the DynaSig System does not receive the consumer or business acceptance that
we anticipate, our revenues and operating results will likewise not reach the
levels we anticipate. The DynaSig System has no brand name recognition, as do
most of our competitors' products. The DynaSig System is based on designs that
we have only begun producing in limited volumes.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2005
We had revenues of $200 for the three months ended March 31, 2006 compared no
revenues for the three months ended March 31, 2005. The revenues for the three
months ended March 31, 2006 consisted of an initial sale to a potential
independent representative for their review and evaluation of the Bio-Pen.
Costs of revenues were $3,906 for the three months ended March 31, 2006 compared
to $41 for the three months ended March 31, 2005. Costs of revenues will
generally include materials and labor associated with the installation,
implementation, warranty and support of the Bio-Pen and components sold. For
the three months ended March 31, 2006, costs of revenues also includes a charge
of $3,777 for discontinued or unsalable versions of the Bio-Pen.
The components of operating expenses for the three months ended March 31, 2006
as compared to the three months ended March 31, 2005 are as follows:
2006 2005
======== ======
Amount % Amount %
-------- ------ -------- ------
Research and development $ 41,085 27.1 $ 34,483 29.7
Selling and marketing 12,647 8.4 18,912 16.3
General and administrative 25,552 16.9 22,267 19.2
Legal and professional 67,674 44.7 35,743 30.8
Depreciation and amortization 4,433 2.9 4,634 4.0
$151,391 100.0 $116,039 100.0
Research and development expenses are comprised primarily of outside development
costs and payroll and related costs. Outside development costs were $10,711 and
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$6,045 for the three months ended March 31, 2006 and 2005, respectively, consist
of purchases of components, parts and supplies from numerous outside development
companies and individuals for the development of the DynaSig System since
inception. Payroll and related costs were $29,731 and $25,248 for the three
months ended March 31, 2006 and 2005, respectively, and include one-half of the
payroll and related costs of Richard C. Kim Ph.D., our Chief Executive Officer
and largest stockholder, and one other full-time employee involved in
development.
Selling and marketing expenses decreased $6,265 to $12,647 for the three months
ended March 31, 2006. This total amount compared to $18,912 for the three
months ended March 31, 2005. Commencing January 1, 2005, we engaged Matthew E.
Doty as our Vice President of Business Development, but he currently works as a
consultant. Mr. Doty's consulting fee for the three months ended March 31, 2006
was only $6,000 compared to $10,600 for the three months ended March 31, 2005,
as Mr. Doty's services were reduced to part-time due to funding constraints. We
expect to expand on our marketing expenditures as sufficient funding becomes
available.
General and administrative expenses increased $3,285 to $25,552 for the three
months ended March 31, 2006. This total amount compared to $22,267 for the
three months ended March 31, 2005. Material components of general and
administrative expenses were as follows:
2006 2005
======== ======
Amount % Amount %
-------- ------ -------- ------
Payroll and related $13,456 52.6 $12,733 57.2
Key-man life insurance 1,651 6.5 1,915 8.6
Rent 7,529 29.5 4,569 20.5
Other 2,916 11.4 3,050 13.7
$25,552 100.0 $22,267 100.0
One-half of Dr. Kim's payroll and related costs is allocated to general and
administrative expense, determined to be the proper allocation of his time
between his G&A and R&D activities. Additionally, as we are highly dependent on
the continued services of Dr. Kim, we purchased a $2 million key man life
insurance policy on Dr. Kim. Rent expense for the three months ended March 31,
2006 and 2005 is for our 1,443 square foot office facility in Tempe, Arizona.
Rent expense increased slightly during the second year of our lease. We believe
this facility will be suitable in the early stages of production, but we may
need additional space in the future. The lease expires on February 28, 2007.
Legal and professional fees increased $31,931 to $67,674 for the three months
ended March 31, 2006 compared to $35,743 for the three months ended March 31,
2005. A substantial portion of these fees for the three months ended March 31,
2006, totaling $50,000, related to financial consulting services under our
agreement with VCC. Corresponding fees to VCC for the three months ended March
31, 2005 were $25,000. Accounting and audit fees of $9,300 to our independent
registered public accounting firm during the three months ended March 31, 2006
accounted for the remainder of the increase.
Interest expense increased to $11,397 for the three months ended March 31, 2006
from $3,897 for the three months ended March 31, 2005, related to borrowings
16
under our line of credit agreement ("LOC") with VCC. Interest on the LOC Notes
accrues at 15% per annum. We owed $333,550 to VCC for advances under the LOC as
of March 31, 2006 compared to $100,000 as of March 31, 2005. These increased
borrowings under the LOC are the principal component of increased interest
expense.
As a result of the above, our net loss for the three months ended March 31, 2006
totaled $166,494 or $.02 per share. This compares to a net loss for the three
months ended March 31, 2005 of $119,977 or $.01 per share.
LIQUIDITY AND CAPITAL RESOURCES
MARCH 31, 2006 COMPARED TO MARCH 31, 2005
Cash and cash equivalents were $1,494 as of March 31, 2006 compared to $15,561
as of March 31, 2005. Cash provided by financing activities supported our
operations for both the three months ended March 31, 2006 and 2005. For the
three months ended March 31, 2006, we operated principally on $41,050 of cash
borrowings under the LOC compared to $75,000 of cash borrowings under the LOC
for the three months ended March 31, 2005.
Debt structure as ofMarch 31, 2006. As of March 31, 2006, we owed $333,500 to
VCC for advances under the LOC. We also owed $55,000, including interest, to
Milestone Equity Partners Phoenix, LLC (the "Milestone Note"), which was due on
December 20, 2005. We do not have sufficient funds to pay the Milestone Note.
In December 2005, we contacted Milestone and requested either an extension or
conversion of the Milestone Note. Milestone has never responded to our offer.
We still owed Optisense $80,868 as of March 31, 2006. Other than these
obligations, we owed $90,866 in trade accounts payable obligations, $85,245 of
related party obligations to VCC, $35,367 in accrued salaries and payroll taxes,
and $722 of other accrued liabilities.
New financing plan. We intend to raise funding under a private placement of a
newly designated Series B 15% Cumulative Convertible Preferred stock ("Series B
Preferred"). All shares of the Series B Preferred are being sold for $1.00 per
share in an Offering document prepared for that purpose ("Series B Offering").
New funds raised under the Series B Offering would be used for general working
capital, marketing, and the acquisition of materials, components and additional
tooling. The Series B Preferred is pari passu with the Series A Preferred
except that each dollar of Series B Preferred and any accumulated dividends are
convertible into two shares of common stock, or $.50 per share. Shares of
Series B Preferred also automatically convert at the same time the Series A
Preferred converts, if the bid price on an established market for our common
stock is more than $2.10 for 60 consecutive trading days. All shares of Series
B Preferred sold under the Series B Offering will be newly issued shares and are
being sold solely to "accredited investors" as defined in Rule 506 of Regulation
D as promulgated under the Securities Act of 1933. Under the Series B Offering,
VCC will receive an unaccountable expense allowance of 15,000 shares of Series B
Preferred, and a cash payment of 1 % of the total gross proceeds from the Series
B Offering. The Series B Offering also provides for the issuance of Selling
Agent Warrants, to the extent that a qualified broker-dealer sells shares under
the Series B Offering, at the same rate as under the Series A Offering. The
Series B Offering has been extended and now expires on the earlier of the date
our common stock is approved for trading or May 31, 2006.
17
There are risks inherent in our reliance on our financing plan. Should we be
unable to raise sufficient capital, it is possible that we will be incapable of
paying our liabilities. If vendors are not timely paid, they may be unwilling
to continue doing business with us. VCC, as our secured creditor, could
foreclose on all our assets, effectively causing us to cease operations. If we
are unable to raise sufficient funds with the Series B Offering, we will be
forced to assume more debt, and it will presumably be very difficult to find a
lender willing to extend us credit, other than VCC or Dr. Kim.
NewSecured LoanAgreement. On May 11, 2006, DynaSig entered into new Secured
Loan Agreements ("SLA") with VCC and Dr. Kim. The maximum principal amount of
notes that may be issued under the SLA ("SLA Notes") is $500,000 to VCC and
$100,000 to Dr. Kim. Contemporaneously, a new SLA Note for $299,845 was issued
to VCC, which repaid the remaining principal balance of the LOC Notes
outstanding as of that date, and a new SLA Note for $10,000 was issued to Dr.
Kim, which repaid the short-term loan from Dr. Kim in April 2006. We also
issued a new SLA Note to VCC for $50,000 to pay the financial consulting fees
incurred during the three months ended March 31, 2006. All SLA Notes are
secured, and the principal and interest, if any, are convertible into Series A
Preferred at $1.00 per share. The SLA Notes are due on October 30, 2006. The
interest rate is set at the time an SLA Note is executed, currently 15% per
annum, payable monthly on the first day of the month. Any advances under the
SLA are solely at VCC's or Dr. Kim's option.
Capital equipment. Our estimated capital equipment expenditures to meet our
goal cannot be precisely estimated, however, we believe additional equipment and
square footage will be needed to allow our production to exceed an estimated
1,000 Bio-Pens per month. In the near term, we expect to contract with third
parties for certain parts production. We have no production information
regarding the hours necessary to manufacture our product in any quantity and
therefore there is no assurance as to the necessary capital equipment required.
If we subcontract parts production, there is no assurance that we will be able
to obtain credit from such vendors or be able to control the prices charged for
such parts.
Manufacturing costs. We have purchased and have on hand sufficient inventory to
manufacture a few hundred Bio-Pens. The selling price of our product ranges
from $175 for a single Bio-Pen to $50,000 for a complete DynaSig System for
enterprise solution (WAN or Internet server licenses). We cannot determine to
what extent we will be profitable, if at all, at these targeted selling prices.
Sales and marketing. Our current sales plan is to sell all our products through
direct marketing to individuals and major users, through manufacturer's
representatives and through value added resellers. We believe the best way to
promote the DynaSig System initially, and solicit interest from both major users
as well as manufacturer's representatives and value added resellers, is through
displays and demonstrations at biometric conferences and trade shows, both
domestically and internationally. Accordingly, it will be necessary to incur
expenditures for trade show participation, demonstrations and exhibits,
marketing materials, advertisements and promotional expenditures and additional
Web site development. On May 1, 2006, we entered into an agreement with Delta
with respect to the sale of our products. Under terms of our agreement, Delta
is appointed as a non-exclusive independent sales agent to solicit orders for
our products, on a best efforts basis and at Delta's own expense.
18
Legal and professional. There will be additional costs estimated at
approximately $50,000 through our year ended December 31, 2006 for continuing
accounting, legal and business consulting expenses. These expenses include (a)
the services of VCC, (b) legal fees and costs related to SEC reporting and
compliance requirements as a fully reporting public company, (c) ongoing
auditor's fees for audit and reviews and (d) legal fees for expanded patent,
trademark and intellectual property protection.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Financial Reporting Release ("FRR") No. 60, released by the SEC in 2001,
requires all companies to include a discussion of critical accounting policies
and estimates used in the preparation of their financial statements. In
addition, FRR No. 61, also released in 2001, requires all companies to include a
discussion to address, among other things, liquidity, off-balance sheet
arrangements, contractual obligations and commercial commitments. On an
on-going basis, we evaluate our critical accounting policies and estimates. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form our basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. Our
summary of significant accounting policies are described in Note 3 to the
Consolidated Financial Statements. These policies were selected because they
represent the more significant accounting policies and methods that are broadly
applied in the preparation of our consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND COMMERCIAL
COMMITMENTS
We have no off-balance sheet arrangements, contractual obligations or commercial
commitments.
FACTORS AFFECTING FUTURE PERFORMANCE
Except for historical information contained herein, this Form 10-QSB contains
express or implied forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 (the "Exchange Act"). We intend that forward-looking statements be subject
to the safe harbors created thereby. We may make written or oral
forward-looking statements from time to time in filings with the SEC, in press
releases, quarterly conference calls or otherwise. The words "believes,"
"expects," "anticipates," "intends," "forecasts," "projects," "plans,"
"estimates" and similar expressions identify forward-looking statements.
Forward-looking statements reflect our current views with respect to future
events and financial performance or operations and speak only as of the date the
statements are made.
Forward-looking statements involve risks and uncertainties and readers are
cautioned not to place undue reliance on forward-looking statements. Our actual
results may differ materially from such statements. Factors that cause or
contribute to the differences include, but are not limited to, those discussed
elsewhere in this Form 10-QSB, as well as those discussed in our Annual Report
on Form 10-KSB for the year ended December 31, 2005, including those in the
Notes to Financial Statements and in "Management's Discussion and Analysis or
19
Plan of Operations" and "Description of Business - Factors Affecting Future
Performance" sections which are incorporated by reference in this Form 10-QSB.
Although we believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in
forward-looking statements will be realized. The inclusion of forward-looking
information should not be regarded as a representation that the future events,
plans or expectations contemplated will be achieved. We undertake no obligation
to publicly update, review or revise any forward-looking statements to reflect
any change in our expectations or any change in events, conditions or
circumstances on which any forward-looking statements are based. Our filings
with the SEC, including the Form 10-KSB referenced above, may be accessed at the
SEC's Web site, www.sec.gov.
ITEM 3. CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures" (as defined in the Exchange Act
Rules 13a-15(e) and 15(d)-15(e)) designed to ensure that information required to
be disclosed in reports filed under the Exchange Act, is recorded, processed,
summarized and reported within the specified time periods. Under the supervision
and with the participation of our management, including our Chief Executive
Officer and our Treasurer, we conducted an evaluation of our disclosure controls
and procedures as of March 31, 2006. Based on this evaluation, our Chief
Executive Officer and Treasurer concluded that, while our disclosure controls
and procedures are effective in timely alerting them to material information
required to be included in our periodic filings with the SEC, there is a lack of
segregation of duties due to the limited number of employees dealing with
general administrative and financial matters. At this time, management believes
that, given the individuals involved and the control procedures in place, the
risks associated with such lack of segregation are not considered significant,
and that the potential benefits of adding additional employees to segregate
duties more clearly do not currently justify the associated added expense.
However, management will reevaluate the situation periodically and will mitigate
the current lack of segregation of duties within the general administrative
functions if it believes the risks from such lack of segregation have increased
or when additional capital is secured.
(B) CHANGES IN INTERNAL CONTROLS
There have been no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rule
13a-15 or 15d-15 promulgated under the Exchange Act that occurred during the
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. Management is
aware that many currently existing internal controls are undocumented and will
be working to document such internal controls over the coming year.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved in any legal proceedings, nor are we aware of any potential
or threatened litigation, or any asserted claims that may result in litigation
or other legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the quarter ending March 31, 2006, covered by
this report to a vote of the Company's shareholders, through the solicitation of
proxies or otherwise.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(A) EXHIBITS
10.21 Secured Loan Agreement by and between DynaSig Corporation and Visitalk
Capital Corporation dated May 11, 2006.
10.22 Secured Loan Agreement by and between DynaSig Corporation and Richard
C. Kim dated May 11, 2006.
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
21
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNAMIC BIOMETRIC SYSTEMS, INC.
(Registrant)
Dated: May 11, 2006 By: /s/ Richard C. Kim
---------------------
Richard C. Kim
Chief Executive Officer and President
Dated: May 11, 2006 By: /s/ Lanny R. Lang
--------------------
Lanny R. Lang
Secretary and Treasurer (Chief
Accounting Officer)
22