Datakey Announces 2003 First Quarter Results

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Datakey receives notice of possible Nasdaq delisting

MINNEAPOLIS, April 24, 2003 – Datakey Inc. (Nasdaq: DKEY), a leading developer of smart card solutions that simplify access and identity management, today reported results for the first quarter ended March 31, 2003. Revenue from continuing operations for the first quarter was $794,000, down 68 percent from $2,493,000 for the same period last year. The first quarter loss from continuing operations was $1,549,000, or $.15 per share, compared to a loss of $656,000, or $.07 per share, in the year-earlier period.

“We are disappointed in first quarter results that reflect reduced revenue due to a combination of factors, including softness in the global PKI market, reduced IT spending and significantly extended program implementation timeframes,” said Tim Russell, president and CEO, Datakey. “As a result of these factors, we have taken a number of steps to position Datakey for future growth, including the introduction of new products, a reduction of expenses, management changes and changes to our sales and marketing approach. Our team is responding to the market challenges we face and we are optimistic about the opportunities these changes present for our future.”

Vision
Datakey’s early vision was focused on becoming a major provider of smart card-based information security products designed to capitalize on the expected rapid growth in the Public Key Infrastructure (PKI) marketplace. Datakey has developed a premier reputation in this market by offering leading technology products with broad interoperability that work out of the box. As a result of many factors, the market for PKI technology has not grown as rapidly as many experts anticipated. In response, Datakey has introduced Datakey Axis, a new product leveraging the strengths of our core technology, while offering additional value independent of PKI. The product combines Datakey’s proven smart card and software technology with existing user ID/password infrastructures to make digital identity management and access to business applications and corporate information easy, cost-effective and more secure. With the addition of Datakey Axis, we have expanded our available markets and are focused on a vision to deliver smart card-based solutions that offer increased productivity and security with rapid implementation and deployment leading to a measurable return on investment. A key aspect of this new vision is to retain and integrate our traditional strength in the PKI market into our Datakey Axis product offerings, therefore enabling our clients to rapidly deploy a solution supporting a broad range of credentials including PKI.

Guidance
Our principal objectives in 2003 are to introduce Datakey Axis to the market, seek to regain momentum in sales of our current PKI-focused products in selected markets and manage losses while conserving cash. Due to the uncertainty of our customer’s PKI project implementation plans, PKI market growth, IT spending growth and speed of market introduction of the new Datakey Axis solution, we are not providing specific forward-looking revenue guidance at this time. We anticipate continued pressure on revenues throughout 2003 and we will not be profitable in the second quarter. Nevertheless we believe that the changes we are making will positively impact future financial results.

Nasdaq notice of possible delisting
Datakey, Inc. also announced today that it received notice from Nasdaq that for 30 consecutive trading days the bid price of its common stock had closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq SmallCap Market. In accordance with Nasdaq rules, Datakey will have until October 13, 2003, to re-qualify for continued listing by having its bid price close at $1.00 per share or more for a minimum of ten consecutive trading days. In addition, the Company does not to expect be in compliance with Nasdaq’s $2.5 million net worth requirement as of June 30, 2003, the end of its second quarter without raising additional capital. The Company is currently evaluating its options.

About Datakey Inc.
Datakey Inc. (www.datakey.com) focuses on delivering complete smart card-based solutions that simplify access and identity management throughout the enterprise. Datakey’s comprehensive solution set makes it easier to administer digital identities and to manage user access to a full range of corporate resources. Our solutions reduce administrative costs while at the same time providing stronger security. In turn, Datakey solutions make it much more convenient and secure for users to login to company resources by consolidating all digital credentials – including passwords, digital certificates, VPN/dial-up credentials and biometric data – onto one smart card and automating access through a reduced number of sign-ons.

Forward-Looking Statements
Statements in this press release related to the efficacy and marketability of the Datakey Axis are forward looking statements, which are subject to certain risks and uncertainties that could materially affect the revenue potential of Datakey Axis. Those risks and uncertainties include, but are not limited to, the ability of Datakey Axis to perform as projected, market acceptance of Datakey Axis and the sufficiency of Datakey’s resources to adequately market and sell Datakey Axis. The Company’s cash balance as of March 31, 2003, was $2,158,000. The Company believes that its cash resources will be sufficient to fund the Company’s operations at least into the fourth quarter of 2003, assuming there is no further deterioration in revenues. There is no assurance that equity or debt financing will be available when needed at acceptable terms or at all.