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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
COMMISSION FILE NUMBER 0-2027
SAFLINK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4346070
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
18650 N.E. 67TH COURT, SUITE 210, REDMOND, WASHINGTON 98052
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(425) 881-6766
(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 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
THERE WERE 31,304,195 SHARES OF SAFLINK CORPORATION'S COMMON STOCK
OUTSTANDING AS OF MAY 18, 2001.
SAFLINK CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
a. Condensed Consolidated Balance Sheets
as of March 31, 2001 and December 31, 2000..........................1
b. Condensed Consolidated Statements of Operations
for the three months ended March 31, 2001 and 2000..................2
c. Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2001 and 2000..................3
d. Notes to Condensed Consolidated Financial Statements................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Result of Operations..................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........13
Part II. Other Information
Item 1. Legal Proceedings .................................................14
Item 2. Changes in Securites...............................................14
Item 3. Default upon Senior Securities.....................................15
Item 6. Exhibits and Reports on Form 8-K...................................15
Signature............................................................................16
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PART 1 - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
SAFLINK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS March 31, December 31,
2001 2000
(In thousands)
Current assets:
Cash and cash equivalents $ 126 $ 1,108
Accounts receivable, net 109 153
Inventory 51 25
Investments 122 102
Prepaid expenses and other current assets 126 244
-------- --------
Total current assets 534 1,632
Furniture and equipment, net 824 869
Intangible assets, net 4,891 5,344
Other assets 134 152
-------- --------
$ 6,383 $ 7,997
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,525 $ 1,494
Accrued liabilities 588 693
Bridge notes payable 2,864 2,437
Deferred revenue 216 286
-------- --------
Total current liabilities 6,193 4,910
Long-term debt, net of discounts 1,504 1,485
-------- --------
7,697 6,395
Stockholders' equity (deficit):
Common stock 313 262
Common stock issuable in asset purchase -- 3,228
Deferred stock-based compensation (71) (81)
Additional paid-in capital 60,090 56,865
Accumulated deficit (61,646) (58,672)
-------- --------
(1,314) 1,602
-------- --------
$ 6,383 $ 7,997
======== ========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
SAFLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
2001 2000
------------ ------------
Products and services:
Software $ 26 $ 140
Hardware 1 216
Services and other 145 60
------------ ------------
Total revenue 172 416
Cost of products and services sold:
Software 13 27
Hardware 1 155
Services and other 60 19
------------ ------------
Total cost of revenue 74 201
------------ ------------
Gross profit 98 215
Operating expenses:
Product development 984 971
Sales and marketing 176 445
Amortization of intangible assets 440 --
Relocation -- 88
General and administrative 1,199 664
------------ ------------
Total operating expenses 2,799 2,168
------------ ------------
Loss from operations (2,701) (1,953)
Interest and other income 2 61
Interest expense (275) --
------------ ------------
Net loss (2,974) (1,892)
Preferred stock dividend -- 123
------------ ------------
Net loss attributable to common stockholders $ (2,974) $ (2,015)
============ ============
Basic and diluted loss per common share $ (0.10) $ (0.11)
============ ============
Weighted average number of common shares outstanding 31,267,437 19,094,460
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
SAFLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,974) $(1,892)
Adjustments to reconcile net loss to net cash used in operating
activities:
Stock-based compensation 10 107
Depreciation and amortization 544 45
Amortization of deferred financing costs 56 --
Amortization of discount on note payable 19 --
Changes in assets and liabilities:
Accounts receivable 44 (157)
Inventory (26) 10
Prepaid expenses and other current assets 118 (80)
Other assets 18 (60)
Accounts payable 1,031 32
Accrued liabilities (105) --
Deferred revenue (70) (25)
------- -------
Net cash used in operating activities (1,335) (2,020)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment (46) (127)
Increase in investments (20) --
------- -------
Net cash used in investing activities (66) (127)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bridge notes and warrants 389 --
Proceeds from issuance of common stock upon exercise of
employee stock options and investor warrants 30 996
------- -------
Net cash provided by financing activities 419 996
------- -------
Net decrease in cash and cash equivalents (982) (1,151)
Cash and cash equivalents at beginning of period 1,108 5,335
------- -------
Cash and cash equivalents at end of period $ 126 $ 4,184
======= =======
NON CASH FINANCING AND INVESTING ACTIVITIES:
Preferred stock dividend $ -- $ 123
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
SAFLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited and
condensed and, therefore, do not contain certain information included in the
annual consolidated financial statements of SAFLINK Corporation and its
wholly-owned subsidiary, SAFLINK International, Inc., (the "Company" or
"SAFLINK"). In the opinion of management, all adjustments (consisting only of
normally recurring items) it considers necessary for a fair presentation have
been included in the accompanying condensed consolidated financial statements.
The Company's condensed consolidated interim financial statements are
not necessarily indicative of results to be expected for a full fiscal year and
should be read in conjunction with its consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000, as filed with the Securities and Exchange
Commission (the "SEC") on April 17, 2001.
Certain items in the 2000 financial statements and the notes thereto
have been reclassified to conform with the 2001 presentation of such items.
2. INVESTMENTS
At March 31, 2001, investments consist of a $103,000 bank time
certificate of deposit pledged to secure a letter of credit in lieu of a
security deposit related to the lease of the Company's headquarters facility and
a $19,000 bank time certificate of deposit pledged to secure a credit card
issued to the Company. During April and May of 2001, approximately $94,000 of
the $103,000 certificate of deposit was used to pay March through May 2001 lease
payments. These investments are carried at cost.
3. STOCKHOLDERS' EQUITY
During the quarter ended March 31, 2001, the Company issued (i) 5.1
million shares of Common Stock to Jotter Technologies Inc. as partial
consideration for the intellectual property and fixed assets acquired from
Jotter pursuant to the December 15, 2000 asset purchase agreement between Jotter
and the Company, (ii) 10,000 shares of Common Stock upon exercise of stock
options exercised by certain employees pursuant to provisions of the Company's
1992 Stock Incentive Plan and (iii) 37,500 shares of Common Stock upon exercise
of investor warrants. The options had an exercise price of $1.34 per share,
which equaled fair value on the dates of grant. The warrants had an exercise
price of $0.50 per share.
4. SIGNIFICANT CUSTOMERS
Two customers accounted for approximately 56% and 31% of the Company's
revenues for the quarter ended March 31, 2001. Two customers accounted for
approximately 62% and 11% of the Company's revenues for the quarter ended March
31, 2000.
4
SAFLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMPREHENSIVE LOSS
For the quarter ended March 31, 2001, total comprehensive loss was
$2,974,000, which equaled the net loss for the quarter. For the quarter ended
March 31, 2000, total comprehensive loss was $2,052,000, which consisted of a
net loss of $1,892,000 and unrealized holding losses on investments of $160,000.
6. NET LOSS PER SHARE
In accordance with Statement of Financial Accounting Standard No. 128,
"Earnings Per Share", the Company has reported both basic and diluted net loss
per common share for each period presented. Basic net loss per common share is
computed on the basis of the weighted-average number of common shares
outstanding for the period. Diluted net loss per common share is computed on the
basis of the weighted-average number of common shares plus dilutive potential
common shares outstanding. Dilutive potential common shares are calculated under
the treasury stock method. Securities that could potentially dilute basic income
per share consist of outstanding stock options and warrants and convertible
preferred stock. Net loss available to common stockholders includes net loss and
preferred stock dividends. As the Company had a net loss available to common
stockholders in each of the periods presented, basic and diluted net loss per
common share are the same. All outstanding warrants and stock options to
purchase common shares were excluded because their effect was anti-dilutive.
Potential common shares consisted of options and warrants to purchase
approximately 4.4 million and 3.8 million common shares at March 31, 2001 and
2000, respectively, and preferred stock convertible into approximately 6.3
million common shares at March 31, 2000.
7. SEGMENT INFORMATION
Operating segments are revenue-producing components of the enterprise
for which separate financial information is produced internally for the
Company's management. Under this definition, the Company operated, for all
periods presented, as a single segment.
8. LEGAL PROCEEDINGS
On June 16, 1999, International Interest Group, Inc. filed suit against
the Company and Mr. J. Anthony Forstmann, a former director and chairman of
SAFLINK, in the Superior Court of the State of California for the County of Los
Angeles (Civil Action No.: BC212033). This lawsuit relates to the Company's
alleged failure to perform under the terms of a settlement agreement relating to
a prior lawsuit filed by IIG. The complaint alleged three causes of action: (i)
the Company's breach of contract with IIG causing IIG to sustain damages; (ii)
fraud; and (iii) recission by IIG against the Company and Mr. Forstmann. IIG's
cause of action for recission and IIG's cause of action for fraud were dismissed
with prejudice by the trial court during the first quarter of 2000. However, the
appellate court reinstated IIG's fraud cause of action in August 2000. On
November 7, 2000, IIG filed a third amended complaint adding causes of action
for fraud by concealment, negligent misrepresentation and breach of fiduciary
duties. IIG is seeking actual and consequential damages and attorneys' fees in
connection with its cause of action for breach of contract; actual,
consequential and
5
punitive damages in connection with its fraud causes of action and its breach of
fiduciary duties cause of action; and actual and consequential damages in
connection with its negligent misrepresentation cause of action. Each party to
this action filed a motion for summary judgment with the court on March 29,
2001, but the court has not ruled on such motions as of May 18, 2001. Trial has
been set for July 18, 2001. The Company does not believe the claims have any
merit and it intends to vigorously defend itself in this lawsuit.
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, in June 1998. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. SFAS No. 133, as amended, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The adoption of this
statement on January 1, 2001 did not have an impact on the consolidated
financial statements.
10. GOING CONCERN
The Company incurred net losses of $9.0 million, $3.9 million and $1.4
million and used cash of $7.2 million, $3.6 million and $723,000 in operating
activities in 2000, 1999, and 1998, respectively. The Company incurred an
additional net loss of $3.0 million and used cash of $1.3 million in operating
activities for the quarter ended March 31, 2001. At March 31, 2001, the Company
has a net working capital deficiency of $5.7 million and has an accumulated
deficit of $61.6 million. To address these liquidity issues, the Company has
taken steps to obtain additional capital through an equity financing.
There can be no assurance that the Company will be able to raise
capital, achieve profitability, or generate cash from operations. If the Company
is unable to obtain financing in the near term, it will be forced to discontinue
operations. The accompanying financial statements have been prepared on the
basis that the Company will be able to meet its obligations as they become due
and continue as a going concern.
11. SUBSEQUENT EVENTS
On April 10, 2001 the Company announced that Jotter Technologies Inc.
will convert its outstanding $1.64 million note, plus accrued interest of
$33,635 into SAFLINK common stock at $1.00 per share. The note had been issued
to Jotter as partial consideration for the assets acquired by SAFLINK in
December 2000. Upon conversion of the debt, Jotter will own 6,770,115 shares of
SAFLINK common stock, representing approximately 20.6% of the Company's
outstanding common stock after the issuance of the new shares. The shares issued
to Jotter will be held in escrow on behalf
6
of Jotter and released in monthly distributions after Jotter satisfies certain
Canadian tax obligations related to the asset purchase.
On April 20, 2001 the Company announced that it received a Nasdaq Staff
Determination on April 16, 2001 indicating that the Company fails to comply with
the minimum bid price requirement for continued listing set forth in Marketplace
Rule 4310(c)(4), and that its securities are, therefore, subject to delisting
from The Nasdaq SmallCap Market. The Company has requested a hearing before a
Nasdaq Listing Qualifications Panel to appeal the Staff Determination. This
request for a hearing stays any delisting action, pending the Panel's decision.
The hearing date has been set for June 7, 2001. There can be no assurance the
Company will be successful in its appeal of the Staff's Determination.
On May 21, 2001, the Company announced that it received $440,000 of
additional bridge financing and $125,000 upon the exercise of warrants to
purchase 250,000 shares of Common stock at $0.50 per share in April and May
2001. The additional bridge funds were received on substantially similar terms
to those of the $2.9 million bridge financings completed in November 2000 and
March 2001. The Company issued unsecured notes, which bear interest at 12% per
annum and mature in May 2001. Holders of the notes will be entitled to
participate in any financing that the Company undertakes prior to the maturity
date of the notes by electing to receive, in lieu of repayment of the note and
accrued interest, securities of the same class and on the same terms as issued
in that financing. The Company also issued warrants to purchase 110,000 shares
of common stock for $1.50 per share.
Cash at May 18, 2001 was approximately $15,000. In addition, trade
accounts payable of approximately $2.6 million includes approximately $1.4
million that is past due more than 90 days and the Company is under increasing
pressure from creditors. Accordingly, unless the Company is able to identify a
source of significant additional funding immediately, the Company expects that
it will be necessary to lay off virtually all of its employees and discontinue
operations at any time.
7
SAFLINK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained herein, certain of the
matters discussed in this quarterly report are "forward-looking statements" as
defined in Section 21E of the Securities Exchange Act of 1934, as amended, which
involve certain risks and uncertainties which could cause actual results to
differ materially from those discussed herein. In addition to other information
contained in this quarterly report, the following factors, among others, may
have affected, and in the future could affect our actual results and could cause
future results to differ materially from those in any forward looking statements
made by or on behalf of the Company. Factors that could cause future results to
differ from expectations include, but are not limited to, the following:
o our need for additional funds to continue operations;
o control of the Company;
o our limited operating history and substantial accumulated net
losses;
o the SmallCap Market eligibility and maintenance requirements;
o the possible delisting of our Common Stock from the SmallCap Market;
o technological and market uncertainty;
o rapid changes in technology;
o competition;
o our dependence upon software licensors;
o our ability to retain key employees and to attract high quality new
employees;
o shares eligible for future sale could adversely affect our ability
to raise capital and the market price for our stock;
o there is a limited public market for our common stock;
o the market price for our stock has been and may continue to be
volatile;
o we are exploring an acquisition strategy with which we have no
experience;
o our dependence on significant growth in the biometrics market which
is a developing market;
o our marketing partners' ability to promote our products; and
o our failure to pay dividends.
These factors are discussed in greater detail in our Annual Report on Form 10-K
filed with the SEC on April 17, 2001.
A. RECENT EVENTS
o On April 20, 2001 we announced that we received a Nasdaq Staff
Determination on April 16, 2001 indicating that the Company fails to
comply with the minimum bid price requirement for continued listing
set forth in Marketplace Rule 4310(c)(4), and that its securities
are, therefore, subject to delisting from The Nasdaq SmallCap
Market. We have requested a hearing before a Nasdaq Listing
Qualifications Panel to appeal the Staff Determination. This request
for a hearing stays any delisting action, pending the Panel's
8
SAFLINK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
decision. The hearing date has been set for June 7, 2001. There can
be no assurance we will be successful in our appeal of the Staff's
Determination.
o In May 2001, we announced that we received $440,000 of additional
bridge financing in April and May 2001. Such funds were received on
substantially similar terms to those of the $2.9 million bridge
financing completed in November 2000 and March 2001. We issued
unsecured notes, which bear interest at 12% per annum and mature in
May 2001. Holders of the notes will be entitled to participate in
any financing that we undertake prior to the maturity date of the
notes by electing to receive, in lieu of repayment of the note and
accrued interest, securities of the same class and on the same terms
as issued in that financing. We also issued warrants to purchase
110,500 shares of common stock for $1.50 per share. In April 2001,
we received $125,000 upon the exercise of warrants to purchase
250,000 shares of Common Stock at $0.50 per share.
o We have been attempting to raise additional working capital by means
of a private placement of equity securities. While we have been able
to obtain expressions of interest from certain potential investors,
there is no assurance that we will be able to close the placement.
Our cash at May 18, 2001 was approximately $15,000. In addition, our
trade accounts payable of approximately $2.6 million includes
approximately $1.4 million that is past due more than 90 days and we
are under increasing pressure from creditors. Accordingly, unless we
are able to identify a source of significant additional funding
immediately, we expect that it will be necessary to lay off
virtually all of our employees and discontinue operations at any
time.
B. RESULTS OF OPERATING ACTIVITIES
We incurred net losses attributable to common stockholders of
approximately $3.0 million and $2.0 million for the three-month periods ended
March 31, 2001 and 2000, respectively. The increase in net loss of approximately
$959,000 was primarily due to increases in professional services related to the
Company's financial difficulties and fund raising efforts ($394,000) and
amortization of intangible assets acquired from Jotter Technologies in December
2000 ($440,000), partially offset by decreases in personnel expense ($178,000)
and relocation expenses incurred in the quarter ended March 31, 2000 ($88,000)
with no such expenses in the quarter ended March 31, 2001. Sales and marketing
expenses decreased to $176,000 for the quarter ended March 31, 2001 from
$445,000 for the quarter ended March 31, 2000 due a lack of cash. We incurred
interest expense of $275,000 on bridge loans for the quarter ended March 31,
2001 with no comparable expense for the quarter ended March 31, 2000.
REVENUE AND COST OF REVENUE
Revenue of approximately $172,000 for the three months ended March 31,
2001 decreased approximately $244,000 (59%) from revenue of approximately
$416,000 for the three months ended March 31, 2000. Our ability to close new
business during the quarter ended March 31, 2001 was seriously reduced by the
lack of funds available for sales and marketing activities.
9
SAFLINK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
The approximately $127,000 decrease in cost of revenue was primarily
attributable to the decrease in revenue.
The Company's gross margin percentages for the three-month periods
ended March 31, 2001 and 2000 were approximately 57% and 52%, respectively. The
changes from 2000 to 2001 were primarily due to a change in product mix, which
included a significantly higher percentage of revenue from services and other in
2001 than in 2000.
OPERATING EXPENSES
Total operating expenses for the three months ended March 31, 2001
increased approximately $631,000 (29%) to approximately $2.8 million from
approximately $2.2 million for the same period in 2000. This increase was
primarily due to increases in professional services related to the Company's
financial difficulties and fund raising efforts ($394,000) and amortization of
intangible assets acquired from Jotter Technologies in December 2000 ($440,000),
partially offset by decreases in personnel expense ($178,000) and relocation
expenses incurred in the quarter ended March 31, 2000 ($88,000) with no such
expenses in the quarter ended March 31, 2001. The following table provides a
breakdown of the dollar and percentage changes in operating expenses for the
three months ended March 31, 2001, as compared to the same period in 2000:
(Dollars in thousands) INCREASE INCREASE
(DECREASE) (DECREASE)
---------- ---------
Product development $ 13 1%
Sales and marketing (269) (60)
Amortization of intangible assets 440 N.M.*
Relocation (88) (100)
General and administrative 535 81
----- -----
$ 631 29%
===== =====
* Not meaningful
PRODUCT DEVELOPMENT - The nearly stable level in product development expenses is
the result of our efforts to contain costs as we continued our efforts to obtain
needed additional working capital, while still enhancing our current products to
meet the requirements of identified sales prospects. We expect to continue to
incur product development expenses, but at a reduced level for the near term, in
order to conserve cash as we focus our efforts on consummating sales of existing
products to identified sales prospects.
SALES AND MARKETING - The decrease in sales and marketing expenses was primarily
due to decreases in employee expenses, travel, and advertising expenses due to
our need to conserve cash while we focused our efforts on securing needed
working capital. The sales cycle for our products has taken longer to develop
than management anticipated due to, among other things, the lack of industry
standards and acceptance by the commercial market, the cost of hardware
associated with the technology, and the extended period of time potential
customers require to test, evaluate and pilot applications. However, we believe
that a convergence of factors, including recent decreases in
10
SAFLINK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
hardware costs as well as the development of industry standards, will lead to
greater market acceptance of biometric security solutions in the foreseeable
future. While we intend to maintain tight control over sales and marketing
expenses in the near term as we focus our efforts to consummate sales to
currently identified prospects, we expect our sales and marketing expenses to
increase over the longer term as the market for our products and services
develops.
GENERAL AND ADMINISTRATIVE - The increase in general and administrative expenses
was primarily due to an increase of approximately $394,000 in professional
services related to the Company's financial difficulties and fund raising
efforts. If we are successful in obtaining the additional financing we require
to continue our operations, we intend to implement a concerted cost reduction
effort while we focus our efforts on consummating sales to already identified
sales prospects.
B. LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Cash and working capital (deficit) as of March 31, 2001 were
approximately $126,000 and $(5.7 million), respectively, compared to
approximately $1.1 million and $(3.3 million), respectively, as of December 31,
2000. The decrease in the Company's cash and working capital as of March 31,
2001 compared to December 31, 2000 was primarily due to net operating losses,
partially offset by proceeds of approximately $389,000 from the issuance of
bridge notes and warrants and $30,000 upon the exercise of employee stock
options and investor warrants during the quarter ended March 31, 2001.
Cash as of May 18, 2001, was approximately $15,000. The decrease from
March 31, 2001 was primarily due to operating losses partially offset by an
increase in accounts payable of approximately $126,000 and an increase in bridge
notes payable of approximately $440,000. The resulting accounts payable balance
of approximately $2.6 million includes approximately $1.4 million of obligations
past due more than 90 days.
We expended net cash at a rate of approximately $467,000 per month
(before considering approximately $389,000 of proceeds from the issuance of
additional bridge notes and the receipt of approximately $30,000 from the
exercise of warrants) during the first quarter of 2001. We do not believe that
our existing working capital, together with anticipated cash flows from sales
under current contracts will be sufficient to meet our immediate working capital
needs.
We require significant additional funds to continue our operations. We
are presently attempting to raise additional working capital through a private
placement of equity securities. While we have received expressions of interest
from certain accredited investors, there is no assurance that we will be able to
obtain sufficient financing to continue our operations. If additional financing
is not obtained in the near term, we expect that it will be necessary to cease
operations. Any equity financing completed by the Company is likely to result in
very substantial dilution to existing stockholders.
Even if a financing is completed, we will require significant
additional funds to continue our operations into the year 2002. Options we are
reviewing to obtain such additional financing include, but are not limited to
the sale and issuance of additional stock, the sale and issuance of debt, the
sale of certain of our assets and entering into an additional strategic
relationship or relationships to either obtain
11
SAFLINK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
the needed funding or to create what we believe would be a better opportunity to
obtain such funds. It is possible that any such additional infusion of capital
would be in the form of the sale and issuance of additional shares of our common
stock or securities that are convertible into our common stock, which would
substantially increase the number of shares of common stock outstanding on a
fully-diluted basis. The failure to obtain such additional funds could cause us
to cease or curtail operations. Even if such additional funding is obtained,
there is no assurance that we will be able to generate significant sales of our
products or services, or, if we are able to consummate significant sales, that
any such sales would be profitable.
DIVIDENDS
Since our incorporation, we have not paid or declared dividends on our
Common Stock, nor do we intend to pay or declare cash dividends on our Common
Stock in the forseeable future.
12
SAFLINK CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to the $122,000 time certificates of deposit included in our
investment portfolio. Investments in fixed rate earning instruments carry a
degree of interest rate risk as their fair market value may be adversely
impacted due to a rise in interest rates. As a result, our future investment
income may fall short of expectations due to changes in interest rates. We do
not use any hedging transactions or any financial instruments for trading
purposes and we are not a party to any leveraged derivatives.
The Company maintains an office and currently has 17 employees located
in Canada. Expenses related to this office are incurred in its local currency.
As exchange rates vary, transaction gains or losses will be incurred and may
vary from expectations and adversely impact overall profitability. If in 2001,
the US dollar uniformly changes in strength by 10% relative to the currency of
the foreign operations, our operating results would likely not be significantly
affected.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 16, 1999, International Interest Group, Inc. filed suit against
us and Mr. J. Anthony Forstmann, a former director and chairman of SAFLINK, in
the Superior Court of the State of California for the County of Los Angeles
(Civil Action No.: BC212033). This lawsuit relates to our alleged failure to
perform under the terms of a settlement agreement relating to a prior lawsuit
filed by IIG. The complaint alleged three causes of action: (i) our breach of
contract with IIG causing IIG to sustain damages; (ii) fraud; and (iii)
recission by IIG against us and Mr. Forstmann. IIG's cause of action for
recission and IIG's cause of action for fraud were dismissed with prejudice by
the trial court during the first quarter of 2000. However, the appellate court
reinstated IIG's fraud cause of action in August 2000. On November 7, 2000, IIG
filed a third amended complaint adding causes of action for fraud by
concealment, negligent misrepresentation and breach of fiduciary duties. IIG is
seeking actual and consequential damages and attorneys' fees in connection with
its cause of action for breach of contract; actual, consequential and punitive
damages in connection with its fraud causes of action and its breach of
fiduciary duties cause of action; and actual and consequential damages in
connection with its negligent misrepresentation cause of action. Each party to
this action filed a motion for summary judgment with the court on March 29,
2001, but the court has not ruled on such motions as of May 18, 2001. Trial has
been set for July 18, 2001. We do not believe the claims have any merit and we
intend to vigorously defend ourselves in this lawsuit.
ITEM 2. CHANGES IN SECURITIES
On March 13, 2001, the Company issued 5,100,000 shares of its Common
Stock to Jotter Technologies Inc. pursuant to the December 15, 2000 asset
purchase agreement between Jotter and the Company. Shares were issued pursuant
to an exemption by reason of Regulation D of the Securities Act of 1933, as
amended. The issuance was made without general solicitation or advertising. The
investor was a sophisticated investor with access to all relavent information.
These shares were registered under Registration Statement No. 333-54084.
On March 13, 2001, the Company issued a warrant to purchase up to
62,500 shares of its Common Stock, $.01 par value, as partial consideration for
a bridge loan. The warrant was fully vested on grant and is exercisable until
March 31, 2006. The exercise price of $1.50 per share was greater than the
closing price of the Common Stock on the date of grant. The warrant was issued
pursuant to an exemption by reason of Section 4(2) of the Securities Act of
1933, as amended. The issuance was made without general solicitation or
advertising. The investor was a sophisticated investor with access to all
relevant information.
On March 21, 2001, the Company issued warrants to purchase up to 17,188
shares of its Common Stock, $.01 par value, as partial consideration for two
bridge loans. The warrants were fully vested on grant and are exercisable until
March 31, 2006. The exercise price of $1.50 per share was greater than the
closing price of the Common Stock on the date of grants. The warrants were
issued pursuant to an exemption by reason of Section 4(2) of the Securities Act
of 1933, as amended. The issuance was made without general solicitation or
advertising. The investors were sophisticated investors with access to all
relevant information.
On March 21, 2001, the Company issued 37,500 shares of its Common
Stock, $.01 par value, for proceeds of $18,750 upon exercise of investor
warrants. The shares were issued pursuant to an exemption by reason of Section
4(2) of the Securities Act of 1933, as amended. The issuance was made without
general solicitation or advertising. The investors were sophisticated investors
with access to all relevant information
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On March 29, 2001, the Company issued a warrant to purchase up to
11,250 shares of its Common Stock, $.01 par value, as partial consideration for
a bridge loan. The warrant was fully vested on grant and is exercisable until
March 31, 2006. The exercise price of $1.50 per share was greater than the
closing price of the Common Stock on the date of grant. The warrant was issued
pursuant to an exemption by reason of Section 4(2) of the Securities Act of
1933, as amended. The issuance was made without general solicitation or
advertising. The investor was a sophisticated investor with access to all
relevant information.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Bridge loans made in November 2000, March 2001 and April 2001, totaling
$2,913,750, were not paid on their maturity date of May 12, 2001. The holders
have not made demand for payment and it is expected that such holders will agree
to extend the maturity date of all such loans.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on January 2,
2001 reporting the specifics of the December 15, 2000 asset purchase agreement
between the Company and Jotter Technologies Inc.
The Company filed a Current Report on Form 8-K on April 19, 2001
reporting the receipt of $413,750 of proceeds from the issuance of bridge notes
and the receipt of $18,750 of proceeds upon the exercise of investor warrants.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAFLINK CORPORATION
DATE: May 21, 2001 BY: /S/ JAMES W. SHEPPERD
----------------------------
James W. Shepperd
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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