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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 SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 0-20270
SAFLINK CORPORATION
(FORMERLY THE NATIONAL REGISTRY INC.)
------------------------------------------------------
(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.)
2502 ROCKY POINT DRIVE, TAMPA, FLORIDA 33607
-----------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(813) 636-0099
----------------------------------------------------
(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 18,511,155 SHARES OUTSTANDING OF SAFLINK CORPORATION'S
COMMON STOCK AS OF NOVEMBER 8, 1999.
TOTAL NUMBER OF PAGES: 17 EXHIBIT INDEX BEGINS ON PAGE 17
<PAGE>
SAFLINK CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
Part I. Financial Information
Item 1. Financial Statements
a. Condensed Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998.....1
b. Condensed Consolidated Statements of Operations
for the Three and Nine Month Periods Ended
September 30, 1999 and 1998.........................2
c. Condensed Consolidated Statements of
Comprehensive Income for the Three and
Nine Month Periods Ended September 30, 1999
and 1998............................................3
d. Condensed Consolidated Statements of Cash Flows
for the Nine Month Periods Ended September 30, 1999
and 1998............................................4
e. Notes to Condensed Consolidated Financial
Statements..........................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................8
Item 3. Quantitive and Qualitative Disclosures About Market Risk....14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................15
Signature.....................................................................16
<PAGE>
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PART 1 - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
SAFLINK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 DECEMBER 31,
ASSETS (UNAUDITED) 1998
--------- ---------
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,238 $ 1,736
Accounts receivable, net 224 149
Inventory 94 37
Investments 666 105
Prepaid expenses and other current assets 285 297
--------- ---------
Total current assets 2,507 2,324
Furniture and equipment, net 211 361
--------- ---------
$ 2,718 $ 2,685
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 578 $ 411
Deferred revenue 794 305
--------- ---------
Total current liabilities 1,372 716
Stockholders' equity:
Preferred stock, $.01 par value convertible
Authorized - 1,000,000 shares
Issued and outstanding
Series A - Liquidation preference $100 per share, 100,000
shares issued and outstanding as of September 30, 1999
and December 31, 1998 1 1
Common stock, $.01 par value
Authorized - 50,000,000 shares as of September 30, 1999 and
25,000,000 shares as of December 31, 1998, respectively
Issued and outstanding -
18,511,154 and 16,677,005 shares as of September
30, 1999 and December 31, 1998, respectively 185 167
Additional paid-in capital 49,376 47,138
Accumulated other comprehensive income (loss) (4) --
Accumulated deficit (48,212) (45,337)
--------- ---------
1,346 1,969
--------- ---------
$ 2,718 $ 2,685
========= =========
</TABLE>
SEE ACCOMPANYING NOTES
1
<PAGE>
SAFLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Post contract services revenue $ -- $ 126 $ 97 $ 381
Net product and service revenue 281 311 794 4,003
-------- -------- -------- --------
Total revenue 281 437 891 4,384
Cost of products and services 151 248 271 792
-------- -------- -------- --------
Gross profit 130 189 620 3,592
Operating expenses:
Product development 288 291 791 973
Sales and marketing 331 269 950 1,195
Minimum royalty payment 125 125 375 375
General and administrative 458 460 1,390 1,499
-------- -------- -------- --------
Total operating expenses 1,202 1,145 3,506 4,042
-------- -------- -------- --------
Loss from operations (1,072) (956) (2,886) (450)
Interest and other income, net 15 4 11 256
-------- -------- -------- --------
Net loss (1,057) (952) (2,875) (194)
Preferred stock dividends -- 69 -- 218
-------- -------- -------- --------
Net loss attributable to common
stockholders $ (1,057) $ (1,021) $ (2,875) $ (412)
======== ======== ======== ========
Basic and diluted loss per common share $ (0.06) $ (0.15) $ (0.17) $ (0.06)
Weighted average number of common shares
outstanding, basic and diluted 18,069 6,902 17,203 6,736
</TABLE>
SEE ACCOMPANYING NOTES
2
<PAGE>
SAFLINK CORPORATION
CONDENSED CONSOLDIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders $(1,057) $(1,021) $(2,875) $ (412)
Other comprehensive loss:
Unrealized losses on marketable equity
securities (4) -- (4) --
------- ------- ------- -------
Other comprehensive loss, before tax (4) -- (4) --
Income tax benefit related to items of other
comprehensive income -- -- -- --
------- ------- ------- -------
Other comprehensive loss, after tax (4) -- (4) --
------- ------- ------- -------
Comprehensive income attributable to common
stockholders $(1,061) $(1,021) $(2,879) $ (412)
======= ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
SAFLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------- -------
(In thousands)
CASH USED IN OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(2,875) $ (194)
Adjustments to reconcile net loss to net cash used in operating activities:
Compensation related to stock option grants -- 18
Compensation related to transfer of assets -- 6
Issuance of stock and warrants for legal settlement and services -- 476
Depreciation 193 448
Loss on disposal of fixed assets 15 --
Changes in operating assets and liabilities:
Accounts receivable (75) (475)
Inventory (57) 246
Investments (561) --
Prepaid expenses and other current assets 12 (178)
Accounts payable and accrued liabilities 167 (846)
Deferred revenue 489 304
------- -------
Net cash used in operating activities (2,692) (195)
CASH USED IN INVESTING ACTIVITIES:
Purchases of equipment (62) (15)
------- -------
Net cash used in investing activities (62) (15)
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,256 --
------- -------
Net cash provided by financing activities 2,256 --
------- -------
Net decrease in cash and cash equivalents (498) (210)
Cash and cash equivalents at beginning of period 1,736 298
------- -------
Cash and cash equivalents at end of period $ 1,238 $ 88
======= =======
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
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 (formerly The
National Registry Inc.) 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 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, 1998, as filed with the Securities and Exchange
Commission (the "SEC") on March 31, 1999.
2. EARNINGS (LOSS) PER COMMON SHARE
For the three and nine month periods ended September 30, 1999 and 1998,
basic earnings (loss) per common share was computed by dividing net income
(loss) attributable to common stockholders by the weighted average number of
common shares outstanding during these periods. Common stock equivalents,
relating to convertible Series A preferred stock and exercise of certain stock
options and warrants, were not included in the calculation of diluted loss per
share due to their anti-dilutive effect.
The following table sets forth the computation of basic and diluted
loss per common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In thousands except per share data) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Denominator:
Weighted average number of shares of
Common Stock outstanding 18,069 6,902 17,203 6,736
Effect of dilutive securities -- -- -- --
-------- -------- -------- --------
Diluted shares outstanding 18,069 6,902 17,203 6,736
======== ======== ======== ========
Numerator:
Net loss $ (1,057) $ (952) $ (2,875) $ (194)
Preferred Stock dividends -- 69 -- 218
-------- -------- -------- --------
Net loss attributable to common stockholders $ (1,057) $ (1,021) $ (2,875) $ (412)
======== ======== ======== ========
Basic loss per common share $ (0.06) $ (0.15) $ (0.17) $ (0.06)
======== ======== ======== ========
Diluted loss per common share $ (0.06) $ (0.15) $ (0.17) $ (0.06)
======== ======== ======== ========
</TABLE>
5
<PAGE>
SAFLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. INVESTMENTS
Investments consist of one bank time certificate of deposit in the
amount of approximately $105,000 and an investment in publicly traded equity
securities of approximately $561,000. The time certificate of deposit is carried
at cost and the equity securities are classified as available for sale and are
recorded at market using the specific identification method; unrealized gains
and losses are reflected in other comprehensive income. Realized and unrealized
gains and losses were not material.
4. STOCKHOLDERS' EQUITY
The Company issued 1,681,670 shares of Common Stock, and warrants to
purchase an additional 840,835 shares of Common Stock at $1.00 per share, for
$2,102,000 on July 23, 1999. The warrants may be exercised by the holders at any
time until July 23, 2001. During the quarter ended September 30, 1999, the
Company issued 38,000 shares of Common Stock upon exercise of stock options by
certain employees pursuant to provisions of the Company's 1992 Stock Incentive
Plan (the "Plan"). All such options had an exercise price of $1.38 per share,
the closing price of the Common Stock on the Nasdaq SmallCap Market (the
"SmallCap Market") on the date of grant.
At a meeting held on September 8, 1999, the Board of Directors of the
Company approved and the holders of a majority of the Company's outstanding
Common Stock subsequently approved by written consent, an increase in the number
of shares of Common Stock authorized for issuance pursuant to the Company's 1992
Stock Incentive Plan from 2,500,000 shares to 4,000,000 shares.
5. SUBSEQUENT EVENTS
On November 9, 1999 the Board of Directors of the Company and the
holders of the majority of the issued and outstanding shares of Common Stock
approved changing the name of the Company to SAFLINK Corporation and requested a
change in its stock symbol to "ESAF".
On November 9, 1999 the Company issued 100,000 shares of Series D
Preferred Stock to RMS Limited Partnership ("RMS") for an aggregate purchase
price of $5,000,000. The holder has the right to convert the Series D Preferred
Stock into that number of shares of the Company's Common Stock realized by
dividing the aggregate purchase price plus any accrued and unpaid dividends by
the applicable conversion price. The initial conversion price is equal to $1.39
per share and is subject to customary anti-dilution provisions. Accordingly, the
Series D may currently be converted into 3.6 million shares of Common Stock. The
Company has the right, but not the obligation, to redeem the Series D Preferred
Stock for $50 per share plus accrued dividends at any time prior to conversion.
All shares of the Series D Preferred Stock issued and outstanding as of November
9, 2004 will be automatically converted into shares of Common Stock at the then
applicable conversion price. The Series D Preferred Stock carries a 10% per
annum cumulative dividend, payable in cash if the Company is profitable, with
any unpaid dividends payable in shares of Common Stock upon conversion. The
shares of Series D Preferred Stock have no voting rights except as required by
law and have a liquidation preference of $50 per share plus unpaid dividends.
6
<PAGE>
SAFLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
RMS Limited Partnership is currently the holder of 8,021,305 shares
(43.3%) of the Company's outstanding Common Stock and, based upon a voting
agreement between RMS, J. Anthony Forstmann and Francis R. Sangangelo, has the
ability to vote 10,013,015 shares (54.1%) of the Company's outstanding Common
Stock. If RMS were to convert the Series D Preferred Stock into Common Stock it
would hold 11,621,305 shares (52.6%), and would have the ability to vote
13,613,015 shares (61.6%), of the Company's then outstanding Common Stock.
The following proforma condensed consolidated balance sheet presents
the Company's financial position as of September 30, 1999 as though the
placement had been completed as of September 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1999
ACTUAL ADJUSTMENTS PROFORMA
-------- ----------- --------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,238 $ 5,000 $ 6,238
Accounts receivable - net 224 224
Inventory 94 94
Investments 666 666
Prepaid expenses and other current assets 285 285
-------- -------- --------
Total current assets 2,507 5,000 7,507
Furniture and equipment - net 211 211
-------- -------- --------
$ 2,718 $ 5,000 $ 7,718
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 578 $ 578
Deferred revenue 794 794
-------- -------- --------
Total current liabilities 1,372 -- 1,372
Stockholders' equity
Series A Preferred stock 1 1
Series D Preferred stock -- 1 1
Common stock 185 185
Additional paid-in capital 49,376 4,999 54,375
Accumulated other comprehensive income (loss) (4) (4)
Accumulated deficit (48,212) (48,212)
-------- -------- --------
Total stockholders' equity 1,346 5,000 6,346
-------- -------- --------
$ 2,718 $ 5,000 $ 7,718
======== ======== ========
</TABLE>
7
<PAGE>
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 that 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 the Company's 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 control of the Company;
o the Company's need for additional funds;
o the Company's limited operating history and substantial
accumulated net losses;
o the SmallCap Market eligibility and maintenance requirements;
o the possible delisting of the Company's Common Stock from the
SmallCap Market;
o technological and market uncertainty;
o competition; and
o the Company's dependence upon software licensors.
RECENT DEVELOPMENTS
NASDAQ - On November 2, 1999, the Company received a letter from the Nasdaq-Amex
Market Group ("Nasdaq") notifying the Company that the Company's Common Stock
would be delisted from The Nasdaq SmallCap Market effective with the close of
business on Wednesday, November 10, 1999 because it was not in compliance with
the requirements set forth in Nasdaq Marketplace Rule 4310 (c) (2) ("Rule 4310
(c) (2)"), which requires the Company to (i) maintain net tangible assets of $2
million; (ii) maintain a market capitalization of $35 million; or (iii) have
recorded net income of $500,000 in the most recently completed fiscal year or in
two of the three most recently completed fiscal years. By letter dated November
9, 1999, Nasdaq notified the Company that, in response to the Company's November
5, 1999 hearing request, delisting of the Company's Common Stock has been stayed
pending a December 2, 1999 hearing to be held before a Panel authorized by The
Nasdaq Stock Market Board of Directors.
As discussed in Note 4 to the financial statements, the Company
received $5.0 million from the issuance of 100,000 shares of Series D
convertible preferred stock to RMS Limited Partnership. While the Company
believes that this transaction will bring it back in compliance with Rule 4310
(c) (2), there is no assurance that the Company and the Common Stock will be in
compliance with Rule 4310 (c) (2) at any time or that the Common Stock will not
be delisted from the SmallCap Market. If the Common Stock were to be delisted
from the SmallCap Market, it could adversely affect the prices of such
securities and the ability of holders to sell them. In addition, it could also
adversely affect the Company's ability to raise additional funds. See "Liquidity
and Capital Resources - Subsequent to September 30, 1999."
8
<PAGE>
YEAR 2000 EXPOSURE
The Company recognizes the need to ensure that its operations will not
be adversely impacted by Year 2000 ("Y2K") software failures. The Y2K problem is
the result of computer programs being written using two digits (rather than
four) to define the applicable year. Computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than 2000,
which could result in miscalculations or system failures. The Company is
currently working to address the potential impact of the Y2K problem. Its
processes for evaluating and managing the risks and costs associated with this
potential problem are being managed by internal staff members.
The Company has, to date, determined that (i) all of the software that
it has developed for sale to others is Y2K compliant and (ii) all of the
developers of other software that it has acquired for use in its business have
publicly stated that their products are also Y2K compliant. The Company is still
evaluating the possible effects of its Y2K exposure relative to certain
equipment utilized by it. The Company has not yet determined the impact that a
Y2K failure suffered by vendors, customers, suppliers or other third party
providers would have on the Company, but believes such a failure could have a
material adverse impact on the Company's business, condition (financial or
otherwise), results of operations, prospects and cash flows.
The Company will continue to evaluate the status of its Y2K compliance
to determine whether a contingency plan for dealing with any such failures is
necessary, but no such plan has yet been adopted by the Company. The Company has
not yet determined what the nature and timing of any such contingency plan would
be. Based on the information the Company has developed to date, the Company
estimates that costs of addressing potential problems will not have a material
adverse impact on the Company's business, condition (financial or otherwise),
results of operations, prospects and cash flows. However, there can be no
assurance that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the extent to which the
Company might be adversely impacted by vendors, customers, suppliers and other
third party service providers' failure to remediate their own Y2K issues.
A. RESULTS OF OPERATING ACTIVITIES
For the three and nine month periods ended September 30, 1999, the
Company incurred net losses attributable to common stockholders of approximately
$1.1 million and $2.9 million, respectively, compared to net losses attributable
to common stockholders of $1.0 million and $412,000, respectively, for the
comparable periods in 1998. The third quarter unfavorable variance of
approximately $36,000 was primarily due to a $59,000 reduction in gross profit
coupled with a $57,000 increase in operating expenses, partially offset by a
$69,000 reduction in preferred stock dividends. The year-to-date unfavorable
variance of $2.5 million was primarily due to a $3.0 million reduction in gross
profit, partially offset by a $536,000 reduction in operating expenses and a
$218,000 reduction in preferred stock dividends.
9
<PAGE>
REVENUE AND GROSS PROFIT
For the three and nine month periods ended September 30, 1999, the
Company reported total revenue of $281,000 and $891,000, respectively, compared
to $437,000 and $4.4 million for the comparable periods in 1998.
The third quarter revenue decrease of $156,000 was primarily due to a
$126,000 reduction in post contract services revenue due to the transfer of
management responsibility for the identification and authentication aspects of
the State of Connecticut welfare system to the prime contractor, Polaroid
Corporation, effective March 1, 1999 and the transfer of responsibility for the
identification and authentication aspects of the State of New Jersey welfare
system to Image Computing, Inc. effective April 1, 1999 coupled with a $116,000
reduction in sales of services to XL Vision, Inc., partially offset by an
$86,000 increase in sales of products and services to various other commercial
customers.
The year-to-date revenue decrease was primarily due to receipt of
approximately $3.5 million of revenue from the sale of prepaid licenses to XL
Vision, Inc. in 1998 with no comparable transactions during 1999 coupled with a
$284,000 decrease in post contract services for the reasons described in the
preceding paragraph, partially offset by a $206,000 increase in sales of
products and services to various other commercial customers.
Revenue from the sale of commercial products and services, excluding
sales to XL Vision, increased approximately $86,000 (46%) for third quarter 1999
when compared to third quarter 1998, these increases were centered in sales of
the Company's SAFtyLatch(TM) product, which was introduced during the first
quarter of this year.
The table below provides a breakdown of the dollar changes in revenue
for the three and nine-month periods ended September 30, 1999, as compared to
the same periods in 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(In thousands) SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Post contract services
Connecticut $ -- $ 43 $ 40 $ 137
New Jersey -- 83 57 244
------ ------ ------ ------
-- 126 97 381
Product and services - commercial
XL Vision 6 122 57 3,472
Other 275 189 737 531
------ ------ ------ ------
281 311 794 4,003
------ ------ ------ ------
$ 281 $ 437 $ 891 $4,384
====== ====== ====== ======
</TABLE>
10
<PAGE>
and increased approximately $206,000 (39%) for the nine months ended September
30, 1999 when compared to the same period in 1998.
The Company's gross margin percentages for the three and nine month
periods ended September 30, 1999 were approximately 46% and 70%, respectively
compared to approximately 43% and 82% for the comparable periods in 1998. The
changes from 1998 to 1999 were primarily due to a change in the mix of hardware
and software sales.
OPERATING EXPENSES
Total operating expenses for the three months ended September 30, 1999
increased approximately $57,000 (5%) to approximately $1.2 million from
approximately $1.1 million for the same period in 1998. This increase was
centered in sales and marketing ($62,000), primarily as a result in increased
expenditures related to the introduction of the Company's SAFtyLatch product.
Total operating expenses for the nine months ended September 30, 1999
decreased approximately $536,000 (13%) to approximately $3.5 million from
approximately $4.0 million for the same period in 1998. This decrease was
primarily due to expense reduction efforts initiated by the Company in late
1997, the sale of the Company's healthcare line of business, and its elimination
of expenses outside of its current strategic focus on indirect sales and
marketing of software products.
The table below provides a breakdown of the dollar and percentage
changes in operating expenses for the three and nine-month periods ended
September 30, 1999, as compared to the same periods in 1998:
THREE MONTHS NINE MONTHS
(Dollars in thousands) INCREASE INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE) (DECREASE)
--------- --------- --------- ---------
Product development $ (3) (1)% $ (182) (19)%
Sales and marketing 62 23 (245) (21)
General and administrative (2) -- (109) (7)
--------- --------- --------- ---------
$ 57 5% $ (536) (13)%
========= ========= ========= =========
PRODUCT DEVELOPMENT - The decreases in product development expenses were
primarily due to reductions in employee expense, travel and professional
consulting services related to the elimination of expenditures outside of the
Company's current strategic focus.
The Company has transitioned out of its initial strategy of
finger-based hardware and software development in order to focus its resources
on multi-biometric data and network security software products and market
development. The Company believes it has completed this transition and intends
to continue its development and sales of software that supports a variety of
hardware technologies that are currently emerging from numerous suppliers. The
Company's software product strategy includes the development and marketing of a
series of packaged applications that provide biometric authentication for a wide
range of client/server systems, stand-alone PC's, and Internet applications.
11
<PAGE>
SAFtyLatch, the Company's packaged application for the consumer and
desktop market, is a file encryption solution that prevents accidental or
deliberate access to confidential data stored on a disk. This product features
ease-of-use and biometrics-based protection via speaker verification technology
from Lernout & Hauspie Speech Products, N.V. SAFtyLatch 1.05, released in
November 1999, has been upgraded to allow voice access to secured Web sites and
e-commerce transactions that have been protected by the Company's SAFsite
Internet security product.
The Company's packaged application for the enterprise market, SAF2000,
is an architected suite of integrated, standards-based, packaged security
products for Windows that protects user access to enterprise resources including
LANs, WANs, dial-up networking, VPNs, Intranets, and Extranets. User credentials
and data are securely managed using database and directory service protocols
from Microsoft SQL Server, Microsoft Active Directory directory services (when
released), Novell's Directory Services (NDS), and LDAP server providers. SAF2000
is delivered ready to use out of the box with built-in voice, finger and facial
recognition biometric software algorithms that are qualified with a broad
variety of Microsoft compatible audio/video and finger scanner peripherals from
biometric technology providers. The Company has also developed additional
products within the Secure Authentication Facility product line for Internet
applications including Secure Authentication Facility for Internet Information
Server(TM) and its SAFsite(TM) product.
There is no assurance that the Company will be able to develop
additional software products, or that the Company will successfully market its
technology. The Company expects its product development costs to increase as it
develops additional products and enhances existing products.
SALES AND MARKETING - The increases in sales and marketing expenses were
centered in employee expenses, travel and advertising expenses. These increases
were primarily due to costs associated with introduction of the Company's
SAFtyLatch product to original equipment manufacturers ("OEM's") as well as to
consumers through the retail distribution channel.
To leverage its sales and marketing resources, the Company has entered
into reseller agreements with a number of biometric technology companies in the
fields of iris, finger, voice and facial recognition. The Company has also
attempted to market its multi-biometric software products to other resellers and
end-users for a wide range of potential uses, including computer network access
security, protection of medical and financial records, facilitation of
electronic commerce, enhancing customer service in banking and deterring on-line
fraud. While the Company has received favorable responses from a limited number
of commercial customers with respect to its new SAFSite(TM), SAF2000, and
SAFtyLatch products, there can be no assurance that the Company will be able to
consummate additional sales of its products and services in commercial markets
or, if it is able to consummate such sales, that any such sales will prove to be
profitable for the Company. Demand for the Company's 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.
The Company expects its sales and marketing expenses to increase as it
attempts to expand its presence in what it believes will be a rapidly growing
market for biometric security products.
12
<PAGE>
GENERAL AND ADMINISTRATIVE - The decreases in general and administrative
expenses were primarily due to decreases in depreciation, legal, employee
expense, travel, telephone, and other expenses resulting from the expense
reduction efforts initiated in late 1997. The Company expects certain general
and administrative costs to increase as it attempts to expand its presence in
the marketplace.
B. LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Cash and working capital as of September 30, 1999 were approximately
$1.2 million and $1.1 million, respectively, compared to $1.6 million and $1.4
million, respectively, as of June 30, 1999 and approximately $1.7 million and
$1.6 million, respectively, as of December 31, 1998. The decrease in the
Company's cash and working capital as of September 30, 1999 was primarily due to
net operating losses for these periods, partially offset by the receipt of
approximately $2.2 million of cash for Common Stock and Warrants issued on July
23, 1999 in a private placement transaction.
The Company used net cash of approximately $2.7 million (excluding $2.2
million generated from the sale of Common Stock and Common Stock purchase
warrants and $62,000 used for capital expenditures) during the nine months ended
September 30, 1999, and used net cash of approximately $195,000 (excluding
$15,000 in capital expenditures) during the nine months ended September 30,
1998.
On July 6, 1999, the Company paid Cogent Systems, Inc. ("Cogent") the
final $125,000 minimum royalty payment required by the licensing agreement
between Cogent and the Company (the "Agreement"). The Company and Cogent have
agreed to extend the Agreement through December 31, 1999, without any minimum
royalty payment and without the $10 million extension payment provided for in
the Agreement, while the companies attempt to negotiate a new agreement. If an
acceptable agreement is not entered into, causing the license to terminate on
January 1, 2000, the Company anticipates that it will use alternate algorithm
suppliers for its products that use finger imaging technology and to use
hardware from suppliers that bundle algorithms with their hardware.
SUBSEQUENT TO SEPTEMBER 30, 1999
Cash as of November 10, 1999 was approximately $6.0 million. The
increase from September 30, 1999 was primarily due to the receipt of $5 million
from the issuance of 100,000 shares of Series D Preferred Stock as more fully
described in Note 4 to the financial statements.
DIVIDENDS
Since its incorporation, the Company has not paid or declared dividends
on the Common Stock, nor does it intend to pay or declare cash dividends on its
Common Stock in the forseeable future.
13
<PAGE>
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates.
The Company does not use any hedging transactions or any financial instruments
for trading purposes and is not a party to any leveraged derivatives.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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
EXHIBIT
NUMBER
-------
3.1.3
27 Financial Data Schedule (Electronic filing only)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on July 23,
1999 reporting the placement of 1,681,670 shares of its Common
Stock and warrants to purchase 840,835 shares of its Common
Stock for $2.1 million.
15
<PAGE>
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: November 12, 1999 BY: /s/ JAMES W. SHEPPERD
--------------------------------
James W. Shepperd
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
EXHIBIT 3.1.1 - Certificate of Amendment of Certificate of Incorporation
EXHIBIT 27 - Financial Data Schedule (Electronic Filing Only)
EXHIBIT 3.1.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
The National Registry Inc., a Delaware corporation, pursuant to Section
242 of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation adopts the
following resolution proposing and declaring advisable the following amendment
to the Certificate of Incorporation of said corporation:
RESOLVED, that the Certificate of Incorporation of The
National Registry Inc. be amended by changing the Article
thereof numbered "FIRST" so that, as amended, said Article
shall be and read as follows:
"FIRST: The name of the corporation is: SAFLINK
Corporation."
SECOND: The amendment of the Certificate of Incorporation of the
corporation herein certified were duly adopted, pursuant to the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said The National Registry Inc. has caused this
certificate to be signed by Jeffery P. Anthony, its authorized officer.
----------------------------
By: Jeffrey P. Anthony
Its: President and Chief
Executive Officer
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