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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, 2000
COMMISSION FILE NUMBER 0-20270
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, WA 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 26,106,680 shares outstanding of SAFLINK Corporation's common
stock as of November 10, 2000.
Total number of pages: 18 Exhibit Index begins on Page 18
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SAFLINK Corporation
FORM 10-Q
For the Quarter Ended September 30, 2000
INDEX
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
a. Condensed Consolidated Balance Sheets
as of September 30, 2000 and December 31, 1999........................................... 1
b. Condensed Consolidated Statements of Operations
for the Three and Nine Month Periods Ended September 30, 2000 and 1999.................... 2
c. Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2000 and 1999..................................... 3
d. Notes to Condensed Consolidated Financial Statements...................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results 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 Securities.............................................................. 14
Item 3. Defaults Upon Senior Securities.................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................ 15
Item 5. Other Information.................................................................. 15
Item 6. Exhibits and Reports on Form 8-K................................................... 15
Signature............................................................................................ 17
</TABLE>
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PART 1 - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
SAFLINK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------------- -------------
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 759 $ 5,335
Accounts receivable, net 232 180
Inventory 16 38
Investments 299 739
Prepaid expenses and other current assets 537 286
-------------- -------------
Total current assets 1,843 6,578
Furniture and equipment, net 409 204
Other assets 625 -
-------------- -------------
$ 2,877 $ 6,782
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,429 $ 602
Deferred revenue 455 582
-------------- -------------
Total current liabilities 1,884 1,184
Stockholders' equity:
Series A Preferred Stock - Liquidation preference of
$10,000,000 in aggregate as of December 31, 1999 - 1
Series D Preferred Stock - Liquidation preference of
$5,071,000 as of December 31, 1999 - 1
Common stock 261 186
Additional paid-in capital 56,419 54,577
Accumulated other comprehensive income (loss) (65) 201
Accumulated deficit (55,622) (49,368)
-------------- -------------
Total stockholders' equity 993 5,598
-------------- -------------
$ 2,877 $ 6,782
============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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SAFLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
September 30, September 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Products and services:
Software $ 168 $ 53 $ 637 $ 425
Hardware 10 160 257 181
Services and other 99 68 262 188
------------ ------------ -------------- ------------
277 281 1,156 794
Post contract services - government - - - 97
------------ ------------ -------------- ------------
Total revenue 277 281 1,156 891
Cost of revenue:
Software 47 3 59 11
Hardware 8 141 207 160
Services and other 24 7 105 34
Post contract services - government - - - 66
------------ ------------ -------------- ------------
79 151 371 271
------------ ------------ -------------- ------------
Gross profit 198 130 785 620
Operating expenses:
Product development 1,125 307 3,193 849
Sales and marketing 355 338 1,224 970
Minimum royalty payment - 125 - 375
Relocation 16 - 216 -
General and administrative 738 432 2,132 1,306
------------ ------------ -------------- ------------
Total operating expenses 2,234 1,202 6,765 3,500
------------ ------------ -------------- ------------
Loss from operations (2,036) (1,072) (5,980) (2,880)
Interest and other income (expense) (30) 15 74 5
------------ ------------ -------------- ------------
Net loss (2,066) (1,057) (5,906) (2,875)
Preferred stock dividend 100 - 348 -
------------ ------------ -------------- ------------
Net loss attributable to common stockholders $ (2,166) $ (1,057) $ (6,254) $ (2,875)
============ ============ ============== ============
Basic and diluted loss per common share $ (0.10) $ (0.06) $ (0.32) $ (0.17)
Weighted average number of basic and diluted
common shares 20,759,175 18,068,937 19,783,831 17,203,466
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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SAFLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
--------- ---------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,906) $ (2,875)
Adjustments to reconcile net loss to net cash used in operating
activities:
Stock compensation 259 -
Depreciation 136 193
Loss on sale of investments 42 -
Loss on disposal of furniture and equipment - 15
Changes in operating assets and liabilities:
Accounts receivable (52) (75)
Inventory 22 (57)
Prepaid expenses and other current assets (251) 12
Other assets (346) (561)
Accounts payable and accrued liabilities 827 167
Deferred revenue (127) 489
--------- ---------
Net cash used in operating activities (5,396) (2,692)
Cash flows from investing activities:
Proceeds from sale of investments 132
Purchases of equipment (341) (62)
--------- ---------
Net cash used in investing activities (209) (62)
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of
employee stock options and investor warrants 1,029 -
Proceeds from common stock subscriptions - 2,256
--------- ---------
Net cash provided by financing activities 1,029 2,256
--------- ---------
Net decrease in cash and cash equivalents (4,576) (498)
Cash and cash equivalents at beginning of period 5,335 1,736
--------- ---------
Cash and cash equivalents at end of period $ 759 $ 1,238
========= =========
Non cash financing and investing activities:
Preferred stock dividend $ 348 $ -
Stock issued for services to be rendered 105 -
Conversion of Series A and Series D Preferred Stock to
Common Stock 65 -
Warrants issued for product received 174 -
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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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 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 the 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, 1999, as filed with the Securities and Exchange
Commission (the "SEC") on March 22, 2000.
Certain items in the 1999 financial statements and the notes thereto
have been reclassified to conform with the 2000 presentation of such items.
2. Investments
At September 30, 2000, investments consist of a $101,000 bank time
certificate of deposit and an investment in publicly traded equity securities of
approximately $198,000. The time certificate of deposit, which is pledged to
secure a letter of credit issued in lieu of a security deposit related to the
lease of the Company's headquarters facility, is carried at cost and the equity
securities are classified as available-for-sale and are recorded at fair value.
Unrealized gains and losses on the available-for-sale equity securities are
reflected as a component of other comprehensive income until realized. Realized
gains and losses from the sale of available-for-sale equity securities are
determined on a specific identification method. The Company recognized realized
losses of $42,000 during the nine months ended September 30, 2000. No realized
gains or losses were recognized during the remaining periods presented. Dividend
income is recognized when earned.
A decline in market value of the available-for-sale equity securities
below cost that is deemed to be other than temporary results in the reduction in
the carrying amount to fair value. The impairment is charged to earnings and a
new cost basis for the security is established.
The Company has recorded deferred revenue of approximately $164,000 and
$328,000 as of September 30, 2000 and December 31, 1999, respectively, in
connection with the receipt of the equity securities as part of a strategic
arrangement. For the three months ended September 30, 2000 and 1999, the Company
recorded non-cash revenue related to this arrangement of $55,000. For the nine
months ended September 30, 2000 and 1999, the Company recorded non-cash revenue
related to this arrangement of $164,000 and $55,000, respectively.
3. Stockholders' Equity
During the nine months ended September 30, 2000, the Company issued
368,897 shares of Common Stock upon exercise of stock options exercised by
certain employees pursuant to provisions of the Company's 1992 Stock Incentive
Plan (the "Plan") and 520,585 shares of Common Stock upon
4
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SAFLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
exercise of investor warrants. The options had exercise prices ranging from
$0.64 to $4.68 per share, which equaled fair value on the dates of grant. The
warrants had exercise prices ranging from $0.63 to $3.38 per share, which
equaled fair value on the date of issuance.
During the nine months ended September 30, 2000, the Company issued
warrants to purchase up to 350,000 shares of its Common Stock to two vendors as
partial consideration for services to be rendered to the Company by such
vendors. One warrant to purchase up to 250,000 shares will vest at the rate of
approximately 98 shares per hour of service performed by the vendor and is
exercisable until July 31, 2005 at an exercise price of $2.19 per share, which
equals the closing price of the Common Stock on date of issuance. The other
warrant to purchase up to 100,000 shares was fully vested upon grant and is
exercisable until September 18, 2005 at an exercise price of $2.00 per share
which equals the closing price of the Common Stock on the date of issuance. The
value of the warrants, as determined using a Black-Scholes pricing model is
being capitalized under FAS No. 86 or recognized as compensation expense over
the underlying awards' service period. The Company capitalized $174,000 and
recognized expense of approximately $147,000 related to these warrants in 2000.
On September 11, 2000, 100,000 shares of the Company's Series D
Convertible Preferred Stock were converted into 3,906,007 shares of the
Company's Common Stock pursuant to a notice of conversion submitted to the
Company by RMS Limited Partnership as the holder of the Series D Convertible
Preferred Stock.
On September 15, 2000, 100,000 shares of the Company's Series A
Convertible Preferred Stock were converted into 2,600,532 shares of the
Company's Common Stock pursuant to a notice of conversion submitted to the
Company by Home Shopping Network, Inc. as the holder of the Series A Convertible
Preferred Stock.
On September 29, 2000, the Company issued 60,000 shares of its Common
Stock to H.C. Wainwright & Co., Inc. ("HCW") and certain of its affiliates as
partial consideration for services performed by HCW in relation to obtaining
additional financing and the proposed acquisition of Jotter Technologies Inc.
The value of the consideration is being deferred until consummation of the
acquisition and financing.
4. Significant Customers
Two customers accounted for approximately 44% and 26% of the Company's
revenues for the nine months ended September 30, 2000. Two customers accounted
for approximately 42% and 21% of the Company's revenues for the nine months
ended September 30, 1999. Three customers accounted for approximately 73%, 13%
and 10% of the Company's revenues for the three months ended September 30, 2000.
Two customers accounted for approximately 67% and 21% of the Company's revenues
for the three months ended September 30, 1999.
5. Comprehensive Loss
For the nine months ended September 30, 2000, total comprehensive loss
was $6,346,000, which consisted of a net loss of $6,080,000 and unrealized
holding losses on investments of $266,000. For the nine months ended September
30, 1999, total comprehensive loss was $2,879,000, which consisted of a net loss
of $2,875,000 and unrealized holding losses on investments of $4,000.
5
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SAFLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the three months ended September 30, 2000, total comprehensive loss
was $2,155,000, which consisted of a net loss of $2,240,000 and unrealized
holding gains on investments of $85,000. For the three months ended September
30, 1999, total comprehensive loss was $1,061,000, which consisted of a net loss
of $1,057,000 and unrealized holding losses on investments of $4,000.
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, in 1999 and
through September 2000, 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 and the
convertible preferred stock, until conversion, were excluded because their
effect was anti-dilutive. Potential common shares consisted of options and
warrants to purchase approximately 3.8 million and 4.3 million common shares at
September 30, 2000 and 1999, respectively, and preferred stock convertible into
approximately 2.6 million common shares at September 30, 1999, respectively.
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. ("IIG") filed suit
against the Company and Mr. J. Anthony Forstmann, a former director and chairman
of the Company, in the Superior Court of the State of California for the County
of Los Angeles (Civil Action No.: BC212033). This lawsuit relates to the alleged
failure of the Company to perform under the terms of a settlement agreement
relating to another lawsuit filed by IIG. The complaint alleges three causes of
action which are described in our Annual Report on Form 10-K which was filed
with the SEC on March 22, 2000. The second and third causes of action were
dismissed with prejudice by the trial court during the first quarter of 2000 but
were reinstated by the appellate court in August 2000. On November 7, 2000, IIG
filed a third amended complaint adding two additional alleged causes of action-
negligent misrepresentation and breach of fiduciary duties. IIG is seeking
actual damages, consequential damages, attorney fees and costs, and punitive
damages with respect to these alleged causes of action. 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 (FASB) issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133)
in June 1998. This statement, as amended, establishes accounting and reporting
standards for derivative instruments, including certain
6
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SAFLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
derivative instruments embedded in other contracts, and for hedging activities.
It requires that entities 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
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000. The adoption of SFAS No. 137 is not expected to have a material impact on
the Company's consolidated financial statements.
Statement of Position No. 98-9 amends certain paragraphs of SOP No.
97-2, Software Revenue Recognition, to require using the "residual method" of
revenue recognition for multiple-element arrangements involving software bundled
with one or more undelivered elements. This SOP is effective for the Company
beginning January 1, 2000. The adoption of this statement did not have a
material impact on the Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB No. 101") "Revenue Recognition in Financial
Statements". SAB No. 101 provides guidance on revenue recognition issues. The
SAB, as amended, is effective no later than the fourth quarter of the 2000
fiscal year. The adoption of SAB No. 101 is not expected to have a material
impact on the Company's consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation: an interpretation of APB
Opinion No. 25," which was effective July 1, 2000. This interpretation provides
guidance for applying provisions of APB Opinion No. 25. The adoption of this
interpretation did not have a material impact on the Company's consolidated
financial statements.
7
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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:
. our need for additional funds to continue operations;
. control of the Company;
. our limited operating history and substantial accumulated net
losses;
. the SmallCap Market eligibility and maintenance requirements;
. the possible delisting of our Common Stock from the SmallCap
Market;
. technological and market uncertainty;
. rapid changes in technology;
. competition;
. our dependence upon software licensors;
. our ability to retain key employees and to attract high quality new
employees;
. shares eligible for future sale could adversely affect our ability
to raise capital and the market price for our stock;
. there is a limited public market for our common stock;
. the market price for our stock has been and may continue to be
volatile;
. we are exploring an acquisition strategy with which we have no
experience;
. our dependence on significant growth in the biometrics market which
is a developing market;
. our marketing partners' ability to promote our products; and
. 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 March 22, 2000.
A. Recent Events
On August 2, 2000, we sent a notice of default to our Australian
distributor, Triton Secure, Ltd. as a result of their failure to satisfy the
payment terms of the Master Distributor Agreement between them and us. Triton
cured the breach on September 1, 2000. The Master Distributor Agreement has been
amended to eliminate Triton's obligation to pay SAFLINK quarterly minimum
prepaid license fees of US$50,000 through the expiration of the term of the
agreement on June 30, 2001.
8
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SAFLINK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
On September 20, 2000 the Company agreed to acquire Jotter Technologies
Inc., a Delaware corporation, in exchange for shares of SAFLINK Common Stock to
be issued to the shareholders of Jotter pursuant to an Agreement and Plan of
Reorganization and Merger ("Merger Agreement") entered into by and among the
Company, Jotter, and certain shareholders of Jotter ( the "Merger"). On November
__, 2000 the parties to the Merger Agreement entered into an amendment to the
Merger Agreement to revise the amount of Jotter liabilities that SAFLINK will
assume upon consummation of the Merger from up to $100,000 to up to $2,100,000
and to revise the number of shares of SAFLINK Common Stock that will be issued
to shareholders of Jotter from 10,600,000 to 7,800,000.
On November 13, 2000 the Company received approximately $2.4 million
upon the issuance of $2.5 million of unsecured notes to a group of investors,
including the Company's largest stockholder, RMS Limited Partnership, and two
of the Company's officers. The notes carry an annual interest rate of 12% and
will mature in May 2001. Holders of the notes will be entitled to participate
in any financing undertaken by SAFLINK prior to the maturity date of the notes
by electing to receive in lieu of repayment of the note securities of the same
class and on the same terms as issued in such financing. The Company also agreed
to issue warrants allowing the note holders to purchase one share of SAFLINK
common stock for each $4.00 invested. RMS and the Company officers participating
in the financing elected not to accept the warrants; the Company therefore only
issued warrants for the purchase of 362,500 shares of SAFLINK common stock for
$1.50 per share at any time until November 2005.
B. Results of Operating Activities
We incurred net losses attributable to common stockholders of
approximately $2.2 million and $6.3 million for the three and nine-month periods
ended September 30, 2000 compared to net losses attributable to common
stockholders of approximately $1.1 million and $2.9 million for the comparable
periods in 1999. These increases in net loss of approximately $1.1 million and
$3.4 million, respectively, were primarily due to increases in operating
expenses of approximately $1.0 million and $3.3 million coupled with increased
preferred stock dividends of approximately $100,000 and $348,000 for the three
and nine month periods, respectively.
Revenue and Cost of Revenue
Revenue of $277,000 for the three months ended September 30, 2000
decreased approximately $4,000 (1%) from revenue of approximately $281,000 for
the three months ended September 30, 1999 while revenue of $1.2 million for the
nine months ended September 30, 2000 increased approximately $265,000 (30%) from
revenue of $891,000 for the nine months ended September 30, 1999.
Revenue from sales of commercial products and services increased
approximately $362,000 (46%) to approximately $1.2 million for the nine months
ended September 30, 2000 from approximately $794,000 for the nine months ended
September 30, 1999. Post contract services revenue decreased by approximately
$97,000 (100%) due to our decision to divest our contracts to manage the
identification and authentication aspects of the Connecticut and New Jersey
welfare systems in early 1999.
The approximately $72,000 decrease in cost of revenue for the three
months ended September 30, 2000 when compared to the same period in 1999 was
primarily due to a significant shift in the mix of revenues from hardware sales
to software sales. The $100,000 increase in cost of revenue for the
9
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nine months ended September 30, 2000 when compared to the same period in 1999
was primarily attributable to the increase in revenue.
The Company's gross margin percentages for the three and nine month periods
ended September 30, 2000 were approximately 71% and 68%, respectively, compared
to approximately 46% and 70% for the three and nine month periods ended
September 30, 1999, respectively. The changes from 1999 to 2000 were primarily
due to a change in product mix which included the elimination of post contract
services revenue and a higher level of software sales in 2000.
Operating Expenses
Total operating expenses for the three months ended September 30, 2000
increased approximately $1.0 million (100%) to approximately $2.2 million from
approximately $1.2 million for the same period in 1999. Total operating expenses
for the nine months ended September 30, 2000 increased approximately $3.3
million (98%) to approximately $6.8 million from approximately $3.5 million for
the same period in 1999.
These increases were primarily due to the expansion of product development,
sales and marketing activities in preparation for releases of our new Internet
products and, to a lesser degree, the relocation of our headquarters to Redmond,
Washington during the first half of this year, partially offset by the
expiration of our obligation to make minimum royalty payments of $125,000 per
quarter to Cogent Systems, Inc. as of October 1, 1999.
The following table provides a breakdown of the dollar and percentage
changes in operating expenses for the three and nine-month periods ended
September 30, 2000, as compared to the same periods in 1999:
<TABLE>
<CAPTION>
Three Months Nine Months
(Dollars in thousands) Increase Increase Increase Increase
(Decrease) (Decrease) (Decrease) (Decrease)
----------------- ----------------- ---------------- ------------
<S> <C> <C> <C> <C>
Product development $ 818 266% $2,344 276%
Sales and marketing 17 5 254 26
Minimum royalty payments (125) (100) (375) (100)
Relocation 16 N.M.* 216 N.M.*
General and administrative 306 71 826 63
----------------- ----------------- ---------------- ------------
$1,032 86% $3,265 93%
================= ================= ================ ============
</TABLE>
* Not meaningful
Product Development - The increases in product development expenses were
primarily due to the addition of new staff to enhance current products as well
as to develop new Internet products we plan to introduce later this year or
early next year. We expect our product development expenses to continue to
increase as we prepare for the expected release of our new Internet products and
as we develop other new products and enhance existing products.
10
<PAGE>
Sales and Marketing - The increases in sales and marketing expenses were
primarily due to increases in employee expenses, travel, and advertising
expenses as we added new staff to market our products to both commercial and
governmental organizations as they begin to redirect their information
technology expenditures to enhanced Internet and network security solutions. 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 hardware costs as well as the development
of industry standards, will lead to greater market acceptance of biometric
security solutions and we expect our sales and marketing expenses to increase
even more as we continue to expand our sales and marketing activities.
General and Administrative - The increases in general and administrative
expenses were centered in personnel, occupancy and professional services
primarily due to additions to infrastructure to support our increased product
development and sales and marketing activities. We expect general and
administrative costs to continue to increase if sales of our products increase.
In addition, we expect general and administrative expenses, particularly
personnel and occupancy, to increase even more upon consummation of the proposed
acquisition of Jotter Technologies Inc.
C. Liquidity and Capital Resources
Working Capital
Cash and working capital (deficit) as of September 30, 2000 were
approximately $759,000 and $(41,000), respectively, compared to approximately
$5.3 million and $5.4 million, respectively, as of December 31, 1999. The
decrease in the Company's cash and working capital as of September 30, 2000
compared to December 31, 1999 was primarily due to net operating losses,
partially offset by proceeds of approximately $1.0 million upon the exercise of
employee stock options and investor warrants, and proceeds of approximately
$132,000 from the sale of 1.6 million shares of Triton common stock.
Cash as of November 13, 2000 was approximately $2.6 million. The increase
from September 30, 2000 was primarily due to the receipt of net proceeds of
approximately $2.4 million from a six month bridge loan coupled with proceeds of
approximately $222,000 from the sale of 2.4 million shares of Triton common
stock, partially offset by net operating losses. Absent a significant increase
in sales, which itself may require a significant increase in working capital, we
will require significant additional funds to continue our operations into 2001.
The options we are reviewing to obtain additional financing include, but are not
limited to, the sale and issuance of stock, the issuance of debt and the sale of
certain of our assets. In addition, we have entered into the Merger Agreement to
acquire Jotter in an effort to augment our product development efforts and to
assist in our efforts to better position the company to obtain the needed
funding. In the event we are able to complete the acquisition of Jotter, our
working capital requirements will increase to accommodate Jotter's capital
requirements. In addition, we have agreed to use our best efforts to raise
sufficient working capital to fund Jotter's operating requirements through the
effective time of the merger. Jotter
11
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recognized a net loss of $2.8 million for the year ended December 31, 1999 and a
net loss of $2.7 million for the six months ended June 30, 2000.
In light of our capital requirements and those of Jotter, we are seeking to
raise additional capital which will be used in part to accelerate our product
development and sales and activities. We have had discussions with a variety of
potential strategic partners and sources of capital and will continue to explore
and pursue opportunities with such entities, but there can be no assurance that
we will be able to obtain additional financing or enter into a strategic
transaction or business combination.
It is possible that any such 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 could 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.
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ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE, INVESTMENT and FOREIGN CURRENCY RISK Our exposure to market
rate risk for changes in interest rates relates primarily to the time
certificate 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. We
also currently hold equity securities of a publicly traded foreign company. This
investment is included in short-term investments and is accounted for in
accordance with the provisions of SFAS No. 115. Such an investment is subject to
significant fluctuations in fair market value due to the general volatility of
the foreign market. As a result, our financial results could be adversely
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets.
Due in part to these factors, Our future investment income may fall
short of expectations due to changes in interest rates, foreign currency
exchange rates and foreign economies or we may suffer losses if we are forced to
sell securities which have declined in market value due to changes in interest
rates, foreign currency exchange rates and foreign economies. At September 30,
2000, we owned a time certificate of deposit in the amount of $101,000 and
equity securities with a fair market value of $198,000.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 16, 1999, International Interest Group, Inc. ("IIG") filed suit
against the Company and Mr. J. Anthony Forstmann, a former director and chairman
of the Company, in the Superior Court of the State of California for the County
of Los Angeles (Civil Action No.: BC212033). This lawsuit relates to the alleged
failure of the Company to perform under the terms of a settlement agreement
relating to another lawsuit filed by IIG. The complaint alleges three causes of
action which are described in our Annual Report on Form 10-K which was filed
with the SEC on March 22, 2000. The second and third causes of action were
dismissed with prejudice by the trial court during the first quarter of 2000 but
were reinstated by the appellate court in August 2000. On November 7, 2000, IIG
filed a third amended complaint adding two additional alleged causes of action -
negligent misrepresentation and breach of fiduciary duties. IIG is seeking
actual damages, consequential damages, attorney fees and costs, and punitive
damages with respect to these alleged causes of action. The Company does not
believe the claims have any merit and it intends to vigorously defend itself in
this lawsuit.
Item 2. Changes in Securities
On September 6, 2000, the Company issued a warrant to purchase up to
250,000 shares of its Common Stock, $.01 par value, to Solthree Software
Corporation ("Solthree") as partial consideration for services to be rendered to
the Company by Solthree pursuant to a Software Development Agreement entered
into by the Company and Solthree effective July 25, 2000. The warrant will vest
at the rate of approximately 98 shares per hour of service performed by Solthree
and is exercisable until July 31, 2005. The exercise price of $2.19 per share
equals the closing price of the Common Stock on September 6, 2000. 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. Solthree was a sophisticated investor with access to all relevant
information.
On September 11, 2000, 100,000 shares of the Company's Series D
Convertible Preferred Stock were converted into 3,906,007 shares of the
Company's common stock pursuant to a notice of conversion submitted to the
Company by RMS Limited Partnership as the holder of the Series D Convertible
Preferred Stock. The issuance was made pursuant to an exemption by reason of
Section 3a9 of the Securities Act of 1933, as amended, which applies to an
exchange of securities between an issuer and an existing shareholder.
On September 15, 2000, 100,000 shares of the Company's Series A
Convertible Preferred Stock was converted into 2,600,532 shares of the Company's
common stock pursuant to a notice of conversion submitted to the Company by Home
Shopping Network, Inc. as the holder of the Series A Convertible Preferred
Stock. The issuance was made pursuant to an exemption by reason of Section 3a9
of the Securities Act of 1933, as amended, which applies to an exchange of
securities between an issuer and an existing shareholder.
On September 18, 2000, the Company issued a warrant to purchase up to
100,000 shares of its Common Stock, $.01 par value, to Anovea, Inc. ("Anovea")
as partial consideration for the license of Anovea's biometric verification
algorithms to the Company pursuant to a Development and Distribution Agreement
entered into by the Company and Anovea effective
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September 18, 2000. The warrant was fully vested upon grant and is exercisable
until September 18, 2005. The exercise price of $2.00 per share equals the
closing price of the Common Stock on September 18, 2000. 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. Anovea had an existing business relationship with the Company prior
to the grant of the warrant.
On September 29, 2000, the Company issued 60,000 shares of its Common
Stock, $.01 par value, to H.C. Wainwright & Co., Inc. ("HCW") and certain of its
affiliates in consideration of its agreement to provide services to the company
including(i) acting as a financial advisor and exclusive placement agent to
arrange financing for the Company pursuant to an engagement letter dated August
15, 2000, and (ii) rendering an opinion as to the fairness, from a financial
point of view, of the consideration to be paid by the Company for the
acquisition of Jotter Technologies Inc. pursuant to an engagement letter dated
August 28, 2000. The issuance was made 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. HCW was a sophisticated investor
with access to all relevant information.
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) Exhibit
Exhibit
Number
------
10.1 Agreement and Plan of Reorganization and Merger, dated
September 20, 2000, by and among SAFLINK Corporation, Jotter Technologies, and
certain shareholders of Jotter (Incorporated by reference to Form 8-K filed on
September 26, 2000)
10.2 Amendment No. 1 to Agreement and Plan of Reorganization
and Merger, dated November 10, 2000, by and among SAFLINK Corporation, Jotter
Technologies, and certain shareholders of Jotter
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10.3 Voting Agreement between SAFLINK Corporation and RMS
Limited Partnership, dated as of September 7, 2000
10.4 Voting Agreement between SAFLINK Corporation and Home
Shopping Network, Inc., dated as of September 15, 2000
10.5 Voting Agreement between SAFLINK Corporation and
certain Jotter shareholders (Glenn Argenbright, Robert Smibert, Jodie Tessier,
Kenneth Wilton, Judy Wilton, Virgin Technologies, Inc., K&J Wilton Limited
Partnership, KJWILTON, INC., and Ken and Judy Wilton JT ROS), dated as of
September 20, 2000
10.6 Facilities lease agreement, dated May 18, 2000, between
SAFLINK Corporation, as tenant, and Carr Redmond Corporation, as Landlord
27 Financial Data Schedule (Electronic filing only)
(b) Reports on Form 8-K:
(i) The Company filed a Current Report on Form 8-K on
September 26, 2000 reporting that it had agreed to acquire Jotter
Technologies Inc. in exchange for shares of SAFLINK Common Stock to be
issued to the shareholders of Jotter.
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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: November 14, 2000 BY: /s/ JAMES W. SHEPPERD
----------------------------
James W. Shepperd
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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EXHIBIT INDEX
10.1 Agreement and Plan of Reorganization and Merger, dated September 20, 2000,
by and among SAFLINK Corporation, Jotter Technologies, and certain shareholders
of Jotter (Incorporated by reference to Form 8-K filed on September 26, 2000)
10.2 Amendment No. 1 to Agreement and Plan of Reorganization and Merger, dated
November 10, 2000, by and among SAFLINK Corporation, Jotter Technologies, and
certain shareholders of Jotter
10.3 Voting Agreement between SAFLINK Corporation and RMS Limited Partnership,
dated as of September 7, 2000
10.4 Voting Agreement between SAFLINK Corporation and Home Shopping Network,
Inc., dated as of September 15, 2000
10.5 Voting Agreement between SAFLINK Corporation and certain Jotter
shareholders (Glenn Argenbright, Robert Smibert, Jodie Tessier, Kenneth Wilton,
Judy Wilton, Virgin Technologies, Inc., K&J Wilton Limited Partnership,
KJWILTON, INC., and Ken and Judy Wilton JT ROS), dated as of September 20, 2000
10.6 Facilities lease agreement, dated May 18, 2000, between SAFLINK
Corporation, as tenant, and Carr Redmond Corporation, as Landlord
27 Financial Data Schedule (Electronic Filing Only)
18
