SAFLINK CORP - 10-Q Quarterly Report

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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 JUNE 30, 2004

COMMISSION FILE NUMBER 0-20270

SAFLINK CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

95-4346070

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

777 108th Ave NE, Suite 2100, Bellevue, Washington 98004

(Address of principal executive offices and zip code)

(425) 278-1100

(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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No x

There were 78,449,126 shares of SAFLINK Corporation’s common stock outstanding as of August 6, 2004.

SAFLINK Corporation

FORM 10-Q

For the Quarter Ended June 30, 2004

INDEX


Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)	3

	a.	Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003	3

	b.	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003	4

	c.	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003	5

	d.	Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

	Item 4.	Controls and Procedures	29

Part II.	Other Information

	Item 1.	Legal Proceedings	30

	Item 2.	Changes in Securities	30

	Item 6.	Exhibits and Reports on Form 8-K	30
Signatures

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SAFLINK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)


	June 30, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	8,176		$	7,099
Accounts receivable, net		661			610
Inventory		252			295
Other current assets		907			454

Total current assets		9,996			8,458
Furniture and equipment, net		813			622
Other long-term assets		1,230			—
Intangible assets, net		1,489			1,610
Goodwill		2,158			2,158

Total assets	$	15,686		$	12,848

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	785		$	547
Accrued expenses		1,146			1,087
Deferred revenue		164			113

Total current liabilities		2,095			1,747
Long-term liability — warrants		2,232			—
Deferred tax liability		26			—
Stockholders’ equity:
Preferred stock		—			—
Common stock		338			281
Deferred stock-based compensation		(773	)		—
Additional paid-in capital		112,126			106,805
Accumulated deficit		(100,358	)		(95,985	)

Total stockholders’ equity		11,333			11,101

Total liabilities and stockholders’ equity	$	15,686		$	12,848

See accompanying notes to condensed consolidated financial statements.

SAFLINK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)


	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Revenue:
Product (including sales to related party of $0 and $196 for the three and six months ended June 30, 2004)	$	484		$	87		$	948		$	357
Service (including sales to related party of $0 and $35 for the three and six months ended June 30, 2004)		434			80			772			407

Total revenue		918			167			1,720			764
Cost of revenue:
Product		260			36			602			91
Service		280			79			453			163
Amortization of intangibles		47			—			94			—

Total cost of revenue		587			115			1,149			254

Gross profit		331			52			571			510

Operating expenses:
Product development		855			705			1,710			1,186
Sales and marketing		1,469			1,482			2,866			2,485
General and administrative		1,202			1,251			2,212			2,247

Total operating expenses		3,526			3,438			6,788			5,918

Operating loss		(3,195	)		(3,386	)		(6,217	)		(5,408	)

Interest expense		—			(5	)		(1	)		(5	)
Other income		19			21			34			31
Change in fair value of outstanding warrants		803			—			1,837			—

Loss before income taxes		(2,373	)		(3,370	)		(4,347	)		(5,382	)
Income tax provision		13			—			26			—

Net loss	$	(2,386	)	$	(3,370	)	$	(4,373	)	$	(5,382	)

Basic and diluted net loss per common share:	$	(0.07	)	$	(0.13	)	$	(0.14	)	$	(0.22	)
Weighted average number of common shares outstanding		31,935			26,074			30,652			23,986

See accompanying notes to condensed consolidated financial statements.

SAFLINK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Six months ended June 30,
	2004			2003
Cash flows from operating activities:
Net loss	$	(4,373	)	$	(5,382	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		19			555
Depreciation and amortization		236			94
Change in fair value of outstanding warrants		(1,837	)		—
Change in deferred tax liability		26			—
Changes in operating assets and liabilities:
Accounts receivable		(51	)		(97	)
Inventory		43			(93	)
Other current assets		(453	)		(295	)
Other long-term assets		(1,230	)		—
Accounts payable		238			(310	)
Accrued expenses		59			(18	)
Deferred revenue		51			(83	)

Net cash used in operating activities		(7,272	)		(5,629	)
Cash flows from investing activities:
Purchases of property and equipment		(306	)		(458	)

Cash used in investing activities		(306	)		(458	)
Cash flows from financing activities:
Proceeds from exercises of stock options		103			1,327
Proceeds from warrant exercises, net of issuance costs		3			9,492
Proceeds from issuance of common stock and warrants, net of issuance costs		8,549			—

Net cash provided by financing activities		8,655			10,819

Net increase in cash and cash equivalents		1,077			4,732
Cash and cash equivalents at beginning of period		7,099			7,447

Cash and cash equivalents at end of period	$	8,176		$	12,179

Non-cash financing and investing activities:
Deferred compensation from grant of stock purchase rights and options	$	792		$	—
Warrants issued in connection with financing		4,069			—
Conversion of Series E preferred stock		22			12
Cashless exercises of warrants		—			3

See accompanying notes to condensed consolidated financial statements.

SAFLINK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

The accompanying condensed consolidated financial statements present unaudited interim financial information and therefore do not contain certain information included in the annual consolidated financial statements of SAFLINK Corporation and its wholly-owned subsidiaries, SAFLINK International, Inc. and Litronic, Inc., (the “Company” or “SAFLINK”). The balance sheet at December 31, 2003, has been derived from the Company’s audited financial statements as of that date. 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. These financial statements 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, 2003, as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2004.

The Company’s condensed consolidated interim financial statements are not necessarily indicative of results to be expected for a full fiscal year.

2. Stock Based Compensation

The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its stock options. Under this method, compensation expense is recognized only if the current market price of the underlying stock exceeded the exercise price on the date of grant. Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an Amendment of SFAS Statement No. 123,” established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, as amended. The following table illustrates the effect on net loss if the fair-value-based method had been applied to all outstanding and unvested awards in each period.

Three months ended
June 30,

Six months ended
June 30,

2004

2003

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