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, 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 79,327,413 shares of SAFLINK Corporation’s common stock outstanding as of November 10, 2004.
FORM 10-Q
For the Quarter Ended September 30, 2004
INDEX
| Part I. |
Financial Information | |||||
| Item 1. | Financial Statements (Unaudited) | 3 | ||||
| a. | Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 |
3 | ||||
| b. | 4 | |||||
| c. | 5 | |||||
| d. | Notes to Condensed Consolidated Financial Statements | 6 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
21 | ||||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 42 | ||||
| Item 4. | Controls and Procedures | 42 | ||||
| Part II. |
Other Information | |||||
| Item 1. | Legal Proceedings | 43 | ||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 43 | ||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 43 | ||||
| Item 6. | Exhibits | 45 | ||||
| 46 | ||||||
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
| September 30, 2004 |
December 31, 2003 |
|||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 26,559 | $ | 7,099 | ||||
| Accounts receivable, net |
1,955 | 610 | ||||||
| Inventory |
599 | 295 | ||||||
| Other current assets |
1,436 | 454 | ||||||
| Total current assets |
30,549 | 8,458 | ||||||
| Furniture and equipment, net |
1,079 | 622 | ||||||
| Intangible assets, net of accumulated amortization of $715 and $0 as of September 30, 2004, and December 31, 2003, respectively |
24,895 | 1,610 | ||||||
| Goodwill |
95,066 | 2,158 | ||||||
| Total assets |
$ | 151,589 | $ | 12,848 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 2,106 | $ | 547 | ||||
| Accrued expenses |
2,347 | 1,087 | ||||||
| Deferred revenue |
371 | 113 | ||||||
| Total current liabilities |
4,824 | 1,747 | ||||||
| Long-term debt |
1,360 | — | ||||||
| Other long-term liabilities |
937 | — | ||||||
| Deferred tax liability |
39 | — | ||||||
| Stockholders’ equity: |
||||||||
| Preferred stock |
— | — | ||||||
| Common stock |
790 | 281 | ||||||
| Additional paid-in capital |
253,473 | 106,805 | ||||||
| Deferred stock-based compensation |
(2,302 | ) | — | |||||
| Accumulated deficit |
(107,532 | ) | (95,985 | ) | ||||
| Total stockholders’ equity |
144,429 | 11,101 | ||||||
| Total liabilities and stockholders’ equity |
$ | 151,589 | $ | 12,848 | ||||
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
| Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Revenue: |
||||||||||||||||
| Product (including sales to related party of $0 and $196 for the three and nine months ended September 30, 2004, and $0 for the three and nine months ended September 30, 2003) |
$ | 1,924 | $ | 331 | $ | 2,872 | $ | 688 | ||||||||
| Service (including sales to related party of $0 and $35 for the three and nine months ended September 30, 2004, and $0 for the three and nine months ended September 30, 2003) |
487 | 432 | 1,259 | 839 | ||||||||||||
| Total revenue |
2,411 | 763 | 4,131 | 1,527 | ||||||||||||
| Cost of revenue: |
||||||||||||||||
| Product |
851 | 125 | 1,453 | 216 | ||||||||||||
| Service |
311 | 175 | 764 | 338 | ||||||||||||
| Amortization of intangibles |
463 | — | 557 | — | ||||||||||||
| Total cost of revenue |
1,625 | 300 | 2,774 | 554 | ||||||||||||
| Gross profit |
786 | 463 | 1,357 | 973 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Product development |
1,657 | 687 | 3,353 | 1,873 | ||||||||||||
| Sales and marketing |
2,130 | 1,288 | 4,996 | 3,639 | ||||||||||||
| General and administrative |
1,606 | 879 | 3,785 | 2,705 | ||||||||||||
| Amortization of intangibles |
30 | — | 58 | — | ||||||||||||
| Stock-based compensation |
380 | 106 | 399 | 661 | ||||||||||||
| Total operating expenses |
5,803 | 2,960 | 12,591 | 8,878 | ||||||||||||
| Operating loss |
(5,017 | ) | (2,497 | ) | (11,234 | ) | (7,905 | ) | ||||||||
| Interest expense |
(22 | ) | (6 | ) | (22 | ) | (11 | ) | ||||||||
| Other income, net |
73 | 20 | 107 | 51 | ||||||||||||
| Change in fair value of outstanding warrants |
(29 | ) | — | 1,808 | — | |||||||||||
| Loss before income taxes |
(4,995 | ) | (2,483 | ) | (9,341 | ) | (7,865 | ) | ||||||||
| Income tax provision |
12 | — | 39 | — | ||||||||||||
| Net loss |
(5,007 | ) | (2,483 | ) | (9,380 | ) | (7,865 | ) | ||||||||
| Modification of outstanding equity instruments |
(2,167 | ) | — | (2,167 | ) | — | ||||||||||
| Net loss attributable to common stockholders |
$ | (7,174 | ) | $ | (2,483 | ) | $ | (11,547 | ) | $ | (7,865 | ) | ||||
| Basic and diluted net loss per common share attributable to common stockholders |
$ | (0.12 | ) | $ | (0.09 | ) | $ | (0.28 | ) | $ | (0.31 | ) | ||||
| Weighted average number of common shares outstanding |
60,202 | 26,936 | 40,574 | 24,980 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine months ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (9,380 | ) | $ | (7,865 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Stock-based compensation |
399 | 661 | ||||||
| Depreciation and amortization |
820 | 151 | ||||||
| Change in fair value of outstanding warrants |
(1,808 | ) | — | |||||
| Change in deferred tax liability |
39 | — | ||||||
| Changes in operating assets and liabilities, net of acquisitions: |
||||||||
| Accounts receivable |
(333 | ) | (584 | ) | ||||
| Inventory |
119 | (107 | ) | |||||
| Other current assets |
(836 | ) | (370 | ) | ||||
| Accounts payable |
(751 | ) | (409 | ) | ||||
| Accrued expenses |
(1,421 | ) | 279 | |||||
| Deferred revenue |
210 | (91 | ) | |||||
| Net cash used in operating activities |
(12,942 | ) | (8,335 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchases of property and equipment |
(539 | ) | (546 | ) | ||||
| Cash acquired in business combination, net of transaction costs paid |
13,379 | — | ||||||
| Cash provided by (used in) investing activities |
12,840 | (546 | ) | |||||
| Cash flows from financing activities: |
||||||||
| Proceeds from exercises of stock options |
177 | 1,487 | ||||||
| Proceeds from warrant exercises, net of issuance costs |
10,836 | 9,886 | ||||||
| Proceeds from issuance of common stock and warrants, net of issuance costs |
8,549 | — | ||||||
| Net cash provided by financing activities |
19,562 | 11,373 | ||||||
| Net increase in cash and cash equivalents |
19,460 | 2,492 | ||||||
| Cash and cash equivalents at beginning of period |
7,099 | 7,447 | ||||||
| Cash and cash equivalents at end of period |
$ | 26,559 | $ | 9,939 | ||||
| Non-cash financing and investing activities: |
||||||||
| Deferred compensation from grant of stock purchase rights and options |
$ | 2,452 | $ | — | ||||
| Warrants issued in connection with financing classified as a liability at issuance |
4,069 | — | ||||||
| Reclassification of warrants from liability to equity |
||||||||