8-K 1 0001.txt FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT Date of report (Date of earliest event reported): December 15, 2000 SAFLINK CORPORATION ------------------------------------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 0-2027 95-4346070 ------------------------- ------------------ -------------------- (State or Other Jurisdiction (Commission File Number) (IRS Employer of Incorporation) Identification No.) 18650 N.E. 67th Court, Suite 210, Redmond, Washington 98052 ------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (425) 881-6766 ITEM 1. CHANGE IN CONTROL OF REGISTRANT Not applicable ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On December 15, 2000 (the "Closing Date"), SAFLINK Corporation (the "Company") acquired substantially all of the intellectual property and fixed assets (the "Assets") of Jotter Technologies Inc., a Delaware corporation ("Jotter"), pursuant to an Asset Purchase Agreement, by and between the Company and Jotter (the "Asset Purchase Agreement"). The Assets were acquired in consideration for an agreement to issue 5,100,000 shares of SAFLINK Common Stock, par value $0.01 per share, (the "Shares") and an unsecured promissory note in the principal amount of $1,700,000 with a two year term (the "Note", collectively with the Shares, the "Purchase Price"). The Purchase Price was determined based upon negotiations between the Company and Jotter, and, among other factors, (i) the financial and operating performance and prospects of the Company after giving effect to the purchase of the Assets; (ii) values of comparable companies; (iii) the value and composition of the Assets; and (iv) the cost and time anticipated by the Company in developing technology with comparable functionality to Jotter's Personal Internet Assistant toolbar. Pursuant to the Asset Purchase Agreement and an escrow agreement, executed on the Closing Date (the "Escrow Agreement"), the Shares will be deposited into escrow within 45 days of the Closing Date and shall be held in escrow in the event of any breach of the Asset Purchase Agreement, and to secure certain indemnification rights under the Asset Purchase Agreement. Shares held in escrow shall be distributed to Jotter as follows: (i) 350,000 Shares 90 days after the Closing Date, and (ii) 250,000 Shares per month beginning one month after the first share distribution. In the event that Jotter does not satisfy certain Canadian tax obligations arising as a result of the transaction ("Tax Obligations"), the Company will be obliged to pay such Tax Obligations and will be entitled to reduce the Purchase Price in an equal amount by reducing the number of Shares to be placed in escrow as valued on the closing date of the Asset Purchase Agreement or the principal amount of the Note or both. The Company has also agreed to use commercially reasonable efforts to register the Shares with the Securities and Exhange Commission by filing a Form S-3 registration statement within 60 days after the Closing Date. On the Closing Date, the Company also entered into non-competition agreements with Jotter and certain of its affiliates which prohibit such persons from competing with the Company in the development and sale of toolbars and internet utility applications and products and services utilizing biometrics. The Company also agreed to offer employment to substantially all of the Jotter employees. A copy of the Asset Purchase Agreement and Escrow Agreement are filed hereto as Exhibit 2.1 and Exhibit 10.1, respectively, and are incorporated by reference herein. The Asset Purchase Agreement and the transactions contemplated thereby have been approved by the board of directors of both the Company and Jotter. Jotter has also received the written consent of a majority of its shareholders approving the Asset Purchase Agreement and the transactions contemplated thereby. The Company's press release dated December 18, 2000, is attached as Exhibit 99.1 hereto and incorporated by reference herein. ITEM 3. BANKRUPTCY OR RECEIVERSHIP Not applicable. ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT Not applicable. ITEM 5. OTHER EVENTS Not applicable. ITEM 6. RESIGNATION OF REGISTRANT'S DIRECTORS Not applicable. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Business Acquired Jotter Technologies Inc. and Subsidiary and Predecessor Consolidated Financial Statements (audited) (b) Pro Forma Financial Information Pro Forma Condensed Combined Financial Statements (unaudited) (c) Exhibits. The exhibits listed on the Exhibit Index are filed as part of this Report. ITEM 8. CHANGE IN FISCAL YEAR Not applicable. 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 hereunto duly authorized. SAFLINK Corporation Date: January 2, 2001 By: /s/ JAMES W. SHEPPERD ------------------------ James W. Shepperd Chief Financial Officer JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Consolidated Financial Statements December 31, 1998 and 1999 (With Independent Auditors' Report Thereon) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Table of Contents
Page Independent Auditors' Report 1 Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Stockholders' Deficit and Comprehensive Loss 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6
Independent Auditors' Report The Board of Directors Jotter Technologies, Inc. We have audited the accompanying consolidated balance sheets of Jotter Technologies, Inc. and subsidiary, and Predecessor, (a development stage enterprise) (collectively, the Company) as of December 31, 1998 and 1999 and the related consolidated statements of operations, stockholders' deficit and comprehensive loss, and cash flows for the period from June 1, 1998 (inception) through December 31, 1998 and the year ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jotter Technologies, Inc. and subsidiary, and Predecessor as of December 31, 1998 and 1999, and the results of their operations and their cash flows for the period from June 1, 1998 (inception) through December 31, 1998 and the year ended December 31, 1999, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Seattle, Washington December 15, 2000 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Consolidated Balance Sheets
(unaudited) December 31, September 30, ------------------------ Assets 1998 1999 2000 ---------- ----------- ----------- Current assets: Cash $ 71,065 -- -- Non-trade receivables -- 40,520 -- Prepaid expenses and other current assets 4,456 18,958 24,564 ---------- ----------- ----------- Total current assets 75,521 59,478 24,564 Property and equipment, net 35,667 214,674 290,575 Debt issuance costs -- 14,677 -- Deferred preferred stock offering costs -- 24,292 -- Other -- 35,172 24,000 ---------- ----------- ----------- Total assets $ 111,188 348,293 339,139 ========== =========== =========== Liabilities, Minority Interest and Stockholders' Deficit Current liabilities: Bank overdraft $ -- 81,576 10,963 Accounts payable 151,183 471,401 370,996 Accrued expenses 2,351 241,704 382,481 Current portion of capital lease obligations -- -- 9,441 Promissory notes payable -- -- 200,000 Due to related parties 236,992 161,225 -- ---------- ----------- ----------- Total current liabilities 390,526 955,906 973,881 Capital lease obligations, net of current portion -- -- 5,888 Convertible promissory notes payable -- 416,642 360,778 Convertible promissory notes payable to related parties -- 81,701 -- ---------- ----------- ----------- Total liabilities 390,526 1,454,249 1,340,547 ---------- ----------- ----------- Minority interest 40,363 -- -- ---------- ----------- ----------- Stockholders' equity (deficit): Convertible preferred stock, Series A, $0.01 par value Authorized 400,000 shares; no shares issued and outstanding at December 31, 1998 and 1999, and 206,200 shares issued and outstanding at September 30, 2000 -- -- 2,062 Common stock, $0.01 par value. Authorized 50,000,000 shares; issued 9,843,621, 10,827,224 and 12,348,512 shares at December 31, 1998 and 1999 and September 30, 2000, respectively; outstanding 9,843,621, 9,827,224 and 11,348,512 shares at December 31, 1998 and 1999 and September 30, 2000, respectively 98,436 108,271 123,484 Treasury stock -- (1) (1) Additional paid-in capital 426,783 2,438,449 6,394,735 Accumulated other comprehensive income 30,106 16,466 16,466 Deficit accumulated during the development stage (875,026) (3,669,141) (7,538,154) ---------- ----------- ----------- Total stockholders' deficit (319,701) (1,105,956) (1,001,408) Commitments, contingencies and subsequent events ---------- ----------- ----------- Total liabilities, minority interest and stockholders' deficit $ 111,188 348,293 339,139 ========== =========== ===========
See accompanying notes to consolidated financial statements. 2 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Consolidated Statements of Operations
(unaudited) Period from Period from June 1, 1998 June 1, 1998 (inception) (unaudited) (inception) through Year ended Nine months ended through December 31, December 31, September 30, September 30, ------------------------- 1998 1999 1999 2000 2000 ------------------------------- ----------- ----------- --------------- Revenue $ -- -- -- 52,027 52,027 Operating expenses: General and administrative 334,388 953,670 857,310 1,662,412 2,950,470 Sales and marketing 110,169 503,269 456,278 1,287,708 1,901,146 Product development 456,107 1,337,958 1,005,580 811,040 2,605,105 -------------- ------------- ----------- ----------- --------------- Total operating expenses 900,664 2,794,897 2,319,168 3,761,160 7,456,721 -------------- ------------- ----------- ----------- --------------- Operating loss (900,664) (2,794,897) (2,319,168) (3,709,133) (7,404,694) Interest expense -- (37,403) (19,902) (159,880) (197,283) -------------- ------------- ----------- ----------- --------------- Loss before minority interest (900,664) (2,832,300) (2,339,070) (3,869,013) (7,601,977) Minority interest in loss 25,638 38,185 38,185 -- 63,823 -------------- ------------- ----------- ----------- --------------- Net loss (875,026) (2,794,115) (2,300,885) (3,869,013) (7,538,154) Beneficial conversion feature -- -- -- (435,810) (435,810) -------------- ------------- ----------- ----------- --------------- Net loss available to common stockholders $ (875,026) (2,794,115) (2,300,885) (4,304,823) (7,973,964) ============== ============= =========== =========== ===============
See accompanying notes to consolidated financial statements. 3 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Consolidated Statements of Stockholders' Deficit and Comprehensive Loss
Convertible preferred stock Common stock Treasury stock ----------------------------- --------------------- ---------------------- Shares Amount Shares Amount Shares Amount -------- -------- -------- -------- ----------- -------- Balances at inception -- $ -- -- -- -- -- Issuance of common stock to founders for cash (7/98) -- -- 8,250,000 6 -- -- Issuance of restricted common stock to employees for cash (7/98) -- -- 350,000 1 -- -- Issuance of common stock at prices ranging from $0.33 to $1.96 per share (11/98 - 12/98) -- -- 1,243,621 98,429 -- -- Comprehensive loss: Net loss -- -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- Total comprehensive loss -------- -------- ---------- -------- ---------- ------ Balances at December 31, 1998 -- -- 9,843,621 98,436 -- -- Issuance of common stock at prices ranging from $0.33 to $1.96 per share, net of cash offering costs of $17,649 (1/99 - 5/99) -- -- 429,044 4,290 -- -- Repurchase of common stock (6/99) -- -- -- -- (1,000,000) (1) Forfeiture of restricted common stock issued to employees (6/99) -- -- (350,000) (3,500) -- -- Issuance of common stock to acquire minority interest (6/99) -- -- 53,333 533 -- -- Issuance of common stock at prices ranging from $0.33 to $1.96 per share, including 79,041 shares issued in payment of commissions and net of cash offering costs of $12,790 (6/99) -- -- 615,925 6,159 -- -- Issuance of common stock at prices ranging from $2.00 to $2.50 per share, including 6,500 shares issued in payment of commissions and net of cash offering costs of $74,348 (6/99 - 9/99) -- -- 159,000 1,590 -- -- Stock compensation related to stock option grants (7/99) -- -- -- -- -- -- Common shares issued for services at $2.50 per share (9/99) -- -- 62,472 625 -- -- Issuance of common stock at $1.26 per share for services performed related to the issuance of convertible promissory notes (11/99) -- -- 13,829 138 -- -- Stock compensation related to the issuance of warrants (11/99) -- -- -- -- -- -- Comprehensive loss: Net loss -- -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- Total comprehensive loss -------- -------- ---------- -------- ---------- ------ Balances at December 31, 1999 -- -- 10,827,224 108,271 (1,000,000) (1) Issuance of Series A convertible preferred stock at $10.00 per share, including 18,750 shares issued in payment of commissions and net of cash offering costs of $24,607 (1/00) (unaudited) 206,200 2,062 -- -- -- -- Beneficial conversion feature of Series A convertible preferred stock (1/00) (unaudited) -- -- -- -- -- -- Recognition of beneficial conversion feature of Series A convertible preferred stock (1/00) (unaudited) -- -- -- -- -- --
Issuance of common stock warrants attached to Series A convertible preferred stock (1/00) (unaudited) -- -- -- -- -- -- Stock compensation related to stock options (1/00) (unaudited) -- -- -- -- -- -- Issuance of common stock in settlement of litigation at $1.26 per share (3/00) (unaudited) -- -- 29,646 297 -- -- Issuance of common stock warrants attached to convertible promissory note (4/00) (unaudited) -- -- -- -- -- -- Recognition of beneficial conversion feature on convertible promissory note (4/00) (unaudited) -- -- -- -- -- -- Conversion of promissory notes into common stock at $1.26 per share, net of unamortized debt issuance costs of $14,363 (1/00) (unaudited) -- -- 397,817 3,978 -- -- Issuance of common stock at prices ranging from $0.61 to $0.80 per share, net of cash offering costs of $9,764 (7/00-9/00) (unaudited) -- -- 489,437 4,894 -- -- Issuance of common stock attached to promissory notes at $1.26 per share (7/00-8/00) (unaudited) -- -- 66,667 667 -- -- Issuance of common stock for services at $1.26 per share (1/00-7/00)(unaudited) -- -- 350,221 3,502 -- -- Issuance of common stock for cash and services at $1.26 per share (7/00) (unaudited) -- -- 187,500 1,875 -- -- Comprehensive loss- net loss (unaudited) -- -- -- -- -- -- -------- -------- ---------- -------- ---------- ------ Balances at June 30, 2000 (unaudited) 206,200 $ 2,062 12,348,512 123,484 (1,000,000) (1) ======== ======== ========== ======== ========== ======
Deficit Accumulated accumulated Additional other during the Total paid-in comprehensive development stockholders' capital income (loss) stage deficit ---------- ------------- ----------- ------------- Balances at inception $ -- $ -- $ -- $ -- Issuance of common stock to founders for cash (7/98) -- -- -- 6 Issuance of restricted common stock to employees for cash (7/98) -- -- -- 1 Issuance of common stock at prices ranging from $0.33 to $1.96 per share (11/98 - 12/98) 426,783 -- -- 525,212 Comprehensive loss: Net loss -- -- (875,026) (875,026) Foreign currency translation adjustment -- 30,106 -- 30,106 -------- Total comprehensive loss (844,920) ---------- ----------- ----------- ---------- Balances at December 31, 1998 426,783 30,106 (875,026) (319,701) Issuance of common stock at prices ranging from $0.33 to $1.96 per share, net of cash offering costs of $17,649 (1/99 - 5/99) 505,481 -- -- 509,771 Repurchase of common stock (6/99) -- -- -- (1) Forfeiture of restricted common stock issued to employees (6/99) 3,500 -- -- -- Issuance of common stock to acquire minority interest (6/99) 17,067 -- -- 17,600 Issuance of common stock at prices ranging from $0.33 to $1.96 per share, including 79,041 shares issued in payment of commissions and net of cash offering costs of $12,790 (6/99) 884,940 -- -- 891,099 Issuance of common stock at prices ranging from $2.00 to $2.50 per share, including 6,500 shares issued in payment of commissions and net of cash offering costs of $74,348 (6/99 - 9/99) 299,062 -- -- 300,652 Stock compensation related to stock option grants (7/99) 68,250 -- -- 68,250 Common shares issued for services at $2.50 per share (9/99) 155,556 -- -- 156,181 Issuance of common stock at $1.26 per share
for services performed related to the issuance of convertible promissory notes (11/99) 17,286 -- -- 17,424 Stock compensation related to the issuance of warrants (11/99) 60,524 -- -- 60,524 Comprehensive loss: Net loss -- -- (2,794,115) (2,794,115) Foreign currency translation adjustment -- (13,640) -- (13,640) ---------- Total comprehensive loss (2,807,755) ---------- ----------- ----------- ---------- Balances at December 31, 1999 2,438,449 16,466 (3,669,141) (1,105,956) Issuance of Series A convertible preferred stock at $10.00 per share, including 18,750 shares issued in payment of commissions and net of cash offering costs of $24,607 (1/00) (unaudited) 1,412,021 -- -- 1,414,083 Beneficial conversion feature of Series A convertible preferred stock (1/00) (unaudited) 435,810 -- -- 435,810 Recognition of beneficial conversion feature of Series A convertible preferred stock (1/00) (unaudited) (435,810) -- -- (435,810) Issuance of common stock warrants attached to Series A convertible preferred stock (1/00) (unaudited) 435,810 -- -- 435,810 Stock compensation related to stock options (1/00) (unaudited) 31,694 -- -- 31,694 Issuance of common stock in settlement of litigation at $1.26 per share (3/00) (unaudited) 37,057 -- -- 37,354 Issuance of common stock warrants attached to convertible promissory note (4/00) (unaudited) 250,984 -- -- 250,984 Recognition of beneficial conversion feature on convertible promissory note (4/00) (unaudited) 250,984 -- -- 250,984 Conversion of promissory notes into common stock at $1.26 per share, net of unamortized debt issuance costs of $14,363 (1/00) (unaudited) 482,909 -- -- 486,887 Issuance of common stock at prices ranging from $0.61 to $0.80 per share, net of cash offering costs of $9,764 (7/00-9/00) (unaudited) 299,342 -- -- 304,236 Issuance of common stock attached to promissory notes at $1.26 per share (7/00-8/00) (unaudited) 83,333 -- -- 84,000 Issuance of common stock for services at $1.26 per share (1/00-7/00)(unaudited) 437,777 -- -- 441,279 Issuance of common stock for cash and services at $1.26 per share (7/00) (unaudited) 234,375 -- -- 236,250 Comprehensive loss- net loss (unaudited) -- -- (3,869,013) (3,869,013) ---------- ----------- ----------- ---------- Balances at September 30, 2000 (unaudited) $6,394,735 $ 16,466 $(7,538,154) (1,001,408) ========== =========== =========== ==========
See accompanying notes to consolidated financial statements. 4 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Consolidated Statements of Cash Flows
(unaudited) Period from Period from June 1, 1998 June 1, 1998 (inception) (unaudited) (inception) through Year ended Nine months ended through December 31, December 31, September 30, September 30, ------------------------ 1998 1999 1999 2000 2000 ------------ ----------- ---------- ---------- ------------ Cash flows from operating activities: Net loss $(875,026) (2,794,115) (2,300,885) (3,869,013) (7,538,154) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 5,388 40,872 23,056 59,237 105,497 Non-cash interest expense -- -- -- 149,652 149,652 Stock-based compensation -- 274,676 317,431 559,223 833,899 Minority interest in loss (25,638) (38,185) (38,185) -- (63,823) Changes in certain assets and liabilities: Current and noncurrent assets (4,614) (97,050) (26,374) 63,520 (38,144) Accounts payable and other accrued expenses 159,005 559,569 433,970 77,727 796,301 --------- ---------- ---------- ---------- ---------- Net cash used in operating activities (740,885) (2,054,233) (1,590,987) (2,959,654) (5,754,772) --------- ---------- ---------- ---------- ---------- Cash used in investing activities - purchases of property and equipment (42,326) (206,496) (138,437) (108,076) (356,898) --------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Bank overdraft, net -- 81,576 -- (70,613) 10,963 Payments of capital lease obligations -- -- -- (4,561) (4,561) Investments from limited partner 67,439 -- -- -- 67,439 Increase (decrease) in due to related parties 245,435 5,935 90,028 (161,225) 90,145 Repurchases of common stock -- (1) -- -- (1) Proceeds from issuance of convertible promissory notes -- 416,642 -- 800,000 1,216,642 Proceeds from issuance or promissory notes -- -- -- 200,000 200,000 Proceeds from issuances of preferred stock, net of issuance costs -- -- -- 1,849,893 1,849,893 Proceeds from issuances of common stock, net of issuance costs 543,933 1,701,522 1,638,816 454,236 2,699,691 --------- ---------- ---------- ---------- ---------- Net cash provided by financing activities 856,807 2,205,674 1,728,844 3,067,730 6,130,211 --------- ---------- ---------- ---------- ---------- Effect of exchange rate changes on cash (2,531) (16,010) 2,504 -- (18,541) --------- ---------- ---------- ---------- ---------- Net decrease (increase) in cash 71,065 (71,065) 1,924 -- -- Cash at beginning of period -- 71,065 71,065 -- -- --------- ---------- ---------- ---------- ---------- Cash at end of period $ 71,065 -- 72,989 -- -- ========= ========== ========== ========== ========== Supplemental disclosures of cash flow information - cash paid during the period for interest $ -- 8,329 -- 29,074 37,403 ========= ========== ========== ========== ========== Supplemental schedule of non-cash investing and financing activities: Conversion of promissory notes and accrued interest thereon into common stock, net of unamortized debt issuance costs $ -- -- -- 486,887 486,887 Debt issuance costs paid through the issuance of common stock -- 17,424 -- -- 17,424 Stock issued in prepayment of expenses to be incurred -- 17,361 -- -- 17,361 Stock issued to acquire minority interest -- 17,600 17,600 -- 17,600 Conversion of related party payables to convertible promissory notes -- 81,701 -- -- 81,701 Equipment acquired through capital leases -- -- -- 19,890 19,890
Stock issued in settlement of a liability -- -- -- 37,354 37,354 Recognition of beneficial conversion feature on Series A convertible preferred stock -- -- -- 435,810 435,810 Recognition of beneficial conversion feature on convertible promissory note -- -- -- 250,984 250,984 Issuance of warrants attached to convertible promissory notes -- -- -- 250,984 250,984 ========= ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 5 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (1) Description of Business and Summary of Significant Accounting Policies (a) Description of Business Jotter Technologies, Inc. and its predecessor (collectively, the Company) is a development stage enterprise whose principal activities since inception have been performing research and development and raising capital for the development and marketing of an Internet microportal that gives consumers increased personalization and control over information they give and receive on the Internet. The microportal allows users the ability to designate advertising preferences, provides customized ticker information on news, sports, investments and other topics, and affords users sophisticated search and electronic commerce tools. The Company is subject to the risks and challenges associated with other companies at a similar stage of development including its limited operating history, the limited history of commerce on the Internet, dependence on key individuals, successful development and marketing of its technology, and competition from substitute services and larger companies with greater financial, technical management and marketing resources. The Company's success depends in part upon the emergence of the Internet as a commerce medium, the acceptance of the Company's technology by the marketplace and its ability to generate revenues from the use of its technology. (b) Basis of Presentation The consolidated financial statements include the accounts of Jotter Technologies, Inc. and its subsidiary, MindQuake Interactive, Inc., and its predecessor. All significant intercompany transactions and accounts have been eliminated in consolidation. Jotter Technologies, Inc. (Jotter) was incorporated in June 1999 in Delaware and is headquartered in San Francisco, CA. The Company also has operations located in Edmonton, Alberta, Canada and Mesa, Arizona. The Company's primary business in all periods presented consists of developing and marketing an Internet microportal. Prior to the formation of Jotter in June 1999, the Company operated as MindQuake Limited Partnership (MQ LP), a Canadian limited partnership formed on June 1, 1998 and based in Edmonton, Alberta, and its 100% owner, MindQuake Interactive Inc. (MQI), a Canadian corporation. The predecessor entity presented in the accompanying consolidated financial statements represents the consolidated accounts of MQI and MQ LP. In December 1998, MQ LP granted an 11% limited partnership interest to an individual in exchange for a cash investment of approximately $65,000. The limited partner's investment has been reflected as a minority interest in the accompanying consolidated financial statements and has been reduced by the limited partner's share of the losses of MQ LP, which is limited to 95% of the original investment, according to the limited partnership agreement. (Continued) 6 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) In June 1999, the Company acquired the minority interest in MQI, consisting of the limited partnership interest in MQ LP, in exchange for the issuance of 53,333 shares of the Company's common stock. MQ LP was then dissolved. Concurrently, Jotter completed a merger with MQI. Prior to the merger, Jotter did not have any assets or operations and therefore the merger transaction has been accounted for as a re-capitalization of MQI. Under a recapitalization, the historical cost basis amounts of MQI carryforward to the accounts of Jotter while the stockholders' deficit details for capital stock are those of Jotter, as adjusted for the recapitalization. Jotter issued one share of common stock for each share of MQI common stock. A total of 8,430,259 shares of Jotter's common stock were issued in exchange for the same number of MQI common shares representing approximately 95% of MQI's common stock outstanding at such date. In addition, Jotter entered into an agreement with the stockholders owning the remaining 492,406 outstanding common shares of MQI in June 1999 whereby the stockholders could exchange their shares of MQI common stock for shares of Jotter common stock. This agreement grants Jotter the right to purchase the shares from the stockholders, and the MQI stockholders the right to put the shares to Jotter on the same terms as the original exchange and is exercisable by either party until June 17, 2004. These remaining 492,406 shares have been included as issued and outstanding stock of the Company as of December 31, 1999, and September 30, 2000 as the shares are exchangeable at Jotter's option. Subsequent to the merger, Jotter entered into an asset transfer agreement with MQI which resulted in all of the assets of MQI being transferred to Jotter. As a result, all of the operations of the Company, subsequent to the transfer, are those of Jotter and its subsidiary, MQI. The equity of the Company presented for the period prior to the merger has been reflected as if it were the equity of Jotter. References to 1998 and 1999 in the accompanying notes to the consolidated financial statements refer to the period from June 1, 1998 (inception) through December 31, 1998 and the year ended December 31, 1999, respectively. The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, the Company has incurred net losses and negative operating cash flows since inception. These factors, among others, raise doubt whether the Company will be able to continue as a going concern for a reasonable period of time. The consolidated financial statements do not include adjustments relating to the recoverability of recorded asset amounts or the amounts or classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuance as a going concern is dependent on its ability to raise capital and ultimately to generate revenue and achieve profitability. (Continued) 7 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) Management is presently evaluating capital sources to sustain the company through the development stage. No assurances can be given that the Company will be successful in raising additional capital or that the Company will achieve profitability or positive cash flows. If the Company is unable to raise adequate additional capital and achieve profitability and positive cash flows, there can be no assurance that the Company will continue as a going concern. (c) Interim Consolidated Financial Statements The consolidated financial information as of September 30, 2000 and for the nine months ended September 30, 1999 and 2000 is unaudited. These interim consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements and in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the consolidated financial information set forth herein. (d) Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives: Estimated useful life ------------------------------- Computer equipment and software 3-5 years Furniture and fixtures 3-7 years Leasehold improvements Lesser of lease term or 7 years (e) Long Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by such asset. If the carrying amount is in excess of the future undiscounted net cash flows of such asset, an impairment is recognized and is measured by the amount by which the carrying value of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of their carrying value or fair value less cost to sell. (Continued) 8 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (f) Revenue Recognition Revenues are derived from advertisements appearing on the Company's Internet microportal. The Company is a participant in a network whereby it makes advertising space on its Internet microportal available for sale. The Company is then remitted 60% of the revenues generated from the sale of the advertising space, its impressions, net of any commissions or other fees. As the amount that will be ultimately remitted to the Company is not determinable, revenue is recognized upon the receipt of payment. (g) Advertising Expenses The Company expenses the cost of advertising and promoting its product as incurred. Such costs are included in sales and marketing expenses and totaled approximately $18,000 and $257,000 for 1998 and 1999, respectively, and $210,000 and $716,000 for the nine months ended September 30, 1999 and 2000, respectively. (h) Product Development Product development expenditures are charged to operations as incurred. Capitalization of certain software development costs is required subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon the completion of a working model. Costs incurred by the Company between completion of a working model and the point at which the product is ready for general release have been insignificant. (i) Income Taxes The Company computes income taxes using the asset and liability method, under which deferred income taxes are provided for the future tax consequences attributable to differences between the financial statement carrying amounts of the Company's assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce any deferred tax assets to the amounts which are more likely than not to be realized. (Continued) 9 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) Under certain provisions of the Internal Revenue Code of 1986, as amended, the availability of the Company's net operating loss and the tax credit carryforwards may be subject to limitations if it should be determined there has been a change in ownership of more than 50% of the value of the Company's stock. Such determination could limit the utilization of net operating loss and the tax credit carryforward. (j) Stock-Based Compensation The Company accounts for its stock option plans for employees in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense related to fixed employee stock options is recorded only if, on the date of grant, the fair value of the underlying stock exceeded the exercise price. The Company adopted the disclosure-only requirements of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and provide pro forma net income disclosures as if the Company had recognized compensation expense based on the fair value of the options at the grant date as prescribed by SFAS No. 123. (k) Foreign Currency The functional currency of the predecessor company through June 30, 1999 was the Canadian dollar, which represents the local currency of the country in which the predecessor company operated. As the functional currency of the predecessor company is different from the reporting currency, the accounts of the predecessor company have been translated into the reporting currency and the net gain or loss resulting from the foreign currency translation is included in accumulated other comprehensive income in stockholders' deficit. Assets and liabilities of the predecessor company have been translated into U.S. dollars using rates of exchange in effect at the end of the reporting periods. Income and expense accounts are translated into U.S. dollars using average rates of exchange for the reporting periods. As of July 1, 1999, the functional currency of the Company changed from the Canadian dollar to the U.S. dollar due to a change in economic facts and circumstances. The translated amounts for non-monetary assets as of June 30, 1999 became the accounting basis for these assets as of July 1, 1999. (l) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (Continued) 10 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (m) Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which will be effective for fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company has assessed the impact of this new statement and does not expect the adoption of SFAS No. 133 to have a material effect on its consolidated financial position or results of operations. In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25. FIN 44 clarifies certain elements of APB Opinion No. 25. Among other issues, this interpretation clarifies: the definition of employee for purposes of applying APB Opinion No. 25, the criteria for determining whether a plan qualifies as non-compensatory, the accounting consequences of various modifications to the terms of a previously fixed stock option award, and the accounting for an exchange of stock compensation in a business combination. This interpretation became effective July 1, 2000. Adoption of this interpretation has not had a material impact on the Company's financial position or results of operations. (2) Property and Equipment Property and equipment consist of the following:
December 31, -------------------------------------- September 30, 1998 1999 2000 ----------------- ----------------- ------------------- Computer equipment and software $ 22,393 210,411 286,939 Furniture and fixtures 18,476 36,355 65,850 Equipment under capital lease -- -- 19,890 Leasehold improvements -- 3,749 5,802 ----------------- ----------------- ------------------- 40,869 250,515 378,481 Less accumulated depreciation and amortization 5,202 35,841 87,906 ----------------- ----------------- ------------------- $ 35,667 214,674 290,575 ================= ================= ===================
(Continued) 11 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) At September 30, 2000, accumulated amortization of equipment under capital lease was $3,570. (3) Convertible Promissory Notes At December 31, 1999, the Company had convertible promissory notes outstanding with aggregate principal balances of $498,343 that bear interest at 7% per annum and mature on November 1, 2000. The principal balance and all accrued interest are due and payable on the maturity date. Included in the balance of promissory notes are notes issued to certain related parties for amounts due to them for services and expenses totaling $81,701. Upon closing of an equity financing round by the Company that raises gross proceeds of at least $1 million, the notes will automatically convert into the common stock of the Company at a conversion price equal to the price of the common stock sold in the equity financing or, if the equity round is preferred stock, the conversion price of the Company's convertible preferred stock. In connection with the issuance of these notes, the Company issued 13,829 shares of its common stock as payment for services provided related to the note issuance. Based on the fair value of the common shares, the Company recorded debt issuance costs of approximately $17,000 which are being amortized to interest expense over the term of the underlying notes. For the year ended December 31, 1999, amortization of debt issuance costs was approximately $3,000. On January 12, 2000, all of the notes and related accrued interest totaling $501,250 were converted into 397,817 shares of the Company's common stock at a conversion rate of $1.26 per share. The remaining unamortized debt issuance costs of approximately $14,000 were recorded in additional paid-in capital in conjunction with this conversion. In April 2000, the Company issued an $800,000 convertible note to an entity affiliated with an officer of the Company. Under the terms of the note, the principal balance will accrue interest at 7% per annum and principal and all accrued interest are due on April 1, 2004. Additionally, the principal balance and all accrued interest are convertible into common stock of the Company only upon the closing of one of the following: (1) an equity financing by the Company that raises gross proceeds of at least $10,000,000, or (2) the acquisition of the Company by another entity. The conversion price will be $1.26 per common share. In addition, upon payment or conversion of this note, the note holder will receive warrants to purchase common stock of the Company at an exercise price of $1.26 per share. The number of warrants to be issued is based upon: (1) 30% of the amount due upon repayment if it is repaid in cash, or (2) 50% of the amount due upon conversion if it is converted into common stock. The fair value of the warrants at the grant date was approximately $251,000 determined using the Black-Scholes option pricing model and based on the probability that the note will be ultimately repaid or converted. The following assumptions were used in the Black-Scholes calculation: expected dividend yield of 0%, risk free interest rate of 6.2%, volatility of 80%, and an expected life of 5 years. The fair value of the warrants was accounted for as a discount on the note and is being recognized as interest expense over the stated term of the notes. As a result of the value assigned to the warrants, the $800,000 convertible promissory note was issued with a beneficial conversion feature which was valued at approximately $251,000 based on the intrinsic value and calculated as the difference between the conversion price and the fair value of the common stock into (Continued) 12 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) which the note was convertible. The beneficial conversion feature is accounted for as an increase in additional paid-in capital and a note discount, with the discount amortized to interest expense over the stated term of the note using the effective interest method. Approximately $63,000 was charged to interest expense for the nine months ended September 30, 2000 related to the amortization of the fair value of the warrants and the beneficial conversion feature. In July and August 2000, the Company issued two promissory notes with aggregate principal balances of $200,000 that bear interest at 10% per annum and were due and payable on September 29 and October 1, 2000, respectively. Subsequent to September 30, 2000, the Lender verbally extended the maturity of the notes. No final due date has been determined. In connection with the notes, the Company issued a total of 66,667 shares of its common stock to the noteholders. Based on the fair value of the shares issued, the Company recognized $84,000 of additional interest expense on the notes through September 30, 2000. (4) Income Taxes The components of loss before income taxes are:
Period from June 1, 1998 (inception) through Year ended Nine months ended December 31, December 31, September 30, ------------------------------- 1998 1999 1999 2000 ------------ ------------ ------------ ------------ United States $ -- (1,375,856) (882,626) (3,869,013) Canadian (875,026) (1,418,259) (1,418,259) -- ---------- ---------- ---------- --------- $ (875,026) (2,794,115) (2,300,885) (3,869,013) ========== ========== ========== ==========
The Company's expected income tax benefit determined by applying the Canadian statutory income tax rate of 43% for the periods prior to July 1, 1999 and the U.S. federal statutory income tax rate of 34% for subsequent periods to net loss before income taxes differs from actual income tax benefit primarily as a result of the increases in the valuation allowance for deferred tax assets. 13 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) The tax effects of temporary differences and tax loss and credit carryforwards that give rise to significant portions of deferred tax assets and liabilities are as follows:
December 31, September 30, -------------------------- 1998 1999 2000 ---------- ---------- ------------ Deferred tax assets: Loss carryforwards $ 387,286 1,330,849 2,635,257 Stock compensation -- 43,783 54,559 Other -- 12,969 20,811 ---------- ---------- ---------- Gross deferred tax assets 387,286 1,387,601 2,710,627 Less valuation allowance (387,286) (1,387,601) (2,710,627) ---------- ---------- ---------- Net deferred tax assets $ -- -- -- ========== ========== ==========
The Company did not provide any current or deferred income tax provision or benefit for any of the years presented because it has experienced operating losses since its inception. The Company provided a full valuation allowance on net deferred tax assets, consisting primarily of loss carryforwards, because of the uncertainty regarding their realizability. The valuation allowance for deferred tax assets increased approximately $387,000, $1,000,000, $416,000 and $1,323,000 during the years ended December 31, 1998 and 1999 and the nine months ended September 30, 1999 and 2000, respectively. As of September 30, 2000, the Company has loss carryforwards of approximately $6,600,000 which are available to offset future U.S. federal taxable income and income taxes, respectively, if any, and expire beginning in 2018. (5) Stockholders' Deficit (a) Convertible Preferred Stock In January 2000, the Board of Directors approved the designation of 400,000 of the authorized preferred shares as Series A convertible preferred stock. The price paid for each share of Series A convertible preferred stock plus any accrued and unpaid dividends are convertible into shares of common stock at $1.26 per share, subject to certain anti-dilution provisions. Outstanding Series A convertible preferred shares automatically convert into common stock on December 31, 2001 or upon closing of an initial public offering of the Company's common stock with a price of at least $10.00 per share. The Series A convertible preferred shares are entitled to cumulative non-cash dividends at a rate of $0.70 per share per annum if and when declared by the Board of Directors and in preference to dividends paid to common shareholders. No dividends have been declared. The Company may not pay cash dividends to any class of stock prior to conversion of the Series A convertible preferred 14 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) shares. In the event of voluntary liquidation, dissolution or termination of the Company, holders of Series A convertible preferred shares shall be entitled to receive $10.00 for each share held plus declared but unpaid dividends. The Series A convertible preferred shareholders have been granted certain registration rights and the Company may not amend the Articles of Incorporation without prior approval of two-thirds of the outstanding Series A shareholders. The Series A shareholders have no other voting rights. On January 12, 2000, the Company completed the sale of 187,450 shares of its Series A convertible preferred stock at a price of $10.00 per share. For each Series A convertible preferred share purchased, investors received warrants to purchase 3.9684 shares of the Company's common stock resulting in the issuance of 743,703 warrants. The warrants are exercisable through December 31, 2001 at an exercise price of $1.26 per share. The fair value of the warrants at the grant date was approximately $436,000 determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk free interest rate of 6.51%, volatility of 80%, and a contractual life of 2 years. As a result of the value assigned to the warrants, the shares of Series A convertible preferred stock were issued with a beneficial conversion feature which was valued at approximately $436,000 based on the intrinsic value and calculated as the difference between the conversion price and the fair value of the common stock into which the preferred stock is convertible. The beneficial conversion feature was recognized at the time of issuance as the Series A convertible preferred stock is convertible immediately. The beneficial conversion feature has been accounted for as an increase in additional paid-in capital and an in substance dividend to the preferred stockholders in 2000. Accordingly, the beneficial conversion feature increases the loss applicable to common stockholders for the nine months ended September 30, 2000 by approximately $436,000. As payment for services provided in connection with the sale of preferred shares, the Company issued 18,750 shares of Series A convertible preferred stock and attached warrants to purchase 18,750 shares of common stock to certain advisors. The warrants are exercisable through December 31, 2001 at an exercise price of $1.26 per share. As additional payment for services provided in connection with the sale of preferred shares, the Company issued warrants to purchase 137,055 shares of common stock to advisors. The warrants are exercisable through December 31, 2004 at an exercise price of $1.26 per share. All of the common stock warrants issued in conjunction with the Series A convertible preferred stock offering, including the warrants issued to advisors, were outstanding at September 30, 2000. 15 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (b) Common Stock During the nine months ended September 30, 2000, the Company sold 187,500 shares of its common stock to a consultant at a price per share of $0.80. The sale price of the common stock represented a discount from the fair value of the Company's common stock on the date of sale. As a result, an expense of $86,250 was recognized. (c) Stock Option Plans In January 2000, the Company adopted its 1999 and 2000 Stock Option Plans and reserved an aggregate of 2,000,000 shares of its common stock for future stock option grants. Options may be granted under both plans to employees, directors and consultants and be designated as incentive or non- qualified stock options at the discretion of the Board of Directors. Generally, options granted under both plans have five-year terms and vest over three years with the initial 1/6 of the options cliff vesting after six months and the remainder monthly over the subsequent two and one-half years. During the year ended December 31, 1999, the Company granted 75,000 stock options under its stock option plans at exercise prices less than the fair value of the underlying common stock on the date of grant. Additionally, the Company granted stock options under its plans prior to approval by the Board of Directors. As such, the measurement date of these option grants is the date of approval of the plans by the Board of Directors. As a result, the Company recorded compensation expense of $68,250 during the year ended December 31, 1999. During the nine months ended September 30, 2000, the Company granted options to a nonemployee to purchase 45,000 shares of its common stock under its stock option plans at an exercise price of $1.26 per share. In lieu of this option grant, the Company cancelled a warrant to purchase 15,000 shares of common stock with an exercise price of $2.50 per share that had been previously granted in 1999 (as discussed in note 5d). The options have a three-year term and vest immediately. Based on the fair value of the options, the Company recognized compensation expense of approximately $31,700 during the nine months ended September 30, 2000 in relation to the grant of these options. The fair value of the options on the date of grant was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk free interest rate of 6.64%, volatility of 80%, and a contractual life of 3 years. 16 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) A summary of stock option activity is as follows:
Options outstanding ----------------------------------------- Weighted Number of average shares exercise price ------------- ------------------ Balance at December 31, 1998 -- $ -- Granted 316,838 1.05 --------- ----------- Balance at December 31, 1999 316,838 1.05 Granted 1,306,500 1.26 Forfeited (47,501) 1.26 --------- ----------- Balance at September 30, 2000 1,575,837 $ 1.22 ========= ===========
At September 30, 2000, 424,163 shares remain available for grant under the Company's stock option plans. Total exercisable options to purchase common shares and their weighted average exercise prices per share at December 31, 1999 and September 30, 2000 were 85,746 shares and 1,228,710 shares and $0.46 and $1.20, respectively. Additional information regarding stock options outstanding and exercisable at December 31, 1999 is as follows:
Options outstanding Options exercisable ----------------------------------------------------------- ------------------------------------- Weighted- average remaining Weighted- Weighted- Number contractual average Number average Exercise prices outstanding life (years) exercise price exercisable exercise price ----------------- --------------- ------------------ ------------------ --------------- ------------------- $ 0.35 75,000 1.50 $ 0.35 75,000 $ 0.35 1.26 241,838 4.92 1.26 10,746 1.26 -------------- ------- ---- ------ ------ ------ $ 0.35 to 1.26 316,838 4.11 $ 1.05 85,746 $ 1.47 ============== ======= ==== ======= ====== ======
(d) Stock Purchase Warrants During 1999, the Company issued warrants to purchase 150,000 shares of its common stock to an officer. The warrants are exercisable through December 1, 2004 at an exercise price of $1.26 per share and were all outstanding at September 30, 2000. 17 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) During 1999, the Company issued to the previous employer of one of its officers warrants to purchase 103,419 shares of its common stock as compensation for their loss of the officer's services. The warrants are exercisable through August 1, 2000 at an exercise price of $1.26 per share and were all outstanding at September 30, 2000. Based on the fair value of the warrants, the Company recognized compensation expense during 1999 of $43,260. The fair value of the warrants was determined using the Black- Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 6.17%, volatility of 80%, and an expected life of one year. During 1999, the Company issued warrants to purchase 15,000 shares of its common stock to a non-employee. The warrants were exercisable through October 1, 2001 at an exercise price of $2.50 per share and were all outstanding at December 31, 1999. These warrants were canceled in March 2000 and common stock options were issued in their place as discussed in note 5c. The fair value of the warrants was approximately $17,264 which was recorded as compensation expense. The fair value of the warrants was determined using the Black-Scholes pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 5.66%, volatility of 80%, and a contractual life of 2 years. A summary of common stock warrant activity is as follows: Number of Weighted- warrants to average purchase exercise common shares price --------------- ----------- Outstanding at December 31, 1998 -- $ -- Issued 268,419 1.33 --------------- ----------- Outstanding at December 31, 1999 268,419 1.33 Issued 899,508 1.26 --------------- ----------- Outstanding at September 30, 2000 1,167,927 $ 1.28 =============== =========== The weighted average remaining contractual life of common stock warrants outstanding at September 30, 2000 is 1.88 years. All of the common stock purchase warrants outstanding at September 30, 2000 are exercisable. 18 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (e) Stock Compensation Had the Company determined compensation cost of employee and officer stock options and warrants based on the fair value of the options and warrants at the date of grant as prescribed by SFAS No. 123, the Company's net loss would have been adjusted to the pro forma amounts indicated below: 1999 ---------- Net loss: As reported $ 2,794,115 Pro forma 2,926,503 On the date of grant, the per share weighted average fair values of stock options and warrants granted to employees and officers during 1999 and the nine months ended September 30, 2000 were as follows: Nine months ended September 30, 1999 2000 -------- ------------- Options granted at: Prices less than market $ 0.16 -- Prices equal to market 0.50 0.29 Prices greater than market -- -- The per share weighted average fair value of stock options and warrants granted to employees and officers during 1999 and the nine months ended September 30, 1999 on the date of grant was determined using the minimum value method with the following assumptions: expected dividend yield of 0%, risk-free interest rates ranging from 6.3% to 6.7%, and an expected life of four years. (6) Related Party Transactions The Company has an agreement with Financial Analysts Consultants, Inc. (FAC), a corporation owned by the Chairman of the Company's Board of Directors. Under the terms of this agreement, FAC is to provide the Company with various management services, including staffing of the Arizona office, rent, etc. The Company paid FAC approximately $307,000 and $222,000 for these services during 1999 and 2000, respectively. The amounts due to related parties are generally non-interest bearing, unsecured, and have no fixed terms of repayment. 19 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (7) Commitments and Contingencies (a) Operating Leases The Company currently leases office space under a noncancelable operating lease which expires in 2002 and leases which are on a month- to-month basis. As of December 31, 1999, future minimum payments under noncancelable operating leases are as follows: 2000 $ 65,700 2001 65,700 2002 60,225 ---------- Future minimum lease payments $ 191,625 ========== Rent expense totaled approximately $6,000, $58,000, $48,000 and $77,000 for 1998 and 1999 and the nine months ended September 30, 1999 and 2000, respectively. (b) Litigation In 1999, the Company was named as a defendant in two suits claiming the non-payment of software development services and license fees, wrongful distribution of software in violation of copyright laws, and that the Company solicited and hired an employee in violation of a written agreement. The Company subsequently entered into settlement agreements in connection with both of these suits. In connection with the settlements, the Company was required to pay the parties involved a total of $225,000 and issue 29,646 shares of its common stock. The Company accrued for the full settlement amount in 1999 as the services were performed by the plaintiffs in 1999. At December 31, 1999, the Company had a remaining accrual for a total of approximately $131,000 relating to the settlement of the suits representing cash payments to be made and the value of 29,646 common shares to be issued based on the fair value of the stock on the settlement date. The cash was paid and the shares were issued in full during the nine months ended September 30, 2000. 20 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (8) Subsequent Events On December 15, 2000, the Company entered into an agreement with SAFLINK Corporation (SAFLINK) to sell all of its intellectual property and fixed assets to SAFLINK in exchange for 5,100,000 shares of SAFLINK common stock and a $1.7 million unsecured promissory note that bears interest at 7% per annum. All principal and accrued interest on the note is due December 15, 2002. 21 PRO FORMA FINANCIAL INFORMATION UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma condensed combined financial statements give effect to the purchase business combination between SAFLINK Corporation ("SAFLINK" or the "Company") and Jotter Technologies Inc. and predecessor companies, Mindquake Interactive Inc. and Mindquake Interactive L.P. ("Jotter"). Under the terms of the acquisition, SAFLINK will acquire certain assets of Jotter in exchange for 5,100,000 shares of SAFLINK common stock valued at approximately $3.2 million and a $1.7 million unsecured promissory note. The note accrues interest at a rate of 7% per annum and any unpaid principal and interest are due on December 15, 2002. The acquisition will be accounted for using the purchase method of accounting in accordance with APB Opinion No. 16. Under the purchase method of accounting, the purchase price is allocated to the assets acquired based on their estimated fair values. The estimated fair values included herein are preliminary in nature and may not be indicative of the final allocation of the purchase price consideration. Such preliminary estimates of the fair values of the assets of Jotter have been combined with the recorded values of the assets and liabilities of SAFLINK in the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements are based on, and should be read in conjunction with, the historical financial statements of SAFLINK included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 22, 2000 and the historical financial statements of Jotter included herein. The unaudited pro forma condensed combined balance sheet has been prepared to reflect the purchase of Jotter as if it occurred on September 30, 2000. The unaudited pro forma condensed combined statements of operations reflect the combined results of operations of SAFLINK and Jotter as if the acquisition occurred on January 1, 1999. The unaudited pro forma condensed combined balance sheet and statements of operations are provided for illustrative purposes only and should be read in conjunction with the accompanying notes thereto, the audited financial statements and notes thereto for the year ended December 31, 1999 of SAFLINK included in its Annual Report on Form 10-K filed on March 22, 2000, the unaudited financial statements and notes thereto for the nine months ended September 30, 2000 included in SAFLINK's Quarterly Report on Form 10-Q filed on November 14, 2000 and the audited financial statements and notes thereto of Jotter included herein. The unaudited pro forma condensed combined balance sheet and statements of operations are not necessarily indicative of the operating results or financial position that would have been achieved had the purchase been consummated at the dates indicated, nor is it necessarily indicative of future operating results and financial condition. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (IN THOUSANDS)
September 30, 2000 ---------------------------- SAFLINK Jotter Pro Forma Pro Forma Historical Historical Adjustments Combined ------------ ------------ ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 759 $ -- $ (750) (a) $ 9 Accounts receivable, net 232 -- -- 232 Inventory 16 -- -- 16 Investments 299 -- -- 299 Prepaid expenses and other current assets 537 24 (24) (b) 537 ------------ ------------ ------------- ------------- Total current assets 1,843 24 (774) 1,093 Furniture and equipment, net: 409 291 -- 700 Intangibles -- -- 5,179 (a) 5,179 Other assets 625 24 (24) (b) 625 ------------ ------------ ------------- ------------- Total assets $ 2,877 $ 339 $ 4,381 $ 7,597 ============ ============ ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 1,429 $ 774 $ (774) (b) 1,429 Deferred revenue 455 -- -- 455 Promissory note -- 200 (200) (b) -- ------------ ------------ ------------- ------------- Total current liabilities 1,884 974 (974) 1,884 Other long-term liabilities -- 6 (6) (b) -- Convertible notes payable -- 360 (360) (b) -- Promissory note -- -- 1,700 (a) 1,700 Stockholders' equity (deficit): Preferred stock -- 2 (2) (b) -- Common Stock 261 124 (73) (a,b) 312 Additional paid-in capital 56,419 6,395 (3,218) (a,b) 59,596 Accumulated other comprehensive income (loss) (65) 16 (16) (b) (65) Accumulated deficit (55,622) (7,538) 7,330 (a,b) (55,830) ------------ ------------ ------------- ------------- Total stockholders' equity (deficit) 993 (1,001) 4,021 4,013 ------------ ------------ ------------- ------------- Total liabilities and stockholders' equity $ 2,877 $ 339 $ 4,381 $ 7,597 ============ ============ ================ ==============
See notes to unaudited pro forma condensed combined financial statements. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1999 ------------------------------------- SAFLINK Jotter Pro Forma Pro Forma Historical Historical Adjustments Combined Revenues $ 1,303 $ -- $ -- $ 1,303 Cost of revenues 359 -- -- 359 --------------- ---------------- --------------- ---------------- Gross profit 944 -- -- 944 Operating expenses: Product development 1,375 1,338 -- 2,713 Sales and marketing 1,332 503 -- 1,835 Minimum royalty payment 375 -- -- 375 Amortization of intangible assets -- -- 1,726 (c) 1,726 General and administrative 1,815 954 -- 2,769 --------------- ---------------- --------------- ---------------- Total operating expenses 4,897 2,795 1,726 9,418 --------------- ---------------- --------------- ---------------- Loss from operations (3,953) (2,795) (1,726) (8,474) Interest and other income (expense) 26 (37) (119) (d) (130) --------------- ---------------- --------------- ---------------- Net loss before minority interest (3,927) (2,832) (1,845) (8,604) Minority interest in loss -- 38 -- 38 --------------- ---------------- --------------- ---------------- Net loss (3,927) (2,794) (1,845) (8,566) Preferred stock dividend 104 -- -- 104 --------------- ---------------- --------------- ---------------- Net loss attributable to common stockholders $ (4,031) $ (2,794) $ (1,845) $ (8,670) =============== ================ =============== ================ Basic and diluted loss per common share $ (0.23) $ (0.38) Weighted average number of basic and diluted common shares 17,541 22,641
See notes to unaudited pro forma condensed combined financial statements. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Nine Months Ended September 30, 2000 ------------------------------------- SAFLINK Jotter Pro Forma Pro Forma Historical Historical Adjustments Combined Revenues $ 1,156 $ 52 $ -- $ 1,208 Cost of revenues 371 -- -- 371 --------------- ---------------- --------------- ---------------- Gross profit 785 52 -- 837 Operating expenses: Product development 3,193 811 -- 4,004 Sales and marketing 1,224 1,288 -- 2,512 Relocation 216 -- -- 216 Amortization of intangible assets -- -- 1,295 (c) 1,295 General and administrative 2,132 1,662 -- 3,794 --------------- ---------------- --------------- ---------------- Total operating expenses 6,765 3,761 1,295 11,821 --------------- ---------------- --------------- ---------------- Loss from operations (5,980) (3,709) (1,295) (10,984) Interest and other income (expense) 74 (160) (89) (d) (175) --------------- ---------------- --------------- ---------------- Net loss (5,906) (3,869) (1,384) (11,159) Preferred stock dividend 348 -- -- 348 Beneficial conversion feature -- 436 -- 436 --------------- ---------------- --------------- ---------------- Net loss attributable to common stockholders $ (6,254) $ (4,305) $ (1,384) $ (11,943) =============== ================ =============== ================ Basic and diluted loss per common share $ (0.32) $ (0.48) Weighted average number of basic and diluted common shares 19,784 24,884
See notes to unaudited pro forma condensed combined financial statements. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 1. PERIODS COMBINED The unaudited pro forma condensed combined balance sheet has been prepared to reflect the purchase of Jotter as if it occurred on September 30, 2000. The unaudited pro forma condensed combined statements of operations reflect the combined results of operations of SAFLINK and Jotter for the year ended December 31, 1999 and the nine months ended September 30, 2000 as if the purchase occurred on January 1, 1999. 2. BASIS OF PRESENTATION The unaudited pro forma condensed combined financial statements reflect the issuance of 5,100,000 shares of SAFLINK common stock valued at approximately $3.2 million and a $1.7 million unsecured promissory note in connection with the purchase of certain assets of Jotter. The note accrues interest at a rate of 7% per annum and any unpaid principal and interest are due on December 15, 2002. The acquisition is expected to be accounted for under the purchase method of accounting in accordance with APB Opinion No. 16. Under the purchase method of accounting, the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Estimates of the fair values of the assets of Jotter have been combined with the recorded values of the assets and liabilities of SAFLINK in the unaudited pro forma condensed combined financial statements. 3. PURCHASE TRANSACTION COSTS SAFLINK expects to incur direct transaction costs of approximately $750,000 associated with the acquisition, primarily for legal, investment banking and accounting fees. These costs will be included as part of the total acquisition cost of Jotter. There can be no assurance that SAFLINK will not incur additional charges in subsequent quarters to reflect costs associated with the acquisition or that management will be successful in its efforts to integrate the operations of the two companies. 4. PRO FORMA LOSS PER COMMON SHARE The pro forma combined basic and diluted net loss per common share are based on the combined actual weighted average number of common shares of SAFLINK common stock outstanding during the periods presented plus the 5,100,000 shares of SAFLINK common stock expected to be issued in the acquisition. All stock options and warrants have been excluded from the computation of pro forma combined basic and diluted net loss per common share because all such securities are anti- dilutive for the periods presented. The following table reconciles shares used to compute historical basic and diluted net loss per share to shares used to compute pro forma basic and diluted net loss per share (rounded):
Nine months Year ended ended December 31, September 30, 1999 2000 ------------------ ------------------ Shares used to compute historical basic and diluted net loss per share 17,541 19,784 Impact of shares issued in acquisition assumed outstanding from January 1, 1999 5,100 5,100 ------------------ ------------------ Shares used to compute pro forma basic and diluted net income per share 22,641 24,884 ================== ==================
5. CONFORMING AND RECLASSIFICATION ADJUSTMENTS There were no adjustments required to conform the accounting policies or financial statement presentation of SAFLINK and Jotter. 6. PRO FORMA ADJUSTMENTS a) To allocate the purchase price, including approximately $750,000 of expected transaction costs, to certain assets of Jotter. The excess of the purchase price over the fair value of net identifiable assets acquired is reflected as goodwill and is amortized using the straight- line method over three years. The estimated fair values of assets acquired are based upon preliminary estimates and may not be indicative of the final allocation of purchase price consideration. A summary of the purchase price for the acquisition is as follows: Stock issued $ 3,228 Direct acquisition costs 750 Promissory note 1,700 ---------- Total $ 5,678 ========== Furniture and equipment $ 291 Identifiable intangible assets 5,174 Goodwill 5 In-process research and development 208 ---------- Total $ 5,678 ========== The purchase price allocation includes the purchase of in-process research and development. The immediate write-off of this item has been excluded from the pro forma results of operations as it is not expected to have a continuing impact on SAFLINK's results of operations. The purchase of in-process research and development represents a one-time charge incurred by the Company upon the acquisition of Jotter. The Company believes that the in-process technology obtained in this acquisition requires significant enhancements so that it may be successfully integrated with the existing SAFLINK products and so that it may successfully compete in the market, and has no future alternative uses. As such, $208,000 of the purchase price was recorded as in-process research and development and expensed on the date of acquisition. b) To eliminate the historical shareholders' equity, certain assets and all liability accounts of Jotter not assumed in the acquisition. c) To reflect the amortization of goodwill and other identifiable intangibles associated with the Company's acquisition of Jotter which are amortized over their useful lives of three years. d) To reflect interest expense incurred on $1.7 million unsecured promissory note associated with the Company's acquisition of Jotter, which is incurred at a 7% interest rate per annum. EXHIBIT INDEX EXHIBIT ------- 2.1 Asset Purchase Agreement, dated as of December 15, 2000, by and between SAFLINK Corporation and Jotter Technologies Inc. 10.1 Escrow Agreement, dated as of December 15, 2000, by and among SAFLINK Corporation, Chase Manhattan Bank and Jotter Technologies Inc. 23.1 Consent of Independent Auditors' 99.1 Press Release dated December 18, 2000