10-Q/A 1 d10qa.htm FORM 10-Q AMENDMENT NO. 1 Form 10-Q Amendment No. 1

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q/A

Amendment No. 1

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

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.)

12413 Willows Road NE, Suite 300, Kirkland, WA 98034

(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 a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

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

There were 88,908,229 shares of Saflink Corporation’s common stock outstanding as of August 1, 2006.

 

EXPLANATORY NOTE

This Amendment No. 1 to Saflink’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2006, which was filed with the Securities and Exchange Commission on August 9, 2006, is being filed to supplement Saflink’s discussion of its liquidity and capital resources in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This Form 10-Q/A does not amend, modify or update any other information.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this document and our 2005 audited consolidated financial statements and notes thereto included in our annual report on Form 10-K, which was filed with the Securities and Exchange Commission on March 17, 2006.

This quarterly report on Form 10-Q contains statements and information about management’s view of our future expectations, plans and prospects that constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those anticipated, including the factors described in the section of this quarterly report on Form 10-Q entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and identified in Item 1A of Part II entitled “Risk Factors.” We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances.

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our annual report on Form 10-K for the year ended December 31, 2005.

As used in this quarterly report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” “the Company,” and “Saflink” refer to Saflink Corporation, a Delaware corporation, and its subsidiaries.

Liquidity and Capital Resources

We financed our operations during the six months ended June 30, 2006, primarily from our existing working capital, and bolstered our cash position as a result of our June 2006 convertible debenture and warrant issuance. As of June 30, 2006, our principal source of liquidity consisted of $5.6 million of working capital, which included $10.5 million of cash and cash equivalents. This is compared to working capital of $11.8 million at December 31, 2005, which included cash and cash equivalents of $15.2 million.

We use approximately $5.0 million per quarter at our current level of operations. As a result of the capital raised during 2006, we believe that we have sufficient funds to continue our operations at current levels through December 31, 2006. We do not have a credit line or other borrowing facility to fund our operations. To continue our current level of operations beyond December 31, 2006, and through September 30, 2007, we expect that we will need an additional $15.0 million of cash flow from operations and through the issuance of equity or debt securities or other sources of financing. Currently, we do not have any arrangements in place for any future financings, and we may not be able to secure additional financing on favorable terms, or at all. Any additional financings will likely cause substantial dilution to existing stockholders. If we are unable to obtain the necessary additional financing, we would be required to reduce the scope of our operations, primarily through the reduction of discretionary expenses, which include personnel, benefits, marketing and other costs, and we may be required to cease our operations.

On June 12, 2006, we entered into a securities purchase agreement with accredited institutional investors, in which we raised $8.0 million through a private placement of 8% convertible debentures and warrants of our common stock. The debentures are convertible into shares of our common stock at any time at an initial conversion rate of $0.45 per share. The principal amount of the debentures is subject to mandatory monthly redemption at the rate of 1/12 of the original principal amount plus accrued but unpaid interest on the debentures commencing December 1, 2006. We may, at our discretion, elect to pay the monthly redemption amount in cash or in shares of our common stock, subject to conditions related to the market for shares of our common stock and the registration of the shares issuable upon conversion of the debentures under the Securities Act of 1933.

 

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Under the terms of the purchase agreement, unless we obtain stockholder approval of the financing, we may not issue shares of our common stock upon any conversion of the debentures or upon any exercise of the warrants if the number of shares of common stock so issued, when aggregated with any shares of common stock issued upon any previous conversion of debentures or exercise of warrants issued in the financing, would exceed 19.999% of number of shares of our common stock outstanding on the date of the financing.

Based upon a stock price $0.37, the last sale price reported for our common stock on the Nasdaq Capital Market on June 30, 2006, it is unlikely that we would issue any shares upon the exercise of the warrants because the exercise price of the warrants exceeds the market price of our common stock. Based on such price, we would be able to redeem $5.6 million of the aggregate principal amount of the debentures in shares of our common stock without stockholder approval. In such event, we would be required to redeem the remaining $2.4 million of the aggregate principal amount of the debentures in cash. If our stockholders do not approve the issuance of more than 19.999% of our common stock in connection with the financing, and if we are required to redeem a portion of the aggregate principal amount of the debentures in cash, we do not believe that we would have sufficient funds for such cash redemption without additional financing.

We expended $10.9 million in operating activities during the first six months of 2006, compared to $10.2 million for the same period in 2005. The net loss of $73.9 million for the six months ended June 30, 2006 was significantly impacted by $60.4 million in losses related to the impairment of goodwill. Other significant adjustments to the net loss were depreciation and amortization of $1.7 million, stock-based compensation of $518,000, a decrease in accounts receivable of $198,000, and an increase in accrued expenses of $383,000. These adjustments were offset by an increase in prepaid expenses and other current assets of $338,000.

Net cash used in investing activities was $469,000 during the six months ended June 30, 2006, primarily related to purchases of equipment and leasehold improvements for our new executive offices in Kirkland, Washington, which we began to occupy in May 2006. This is compared to $117,000 used for purchases of furniture and equipment for the same period in 2005.

Net cash provided from financing activities was $6.6 million during the six months ended June 30, 2006, compared to $14.4 million during the same period in 2005. In June 2006, we received gross proceeds of $8.0 million, net of $521,000 in debt issuance costs paid during the quarter, through the issuance of 8% convertible debentures and warrants to purchase 8,889,002 shares of our common stock. These proceeds were offset by $855,000 in payments as a result of the amendments of certain warrants issued in connection with our June 2005 financing. For further discussion related to the June 2006 convertible debenture and warrant issuance and the amendments to certain warrants in connection with our June 2005 financing, see Note 7. Stockholders’ Equity in the notes to the consolidated financial statements included in this quarterly report on Form 10-Q.

In May 2006, we moved our principle executive offices from Bellevue, Washington to Kirkland, Washington. We now lease our current principal executive offices, consisting of approximately 19,456 square feet, in Kirkland, Washington, under a lease that expires in August 31, 2011. We also lease approximately 8,100 square feet of office space, under a lease expiring in March 2007, in Edmonton, Alberta, Canada. In Reston, Virginia, we lease 6,083 square feet of office space under a lease that expires in April 2009. In connection with our asset purchase on December 29, 2003, we assumed a lease from Information Systems Support, Inc., consisting of 4,484 square feet in Charleston, South Carolina, which expired in February 2006. On March 1, 2006, we signed a new one-year lease for the same property in Charleston, South Carolina, that will expire in February 2007.

In connection with our acquisition of SSP-Litronic on August 6, 2004, we assumed the leases for properties in Irvine, California and Reston, Virginia. In Irvine, we lease 20,702 square feet of office space that serves as the principal office for Litronic. This lease expires in February 2012 and the lessor is KRDS, Inc., an entity that is majority-owned by three employees of Litronic, one of whom is Kris Shah, the president of Litronic, and a member of our board of directors. In Reston, we lease 5,130 square feet of office space under a lease that expires in March 2009. On April 21, 2006, we entered into an agreement to sublet this office space. The term of the sublease is April 24, 2006, through March 31, 2009. The initial base rent is $117,990 per year, subject to 5% annual adjustments throughout the term of the sublease. We believe that our facilities are adequate to satisfy our projected requirements for the foreseeable future, and that additional space will be available if needed. The following is a summary of our current property leases:

 

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Property Description

   

Location

    Square Feet    Lease
Expiration Date

Saflink executive offices (beginning May 1, 2006)

    Kirkland, Washington    19,456    8/31/2011

Edmonton development office

    Edmonton, Alberta, Canada    8,100    3/31/2007

Charleston development office

    Charleston, South Carolina    4,484    2/25/2007

Saflink Reston sales office (Campus Commons)

    Reston, Virginia    6,083    4/30/2009

Litronic headquarters

    Irvine, California    20,702    2/29/2012

Litronic Reston sales office

    Reston, Virginia    5,130    3/31/2009

Our significant fixed commitments with respect to our convertible debt and warrant obligations and our operating leases as of June 30, 2006, were as follows (in thousands):

 

     Payments For The Year Ended December 31,
     Total    Remainder
2006		    2007 & 2008    2009 & 2010    2011 & After

Operating leases

    $ 5,254    $ 526    $ 2,103    $ 1,745    $ 880

Series A warrant redemptions

      569      569      —        —        —  

Convertible note payable to related party

      1,250      1,250      —        —        —  

Convertible note interest

      125      125      —        —        —  

Convertible debentures (1)

      8,000      667      7,333      —        —  

Convertible debentures interest (2)

      592      299      293      —        —  
                                  

Total Contractual Cash Obligations

    $ 15,790    $ 3,436    $ 9,729    $ 1,745    $ 880
                                  
(1) Based upon a stock price of price $0.37, the last sale price reported for our common stock on the Nasdaq Capital Market on June 30, 2006, and assuming no issuance of shares upon the exercise of the warrants, we would be able to redeem $5.6 million of the aggregate principal amount of the debentures in shares of our common stock without stockholder approval. In such event, we would be required to redeem the remaining $2.4 million of the aggregate principal amount of the debentures in cash. If our stockholders approve the issuance of more than 19.999% of our common stock in connection with the financing, we would be able to redeem the entire aggregate principal amount of the debentures in shares of our common stock.
(2) If we obtain stockholder approval of the financing and meet certain conditions, we may, in our discretion, elect to pay interest in shares of our common stock, subject to the registration of the resale of the shares of common stock issuable as payment of interest on the debentures under the Securities Act.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Saflink Corporation
DATE: October 4, 2006   By:  

/s/ JON C. ENGMAN

   

Jon C. Engman

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

 

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Exhibit Index

 

               Incorporated by Reference

Exhibit No.

   

Description

    Filed
Herewith		    Form    Exhibit
No.		    File No.    Filing Date
31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    X            
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    X            
32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    X            
32.2    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    X            

 

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