APPROVAL OF AN AMENDMENT TO SAFLINK’S CERTIFICATE OF INCORPORATION TO INCREASE
THE NUMBER OF AUTHORIZED SHARES OF CAPITAL STOCK
Background
Under Delaware law, we may only issue shares of common stock to the extent such shares have been authorized for issuance under our certificate of incorporation. The certificate of incorporation currently authorizes our issuance of up to 200,000,000 shares of common stock. However, as of November 1, 2006:
• 88,908,229 shares of our common stock were outstanding;
• 11,320,828 unissued shares of common stock were reserved for issuance under our stock incentive plan;
• 14,646,912 unissued shares of common stock were reserved for issuance upon exercise of outstanding warrants; and
• 19,538,564 unissued shares of common stock were reserved for issuance upon conversion of outstanding convertible promissory notes and debentures.
As a result, approximately 65,585,467 shares of common stock are unissued and unreserved under our certificate of incorporation, an amount that the board of directors believes to be inadequate for future purposes. In order to ensure that sufficient shares of common stock will be available for issuance by us, the board of directors has approved, subject to stockholder approval, an amendment to our certificate of incorporation to increase the number of shares of common stock authorized for issuance to 1,000,000,000 shares.
Purpose and Effect of the Amendment
The purpose of the proposed amendment to our certificate of incorporation is to authorize additional shares of common stock which will be available in the event our board of directors determines that it is necessary or appropriate to issue additional shares in connection with a stock dividend, raising additional capital, acquiring other businesses, establishing strategic relationships with corporate partners or providing equity incentives to employees and officers or for other corporate purposes. The availability of additional shares of common stock is particularly important if we need to undertake any of the foregoing actions on an expedited basis and we wish to avoid the time and expense of seeking stockholder approval in connection with the contemplated issuance of common stock.
We have no present agreement or arrangement to issue any of the shares for which approval is sought. However, if we are unable to generate sufficient cash flow from operations, we will need to seek additional funds in the near future through the issuance of additional equity or debt securities or other sources of financing.
As of September 30, 2006, our working capital was negative $1.4 million, which included $5.2 million of cash and cash equivalents. In October 2006, we significantly reduced our operating expenses by reducing our workforce by over 50%. We expect to pay out the $800,000 in restructuring costs, in addition to employee accrued paid-time off balances totaling approximately $525,000, during the fourth quarter of 2006. After these restructuring activities and excluding severance expense we expect to recognize in the fourth quarter, we expect to use approximately $2.5 million in the fourth quarter of 2006 and approximately $2.0 per quarter in operations after that.
As a result of the restructuring and the capital we raised during June 2006, we believe that we have sufficient funds to continue our operations at current levels into the first quarter of 2007. We do not have a credit line or other borrowing facility to fund our operations. To continue our current level of operations through September 30, 2007, we expect that we will need an additional $5.0 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, even if the amendment is approved.
If the amendment to our certificate of incorporation is approved by our stockholders, the board of directors does not intend to solicit further stockholder approval prior to the issuance of any additional shares of common stock, except as may be required by applicable law or the requirements of any market or exchange on which shares of our common stock are listed or quoted on the date of such action.
If the amendment to our certificate of incorporation is not approved by our stockholders, we will likely be unable to obtain necessary additional financing. In that case, we would likely be required to further reduce the scope of our operations,
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