SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended January 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period
Commission File Number 0-19726
TELYNX, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-3022377
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
6006 North Mesa Street, Suite 600
El Paso, Texas 79912
(Address of principal executive offices)
(915) 581-5828
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
As of March 1, 2002, 208,765,000 shares of Class A Common Stock, no shares of
Class B Common Stock, and no shares of Series B Convertible Preferred Stock were
outstanding.
1
TELYNX, INC.
Form 10-QSB
INDEX
Page
Number
------
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of January
31, 2002 (unaudited) and October 31, 2001 (audited) 3
Condensed Consolidated Statements of Operations for
the three months ended January 31, 2002 and 2001
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for
the three months ended January 31, 2002 and 2001
(unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II Other Information 10
Item 1 Legal Proceedings 10
Item 2 Changes in Securities 10
Item 3 Defaults upon Senior Securities 10
Item 4 Submission of Matters to a Vote of Security Holders 10
Item 5 Other Information 10
Item 6 Exhibits and Reports on Form 8-K 10
Signature 11
2
TELYNX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31 October 31
2002 2001
------------ ------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,000 $ 130,000
Accounts receivable 781,000 467,000
Prepaids and deposits 67,000 51,000
------------ ------------
Total current assets 849,000 648,000
Deferred finance cost, net 156,000 154,000
Property and equipment, net 30,000 34,000
------------ ------------
Total assets $ 1,035,000 $ 836,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 4,167,000 $ 3,897,000
Accrued payroll 375,000 313,000
Notes payable to stockholders 463,000 463,000
Payable to investor 250,000 250,000
Current convertible notes payable to investors 20,000 0
Deferred revenue 0 14,000
------------ ------------
Total current liabilities 5,275,000 4,937,000
Convertible notes payable to investors 646,000 582,000
Stockholders' deficit:
Preferred stock, $0.01 par value - no shares issued
and outstanding at January 31, 2002; 500 shares
issued and outstanding at October 31, 2001 -- --
Common stock, $0.01 par value - 1,005,000,000
authorized; 208,764,105 shares issued and
outstanding at January 31, 2002; 200,165,277
shares issued and outstanding at October 31, 2001 2,088,000 2,002,000
Paid in capital 32,126,000 31,966,000
Accumulated deficit (39,100,000) (38,651,000)
------------ ------------
Total stockholders' deficit (4,886,000) (4,683,000)
------------ ------------
Total liabilities and stockholders' deficit $ 1,035,000 $ 836,000
============ ============
See Notes to Condensed Consolidated Financial Statements (unaudited).
3
TELYNX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
January 31
---------------------------
2002 2001
------------ -----------
Revenue $ 479,000 $ 80,000
Cost of revenue 95,000 --
------------ -----------
Gross profit 384,000 80,000
Operating expenses:
Sales and marketing 63,000 442,000
Services 59,000 184,000
Research and development 56,000 230,000
General and administrative 438,000 900,000
------------ -----------
Total operating expenses 616,000 1,756,000
Loss from operations (232,000) (1,676,000)
Other income (expense):
Interest income -- --
Interest expense (217,000) (682,000)
------------ -----------
Total other expense (217,000) (682,000)
------------ -----------
Net loss $ (449,000) $(2,358,000)
============ ===========
Basic and diluted net loss per common share $ 0.00 $ (0.08)
============ ===========
Weighted average shares outstanding 203,214,191 28,592,302
============ ===========
See Notes to Condensed Consolidated Financial Statements (unaudited).
4
TELYNX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
January 31
------------------------
2002 2001
--------- -----------
Cash flows from operating activities:
Net loss $(449,000) $(2,358,000)
Adjustments to reconcile net loss to cash used in operations:
Depreciation and amortization 23,000 23,000
Beneficial conversion cost of convertible debt and warrants 168,000 731,000
Expenses and settlements paid with equity 32,000 91,000
Changes in assets and liabilities:
Receivables (314,000) 266,000
Prepaid expenses (16,000) (18,000)
Accounts payable and accrued liabilities 332,000 476,000
Deferred revenue (14,000) (39,000)
Other 2,000 (31,000)
--------- -----------
Net cash used in operating activities (236,000) (859,000)
--------- -----------
Cash flows from investing activities:
Capital expenditures -- (13,000)
--------- -----------
Net cash used in investing activities -- (13,000)
--------- -----------
Cash flows from financing activities:
Proceeds from issuance of convertible debt 181,000 650,000
Proceeds from issuance of common stock -- 145,000
Proceeds from note payable to stockholder -- 67,000
Payment on convertible debt (75,000) --
Other 1,000 (1,000)
--------- -----------
Net cash provided by financing activities 107,000 861,000
--------- -----------
Net change in cash and cash equivalents (129,000) (11,000)
Cash and cash equivalents at beginning of the period 130,000 42,000
--------- -----------
Cash and cash equivalents at end of the period $ 1,000 $ 31,000
========= ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- $ --
Income taxes -- --
Non-cash financing activity:
Conversion of debt for common shares 11,000 688,000
Discousnt of beneficial conversion on debt 215,000 686,000
Payment of Imperial loan debt -- 678,000
See Notes to Condensed Consolidated Financial Statements (unaudited).
5
TELYNX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of the
Company for the three months ended January 31, 2002 and 2001 have been prepared
on the same basis as the audited financial statements. In the opinion of
management, such unaudited information includes all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of this interim
information. Operating results and cash flows for interim periods are not
necessarily indicative of results for the entire year. Certain prior period
amounts have been reclassified to conform to the current period presentation.
Additionally, certain information and footnote disclosures normally included in
a full set of financial statements have been condensed or omitted pursuant to
the Securities and Exchange Commission rules and regulations. The information
included in this report should be read in conjunction with the Company's audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended October 31, 2001 previously filed with the
Securities and Exchange Commission.
The financial statements were prepared by management without a review, pursuant
to Statement on Auditing Standard Number 71, being performed by the Company's
Independent Accountants. The Company will file a Form 10-QA upon completion of
that review.
NOTE 2. NATURE OF BUSINESS
We design and market a line of software products and related services to
telecommunications service providers. Specifically, our software is designed to
be an integral part of the operations support system environment of
telecommunications service providers. Our software is designed to track
inventory, provision new telecommunications service, and provide a tool for
managing network bandwidth. While the software is designed to manage
telecommunications service provider networks, it can also be used to track and
manage any network. Our services relate to the implementation of our software
and the general consulting surrounding network management.
We have leveraged our relationship with key industry leaders such as Hewlett
Packard in order to gain penetration in the marketplace. Specifically,
individual long standing relationships in international markets have leveraged
business for us in the Middle East as well as the Far East. The first two years
of product revenue for us were derived in large part from these sources.
Additionally, we have made significant investments by participating in industry
forums such as the Telemanagement Forum to further our position in the domestic
market. These forums provide industry standards, direction, and catalyst
function to the market in general. Telynx has participated for two years in
these activities. In combination, these two strategies have leveraged our market
awareness. Our primary product is Telynx Version 2. We have sales and support
staff located in Dallas, Texas, the Washington, D.C. area, and London, England,
as well as representative offices in Asia (Kuala Lumpur, Malaysia) and the
Middle East (Cairo, Egypt and Saudi Arabia).
NOTE 3. DISCONTINUED OPERATIONS
On February 2, 1999, the Company transferred all of the issued and outstanding
stock of the discontinued healthcare subsidiaries (the "Subsidiaries") to
Imperial Loan Management Corporation ("Imperial"). The Company received no
proceeds from the transfer. Prior to the transfer, Imperial loaned $900,000 to
the Subsidiaries and Telynx, represented by a 10% note payable due February 1,
2000. There is a subsequent agreement allowing for interest to remain accruing
along with a monthly collection fee payable to Imperial. Imperial agreed to use
its best efforts to liquidate each of the Subsidiaries, settle outstanding
obligations and collect all amounts receivable. Upon liquidation of the
Subsidiaries and settlement of the outstanding indebtedness, Telynx is entitled
to receive one-half of the proceeds remaining after payment of Imperial's
expenses. The Company had received information from Imperial that $641,000 was
collected on the liquidation of the subsidiaries effective January 4, 2001. The
Company therefore changed its estimate of net asset value on the receivables to
$641,000. For the four months ended October 31, 2000, the Company recorded a
credit by decreasing the valuation allowance against the assets with an
offsetting $641,000 gain from disposal of discontinued operations on the income
statement. The Company considers the realization of the remaining assets to be
unlikely and the assets have been fully reserved. All other material obligations
of the Subsidiaries have been settled, including the Imperial loans which were
paid off effective January 4, 2001.
6
NOTE 4. NOTES PAYABLE
Convertible Notes Payable to Investors
- --------------------------------------
In July 2000, the Company entered into a Subscription Agreement, whereby up to
$17,000,000 principal amount of 6% convertible notes were offered for sale. The
notes have various maturities from August 31, 2002 to July 18, 2004. The notes
are subject to certain performance covenants and registration rights, as defined
in the Subscription Agreement. The notes are convertible into the Company's
Class A common stock on a conversion price that is the lower of (1) 85% of the
average of the three lowest closing prices for the Company's common stock quoted
on principal market for the last 30 trading days but not including the issue
date of the note or (2) 78% of the average of the three lowest closing prices
for the Company's common stock quoted on the principal market for the last 90
trading days prior to but not including the conversion date. Through October 31,
2001, $3,150,000 has been funded pursuant to this agreement. From November 1,
2001 to January 31, 2002, no monies have been received pursuant to this
agreement. Through January 31, 2002, $1,710,000 of principal with related
accrued interest has been converted to common stock. The notes convert at the
option of the holder and are subject to certain mandatory and optional
redemption, as defined. The agreement has been terminated and no further
investments will be made to the Company under this line.
Payable to Investor
- -------------------
On January 19, 2001, the Company issued $350,000 in principle amount of
convertible notes bearing interest at 8% which were converted into 8,000,000
shares of the Company's common stock at the holder's option during 2001. Also
during 2001, the Company received advances from the same subscriber of $250,000
which is convertible into approximately 5,714,000 shares of the Company's common
stock.
Current Convertible Notes Payable to Investors
- ----------------------------------------------
In the first three months ended January 31, 2002, the Company issued $215,000
principle amount of 5% convertible notes payable with maturities due within one
year. Through the three months ended January 31, 2002, $75,000 of principle has
been paid off. The notes have various maturities due by January 10, 2003. The
notes are subject to certain performance covenants and registration rights. The
notes are convertible into the Company's Class A common stock on a conversion
price that is the lower of (1) 80% of the average of the three lowest closing
prices of the common stock for the 30 trading days prior to but not including
the closing date, or (2) 80% of the average of the three lowest closing prices
for the common stock for the 30 trading days prior to but not including the
conversion date.
Notes Payable to Shareholders
- -----------------------------
We have notes payable to shareholders in the amount of $151,000 bearing an
interest rate at 7% per annum and notes payable in the amount of $312,000
bearing an interest rate at 8% per annum.
7
Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking Statements
This document contains forward-looking statements that involve risks and
uncertainties that could cause the results of Telynx to differ materially from
those expressed or implied by such forward-looking statements. These risks
include the timely development, production and acceptance of new products and
services and their feature sets; the challenge of managing asset levels; the
flow of products into third-party distribution channels; the difficulty of
keeping expense growth at modest levels while increasing revenues; risks
associated with the settlement of accounts payable claims; and other risks
detailed from time to time in Telynx' Securities and Exchange Commission
filings.
The words "anticipate," "believe," "estimate," "expect," "intend," "will,"
and similar expressions, as they relate to Telynx or its management team, may
identify forward-looking statements. Such statements reflect the current views
of Telynx with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. Telynx does not intend to update these
forward-looking statements.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended January 31, 2002 as compared to Three Months Ended January
31, 2001
Revenues. Revenues from operations increased approximately 500% from
$80,000 for the three months ended January 31, 2001 to $479,000 for the three
months ended January 31, 2002. The increase is mainly attributable to consulting
income of $462,000 to our customer in Saudi Arabia along with additional
maintenance and training revenues of approximately $17,000 to our existing
customers during the three months ended January 31, 2002, offset by $80,000 of
consulting, maintenance and license revenue during the three month period ending
January 31, 2001.
Cost of Revenues. Cost of revenues from operations increased to $95,000 for
the three months ended January 31, 2002 from minimal cost of revenue for the
three months ended January 31, 2001. The increase is mainly attributable to cost
incurred during the three months ended January 31, 2002 on products sold during
that quarter compared to the three months ended January 31, 2001 where the
limited revenue was picked up and all significant costs had been absorbed prior
to the three months ended January 31, 2001.
Sales and Marketing. Sales and marketing expenses decreased 86% from
$442,000 for the three months ended January 31, 2001 to $63,000 for the three
months ended January 31, 2002. The decrease of $379,000 is mainly representative
of salaries and benefits cost reduction of $249,000, reduction of recruitment
costs by $56,000, reduction of travel and entertainment expenses of $40,000, and
reduction of general office expenses of $34,000.
Services. Services expenses decreased 68% from $184,000 for the three
months ended January 31, 2001 to $59,000 for the three months ended January 31,
2002. The decrease of $125,000 is mainly attributable to salaries and benefits
cost reduction of $89,000, travel related cost reduction of $12,000, and other
general office expense reduction of $24,000.
Research and Development. Research and development expenses decreased 76%,
from $230,000 for the three months ended January 31, 2001 to $56,000 for the
three months ended January 31, 2002. The decrease of $174,000 is mainly
representative of salaries and benefits expense reduction of $128,000, travel
related cost reduction of $21,000, recruitment cost reduction of $11,000, and
other general office operating costs of approximately $14,000.
General and Administrative. General and administrative expenses decreased
51%, from $900,000 for the three months ended January 31, 2001 to $438,000 for
the three months ended January 31, 2002. The decrease of $462,000 is mainly
representative of decreased salaries and benefits expense of $362,000, reduction
of travel related costs of $34,000, reduction of outside professional services
of $40,000, and reduction of other general office expenses of approximately
$26,000.
8
Interest. Interest expense decreased from $682,000 for the three months
ended January 31, 2001 to $217,000 for the three months ended January 31, 2002.
The decrease is mainly attributable to a beneficial conversion feature of the
convertible notes and warrants issued on July 27, 2000 and effective December
31, 2000, in accordance with EITF's 00-27 and 98-5. The charge is the
amortization expense related to the discount recorded on the conversion feature
versus the fair market price.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's operating activities used cash of $236,000 during the three
months ended January 31, 2002 compared to a use of $859,000 for the three months
ended January 31, 2001. The primary reason for the use of cash in operating
activities in 2002 is the net loss of $449,000 offset by non-cash expenses of
$223,000 to equal $226,000. The adjusted net loss in operations of $226,000 is
further increased by $10,000 due to changes in assets and liabilities used in
operating activities.
During the three months ended January 31, 2002, the Company had no
investing activities as compared to the three months ended January 31, 2001 of
$13,000.
Net cash provided by financing activities of $107,000 during the three
months ended January 31, 2002 consist of proceeds from the issuance of
convertible debt of $181,000 and other items of $1,000 offset by cash payments
of $75,000 on convertible debt as compared to net cash provided by financing
activities of $861,000 during the three months ending January 31, 2001.
In the first three months ended January 31, 2002, the Company issued
$215,000 principle amount of 5% convertible notes payable with maturities due
within one year. Through the three months ended January 31, 2002, $75,000 of
principal of these notes have been paid off. The notes have various maturities
due by January 10, 2003. The notes are subject to certain performance covenants
and registration rights. The notes are convertible into the Company's Class A
common stock on a conversion price that is the lower of (1) 80% of the average
of the three lowest closing prices of the common stock for the 30 trading days
prior to but not including the closing date, or (2) 80% of the average of the
three lowest closing prices of the common stock for the 30 trading days prior to
but not including the conversion date.
The Company believes that its current negative operational cash flow will
be alleviated by increased sales. However, there can be no assurance that sales
will increase or additional capital will be available on terms favorable to us.
If adequate funds are not available to us, our operations would be impaired,
including any operational efficiencies to provide our client base with superior
services and performance. If we are unable to raise additional capital in the
future, we may not be able to continue as a going concern. As a result of the
above conditions, the Company's most recent audited financial statements
contained a going concern opinion.
9
Part II. Other Information
-----------------
Item 1. Legal Proceedings
-----------------
Telynx is a party to various litigation matters primarily
involved with vendors and arising out of the ordinary course of
business. Aggressive efforts are being pursued to defend or
otherwise resolve the claims and any pending litigation.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
None
10
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 25, 2002
Telynx, Inc.
/s/ Kent J. Van Houten
- ----------------------
Kent J. Van Houten
Vice President of Finance and Chief Financial Officer
(Principal Financial Officer)
11