UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-QSB
(MARK ONE)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF EXCHANGE ACT
COMMISSION FILE NUMBER 000-31213
TEK DIGITEL, INC.
-----------------
(Name of small business issuer as specified in its charter)
WYOMING 84-1465503
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
ADDRESS
20030 CENTURY BLVD., SUITE 201
GERMANTOWN, MARYLAND 20036
(Address of principal executive offices)
(301) 916-7600
(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 31, 2001, 24,954,500 shares of Common Stock were issued and
outstanding.
Transitional Small Business Disclosure Format (check one): |_| Yes |X| No
TEK DIGITEL, INC.
FORM 10-QSB
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000...............2
Consolidated Statement of Operations for the Three Months Ended
March 31, 2001 and 2000..........................................................3
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2001 and 2000.......................................................4
Notes to Consolidated Financial Statements...........................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................13
Item 2. Changes in Securities and Use of Proceeds...........................................13
Item 3. Defaults Upon Senior Securities.....................................................13
Item 4. Submission of Matters to a Vote of Security Holders.................................13
Item 5. Other Information...................................................................13
Item 6. Exhibits and Reports on Form 8-K....................................................13
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
TEK DIGITEL CORPORATION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, March 31,
2000 2001
----------- -----------
Assets
Cash $ 885,297 $ 377,513
Accounts receivable, net 42,032 600,659
Inventory 508,118 488,165
Prepaid expenses and other current assets 88,417 81,684
----------- -----------
Total Current Assets 1,523,864 1,548,021
Property and equipment, net 93,361 94,541
Other assets 144,783 132,279
----------- -----------
$ 1,762,008 $ 1,774,841
=========== ===========
Liabilities and Stockholders' Equity
Accounts payable $ 352,154 $ 740,551
Accrued expenses 239,440 360,260
Unearned revenue 92,229 23,125
----------- -----------
Total Current Liabilities 683,823 1,123,936
----------- -----------
Commitments and Contingencies -- --
Stockholders' Equity:
Preferred Stock, no par value, 20,000,000 shares authorized, of
which 2,100,000 has been designated as convertible Series A voting preferred
stock. At both December 31, 2000 and March 31, 2001, 2,066,667 shares of
convertible Series A voting preferred stock were issued and outstanding 435,798 435,798
Common stock no par value, 50,000,000 shares authorized, 24,956,500
shares issued and outstanding at December 31, 2000 and March 31, 2001. 6,908,788 6,986,528
Other - stock options 715,583 715,583
Deferred compensation (145,557) (117,840)
Accumulated deficit (6,836,427) (7,369,164)
----------- -----------
Total Stockholders' Equity 1,078,185 650,905
----------- -----------
$ 1,762,008 $ 1,774,841
=========== ===========
See accompanying notes to the consolidated financial statements.
2
TEK DIGITEL CORPORATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
March 31,
2000 2001
------------ ------------
Product sales revenue $ 150,720 $ 1,077,544
Operating expenses:
Cost of sales 103,555 831,880
Sales and marketing 146,758 182,214
General and administrative 372,333 266,649
Research and development 289,556 338,953
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Total operating expenses 912,202 1,619,696
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Loss from operations (761,481) (542,152)
Other income -- 9,415
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Net loss $ (761,481) $ (532,737)
============ ============
Net loss per share:
Basic and diluted $ (0.05) $ (0.02)
============ ============
Weighted average common shares
Outstanding 14,528,305 24,956,500
============ ============
See accompanying notes to the consolidated financial statements.
3
TEK DIGITEL CORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
------------------------------------
2000 2001
----------- -----------
Cash Flows From Operating Activities
Net loss $ (761,482) $ (532,737)
Adjustments to reconcile net loss to net cash
Provided by operating activities:
Depreciation 9,911 9,699
Amortization of deferred compensation 43,921 27,717
Donated services from a shareholder -- 77,740
Changes in operating assets and liabilities
Increase in accounts receivables (73,004) (558,627)
Decrease in inventory 34,188 19,953
Decrease in prepaids and other current assets 16,003 6,733
Decrease in other assets 15,400 12,504
(Decrease) increase in accounts payable (33,889) 388,397
Increase in accrued expenses 4,410 120,820
Decrease in unearned revenue (17,900) (69,104)
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Net cash used in operating activities (762,442) (496,905)
----------- -----------
Cash Flows From Investing Activities
Purchases of property and equipment (24,838) (10,879)
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Cash Flows From Financing Activities
Proceeds from the exercise of stock purchase
Warrants 1,000,000 --
Proceeds from exercise of stock options 500 --
----------- -----------
Net cash provided by financing activities 1,000,500 --
----------- -----------
Net change in cash and cash equivalents 213,220 (507,784)
Cash at beginning of period 477,682 885,297
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Cash at end of period $ 690,902 $ 377,513
=========== ===========
See accompanying notes to the consolidated financial statements.
4
TEK DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
1 - BASIS OF PRESENTATION
Tek DigiTel Corporation, Inc. (the "Company") is a state-of-the-art technology
company that develops and manufactures internet access devices used by service
providers to offer integrated voice/data services to the small and medium
business and SOHO marketplaces. In addition, the Company has developed the
software and services necessary to help them deploy and manage these devises and
offer sophisticated voice services to their customers.
The Company was formed as ATC Group LLC in December 1995. In July 1998, the
Company merged with and into ATC Group Inc. a wholly owned subsidiary of
Diversified Technologies, Inc. (Diversified). The consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiary,
ATC Group, Inc (ATC Inc.). Intercompany accounts and transactions have been
eliminated in consolidation.
In the opinion of the Company's management, the interim consolidated financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The interim consolidated financial
statements should be read in conjunction with the Company's December 31, 2000
audited financial statements included with the Company's filing on Form 10-KSB
filed with the Securities and Exchange Commission on March 29, 2001. The interim
operating results are not necessarily indicative of the operating results for
the full fiscal year.
As shown in the accompanying financial statements, the Company has incurred
operating losses since its inception, and has accumulated a deficit of
$7,369,164 at March 31, 2001. The Company's continued existence is dependent
upon its ability to develop profitable operations, successfully market and sell
itsproducts and obtain additional financing to fund future operations.
Management is currently attempting to secure a line of credit from a bank,
working capital advance from one of its business partners and additional equity
investments. Management believes that if any of its attempts are successful, the
proceeds from these transactions would enable the Company to continue as a going
concern through December 31, 2001.
2. - INVENTORY
Inventories are stated at the lower of market, or cost, utilizing the first-in,
first-out method. At March 31, 2001 and December 31, 2000 inventory consisted of
the following.
2001 2000
-------- --------
Raw Materials $294,304 $163,514
Work in process 28,638 213,300
Finished goods 165,223 131,304
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$488,165 $508,118
-------- --------
5
3. - RELATED PARTY TRANSACTION
During the three months ended March 31, 2001, a shareholder of the Company
provided iGATE assembly services at no cost to the Company. The fair market
value of such services was approximately $77,000, which has been recorded as a
shareholder contribution in the accompanying financial statements.
4. - MAJOR CUSTOMER
During the three months ended March 31, 2001, 87% of our product sales were made
to a single customer. At March 31, 2001, 93% of our accounts receivable was due
from this customer.
6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements made by our management may be considered to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Act of 1995. Forward-looking statements are based on various factors
and assumptions that include known and unknown risks and uncertainties. The
words "believe," "expect," "anticipate" and "project," and similar expressions
identify forward-looking statements, which speak only as of the date the
statement was made. Such statements may include, but not be limited to,
projections of revenues, income or loss, expenses, plans, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
results could differ materially from those described in forward-looking
statements as a result of the risks set forth in the following discussion, among
others.
Our financial statements have been presented on a going concern basis, which
contemplates the realization of assets and settlement of liabilities and
commitments in the normal course of business. The Company has experienced losses
since its inception. Although we expect operating results to improve, there can
be no assurances that we will not experience adverse results of operation in the
future.
On the following pages we present management's discussion and analysis of
financial condition and results of operations. You should read this information
in conjunction with our consolidated financial statements and notes included in
the Form 10-KSB. The following financial review is presented on a consolidated
basis and is intended to provide a comparison of our financial performance for
the three-month periods ended March 31, 2001 and 2000.
OVERVIEW
TEK DigiTel Corporation is a Wyoming corporation with a limited operating
history. We are a hardware technology equipment developer that provides
integrated communication solutions for the small to medium size enterprise and
small office/home marketplace. By integrating traditional PBX technology with
data routing, the latest advances in VoIP technology and sophisticated Linux
based server technology, we are producing Internet access devices used by the
new generation of service providers to deploy integrated voice, fax and data
services to their customers. In addition, the Company has developed the software
and services necessary to help them deploy and manage these devises and offer
sophisticated voice services to their customers.
We have a limited operating history on which to base an evaluation of our
business and prospects. Similar to other companies in their early stages of
development, and particularly for companies in the rapidly evolving technology
industry, our prospects must be considered in light of the risks frequently
encountered. We set forth what we believe to be the risks in the "Factors That
May Affect Future Results" section included in our Management Discussion and
Analysis of Financial Condition and Result of Operations of our Form 10-KSB we
filed with the Commission on March 29, 2001, to which the reader is referred. To
address these risks, we must, among other things, successfully continue to
develop and execute our business and marketing plan, continue to expand and
otherwise improve our products, and increase our operating infrastructure. We
can provide no assurances that we will be successful in addressing the risks we
face, and the failure to do so could prevent us from being a profitable
operation.
7
The following table lists in chronological order, some of the major milestones
we have accomplished during the evolution of our company and our products. The
table is not meant to be all-inclusive, but merely serves to highlight our
progress.
Date Major Milestone
December 1995 Formed ATC LLC, the predecessor company to TEK DigiTel.
February 1998 Completed the prototype of our router product. Installed, for evaluation and alpha field trial purposes,
our first V-Server iGATE product, in Mongolia.
July 1998 ATC LLC merged with Diversified Technologies, Inc., changed its name to TEK DigiTel and became a public
company listed on the OTC BB.
February 1999 Completed our first prototype of the V-Server iGATE product. Installed, for evaluation and field trial
purposes, our first V-Server iGATE product in Asia.
March 1999 First beta test of the iGATE product initiated in North America, Canada and several European countries.
May 1999 Began sales of our V-Server products.
July 1999 Entered into a business relationship with ePHONE in which ePHONE agreed to purchase 500 of our iGATE
products.
October 1999 Launched the Pronto service package to help ISP's and CLEC's deploying iGATE massively.
November 1999 Beta test initiated in Asia including Taiwan, Hong Kong, China and New Zealand.
September 2000 Beta test completed in most of the countries participating. Announced OfficeBuilder product with embedded
PBX function.
July 2000 Latest software version released. Ready for mass deployment of iGATE product.
August 2000 Filed SEC Form 10-SB in order to become an SEC-reporting company and to regain our listing on the OTC BB.
August 2000 Delivered the last of the 500 iGATES ordered by ePHONE in July 1999.
August 2000 ePHONE placed purchase order for 1,000 additional iGATES.
September 2000 Arelnet placed an order for 5,000 iGATES. As of the end of March 2001, we have delivered approximately
900 iGates to Arelnet under this order. We anticipate the remaining units being purchased by Arelnet
during 2001 and 2002.
January 2001 Introduced a new version of V-Server product, the iPRO, which is equipped with four voice ports.
January 2001 Formed a strategic alliance with Formosa Industrial Computing to work together in the development of an
advanced IP phone.
8
January 2001 We received a new purchase order for 3,200 iGATES/iPROs from Arelnet. As of the end of March 2001, we
have delivered approximately 2,000 of these units, and anticipate delivering the remaining 1,200 units
during the third quarter of 2001.
February 2001 Began beta testing of TEKVPN by Formosa Industrial Computing, our"turn key" voice VPN solution.
March 2001 Successfully completed beta testing of the iPRO and began production and delivery of the iPRO to the
customers.
April 2001 Arelnet placed an order for 500 iGATES.
May 2001 Received an order for 500 iPROs from IPFon of Taiwan.
We have incurred net operating losses in each fiscal quarter since our
inception; and, we expect to incur additional losses for the foreseeable future,
primarily as a result of our building the corporate infrastructure necessary for
continued product development and enhancement, for increased sales and marketing
efforts and for research activities. As of March 31, 2001, we had accumulated a
deficit of approximately $7,369,000.
We believe that our success depends, in large part, on our ability to create
market awareness and acceptance for our products, raise additional operating
capital to grow operations, build technology infrastructures and continue
product research and development.
Currently, our primary source of revenues is from the sale of our V-Server
products. We are also investigating other applications for the V-Server products
and marketing channels. The principal end-users of our products and solutions
are small and medium enterprise users. We strategically partner with Internet
service providers, including traditional and new telecommunications carriers, in
order to distribute our products to the end-users. We also maintain a direct
sales organization, OEM relationships and value added resellers for sales
targets other than service providers.
Since the introduction of our V-Server products to market, we have generated a
significant percentage of our revenues through several of our strategic
partners, including ePHONE, Centrecom and Arelnet. We are currently highly
dependent upon the sales of our products to these partners.
We believe that our current dependency on a few customers is due to the recent
introduction of our V-Server products to market. We are planning to restructure
and expand our direct sales force and develop an indirect sales channel,
targeting value-added resellers ("VARs") and original equipment manufacturers
("OEMs"). We also plan to continue to expand our global distribution channels.
We currently have strategic alliances with Arelnet, Centrecom, ePHONE,
DialDigital and Centrepoint Technologies; and, we plan to pursue additional
relationships with other companies in the future.
The market for our products and solutions is in the early stages of development
and is characterized by rapid technological change, evolving industry standards,
changes in end-user requirements, intense competition created by more
established industry participants and frequent new product introductions and
enhancements. As is typical in the case of new and rapidly emerging
technologies, demand and market acceptance are subject to a high level of
uncertainty. Broad acceptance of our products by customers and end-users is
critical to our success and ability to generate revenues.
9
RECENT DEVELOPMENTS
On March 23, 2001, we signed a non-binding Memorandum of Agreement with Arelnet
to enter into an OEM arrangement whereby Arelnet may purchase up to 150,000
units of our V-Server products at a predetermined fixed price per unit. As an
incentive for Arelnet to purchase our V-Server products, the agreement also
grants Arelnet warrants to purchase the Company's common stock based on
performance milestone as follows:
Number of Units Number of Warrants Warrant Price
- ----------------- ------------------ -------------
First 5,000 units 1.6 Million shares $0.70
Next 10,000 units 1.6 Million shares $0.90
Next 15,000 units 1.6 Million shares $1.10
Next 20,000 units 2.0 Million shares $1.20
Next 25,000 units 1.6 Million shares $1.30
Next 25,000 units 1.6 Million shares $1.40
Next 50,000 units 2.0 Million shares $1.50
During the three months ended March 31, 2001, the first prototype of the PBX
version of the OfficeBuilder product, a co-development with Centrepoint
Technologies, is currently being tested in a lab setting, and we anticipate this
product will be field beta tested in the second quarter of 2001.
In January 2001, we started working jointly with Formosa Industrial Computing
(FIC) Corporation, a technology company in Taiwan, to develop an advanced IP
phone system (iPOTS). The iPOTS is a stand-alone Internet accessible telephone
set. It has been designed to integrate voice/data devices for the small, and
medium size business user and can also be connected to a single platform for
both voice and data applications. The Company is responsible for the design of
the software architecture and Formosa Industrial Corporation's focus is on
hardware development and manufacturing. We plan to introduce iPOTS to the market
by early 2002.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 Compared with Three Months Ended
- ------------------------------------------------------------------
March 31, 2000
- --------------
We recorded revenues from product sales of $ 1,077,544 for the three months
period ended March 31, 2001. This represented a significant increase in product
sales over the period ended March 31, 2000 of $ 150,720. We have sold 2,560
units during three months ended March 31, 2001 to our customers. This
represented a significant increase over the 213 units we sold during the three
months ended March 31, 2000.
During the three months ended March 31, 2001, the majority of our product sales
were attributable to a single customer, Arelnet. As discussed above, we are
working to expand our sales and marketing efforts and our global distribution
channels.
Our cost of product sales for the three months ended March 31, 2001 was $831,880
compared to $103,555 for the period ended March 31, 2000. Our cost per unit
decreased during the three months ended March 31, 2001 compared to the three
months ended March 31, 2000 due to improvements in our manufacturing process,
increase in the size of our production lots and the introduction of iPRO, which
requires substantially less materials to produce. However, our gross margin
decreased from 31% to 23%. The decrease in gross margin is due to an overall
decrease in the per unit sale price. We are currently experiencing a lower sales
price in order to satisfy our limited number of customers and in an attempt to
expand our customer base. In addition, we believe that we will continue to
experience cost savings from the purchase of larger quantities of component
parts. In the future, we expect our gross profit margins to be approximately
30%, which is in line with typical
10
gateway/router hardware margins. Currently, we use a local manufacturer to
produce our iPRO units. We have entered into agreements with Formosa Industrial
Computing to also manufacture our products in Taiwan.
Since we use contract manufacturers for the assembly of our products, the focus
of our employees and equipment is not on our manufacturing process but on
research and development and quality control. We have used several manufacturers
in the past and believe there are many manufacturers that can assemble our
products. We do not have any fixed or long- term agreements for the assembly of
our products. The contract manufacturer charges us on a per unit basis for
assembly and quality control functions, which we include in our costs of sales.
We expect these charges, on a per unit basis, will continue to decrease, as size
of each manufacturing batch we have assembled increases.
Our sales and marketing expenses for the three months ended March 31, 2001 and
2000 were $182,214 and $146,758, respectively. During late 2000, we closed our
sales and marketing location in Canada. This included the termination of our
consultants and employees in Canada and we relocated our sales and marketing
function to our corporate headquarters in Germantown, Maryland. We believe that,
by reorganizing our sales and marketing function and co-locating it in our
corporate offices, we will improve communications between our executives and our
sales and marketing personnel, improve sales of our products, and reduce travel
and other related expenses that we had incurred due to the geographic distances.
The increase in sales and marketing expenses during the three months ended March
31, 2001 is due to the write off of demo units supplied to current and potential
customers who have exceeded the grace period of 90 days at which point the units
must be returned or paid for.
Our general and administrative expenses for the three months ended March 31,
2001 and 2000 were $266,649 and $372,333, respectively. The decrease in general
and administrative expenses during 2001 was due to the higher costs during 2000
related to legal and accounting fees incurred in preparation of our Form 10-SB.
We expect overall, that our general and administrative costs will stay
consistent with the period ended March 31, 2001 throughout 2001.
Our research and development expenses for the three months ended March 31, 2001
and 2000 were $338,953 and $289,556, respectively. We are continuing to expend
development efforts on our V-Server products. In early 2001, we completed
our four-port iPRO and sold approximately 1800 iPRO units to one of our
customers. We anticipate that research and development expenses will increase in
future periods as we expand our existing research and development efforts in
order to further enhance our existing products and develop new products.
We did not make any provision for federal or state income taxes for the period
from our inception due to our operating losses. At March 31, 2001 and 2000, we
had net operating loss carry forward for income tax purposes. A valuation
allowance has been established and, accordingly, no benefit has been recognized
for our net operating losses and other deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have primarily financed our operations through the sales
of equity securities in private placements; and, since that date through March
31, 2001, we have raised approximately $8,200,000. As of March 31, 2001, we had
$377,513 in cash. We currently have no bank loans or any available lines of
credit for our use but are negotiating to establish a line of credit.
Net cash used in operating activities during the three months ended March 31,
2001 and 2000 was $496,905 and $762,442, respectively. The net cash used in
operating activities was related to our expansion and funding of our research
and development and sales and marketing activities as well as our corporate
infrastructure.
Net cash used in investing activities during the periods ended March 31, 2001
and 2000 was $10,879 and $24,838, respectively, for the purchase of computer and
test equipment and office furniture.
11
We did not generate any cash from financing activities during the period ended
March 31, 2001. During the period ended March 31, 2000, we received $1,000,000
from exercise of stock purchase warrants and $500 from exercise of stock options
by employees for the purchase of 5,000 shares of common stock.
We have no material commitments other than those under office and equipment
operating leases. As a result of the expansion of our research and development
and sales and marketing activities, capital expenditures may increase in future
periods primarily due to the purchase of computer and test related equipment. We
anticipate that, based on our present plans and assumptions, our current cash
balances plus potential external financing as described previously will be
sufficient to enable us to sustain our current and planned operations to the end
of this fiscal year . If our estimates or assumptions prove to be incorrect, we
may require additional capita sooner. Additional funding, whether obtained
through public or private debt or equity financing or from strategic alliances,
may not be available when needed or may not be available on terms acceptable to
us. Failure to secure additional financing, if and when needed, may have a
material adverse effect on our business, financial condition and results of
operations.
We are currently generating positive cash flow from the sale of our iPRO
products before overhead allocation. As we expand our sales and marketing
efforts to sell our V-Server family of products and services, we have begun to
generate additional revenues and believe that our revenues will continue to
increase as we implement our business plan.
We will, until we become financially self-sufficient, need to moderate our
activities to fit the funds we have available. We anticipate that we will need
to obtain additional financing during 2001, either in the form of stock sales or
debt in order to fund all of our equipment purchases and operating capital
requirements for at least the remainder of the year.
We currently lease, and plan to continue to lease, all facilities. During
remainder of 2001, we anticipate that our significant capital expenditure will
be approximately $20,000 for laboratory and diagnostic equipmentand $100,000 for
prototypes of our products under development.
12
PART II - OTHER INFORMATION
Item 1. Legal proceedings - None.
Item 2. Changes in securities and use of proceeds - 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
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TEK DigiTel Corporation
(Registrant)
By: /s/ Enghe Chimood Date: March 15, 2001
-----------------------------------
Enghe Chimood, President
and Chief Executive Officer
13