SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
Commission File Number: 000-27867
TECHALT, INC.
(Exact name of small business issuer as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
87-0533626
(IRS Employer Identification Number)
3311 N. Kennicott Ave., Suite A
Arlington Heights, IL 60004
(Address of principal executive offices)(Zip Code)
(847) 870-2601
(Registrant's telephone no., 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 [ ]
The number of shares of the Company's common stock outstanding on June 30, 2005:
13,365,972
TECHALT, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Item 2 Management's Discussion and Analysis or Plan of Operation
Item 3 Controls and Procedures
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits
SIGNATURES
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TECHALT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30,
2005
---------------
Current assets
Cash and cash equivalents $ --
Accounts receivable 580,248
Inventory 395,183
Prepaid expenses and other current assets 62,167
---------------
Total current assets 1,037,598
Property and equipment, net 245,647
Other assets 35,928
---------------
Total assets $ 1,319,173
===============
Current liabilities
Excess of checks issued over bank balance $ 18,777
Notes payable to bank collateralized by accounts receivable 628,094
Accounts payable 1,059,805
Accounts payable - related parties 346,670
Accrued liabilities 434,039
Deferred revenue 287,623
Current portion of notes payable to bank 26,672
Advances due to officer 126,399
Current portion of note payable due to affiliate of shareholder 650,000
Accrued preferred stock dividends 124,600
---------------
Total current liabilities 3,702,679
Notes payable to bank, net of current portion 16,921
Note payable to affiliate of shareholder, net of current portion 500,000
---------------
Total liabilities 4,219,600
---------------
Commitments and contingencies (Note 3)
Series A Preferred stock subject to potential recission (Note 4) 4,816,260
---------------
Stockholders' Deficit
Preferred stock, $0.001 par value, 100,000,000 shares authorized, of which,
4,820,000 million are authorized and designated as Series A Preferred Stock,
4,816,260 shares issued and outstanding, liquidation preference of $9,632,520 --
Common stock and additional paid-in capital, $0.001 par value,
500,000,000 shares authorized, 13,307,719 shares issued and outstanding 13,306
Common stock issuable (169,577 shares) 170
Additional paid-in capital 397,980
Deferred stock-based consulting (125,619)
Accumulated deficit (8,002,524)
---------------
Total stockholders' deficit (7,716,687)
---------------
Total liabilities and stockholders' deficit $ 1,319,173
===============
See accompanying notes to condensed consolidated financial statements.
3
TECHALT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue $ 1,318,938 $ 64,760 $ 2,315,320 $ 123,849
Cost of goods sold 411,517 59,850 901,040 84,710
------------ ------------ ------------ ------------
Gross profit 907,421 4,910 1,414,280 39,139
------------ ------------ ------------ ------------
Operating expenses
General and administrative 856,056 205,145 1,611,428 365,080
Research and development 568,725 26,153 1,038,653 35,583
Business development 639,688 33,456 1,096,685 67,558
------------ ------------ ------------ ------------
Total operating expenses 2,064,469 264,754 3,746,766 468,221
------------ ------------ ------------ ------------
Loss from operations before interest (1,157,048) (259,844) (2,332,486) (429,082)
Interest expense, net (15,855) -- (29,127) --
------------ ------------ ------------ ------------
Net loss (1,172,903) (259,844) (2,361,613) (429,082)
Preferred stock dividends (59,251) -- (112,075) --
------------ ------------ ------------ ------------
Net loss attributable to holders of common stock $ (1,232,154) $ (259,844) $ (2,473,688) $ (429,082)
============ ============ ============ ============
Basic and diluted net loss per share
attributable to holders of common stock $ (0.09) $ (0.03) $ (0.18) $ (0.04)
============ ============ ============ ============
Weighted average shares used
in computing loss per share 13,477,296 9,544,000 13,418,033 9,544,000
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
4
TECHALT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
--------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net loss $(2,361,613) $ (429,082)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation expense 56,425 7,759
Amortization of deferred stock-based compensation 177,573 --
Decrease in provision for allowance for doubtful accounts (28,000) --
Changes in operating assets and liabilities:
Inventory (186,383) --
Accounts receivable (455,929) (16,439)
Prepaid expenses and other current assets 32,310 --
Accounts payable and accounts payable - related party 815,688 345,010
Accrued liabilities 187,540 (4,308)
Deferred revenue (763,657) --
----------- -----------
Net cash used in operating activities (2,526,046) (97,060)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant & equipment (181,844) (2,759)
----------- -----------
Net cash used in investing activities (181,844) (2,759)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in excess of checks issued over bank balance 18,777 (13,137)
Proceeds from notes payable collateralized by accounts receivable, net 628,094 --
Principal payments on notes payable to bank (10,608) --
Proceeds from sale of preferred stock 881,260 --
Increase (decrease) in advances due to officer (12,381) 127,994
----------- -----------
Net cash provided by financing activities 1,505,142 114,857
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,202,748) 15,038
Cash and cash equivalents, beginning of period 1,202,748 --
----------- -----------
Cash and cash equivalents, end of period $ -- $ 15,038
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 35,846 $ --
=========== ===========
Cash paid for income taxes $ -- $ --
=========== ===========
Non-cash investing and financing activities
Common stock issued for preferred stock dividends $ 13,860 $ --
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
TECHALT, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENT - As described in Note 4, in July 2005, Company management became
aware of the possibility that holders of the Company's Series A Preferred Stock
may be entitled to certain recission rights. As a result, the Company's December
31, 2004 consolidated balance sheet will be restated to reclassify the gross
proceeds received from the sale of these securities out of stockholders' equity,
where originally recorded, to the balance sheet classification "Series A
Preferred Stock Subject to Recission" in accordance with Emerging Issues Task
Force Topic D-98, Classification and Measurement of Redeemable Securities. The
consolidated statement of stockholders' equity for the year ended December 31,
2004 will similarly be restated for this reclassification. There was no effect
on the Company's consolidated statements of operations or of cash flows. The
Company is in the process of filing amendments to its December 31, 2004 Annual
Report on Form 10-KSB and March 31, 2005 Quarterly Report on Form 10-QSB (for a
similar adjustment) relating to this restatement.
Additionally, the Company is restating its December 31, 2004 and March 31, 2005
consolidated financial statements included in the aforementioned Form 10-KSB and
Form 10-QSB amendments to be filed for the revaluation of warrants issued, which
had been initially recorded using values determined utilizing the Black-Scholes
valuation model with a volatility factor of 0%, and have been revised utilizing
a volatility factor of 71%, determined based on average volatilities of other
similar entities. The effect of the change in volatility factor resulted in an
increase in settlement expense of $172,500, an increase in general and
administrative expense of $32,025 (relating to amortization of increased
deferred stock-based consulting), an increase in deferred stock-based consulting
of $181,475, and an increase in additional paid-in capital of $395,000 as of and
for the year ended December 31, 2004. The net effect on the Company's December
31, 2004 financial statements increased net loss by $213,525. The effect of the
restatement also increased general and administrative expense by $51,000 and
decreased deferred stock-based consulting by $51,000 as of and for the three
months ended March 31, 2005. There was no effect on total stockholders' deficit
or cash flows.
ORGANIZATION - TechAlt, Inc. ("TechAlt") was organized under the laws of the
State of Nevada in 1994, and effective October 15, 2004, changed its name from
Dendo Global Corp. ("Dendo") to TechAlt. As more fully described in Note 2, in
December 2004, Technology Alternatives, Inc. ("TAI") became a wholly-owned
subsidiary of TechAlt. The transaction, in which a wholly-owned subsidiary of
TechAlt, TechAlt Acquisitions, Inc., was merged with and into TAI, is accounted
for as a recapitalization of TAI and combination of entities under common
control. Inasmuch as the former TAI shareholders own a majority of TechAlt
common stock after the merger and obtained management control, TAI is considered
to be the acquiring corporation for accounting purposes. The consolidated
financial statements after the transaction consist of the historical financial
statements of TAI, together with the operations of TechAlt from August 24, 2004,
the date of the License Agreement, as described in Note 2.
DESCRIPTION OF BUSINESS - TechAlt and its subsidiary, TAI, (together, the
"Company") is engaged in the sale of portable wireless communications solutions
used by emergency first responders for interagency interoperability,
communication and collaboration used in Homeland security, emergency medical and
disaster response. Sales of these products are generally made to an independent
contractor hired by local, state or federal agencies.
BASIS OF PRESENTATION AND GOING CONCERN - The accompanying consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles in the United States of America, which contemplate
continuation of the Company as a going concern. The Company has incurred net
losses since inception, During the six months ended June 30, 2005, the Company
incurred a net loss of $2,361,613, and its operating activities used cash of
$2,526,046, and has a working capital deficit of $2,665,081 and a stockholders'
deficit of $7,716,687 at June 30, 2005. In addition, as discussed in Note 3, a
creditor, an affiliate of a greater than 10% shareholder, has provided notice of
default to the Company and demanded possession of collateral, which includes
substantially all Company assets, and as discussed in Note 4, certain investors
may have recission rights. These factors and the company cash position, among
others, raise substantial doubt about the ability of the Company to continue as
a going concern. The condensed consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
Management's plans include, among other things, additional equity or debt
financing, the expansion of bank and vendor financing and cash flows generated
from sales activities all of which, management believes will provide the Company
the ability to continue as a going concern.
BASIS OF PRESENTATION OF INTERIM FINANCIAL STATEMENTS - The accompanying
unaudited condensed consolidated financial statements reflect, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of financial position, results of operations
and cash flows for each period presented in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-QSB and of Regulation
SB. Accordingly, information and certain note disclosures normally included in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted from the accompanying statements. Operating results for interim periods
in 2005, are not necessarily indicative of future results that may be expected
for the year ending December 31, 2005. These interim condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and related notes thereto, which are included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2004 (the
"2004 Form 10-KSB") and Note 1 "RESTATEMENT" above.
6
PRINCIPLES OF CONSOLIDATION - The condensed consolidated financial statements
include the accounts of TechAlt, Inc. and its wholly-owned subsidiary. All
significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and 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. Significant estimates in 2004
and 2005 include valuation of accounts receivable, valuation of inventory,
valuation of acquired intangible assets, valuation of capital stock and warrants
issued for services and income taxes, including the valuation of deferred tax
assets. Actual results could differ from those estimates.
REVENUE RECOGNITION - The Company recognizes revenue when there is persuasive
evidence of an arrangement, products have been delivered or services have been
provided to the customer, the sales price is fixed or determinable, and
collectibility is reasonably assured. Delivery terms are generally FOB shipping
point, typically the Company's facility. Amounts billed in advance of revenue
recognition are included in deferred revenue.
Revenue from hardware sales is recognized when the product is shipped to the
customer and when there are no unfulfilled obligations that affect the
customer's final acceptance. Revenue from sales of software licenses and
software maintenance subscriptions, which to date have been insignificant, are
recognized on a straight-line basis over the subscription term.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs, which are
comprised primarily of compensation, consulting costs, supplies, materials and
related costs, are expensed as incurred. The value of acquired In-process
Research and Development is charged to expense on the date of acquisition if the
acquired intellectual property has not attained "technological feasibility" as
of that date.
STOCK BASED COMPENSATION - The Company accounts for stock options issued to
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 cost is measured on the date of grant as
the excess of the current market price of the underlying stock over the exercise
price. Such compensation amounts are amortized over the respective vesting
periods of the option grant. The Company adopted the disclosure provisions of
SFAS No. 123 "Accounting for Stock-Based Compensation," and SFAS No. 148
"Accounting for Stock Based Compensation - Transition and Disclosure," which
permits entities to provide pro forma net income (loss) and pro forma earnings
(loss) per share disclosures for employee stock option grants as if the
fair-valued based method defined in SFAS No. 123 had been applied. If the
Company recorded stock-based compensation expense in accordance with SFAS No.
123, the net loss for the three and six month periods ended June 30, 2005 would
have increased by approximately $1,186,000 from $1,172,903 and $2,361,613 to a
pro forma net loss of $2,358,903 and $3,547,613, respectively. Basic and diluted
net loss per share attributable to holders of common stock would have increased
from $0.09 and $0.18 to $0.18 and $0.26 on a pro forma basis for the three and
six months ended June 30, 2005, respectively.
LOSS PER SHARE - The computation of net loss per share attributable to holders
of common stock is based on the weighted average number of shares outstanding
during the period presented in accordance with Statement of Financial Accounting
Standards No. 128 "Earnings Per Share". Net loss is increased by preferred stock
dividends (paid or payable) in the computation of net loss per share
attributable to holders of common stock. Dilutive loss per share is not
presented as the effects of including common stock equivalent shares, which
there were none during the six months ended June 30, 2004, would be
anti-dilutive for all periods presented. Computations of net loss per share for
the three and six months ended June 30, 2005, exclude 9,632,520 common shares
potentially issuable pursuant to terms of outstanding Series A Convertible
Preferred Stock, 1,150,000 common shares potentially issuable pursuant to a
convertible promissory note and 12,915,772 common shares issuable upon exercise
of outstanding warrants. Such common stock equivalents may dilute future
earnings per share.
RECENT ACCOUNTING PRONOUNCEMENTS - In December 2004, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 123(R) that will require compensation
costs related to share-based payment transactions to be recognized in the
financial statements. With limited exceptions, the amount of compensation cost
will be measured based on the grant-date fair value of the equity or liability
instruments issued. In addition, liability awards will be remeasured each
reporting period. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. Statement 123(R) replaces
FASB Statement No. 123 and supercedes APB Opinion No. 25, and is effective as of
the beginning of the first annual reporting period that begins after June 15,
2005.
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections", (SFAS 154"). SFAS 154 replaces
APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements," and changes the requirements for the
accounting for and reporting of a change in accounting principle. The Company is
required to adopt SFAS 154 in 2007. The Company's results of operations and
financial condition will only be impacted by SFAS 154 if the Company implements
changes in accounting principles that are addressed by the standard or correct
accounting errors in future periods.
RECLASSIFICATIONS - Certain amounts in 2004 financial statements have been
reclassified to conform with 2005 classifications.
NOTE 2 - AGREEMENT AND PLAN OF MERGER AND SETTLEMENT AGREEMENT
On December 15, 2004, TechAlt paid $650,000 to the former 45% owner of TAI
("Masanek"), which such payment then provided that certain documents and
agreements became effective pursuant to terms of an Escrow Agreement entered
into in November 2004 between TechAlt, TAI, Masanek and the former 55% owner of
TAI ("Solomon"). Material terms of the agreements and transactions occurring
subsequent to these payments are as follows:
7
Agreement and Plan of Merger- Pursuant to the Merger Agreement, all of the
shares of common stock of TAI (all of which were owned by Solomon and Masanek)
were exchanged for 9,544,000 shares of common stock of TechAlt. TechAlt
Acquisitions, Inc., a wholly-owned subsidiary of TechAlt, was merged with and
into TAI, with TAI becoming a wholly-owned subsidiary of TechAlt (the "Merger").
Upon consummation of the Merger, Solomon and Masanek together own approximately
83% of the voting common stock of the merged entity and obtained management
control and the shareholders of TechAlt prior to the License Agreement own
approximately 17%. The transaction, in which TechAlt Acquisitions, Inc. was
merged with and into TAI, is accounted for as a recapitalization of TAI and
combination of entities under common control as of the August 24, 2004 license
date and the Company is deemed to have issued 1,656,000 common shares to the
shareholders of TechAlt. Inasmuch as the former TAI shareholders own a majority
of TechAlt common stock after the merger and obtained management control, TAI is
considered to be the acquiring corporation for accounting purposes
Settlement Agreement - Pursuant to terms of the Settlement Agreement between
TechAlt and Masanek, among other things, (i) the License Agreement entered into
between TechAlt and TAI in August 2004 was rescinded, which rescission included
rescinding the 10,044,000 shares of TechAlt common stock issued pursuant to the
License agreement, (ii) TechAlt paid Masanek $650,000 cash, (iii) TechAlt and
Masanek entered into Sales, Consulting, Registration Rights, Right of First
Refusal and Escrow Agreements, (iv) TechAlt issued a Convertible Promissory Note
for $1,150,000 to Services by Designwise, Ltd. ("SBD"), a company owned by
Masanek, payable $650,000 one year from issuance and the remainder two years
from issuance subject to acceleration, as defined, based on capital raises, with
interest at 5%, and convertible into shares of TechAlt common stock on the basis
of $1.00 per share, and secured by substantially all assets of TechAlt, (v)
TechAlt issued warrants to Masanek for the right to purchase for a period of
five years 750,000 shares of TechAlt common stock for $1.00 per share with a
cashless exercise provision, (vi) TechAlt received from SBD the assignment of
all right, title and interests in certain intellectual property and inventory of
SBD relating to In-Car Based Communications Data Capture and Video Systems,
(vii) TechAlt paid $140,000 for the attorneys fees of Masanek, (viii) settlement
of certain claims made by Masanek against TechAlt and others in a lawsuit filed
in the Circuit Court of Cook County, Illinois, (ix) the Company entered into a 3
year sales agreement with a commitment for the Company to purchase from SBD
$1,250,000 of equipment inventory per year plus pay 6.25% to 6.75% royalties on
certain third party supplied goods, and (x) a consulting agreement for which the
Company will pay SBD $25,000 for the first four months and $6,250 per month for
the next 32 months plus other benefits. Also see Note 3 regarding communications
received from SBD in June and July 2005.
License Agreement - On August 20, 2004, Dendo and its then majority (52%)
shareholder and sole member of its board of directors entered into an
Intellectual Property License Agreement with Technology Alternatives, Inc.
("TAI"), which agreement (the "License Agreement") was consummated on August 24,
2004. Pursuant to the License Agreement, in exchange for the issuance of
10,044,000 shares of Company common stock ("Common Stock"), the Company licensed
certain intellectual property owned by TAI. The initial term of the License was
6 months, automatically extended for additional 6 month terms until terminated
by mutual agreement. In connection with the License Agreement the Company made
payments to former Dendo shareholders of approximately $77,000 for the
cancellation of 27,219,000 shares of Dendo common stock. After issuance of
shares and cancellation of shares in connection with the License Agreement, TAI
owned 4 million shares of the 12 million total outstanding and Solomon, directly
or beneficially owned an additional approximately 4.5 million shares. In certain
circumstances, Solomon, voting shares directly or beneficially owned, along with
voting shares beneficially owned by TAI, had control to vote approximately 71%
of the Company's outstanding common shares
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Bridge Loans - During the six months ended June 30, 2005, the Company entered
into two short-term loans, one for $376,094 and the other for $252,000. The
first loan is due July 6, 2005, which was paid on that date. The other loan is
due August 6, 2005, which was paid on that date. Both loans were collateralized
by all business assets, and in particular accounts receivable from one of the
Company's customers.
Compensation Agreement - In August 2004, the Company entered into an Employment
Agreement with Solomon, pursuant to which Solomon is to be employed by the
Company as Chief Executive Officer for an initial period of 3 years, which
period shall be automatically renewed until terminated by the Company. The
Employment Agreement provides for annual compensation of $175,000, an
opportunity for Solomon to earn additional annual bonuses upon the Company
attaining certain financial targets, and for the Company to grant Solomon
options to purchase up to 1 million shares of Company common stock at an
exercise price being fair value at date of grant. In April 2005, the Company
granted Solomon fully vested options with a 10 year term to purchase 1 million
shares of Company common stock with an exercise price of $0.50 per share.
Investment Banking Agreement - In connection with an investment banking
agreement, at March 31, 2005 the Company had issued 45,200 common shares and had
issuable 169,577 common shares and warrants to purchase 195,252 common shares at
$0.50 exercisable for four years. The $107,388 value of the common stock based
on a value of $0.50 per share and $54,866 value of the common stock warrants
(based on a Black-Scholes valuation using zero dividends and 71% volatility,
interest rate of 4.15% and term of 4 years) was recorded as offering costs
deducted from Series A funds raised as a charge to additional paid-in-capital.
(See Note 4.)
Business Development Agreement - During the three months ended March 31, 2005,
the Company entered into a one-year Business Development Agreement with a
financial advisor, which replaced the Company's prior agreement with the advisor
and one of its affiliates. Pursuant to terms of the Business Development
Agreement, the Company paid $290,000 and issued a total of 600,000 shares of its
common stock and 570,000 warrants to purchase Company common stock at a price of
$1.00 per share with a four-year term, which were recorded at December 31, 2004.
In addition, the Company has agreed to pay fees for future financing funds
received by the Company during the agreement term of cash equal to 10% of future
financing proceeds received and 10% of the securities issued in the financing
Public Relations Agreement - In connection with a one-year Public Relations
Agreement entered into in 2004, the Company agreed to issue 240,000 common
shares valued at $120,000 and warrants to purchase 500,000 common shares at
$0.50 per share and warrants to purchase 500,000 common shares at $1.00 per
share, which were recorded at December 31, 2004. The total estimated value of
$251,000 was initially deferred as a component of stockholders' equity and is
being amortized over the one-year term. During the six months ended June 30,
2005, amortization expense was $62,750.
8
Contract to Supply Equipment to Cook County - In July 2004, the Company was
awarded a contract to supply certain equipment, software and services to a
contractor doing business with Cook County Commissioners Office. The Cook County
Commissioners Office approved a plan to implement a county-wide wireless
communications system. A grant of approximately $13 million from the Urban Area
Security Initiative of the Department of Homeland Security has been accepted to
fund the project. An additional grant of approximately $17 million has also been
approved for the second phase of the project. The contract is anticipated to
result in future Company revenues of approximately $9 million.
Agreement with IBM - In October 2004, the Company entered into a Statement of
Work ("SOW") with International Business Machines Corporation ("IBM") for the
Phase 1 Implementation of the Company's wireless communications product line in
connection with Cook County's mobile wireless video and data network project.
The SOW serves as the Company's official notice and authorization to begin
implementation of and billing for the project. Pursuant to terms of the SOW, the
Company will be providing hardware and software, and maintenance services
through 2009, under Phase 1 for which it is to receive payments of approximately
$2.9 million. During December 2004, the Company received approximately $1
million from IBM, which was recorded as deferred revenue at December 31, 2004.
During the six months ended June 30, 2005, the Company received additional
payments of $817,585, and recognized $1,610,656 of revenue.
Operating Lease Agreement - In March 2005, TechAlt entered into an operating
lease for equipment to be used in a multi-city demo network. The total value of
the equipment was $670,000. The term of the lease is twenty-four months with
monthly lease payments of $7,600.
Registration Statement on Form SB-2 - The Company filed a Registration Statement
on Form SB-2 with the Securities and Exchange Commission regarding registration
of approximately 40 million shares of Company common stock to be sold by certain
stockholders. In July 2005, the Company withdrew this Registration Statement and
is in the process of filing a new registration statement. It is expected that
the selling stockholders will offer common stock in amounts, at prices and on
terms to be determined at the time of the offering. The Company will not receive
any proceeds from sales of common stock by selling stockholders. Shares of
Company common stock are not currently quoted on any exchange or
over-the-counter bulletin board market. The Company has applied for trading of
its common stock on the over-the-counter bulletin board.
Communications received from SBD - On June 30, 2005, the Company received a
letter from SBD claiming that the Company had defaulted on its payment
obligations under the Note and that SBD has the right to accelerate the full
payment of the $1,150,000 promissory note. The Company engaged in discussions
with SBD to resolve its claim of default and acceleration, however, on July 22,
2005, the Company received a letter from SBD's legal counsel demanding
possession of "all accounts, accounts receivable, good, equipment, inventory,
machinery, fixtures, cash, securities, all intellectual property, including
trademarks, services marks, trade names, copyrights, patents, licenses,
including patent licenses, contracts and other tangible and intangible
property." Company management believes SBD's demand to be legally defective and
without force or effect and intends to defend itself vigorously against any
attempts by Masanek and/or SBD to secure possession of the Company's assets, in
addition to pursuing in a court of law, if necessary, SBD, Masanek and his
associates in connection with certain actions taken by them prior to the July
22, 2005 letter. The Company continues to be engaged in discussions to resolve
this matter.
NOTE 4 - STOCKHOLDERS' EQUTIY
Series A Convertible Preferred Stock, Warrants and Additional Investment Rights
- - During the year ended December 31, 2004, pursuant to the private offering
exemption provided in Rule 506 of Regulation D of the Securities Act of 1933, in
exchange for $3,835,000, the Company sold 3,835,000 shares of its Series A
Convertible Preferred Stock (purchase price of $1.00 per share) (the "Series A
Preferred"), warrants to purchase 7,670,000 shares of the Company's common stock
at an exercise price of $1.00 per share with a cashless exercise provision for
the period ending five years from issuance (the "Warrants") and Additional
Investment Rights to purchase 65,000 additional shares of Series A Preferred
with 130,000 warrants at a purchase price of $1.00 per share (the "Series A
Preferred Rights"), all of such rights have been exercised. An additional
820,000 Series A Preferred were authorized in December 2004. Each share of
Series A Preferred is convertible under certain circumstances into two shares of
the Company's common stock, at a conversion price of $0.50 per common share, the
price determined by Company management to represent the fair value of such stock
at the issuance date. The Series A Preferred holders have voting rights on an as
converted basis. The Series A Preferred shares contain registration rights and
damages of 1.5% per month or part of any month based on filing and effectiveness
deadlines. Included in general and administrative expenses for the three and six
months ended June 30, 2005 is $300,000 relating to accrued damages.
During the three months ended March 31, 2005, pursuant to the private offering
exemption provided in Rule 506 of Regulation D of the Securities Act of 1933, in
exchange for $881,260 the Company sold 881,260 shares of its Series A Preferred
(purchase price of $1.00 per share) and Warrants to purchase 1,762,520 shares of
the Company's common stock.
Terms of Series A Preferred provides for, among other things, cumulative
dividends to be paid to holders at a rate of 5% per annum, which accumulate
daily from issuance date and payable quarterly, in certain circumstances payable
in the Company's common stock, each preferred share to be convertible into 2
shares of Company common stock, subject to anti-dilution conversion rate
adjustments, a $2.00 per share liquidation preference amount, if common stock
dividends are declared, Series A receives the same on an as converted basis,
voting rights on an as converted basis, and limits payment of dividends on
common stock until certain financial targets are met.
9
Series A Preferred Stock Subject to Potential Recission - In July 2005, Company
management became aware that holders of 4,816,260 shares of the Company's Series
A Preferred Stock (all outstanding shares) may be entitled to certain rescission
rights. The resale registration statement of shares of common stock underlying
these securities was originally filed by the Company in November 2004, and has
subsequently been withdrawn. Pursuant to the Securities Act of 1933 and the
related rules and regulations, as interpreted by the Securities and Exchange
Commission, as a result of a portion of the additional investment rights granted
with the initial sale of 500,000 shares of Series A Preferred Stock, which were
the basis of the sale of additional shares of Series A Preferred Stock, being
unexercised at the time the resale registration statement was originally filed,
the private offerings have not been completed and accordingly, the public and
private offerings would be integrated and result in a violation of Section 5 of
the Securities Act. Accordingly, the investors who purchased the private
placement securities may have a number of remedies available to them, including
the potential right to rescind the purchase of those securities plus,
potentially, any amount representing damage to such investors.
The Company is unable to predict if the investors would attempt to exercise such
potential rescission rights. Each investor's decision would be based upon, among
other things, the price of the Company's common stock and other factors. These
potential rescission rights could require the Company to refund at least the
gross proceeds of these private offerings to the investors. In order to satisfy
such potential obligations, the Company would be required to utilize its
available capital resources and obtain alternate sources of capital for such
purposes. The Company presently does not have the capital available to satisfy
all potential claims for rescission. The inability to obtain alternative sources
of capital would have a material effect on the Company's financial condition and
results of operations.
For purposes of accounting for this contingency in accordance with Statement of
Financial Accounting Standards 5, "Accounting for Contingencies", the Company's
management has evaluated the above factors and has determined that the ultimate
liability to the Company from the potential assertion by investors of rescission
rights is not probable. This conclusion is based on management's determination
that the factors and/or conditions that would encourage an attempt to assert
such rights are significantly outweighed by the factors and/or conditions that
would discourage an attempt to assert such rights. Since the Company has
determined that a rescission is not probable, although it may be possible, no
accrual is required under SFAS 5. As of June 30, 2005, the Company's
consolidated balance sheet reflects $4,816,260, as "Series A Preferred Stock
Subject to Potential Rescission", in accordance with Emerging Issues Task Force
Topic D-98, Classification and Measurement of Redeemable Securities.
Common Stock - In 2004, as amended in February 2005, 400,000 shares were issued
and 100,000 were issuable at December 31, 2004 (and issued in 2005) under an
agreement for capital raising services and 100,000 shares were issued for cash
of $50,000 to a financial consultant. The shares for services were valued at
$250,000 based on the $.50 per share common stock value of contemporaneous
issuances and conversion terms of the Series A Preferred. The $250,000 was
charged to additional paid-in capital as a Series A Preferred offering cost.
During the period ending March 31, 2005, 45,200 common shares were issued and
169,577 are issuable pursuant to an Investment Banking Agreement relating to the
Series A Preferred sale. The shares were valued at $107,388 based on the $.50
per share common stock value of contemporaneous issuances and conversion terms
of the Series A Preferred, and charged to additional paid-in-capital as an
offering cost.
On March 29, 2005, the Board of Directors of TechAlt approved the 2005 Stock
Option Plan (the "Plan") and the forms of Non-Qualified Stock Option Agreement
("NQA") and Incentive Stock Option Agreement ("ISOA") to provide additional
incentives to key employees, officers, directors and independent contractors of
TechAlt and any Parent or Subsidiary it may at any time have, thereby helping to
attract and retain the best available personnel for positions of responsibility
with those entities and otherwise promoting the success of the business
activities of such entities. It is intended that options issued under the Plan
constitute either incentive stock options or nonqualified stock options. The
maximum number of shares that may be optioned and sold under the Plan is the
greater of (i) five million (5,000,000) shares of Common Stock of the Company,
subject to adjustment, or (ii) twenty percent of the total number of shares of
Common Stock that would be outstanding if each class of the Company's stock
(including each class of preferred stock) were converted into shares of Common
Stock. The Plan is administered by the Board directly, acting as a Committee of
the whole, or if the Board elects, by a separate Committee appointed by the
Board for that purpose and consisting of at least two Board members, all of whom
shall be Non-Employee Director. The adoption of the Plan is subject to
ratification by the affirmative vote of the holders of a majority of the shares
of Common Stock represented in person or by proxy at a duly convened meeting of
the shareholders of the Company, which ratification shall occur within twelve
(12) months before or after the date of adoption of the Plan by the Board. In
April 2005, the Company granted to certain of its employees, officers and member
of the Board of Directors fully-vested, ten-year options to purchase 2,845,000
shares of Company common stock at $0.50 per share, a price considered by the
Company's Board of Directors to represent the fair value of such common stock at
grant date. Additionally, in April 2005, the Company granted to certain of its
employees and officers ten-year options, which fully vest 1 year from grant
date, to purchase 693,664 shares of Company common stock at $0.50 per share. At
June 30, 2005, there were 3,538,664 options outstanding.
NOTE 5 - RELATED PARTY TRANSACTIONS
Purchases of equipment from SBD included in cost of goods sold during the six
months ended June 30, 2005 and 2004 approximated $212,000 and $84,000,
respectively. Additionally, during the six months ended June 30, 2005 and 2004
the Company incurred consulting fees payable to SBD of approximately $102,000
and $184,000. The amounts are included in general and administrative expenses on
the accompanying condensed consolidated financial statements. At June 30, 2005
the Company had accounts payable to SBD of approximately $167,000 which is
included in accounts payable-related party.
Advances payable to the Company's Chairman and Chief Executive Officer and 55%
founding shareholder was $126,399 at June 30, 2005. These advances are due on
demand, unsecured and non-interest bearing.
An officer of the Company is also a principal owner of a law firm that provides
services to the Company. Expenses incurred to this law firm were approximately
$294,000 and $52,000 during the six months ended June 30, 2005 and 2004,
respectively. Accounts payable of approximately $160,000 was due to this law
firm at June 30, 2005, which is included in accounts payable-related party.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and related notes to
the financial statements included elsewhere in this Quarterly Report on Form
10-QSB and the Company's financial statements and management's discussion and
analysis of financial condition and results of operations included in the
Company's 2004 Annual Report on Form 10-KSB and RESTATEMENT in Note 1 to the
financial statements included in this Form 10-QSB. This discussion contains
forward-looking statements that relate to future events or our future financial
performance. These statements involve known and unknown risks, uncertainties and
other factors that may cause actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements. These risks and other factors include, among others,
those listed under "Risk Factors" in the Company's Annual Report on Form 10-KSB,
which investors are encouraged to read and consider.
When used in this report, the words or phrases "would be", "will allow",
"intends to", "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company cautions readers not to
place undue reliance on any forward-looking statements, which speak only as of
the date made, and advises readers that forward-looking statements involve
various risks and uncertainties. The Company does not undertake, and
specifically disclaims any obligation to update any forward-looking statements
to reflect occurrences or unanticipated events or circumstances after the date
of such statement.
OVERVIEW
CONTRACT TO SUPPLY EQUIPMENT TO COOK COUNTY - In July 2004, the Company was
awarded a contract to supply certain equipment, software and services to a
contractor doing business with Cook County Commissioner's Office. The Commission
approved a plan to implement a county-wide wireless communications system. A
grant of approximately $13 million from the Urban Area Security Initiative of
the Department of Homeland Security has been accepted to fund the project. An
additional grant of approximately $17 million has also been approved for the
second phase of the project. The contract is anticipated to result in future
Company revenues of approximately $9 million.
AGREEMENT WITH IBM - In October 2004, the Company entered into a Statement of
Work ("SOW") with International Business Machines Corporation ("IBM") for the
Phase 1 Implementation of TAI's wireless communications product line in
connection with Cook County's mobile wireless video and data network project.
The SOW serves as the Company's official notice and authorization to begin
implementation of and billing for the project. Pursuant to terms of the SOW, TAI
will be providing hardware and software, and maintenance services through 2009,
under Phase 1 for which it is to receive payments of approximately $2.9 million.
In Phase 1 of the project, 15 radio towers and 32 municipal and county buildings
will be configured as wireless hotspots. The Company's multi-network capable
communications modules will be used to transmit video and data to police, fire,
and emergency services vehicles. This live streaming video will help first
responders orchestrate a coordinated response to emergencies. The wireless
network will provide first responders in remote locations with information
already shared on the county's wired network. Police, fire and emergency
services personnel will have real-time access to law enforcement databases, GIS
information, hazmat information and other data on the Cook County network.
AGREEMENT AND PLAN OF MERGER- Pursuant to the Merger Agreement, all of the
shares of common stock of TAI (all of which were owned by Solomon and Masanek)
were exchanged for 9,544,000 shares of common stock of TechAlt. TechAlt
Acquisitions, Inc., a wholly-owned subsidiary of TechAlt, was merged with and
into TAI, with TAI becoming a wholly-owned subsidiary of TechAlt (the "Merger").
Upon consummation of the Merger, Solomon and Masanek together own approximately
83% of the voting common stock of the merged entity and obtained management
control and the shareholders of TechAlt prior to the License Agreement and name
change from Dendo Global Corp. own approximately 17%. The transaction, in which
TechAlt Acquisitions, Inc. was merged with and into TAI, is accounted for as a
recapitalization of TAI and combination of entities under common control as of
the August 24, 2004 license date and the Company is deemed to have issued
1,656,000 common shares to the shareholders of TechAlt. Inasmuch as the former
TAI shareholders own a majority of TechAlt common stock after the merger and
obtained management control, TAI is considered to be the acquiring corporation
for accounting purposes. The consolidated financial statements after the
transaction consist of the balance sheet of TAI and TechAlt, the operations of
TechAlt from the August 24, 2004 license closing date and the historical
operations of TAI.
SETTLEMENT AGREEMENT - Pursuant to terms of the Settlement Agreement between the
TechAlt and Masanek, among other things, (i) the License Agreement entered into
between TechAlt and TAI in August 2004 was rescinded, which rescission included
rescinding the 10,044,000 shares of TechAlt common stock issued pursuant to the
License agreement, (ii) TechAlt paid Masanek $650,000 cash, (iii) TechAlt and
Masanek entered into Sales, Consulting, Registration Rights, Right of First
Refusal and Escrow Agreements, (iv) TechAlt issued a Convertible Promissory Note
for $1,150,000 to Services by Designwise, Ltd. ("SBD"), a company owned by
Masanek, payable $650,000 one year from issuance and the remainder two years
from issuance subject to acceleration, as defined, based on capital raises, with
interest at 5%, and convertible into shares of TechAlt common stock on the basis
of $1.00 per share, and secured by substantially all assets of TechAlt, (v)
11
TechAlt issued warrants to Masanek for the right to purchase for a period of
five years 750,000 shares of TechAlt common stock for $1.00 per share with a
cashless exercise provision, (vi) TechAlt received from SBD the assignment of
all right, title and interests in certain intellectual property and inventory of
SBD relating to In-Car Based Communications Data Capture and Video, (vii)
TechAlt paid $140,000 for the attorneys fees of Masanek, and (viii) settlement
of certain claims made by Masanek against TechAlt and others in a lawsuit filed
in the Circuit Court of Cook County, Illinois, (ix) the Company entered into a 3
year sales agreement with a commitment for the Company to purchase from SBD
$1,250,000 of equipment inventory per year plus pay 6.25% to 6.75% royalties on
certain third party supplied goods, and (x) a consulting agreement for which the
Company will pay SBD $25,000 for the first four months and $6,250 per month for
the next 32 months plus other benefits.
SALE OF SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANTS - Through June 30,
2005, pursuant to the private offering exemption provided in Rule 506 of
Regulation D of the Securities Act of 1933, in exchange for $4,816,000, before
offering costs, the Company sold 4,816,260 shares of its Series A Convertible
Preferred Stock (purchase price of $1.00 per share) (the "Series A Preferred")
and warrants to purchase 9,632,520 shares of the Company's common stock at an
exercise price of $1.00 per share with a cashless exercise provision (the
"Warrants"). The Series A Preferred contain registration rights and damages
based on filing and effectiveness deadlines.
Terms of Series A Preferred provides for, among other things, cumulative
dividends to be paid to holders at a rate of 5% per annum, which accumulate
daily from issuance date and payable quarterly, in certain circumstances payable
in the Company's common stock, each preferred share to be convertible into two
shares of Company common stock, subject to anti-dilution conversion rate
adjustments, a $2.00 per share liquidation preference amount, if common stock
dividends are declared, Series A receives the same on an as converted basis,
voting rights on an as-converted basis and limits payment of dividends on common
stock until certain financial targets are met.
SERIES A PREFERRED STOCK SUBJECT TO RECISSION - In July 2005, Company management
became aware that holders of 4,816,260 shares of the Company's Series A
Preferred Stock (all outstanding shares) may be entitled to certain rescission
rights. The resale registration statement of shares of common stock underlying
these securities was originally filed by the Company in November 2004, and has
subsequently been withdrawn. Pursuant to the Securities Act of 1933 and the
related rules and regulations, as interpreted by the Securities and Exchange
Commission, as a result of a portion of the additional investment rights granted
with the initial sale of 500,000 shares of Series A Preferred Stock, which were
the basis of the sale of additional shares of Series A Preferred Stock, being
unexercised at the time the resale registration statement was originally filed,
the private offerings have not been completed and accordingly, the public and
private offerings would be integrated and result in a violation of Section 5 of
the Securities Act. Accordingly, the investors who purchased the private
placement securities may have a number of remedies available to them, including
the potential right to rescind the purchase of those securities plus,
potentially, any amount representing damage to such investors.
The Company is unable to predict if the investors would attempt to exercise such
potential rescission rights. Each investor's decision would be based upon, among
other things, the price of the Company's common stock and other factors. These
potential rescission rights could require the Company to refund at least the
gross proceeds of these private offerings to the investors. In order to satisfy
such potential obligations, the Company would be required to utilize its
available capital resources and obtain alternate sources of capital for such
purposes. The Company presently does not have the capital available to satisfy
all potential claims for rescission. The inability to obtain alternative sources
of capital would have a material effect on the Company's financial condition and
results of operations.
For purposes of accounting for this contingency in accordance with Statement of
Financial Accounting Standards 5, "Accounting for Contingencies", the Company's
management has evaluated the above factors and has determined that the ultimate
liability to the company from the potential assertion by investors of rescission
rights is not probable. This conclusion is based on management's determination
that the factors and/or conditions that would encourage an attempt to assert
such rights are significantly outweighed by the factors and/or conditions that
would discourage an attempt to assert such rights. Since the Company has
determined that a rescission is not probable, although it may be possible, no
accrual is required under SFAS 5. As of June 30, 2005, the Company's
consolidated balance sheet reflects $4,816,260 as "Series A Preferred Stock
Subject to Potential Rescission", in accordance with Emerging Issues Task Force
Topic D-98, Classification and Measurement of Redeemable Securities.
Registration Statement on Form SB-2 - The Company filed a Registration Statement
on Form SB-2 with the Securities and Exchange Commission regarding registration
of approximately 40 million shares of Company common stock to be sold by certain
stockholders. In July 2005, the Company withdrew this Registration Statement and
is in the process of filing a new registration statement. It is expected that
the selling stockholders will offer common stock in amounts, at prices and on
terms to be determined at the time of the offering. The Company will not receive
any proceeds from sales of common stock by selling stockholders. Shares of
Company common stock are not currently quoted on any exchange or
over-the-counter bulletin board market. The Company has applied for trading of
its common stock on the over-the-counter bulletin board.
12
Communications received from SBD - On June 30, 2005, the Company received a
letter from SBD claiming that the Company had defaulted on its payment
obligations under the Note and that SBD has the right to accelerate the full
payment of the $1,150,000 promissory note. The Company engaged in discussions
with SBD to resolve its claim of default and acceleration, however, on July 22,
2005, the Company received a letter from SBD's legal counsel demanding
possession of "all accounts, accounts receivable, good, equipment, inventory,
machinery, fixtures, cash, securities, all intellectual property, including
trademarks, services marks, trade names, copyrights, patents, licenses,
including patent licenses, contracts and other tangible and intangible
property." Company management believes SBD's demand to be legally defective and
without force or effect and intends to defend itself vigorously against any
attempts by Masanek and/or SBD to secure possession of the Company's assets, in
addition to pursuing in a court of law, if necessary, SBD, Masanek and his
associates in connection with certain actions taken by them prior to the July
22, 2005 letter. The Company continues to be engaged in discussions to resolve
this matter.
QUARTER ENDED JUNE 30, 2005 AND 2004, AND SIX MONTHS ENDED JUNE 30, 2005 AND
2004
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operation and financial condition for the three months ended June 30, 2005
and six months ended June 30, 2005 as compared to the three and six months ended
June 30, 2004. The discussion should be read in conjunction with the financial
statements and notes thereto.
Revenue of $1,319,000 for the three months ended June 30, 2005 increased over
the same period for 2004 due to Phase 1 implementation and billing $1,197,000
for the IBM contract and $122,000 in equipment sales to municipalities. Revenue
of $65,000 for the three months ended June 30, 2004 is comprised primarily of
equipment sales.
General and administrative expenses of $856,000 for the three months ended June
30, 2005 included approximately $132,000 of legal and accounting fees, $192,000
for employee compensation, and $300,000 for accrued damages relating to the
effectiveness deadlines for holders of preferred stock. The balance of $232,000
included consulting fees, and operations costs such as Building Rent, Insurance,
Telephone and Office Expenses. General and administrative expenses for the same
period in 2004 were $205,000. The increase is primarily attributed to additional
staff and related expenses to support the IBM contract, and accrued damages.
The $569,000 for the three months ended June 30, 2005 of research and
development expenses are comprised primarily of $242,000 employee compensation
and related expenses, $291,000 in Applications Development and Project Costs and
the balance of $36,000 for Office and other operating expenses. Research and
development costs for the same period in 2004 were $26,000. The increase is due
to additional staff and outside services to support the IBM Project and
continued product development.
Business Development expenses of $ 640,000 for the three months ended June 30,
2005 included $276,000 for employee compensation and related expenses, $308,000
for Public Relations, Marketing materials and Trade Shows, and the balance of
$56,000 for operating expenses. Expenses for the same period in 2004 were
$33,000, with the increase for additional staff and Marketing.
Revenue for the six months ended June 30, 2005 was $2,315,000, comprised of
$1,983,000 for Phase 1 IBM contract billing and $332,000 from the State of
Illinois and other municipality equipment purchases. Revenue for the six months
ended June 30, 2004 was $ 124,000 and is comprised of equipment sales to
municipalities. The increase in revenue is primarily due to the IBM contract.
General and administrative expenses of $1,611,000 for the six months ended June
30, 2005 included approximately $336,000 in legal and accounting fees, $412,000
for employee compensation and related expenses and $300,000 for accrued damages
relating to the effectiveness deadlines for holders of preferred stock. The
balance of $563,000 included consulting fees, and operations costs such as
Building Rent, Insurance, Office and Travel expenses. General and administrative
expenses for the same period in 2004 were $365,000. Increased expenditures for
General and administrative were due to additional staff and related expenses to
support the IBM contract, and accrued damages.
Research and Development costs for the six months ended June 30, 2005 were
$1,039,000, comprised primarily of $438,000 for employee compensation and
related expenses, $494,000 in Application Development and Project Costs, with
the balance of $107,000 for operating expenses. For the same period in 2004 the
Research and Development costs were $36,000. Increases in these costs reflect
increased staff and outside services to support continued product development
and the requirements for the IBM contract.
13
Business Development expenses totaled $1,097,000 for the six months ended June
30, 2005. This included $521,000 for employee compensation and related expenses,
$391,000 for Public Relations, Marketing materials and Trade Shows, with the
balance of $185,000 for operating expenses. Expenses were $68,000 for the same
period in 2004. The increase over 2004 expenses is due to increased staff and
Marketing activities.
LIQUIDITY AND CAPITAL RESOURCES
During the six-months ended June 30, 2005, cash used by operating activities was
$2,526,046 as compared to cash used of $97,060 during the comparative prior year
period. The increase in cash used by operating activities was primarily due to
the increase in net loss to $2,361,613, a $1,932,531 increase, as further
increased by changes in operating assets and liabilities, most significant of
which were increases in accounts receivable and inventories, offset by increases
in accounts payable.
Cash used by investing activities was $181,844 during the six months ended June
30, 2005 for the acquisition of property and equipment versus $2,759 in the
comparative prior year period.
Cash provided by financing activities for the six-months ended June 30, 2005 was
$1,505,142, resulting primarily from $881,260 proceeds received from sale of
881,260 shares of Series A Convertible Preferred Stock and warrants to purchase
1,760,000 shares of TechAlt common stock for $1.00 per share and the proceeds
from collateralizing of the accounts receivable with our bank in the amount of
$628,094. Cash provided by financing activities for the six-months ended June
30, 2004 was $127,994, primarily consisting of an increase in advances due to
officer.
Off-Balance sheet arrangements - The Company does not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on its financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
BASIS OF PRESENTATION AND GOING CONCERN UNCERTAINTIES - Since inception, the
Company has incurred losses. Operating expenses are expected to increase
significantly as the Company expands its sales and marketing efforts and
otherwise supports its expected growth. Given these planned expenditures, the
Company may incur additional losses in the near future. The Company needs
additional financing and could be required to cut back or stop operations if
sufficient funding is not raised. The Company's ability to continue operations
will depend on positive cash flow, if any, from future operations and its
ability to raise additional funds through equity or debt financing. While,
Company management anticipates that cash to be received in the future resulting
from the Agreement with IBM, and additional cash to be received from private and
institutional investors will be sufficient to fund our current operations and
capital requirements for the next 12 months, there can be no assurance that such
amounts will be realized.
As disclosed in report of Independent Registered Public Accounting Firm on the
Company's financial statements for the years ended December 31, 2004 and 2003
included in the Company's 2004 Annual Report on Form 10-K, these matters raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern and do not include any adjustments to
reflect the possible future effects on the recoverability of assets and
liquidation of liabilities that may result from these uncertainties.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which among other
things, requires management to make estimates and assumptions that affect
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of financial statements and reported amounts of
revenues and expenses during reporting periods. These estimates and assumptions
are affected by management's application of accounting policies. Critical
accounting policies applied in 2005 and 2004 financial statements include
accounting for revenue recognition, accounting for research and development
costs, accounting for non-cash issuances of capital stock, accounting for income
taxes.
REVENUE RECOGNITION - The Company recognizes revenue when there is persuasive
evidence of an arrangement, products have been delivered or services have been
provided to the customer, the sales price is fixed or determinable, and
collectibility is reasonably assured. Delivery terms are generally FOB shipping
point, typically the Company's facility. Amounts billed in advance of revenue
recognition are included in deferred revenue. Revenue from hardware sales is
recognized when the product is shipped to the customer and when there are no
unfulfilled obligations that affect the customer's final acceptance. Revenue
from sales of software licenses and software maintenance subscriptions, which to
date have been insignificant, are recognized on a straight-line basis over the
subscription term.
14
RESEARCH AND DEVELOPMENT COSTS - Research and development costs, which are
comprised primarily of compensation, consulting costs, supplies, materials and
related costs, are expensed as incurred.
STOCK BASED COMPENSATION - The Company accounts for stock options issued to
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 cost is measured on the date of grant as
the excess of the current market price of the underlying stock over the exercise
price. Such compensation amounts are amortized over the respective vesting
periods of the option grant. The Company adopted the disclosure provisions of
SFAS No. 123 "Accounting for Stock-Based Compensation," and SFAS No. 148
"Accounting for Stock Based Compensation - Transition and Disclosure," which
permits entities to provide pro forma net income (loss) and pro forma earnings
(loss) per share disclosures for employee stock option grants as if the
fair-valued based method defined in SFAS No. 123 had been applied.
INCOME TAXES - The Company continues to record a valuation allowance for the
full amount of deferred income taxes, which would otherwise be recorded for tax
benefits relating to operating loss carryforwards, as realization of such
deferred tax assets cannot be determined to be more likely than not.
15
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15(b) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective. There
were no changes in our internal control over financial reporting during the
quarter ended June 30, 2005 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
2.1 Form of Agreement and Plan of Merger
3.1(i) Articles of Incorporation
3.2(i) Certificate of Amendment to the Articles of Incorporation
3.3(i) Certificate of Amendment to the Articles of Incorporation
3.4(ii) Bylaws
3.5(ii) Amended Bylaws
4.1 Certificate of Designation
4.2 Amended Certificate of Designation
4.3 Form of Securities Purchase Agreement
4.4 Form of Registration Rights Agreement
4.5 Form of Warrant
4.6 Form of Additional Warrant
4.7 Form of Additional Investment Right
4.8 Form of Lock-Up Agreement
4.9 Form of Warrant issued to Paul Masanek
4.10 Secured Convertible Promissory Note
17
4.11 Form of Registration Rights Agreement with Paul Masanek and Services By
Designwise, Ltd.
4.12 Form of Right of First Refusal Agreement
4.13 Form of Non-Qualified Stock Option Agreement
4.14 Form of Incentive Stock Option Agreement
4.15 Form of Excipio Group, S.A. Warrant
10.1 Employment Agreement with James E. Solomon
10.2 Intellectual Property License Agreement
10.3 Financial Advisory and Investment Banking Agreement with Sunrise
Securities Corp.
10.4 Public Relations Retainer Agreement with with Sunrise Financial Group,
Inc.
10.5 Base Agreement with International Business Machines Corporation
10.6 IBM Solutions Engagement Agreement Statement of Work
10.7 Arias Technology Corporation, Inc., Agreement for Consulting Services
10.8 TechAlt/Arias Statement of Work
10.9 Form of Agreement to Rescind Intellectual Property License Agreement
10.10 Form of Sales Agreement
10.11 Form of Security Agreement
10.12 Form of Settlement Agreement
10.13 Form of Technology Assignment and Bill of Sale
10.14 Form of Escrow Agreement
10.15 Form of Consulting Agreement
10.16 Form of Waiver and Amendment Agreement
10.17 2005 Stock Option Plan
10.18 Business Development Agreement with Excipio Group, S.A.
31.1 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
31.2 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
32 Certification of CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
TECHALT, INC.
August 15, 2005 /s/ James E. Solomon
------------------------------------------
James E. Solomon
Chairman & Chief Executive Officer
August 15, 2005 /s/ James E. Solomon
------------------------------------------
James E. Solomon
Chairman & Chief Executive Officer
(Principal Executive Officer)
August 15, 2005 /s/ James Hurley
------------------------------------------
James Hurley
Chief Financial Officer
(Principal Financial Officer)
19
EXHIBIT INDEX
2.1 Form of Agreement and Plan of Merger*
3.1(i) Articles of Incorporation*
3.2(i) Certificate of Amendment to the Articles of Incorporation*
3.3(i) Certificate of Amendment to the Articles of Incorporation*
3.4(ii) Bylaws*
3.5(ii) Amended Bylaws*
4.1 Certificate of Designation*
4.2 Amended Certificate of Designation*
4.3 Form of Securities Purchase Agreement*
4.4 Form of Registration Rights Agreement*
4.5 Form of Warrant*
4.6 Form of Additional Warrant*
4.7 Form of Additional Investment Right*
4.8 Form of Lock-Up Agreement*
4.9 Form of Warrant issued to Paul Masanek*
4.10 Secured Convertible Promissory Note*
4.11 Form of Registration Rights Agreement with Paul Masanek and Services By
Designwise, Ltd.*
4.12 Form of Right of First Refusal Agreement*
4.13 Form of Non-Qualified Stock Option Agreement*
4.14 Form of Incentive Stock Option Agreement*
4.15 Form of Excipio Group, S.A. Warrant*
10.1 Employment Agreement with James E. Solomon*
10.2 Intellectual Property License Agreement*
10.3 Financial Advisory and Investment Banking Agreement with Sunrise
Securities Corp.*
10.4 Public Relations Retainer Agreement with with Sunrise Financial Group,
Inc.*
20
10.5 Base Agreement with International Business Machines Corporation*
10.6 IBM Solutions Engagement Agreement Statement of Work*
10.7 Arias Technology Corporation, Inc., Agreement for Consulting Services*
10.8 TechAlt/Arias Statement of Work*
10.9 Form of Agreement to Rescind Intellectual Property License Agreement*
10.10 Form of Sales Agreement*
10.11 Form of Security Agreement*
10.12 Form of Settlement Agreement*
10.13 Form of Technology Assignment and Bill of Sale*
10.14 Form of Escrow Agreement*
10.15 Form of Consulting Agreement*
10.16 Form of Waiver and Amendment Agreement*
10.17 2005 Stock Option Plan*
10.18 Business Development Agreement with Excipio Group, S.A.*
31.1 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act Attached
31.2 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act Attached
32 Certification of CEO and CFO pursuant to Section 906 of the Attached
Sarbanes-Oxley Act
* Previously filed.
21