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 September 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)
601 Union Street, Suite 4500
Seattle, WA 98101
(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 |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
Yes |_| No |X|
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)
September 30,
2005
-------------
Current assets
Escrow cash receivable $ 107,000
-------------
Total current assets 107,000
Auto, net 35,684
-------------
Total assets $ 142,684
=============
Current liabilities
Fair value of registration rights liability $ 1,400,000
Accounts payable 1,011,089
Accounts payable - related parties 322,821
Accrued liabilities 116,808
Deferred revenue 580,513
Notes payable - bank 39,527
Convertible notes 195,000
Advances due to officer 183,201
Settlement liabilities 1,862,436
Accrued preferred stock dividends 184,994
-------------
Total current liabilities 5,896,389
-------------
Total liabilities 5,896,389
-------------
Commitments and contingencies (Note 3)
Series A Preferred stock subject to potential rescission, net of
offering costs of $1,439,392 plus beneficial conversion value
of $1,806,125, 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 (Note 4) 5,182,993
-------------
Stockholders' Deficit
Preferred stock, $0.001 par value, 100,000,000 shares authorized --
Common stock and additional paid-in capital. $0.001 par value,
500,000,000 shares authorized, 13,307,719 shares issued and outstanding 13,308
Common stock issuable (169,577 shares) 170
Additional paid-in capital 2,435,630
Deferred stock-based consulting (125,619)
Accumulated deficit (13,260,187)
-------------
Total stockholders' deficit (10,936,698)
-------------
Total liabilities and stockholders' deficit $ 142,684
=============
See accompanying notes to condensed consolidated financial statements
3
TechAlt, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue $ 448,907 $ 55,067 $ 2,764,227 $ 178,916
Cost of goods sold 226,047 4,800 1,127,087 89,511
------------ ------------ ------------ ------------
Gross profit 222,860 50,267 1,637,140 89,405
------------ ------------ ------------ ------------
Operating expenses
General and administrative 982,048 383,105 2,593,476 740,308
Research and development 396,784 16,807 1,435,437 52,390
Business development 13,511 43,584 1,110,196 111,142
------------ ------------ ------------ ------------
Total operating expenses 1,392,343 443,496 5,139,109 903,840
------------ ------------ ------------ ------------
Loss from operations before Income/(Expenses) (1,169,483) (393,229) (3,501,969) (814,435)
Other Income/(Expenses)
Settlement loss (138,129) -- (138,129) --
Compensatory damages (666,689) -- (666,689) --
Loss on disposal of fixed assets (11,981) -- (11,981) --
Change in fair value of registration rights damages (510,000) -- (920,000) --
Interest expense, net (65,255) (45) (94,382) (161)
------------ ------------ ------------ ------------
Total Other Income/(Expenses), net (1,392,054) (45) (1,831,181) (161)
Net loss (2,561,537) (393,274) (5,333,150) (814,596)
Preferred stock dividends (60,000) -- (172,075) --
------------ ------------ ------------ ------------
Net loss attributable to holders of common stock $ (2,621,537) $ (393,274) $ (5,505,225) $ (814,596)
============ ============ ============ ============
Basic and diluted net loss per share
attributable to holders of common stock $ (0.20) $ (0.02) $ (0.41) $ (0.03)
============ ============ ============ ============
Weighted average shares used
in computing loss per share 13,307,719 22,088,315 13,298,046 26,596,259
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements
4
TechAlt, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended Sept. 30,
--------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net loss $(5,333,150) $ (814,596)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation expense 88,686 11,639
Amortization of deferred stock-based compensation 177,573 --
Loss on disposal of assets 180,130 --
Issuance of warrants 598,258 --
Changes in operating assets and liabilities:
Inventory 208,800 --
Accounts receivable 96,319 (80,033)
Escrow cash receivable (107,000) --
Prepaid expenses and other current assets 130,405 --
Accounts payable and accounts payable - related party 743,231 587,515
Accrued liabilities (69,404) (4,555)
Fair value of registration rights liability 920,000 --
Deferred revenue (470,767) 7,576
Settlement liabilities 1,862,436 --
----------- -----------
Net cash used by operating activities (974,483) (292,454)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant & equipment (184,272) (22,792)
----------- -----------
Net cash used by investing activities (184,272) (22,792)
----------- -----------
Cash flows from financing activities:
Principal payments on notes payable (1,182,693) --
Proceeds from note payable 213,019 --
Proceeds from sale of preferred stock 881,260 --
Proceeds from loan payable-officer -- 174,196
Proceeds from officer loans 44,421 --
Proceeds from debenture -- 100,000
----------- -----------
Net cash provided by financing activities (43,993) 274,196
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,202,748) (41,050)
Cash and cash equivalents, beginning of period 1,202,748 (13,136)
----------- -----------
Cash and cash equivalents, end of period $ -- $ (54,186)
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 43,473 $ --
=========== ===========
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
SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DISCONTINUED OPERATIONS
On September 29, 2005 a creditor foreclosed on all the assets of the Company and
the Company ceased all operations. The accompanying financial statements are not
presented in accordance with the accounting standards for presenting
discontinued operations as there was only one operating segment. (see Note 2)
RESTATEMENT
As discussed below, certain restatements are being recorded for the year ended
December 31, 2004. The net effect of the December 31, 2004 restatement
adjustments has been incorporated into the accompanying interim condensed
consolidated financial statements for the three and nine months ended September
30, 2005.
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 rescission
rights. As a result, the Company's December 31, 2004 consolidated balance sheet
has been restated to reclassify the gross proceeds received from the sale of
these securities and the related offering costs out of stockholders' equity,
where originally recorded, to the balance sheet classification "Series A
Preferred Stock Subject to Rescission" in accordance with Emerging Issues
TaskForce Topic D-98, Classification and Measurement of Redeemable Securities.
The consolidated statement of stockholders' equity for the year ended December
31, 2004 has been similarly be restated for this reclassification. There was no
effect on the Company's consolidated statements of operations or cash flows.
Additionally, the Company is restating its December 31, 2004 consolidated
financial statements 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 $30,600 (relating to amortization of increased
deferred stock-based consulting), an increase in deferred stock-based consulting
of $173,400, and an increase in additional paid-in capital of $376,500 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 $203,100. There was no
effect on total stockholders' deficit or cash flows.
Additionally, the Company is restating its December 31, 2004 consolidated
financial Statements as they determined that the registration rights agreement
should have been accounted for as a derivative at fair value. The effect of this
restatement is to increase the registration rights liability at December 31,
2004 by $420,000 with a corresponding charge to other expenses.
6
Additionally, the Company is restating it's December 31, 2004 consolidated
financial statements to record as a constructive dividend and credit to Series A
Preferred Stock for the $1,806,125 intrinsic value of the beneficial conversion
feature.
The aggregate net effect on operations of the above adjustments in fiscal 2004
is to increase net loss by $623,100 and net loss attributable to common
stockholders by $2,429,225, and net loss per share by $0.25 per share.
GOING CONCERN - The accompanying condensed 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 nine months ended September 30, 2005, the Company incurred a net loss of
$5,333,150, and its operating activities used cash of $974,483, and has a
working capital deficit of $5,789,389 and a stockholders' deficit of $10,936,698
at September 30, 2005. In addition, as discussed above, a creditor foreclosed on
substantially all assets of the Company and the Company ceased all operations in
September 2005. In addition, certain investors may have rescission 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
seeking a merger candidate along with additional Financing 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.
7
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 nine months ended September 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, 12,915,772 common shares issuable
upon exercise of outstanding warrants, and 2,500,000 common shares potentially
issuable upon exercise of outstanding options. Such common stock equivalents may
dilute future earnings per share.
RECLASSIFICATIONS - Certain amounts in 2004 financial statements have been
reclassified to conform with 2005 classifications.
NOTE 2 - AGREEMENT AND PLAN OF MERGER, SETTLEMENT AGREEMENT AND FORECLOSURE
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:
8
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.
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
FORECLOSURE ON SUBSTANTIALLY ALL ASSETS
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,
goods, 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."
9
On September 29, 2005 the Company received a court ordered judgment and entered
into a settlement agreement to allow foreclosure of substantially all the assets
of the Company by the creditor discussed above. The settlement allowed for
certain payments to the Company by the creditor to cover health insurance and
accrued payroll and certain assets not covered by the foreclosure. The final
balance due to the creditor prior to the settlement was $1,862,436. The
settlement agreement stipulates that the creditor may not sue the Company to
recover the liability unless the Company is subjected to bankruptcy proceedings.
Upon consultation with legal counsel it was determined that this settlement is
in effect a legal dismissal of the liabilities since whether under the
settlement agreement or under bankruptcy, the liabilities would ultimately be
dismissed. Under the bankruptcy laws, the settlement can be disturbed if within
90 days of the settlement date the Company is put into bankruptcy. Therefore the
Company has left the liability on its records as of September 30, 2005 and after
further analysis, if proper, may relieve such liability after the 90 days period
has expired.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Bridge Loans - During the nine months ended September 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.
During the three months ended September 30,2005 the Company issued a 10% secured
convertible promissory note aggregating $135,000 and due August 15, 2006
accruing interest at 10%. This note is convertible at the same price of a future
Offering and therefore there is no beneficial conversion value as the intrinsic
value is zero. In addition, the Company issued three separate 10% secured
promissory notes for $20,000 each due at the next round of financing of the
Company. At the option of the holder these three notes may be converted into
common stock in the second round of financing at the same price of that second
round future offering and therefore there is no beneficial conversion feature
value as the intrinsic value is zero.
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. In
September 2005 Solomon resigned and the employment agreement terminated.
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..
(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. The deferred amount was fully amortized
as of September 30, 2005.
10
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. The Company
advised the customer it could no longer perform under the contract and this
contract was ultimately assumed by the creditor. ( see Notes 1 and 3)
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. The Company advised
the customer it could no longer perform under the contract and this contract was
ultimately assumed by the creditor. ( see Notes 1 and 3)
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.The equipment was returned to the lessor in
September 2005 and management believes there may still be obligations under the
lease.
Legal Matters - The Company has been contacted by certain convertible note
holders regarding repayment of the notes. No claims have been filed but certain
of the note holders have expressed an intent to do so in the event repayment
does not commence in a reasonable period of time.
The Company is engaged in two regulatory actions against the Company relating to
unpaid employee salaries and reimbursable expenses aggregating approximately
$33,000. The Company also anticipates an additional 3 to 5 claims of up to
$10,000 each. The Company has accrued all known amounts.
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.
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
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 up to the
earlier of (i) the date all underlying shares are sold by the investors or (ii)
the date the shares become freely traded pursuant to Rule 144(k). The Company
determined that the preferred stock, warrants and additional investment rights
qualified as equity classification under SFAS 133 and EITF 00-19 and that a
beneficial conversion value of $1,806,125 relating to the embedded conversion
feature should be recorded as a constructive dividend in 2004. The Company
determined that the registration rights agreement was a separate freestanding
derivative pursuant to SFAS 133 and related interpretations and has recorded the
derivative liability at fair value of $1,400,000 as of September 30, 2005. The
expense for the change in fair value of the derivative for the three and nine
months ended September 30, 2005 was, $510,000 and $920,000.
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.
11
Series A Preferred Stock Subject to Potential Rescission - 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 September 30, 2005, the Company's
consolidated balance sheet reflects a temporary equity of $5,182,993 ($4,816,260
preferred stock value less offering costs of $1,439,392 plus beneficial
conversion value of $1,806,125 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. The $250,000 was charged to Series A Preferred Stock value presented
as temporary equity as an offering cost.
12
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 charged to Series
A Preferred Stock value presented as temporary equity 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. In
August 2005 the Company granted stock options to purchase 2,500,000 common
shares to three officers for services rendered at an exercise price of $1.00
expiring in five years. The Company valued the options using a Black-Scholes
method (5 year term, 71% volatility, zero dividends and interest rate of 4%)
resulting in expense of $598,258. At September 30, 2005, there were 6,038,664
options outstanding.
NOTE 5 - RELATED PARTY TRANSACTIONS
Purchases of equipment from SBD included in cost of goods sold during the nine
months ended September 30, 2005 and 2004 approximated $292,000 and $92,000,
respectively. Additionally, during the nine months ended September 30, 2005 and
2004 the Company incurred consulting fees payable to SBD of approximately
$102,000 and $195,000. The amounts are included in general and administrative
expenses on the accompanying condensed consolidated financial statements. (See
Notes 1 and 2)
Advances payable to the Company's Chairman and Chief Executive Officer (who
resigned in September 2005)and 55%founding shareholder was $183,201 at September
30, 2005. These advances are due on demand, unsecured and non-interest bearing.
An officer/director 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 $456,000 during the nine months ended September 30, 2005..
Accounts payable of approximately $323,000 was due to this law firm at September
30, 2005, which is included in accounts payable-related party.
13
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 projections regarding future
events or our future financial performance. Historical results should not be
relied on as indicative of trends in operating results for any future period.
The actual results of the future events described in such forward-looking
statements in this quarterly report could differ materially from those stated in
such forward-looking statements. All subsequent written and oral forward-looking
statements attributable to us, or persons acting on our behalf, are expressly
qualified in their entirety by the foregoing. Except as otherwise required by
law, we assume no duty to update or revise our forward-looking statements based
on changes in internal estimates or expectations or otherwise subsequent to the
date of this filing.
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, performance or
achievements expressed or implied by these forward-looking statements. Important
factors that could cause actual results to differ materially from the Company's
stated or implied expectations include, but are not limited to: the Company's
ability to fund expansions of future growth and to implement our business
strategy; the Company's ability to integrate the operations of any businesses we
may acquire; potential legal claims against the Company; general economic and
business conditions; the condition of the securities and capital markets;
legislative or regulatory changes that affect the Company and our ability to
ability to comply with regulatory bodies; and statements of assumption
underlying any of the foregoing, as well as any other factors set forth in the
Company's Annual Report on Form 10-KSB, in our consolidated financial statements
contained in this report and the notes thereto, or under the caption "Plan of
Operation" under Item 2 of this report, all of 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.
14
OVERVIEW
TechAlt and its subsidiary, TAI, (together, the "Company") is engaged in the
homeland security sector with a particular focus on communications and security
solutions for private businesses. Sales of these products to governmental
entities or their agents are generally made to an independent contractor hired
by local, state or federal agencies, or directly to businesses seeking internal
communications and tracking security.
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. This contract was subsequently assumed by the
creditor as part of the foreclosure, as detailed below.
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. This
contract was assumed by the creditor as part of the foreclosure
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 AND CREDITOR FORECLOSURE ON SUBSTANTIALLY ALL ASSETS -
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)
15
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. The consulting agreement has
subsequently been terminated in connection with the Masanek Settlement, as
detailed in the section entitled "Legal Proceedings."
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."
On September 8, 2005, the Company received notice that Masanek and SBD
(collectively, the "Plaintiff"), filed legal action in the Circuit Court of Cook
County, Illinois County Department, Law Division, seeking an Order of Replevin
against the Company. Under the Order of Replevin, the Plaintiff alleged that the
Company is in default for nonpayment on the Note. On Sepember 29, 2005 the
Company received a court ordered judgment and entered into a settlement
agreement to allow foreclosure of substantially all the assets in relation to
intellectual property and contracts with IBM by the creditor discussed above.
The settlement allowed for certain payments to the Company by the creditor to
cover health insurance and accrued payroll. Default on the Note triggered the
Plantiff's right, under a Security Agreement dated November 19, 2004, to
immediate possession of certain collateral in the Company including the
Company's accounts, accounts receivables, goods, equipment inventory, machinery,
fixtures, cash, securities, all intellectual property including trademarks,
service marks, trade names, copyrights, patents, patent licenses, contracts and
other tangible and intangible contracts. On September 29, 2005, the Company
agreed not to contest the Entry of Judgment on the Replevin action in exchange
for the Plaintiff's payment of all accrued employee-health insurance premiums,
in the amount of $31,000, payment of $20,000 toward accrued payroll subject to
Plaintiff's UCC sale of the aforementioned secured collateral, and $32,833 in
cash.
The final balance due to the creditor prior to the settlement was $1,862,436.
The settlement agreement stipulates that the creditor may not sue the Company to
recover the liability unless the Company is subjected to bankruptcy proceedings.
Upon consultation with legal counsel it was determined that this settlement is
in effect a legal dismissal of the liabilities since whether under the
settlement agreement or under bankruptcy, the liabilities would ultimately be
dismissed. Under the bankruptcy laws, the settlement can be disturbed if within
90 days of the settlement date the Company is put into bankruptcy. Therefore the
Company has left the liability on its records as of September 30, 2005 and after
further analysis, if proper, may relieve such liability after the 90 days period
has expired.
As A Result of the above foreclosure, the Company has ceased substantially all
operations in connection with its IBM related and other sales related contracts
and has closed its offices in Arlington Heights, IL, but continues to focus on
the development of technologies in the homeland security sector.
16
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 RESCISSION - 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. The Series A Preferred Stock, net of offering
costs plus the value of the beneficial conversion feature is reflected as
temporary equity on the balance sheet as of September 30, 2005.
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.
17
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." Masanek and SBD subsequently brought legal action against the
Company, seeking Replevin, to enforce possession of these assets. On September
29, 2005, the Company agreed not to contest the Entry of Judgment on the
Replevin action in exchange for the Plaintiff's payment of all accrued
employee-health insurance premiums, in the amount of $31,000, payment of $20,000
toward accrued payroll subject to Plaintiff's UCC sale of the aforementioned
secured collateral, and $32,833 in cash.
QUARTER ENDED SEPTEMBER 30, 2005 AND 2004, AND NINE MONTHS ENDED SEPTEMBER 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 September 30,
2005 and nine months ended September 30, 2005 as compared to the three and nine
months ended September 30, 2004. The discussion should be read in conjunction
with the financial statements and notes thereto.
Revenue of $449,000 for the three months ended September 30, 2005 increased over
the same period for 2004 due to Phase 1 implementation and billing $449,000 for
the IBM contract and equipment sales to municipalities.
General and administrative expenses of $928,000 for the three months ended
September 30, 2005 included approximately $165,000 of legal and accounting fees,
$661,000 for employee compensation. The balance of $102,000 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 $383,000. The increase is primarily attributed to additional staff and
related expenses to support the IBM contract.
The $397,000 for the three months ended September 30, 2005 of research and
development expenses are comprised primarily of $193,000 employee compensation
and related expenses, $144,000 in Applications Development and Project Costs and
the balance of $60,000 for Office and other operating expenses. Research and
development costs for the same period in 2004 were $17,000. The increase is due
to additional staff and outside services to support the IBM Project and
continued product development.
Revenue for the nine months ended September 30, 2005 was $2,764,227, comprised
of Phase 1 IBM contract billing and other municipality equipment purchases.
Revenue for the nine months ended September 30, 2004 was $178,916.
General and administrative expenses of $2,593,000 for the nine months ended
September 30, 2005 included approximately $501,000 in legal and accounting fees,
$1,073,000 for employee compensation and related expenses. The balance of
$1,019,000 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 $740,000. Increased expenditures for General and
administrative were due to additional staff and related expenses to support the
IBM contract.
Research and Development costs for the nine months ended September 30, 2005 were
$1,435,000 comprised primarily of $631,000 for employee compensation and related
expenses, $638,000 in Application Development and Project Costs, with the
balance of $166,000 for operating expenses. For the same period in 2004 the
Research and Development costs were $52,000. Increases in these costs reflect
increased staff and outside services to support continued product development
and the requirements for the IBM contract.
18
Business Development expenses totaled $1,110,000 for the nine months ended
September 30, 2005. This included $621,000 for employee compensation and related
expenses, $285,000 for Public Relations, Marketing materials and Trade Shows,
with the balance of $194,000 for operating expenses. Expenses were $111,000 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 nine-months ended September 30, 2005, cash used by operating
activities was $974,000 compared to cash used of $292,000 during the comparative
prior year period. The increase in cash used by operating activities was
primarily due to the increase in net loss to $5,333,150 and the effects of the
legal settlement with Masanak and SBD.
Cash used by investing activities was $184,000 during the nine months ended
September 30, 2005 for the acquisition of property and equipment versus $23,000
in the comparative prior year period.
Cash used by financing activities for the nine-months ended September 30, 2005
was $44,000, 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 additional notes payable in the amount of $213,000, offset by note payments
of $1,183,000. Cash provided by financing activities for the nine-months ended
September 30, 2004 was $274,000, primarily consisting of proceeds received from
a loan payable from an officer of the Company and proceeds from a debenture of
$100,000.
Off-Balance sheet arrangements - As a result of legal action culminating in the
Masanek Settlement (as detailed in the section entitled "Legal Proceedings"),
the Company currently 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.
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
nine months ended September 30, 2005, the Company incurred a net loss of
$5,333,150, and its operating activities used cash of $974,483, and has a
working capital deficit of $5,789,389 and a stockholders' deficit of $10,936,698
at September 30, 2005. In addition, as discussed above, a creditor foreclosed on
substantially all assets of the Company and the Company ceased substantially all
operations in September 2005 in connection with its IBM related and other sales
related contracts and has closed its offices in Arlington Heights, IL,. In
addition, certain investors may have rescission 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 seeking a merger
candidate along with additional Financing which, management believes will
provide the Company the ability to continue as a going concern.
19
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.
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-KSB, 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.
20
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.
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 September 30, 2005 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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."
On September 8, 2005, the Company received notice that Masanek and SBD
(collectively, the "Plaintiff"), filed legal action in the Circuit Court of Cook
County, Illinois County Department, Law Division, seeking an Order of Replevin
against the Company, case No. 05 L 050840. Under the Order of Replevin, the
Plaintiff alleged that the Company is in default for nonpayment on the Note.
Default on the Note triggered the Plantiff's right, under a Security Agreement
dated November 19, 2004, to immediate possession of certain collateral in the
Company including the Company's accounts, accounts receivables, goods, equipment
inventory, machinery, fixtures, cash, securities, all intellectual property
including trademarks, service marks, trade names, copyrights, patents, patent
licenses, contracts and other tangible and intangible contracts. On September
29, 2005, the Company agreed not to contest the Entry of Judgment on the
Replevin action in exchange for the Plaintiff's payment of all accrued
employee-health insurance premiums, in the amount of $31,000, payment of $20,000
toward accrued payroll subject to Plaintiff's UCC sale of the aforementioned
secured collateral, and $32,833 in cash (collectively, the "Masanek
Settlement").
On October 26, 2005, the Company received notice that Bruno J. Riegl, a former
officer of the Company, filed a Wage Claim against the Company in the State of
Illinois, Department of Labor, Fair Labor Standards Division, seeking $28,153.38
in accrued salary and expenses, Wage Claim No. 05-004880. The Company has filed
a response disputing Mr. Riegl's claim and intends to vigorously defend against
the action.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On June 30, 2005, the Company received a letter from Masanek and SBD ("note
holder") 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 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." As detailed in Part II,
Item I of this Form 10QSB, Default on the Note triggered the note holders right,
under a Security Agreement dated November 19, 2004, to immediate possession of
certain collateral in the Company including the Company's accounts, accounts
receivables, goods, equipment inventory, machinery, fixtures, cash, securities,
all intellectual property including trademarks, service marks, trade names,
copyrights, patents, patent licenses, contracts and other tangible and
intangible contracts. On September 29, 2005, the Company entered a settlement
agreement with the note holder providing that the Company would not contest the
Entry of Judgment for transfer of the aforementioned collateral to the note
holder in exchange for the note holder's payment of all accrued employee-health
insurance premiums, in the amount of $31,000, payment of $20,000 toward accrued
payroll subject to Plaintiff's UCC sale of the aforementioned secured
collateral, and $32,833 in cash.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) 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
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
23
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
24
(b) Reports on Form 8-K.
During the period ended September 30, 2005, and for the subsequent period
through the date of this report, the Company filed the following reports on Form
8-K:
Date of Event Reported Items Reported*
- ---------------------- --------------
July 7, 2005 Items 5.02 and 9.01
July 25, 2005 Items 2.04 and 9.01
September 13, 2005 Item 8.01
October 6, 2005 Items 5.02, 8.01 and 9.01
* Previously filed.
25
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.
December 21, 2005 /s/ David M. Otto
----------------------------------
David M. Otto
Chairman & Chief Executive Officer
December 21, 2005 /s/ David M. Otto
----------------------------------
Chief Financial Officer
(Principal Financial Officer)
26
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.*
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
Sarbanes-Oxley Act Attached
* Previously filed.
27