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 MARCH 31, 2006
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)
(206) 838-9736
(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 March
30, 2006 was 13,477,296.
-----------------------------------
Transitional Small Business Disclosure Format (Check One):
Yes |_| No |X|
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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TechAlt, Inc. and Subsidiary
Condensed Consolidated Balance Sheet
Unaudited
March 31,
2006
------------
Automobiles, net of accumulated depreciation $ 24,842
------------
Total assets $ 24,842
============
Current liabilities
Notes payable to bank collateralized by automobiles $ 38,180
Accounts payable 1,067,126
Accounts payable - related parties 522,280
Accrued liabilities 161,111
Customer deposits 350,513
Convertible and other notes payable 195,000
Advances due to officer 183,201
Fair value of registration rights liability 1,490,000
Accrued preferred stock dividends 304,410
------------
Total current liabilities 4,311,821
------------
Commitments and contingencies (Notes 1, 4 and 6)
Series A Preferred stock subject to potential recission (Note 4),
4,820,000 authorized, 4,816,260 issued and outstanding, liquidation
preference of $9,632,520 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
Accumulated deficit (11,919,080)
------------
Total stockholders' deficit (9,469,972)
------------
Total liabilities and stockholders' deficit $ 24,842
============
See accompanying notes to condensed consolidated financial statements.
TechAlt, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
Three months ended March 31,
----------------------------
2006 2005
------------ -----------
Revenue $ -- $ 996,382
Cost of goods sold -- 489,523
----------- -----------
Gross profit -- 506,859
----------- -----------
Operating expenses
General and administrative 112,040 806,372
Research and development -- 469,928
Business development -- 456,997
----------- -----------
Total operating expenses 112,040 1,733,297
----------- -----------
Loss from operations (112,040) (1,226,438)
----------- -----------
Other income (expense)
Change in fair value of registration rights damages -- (210,000)
Interest expense, net (5,766) (13,272)
----------- -----------
Total other income (expense) (5,766) (223,272)
----------- -----------
Net loss (117,806) (1,449,710)
Preferred stock dividends (58,719) (52,824)
----------- -----------
Net loss attributable to holders of common stock $ (176,525) $(1,502,534)
=========== ===========
Basic and diluted net loss per share attributable
to holders of common stock $ (0.01) $ (0.11)
=========== ===========
Weighted average shares used
in computing loss per share 13,477,296 13,358,770
=========== ===========
See accompanying notes to condensed consolidated financial statements.
TechAlt, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
Three months ended March 31,
----------------------------
2006 2005
------------ ------------
Cash flows from operating activities:
Net loss $(117,806) $(1,449,710)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation 5,421 20,101
Amortization of deferred stock-based consulting -- 38,125
Stock-based compensation expenses -- 51,000
Change in fair value of registration rights -- 210,000
Changes in operating assets and liabilities, exclusive of foreclosure effects:
Accounts receivable -- (445,361)
Prepaid expenses and other current assets -- (135,551)
Accounts payable (29,117) 296,250
Accounts payable - related party 99,639 42,770
Accrued liabilities 5,363 (136,681)
Customer deposits and deferred revenue -- (256,230)
--------- -----------
Net cash used by operating activities (36,500) (1,765,287)
--------- -----------
Cash flows from investing activities:
Purchase of property, plant & equipment -- (96,508)
--------- -----------
Net cash used by investing activities -- (96,508)
--------- -----------
Cash flows from financing activities:
Decrease in excess of checks issued over bank balance -- (5,272)
Proceeds from advances 36,500 --
Proceeds from sale of preferred stock -- 881,260
Proceeds from loan payable - officer -- 24,379
--------- -----------
Net cash provided by financing activities 36,500 900,367
--------- -----------
Net increase (decrease) in cash and cash equivalents -- (961,428)
Cash and cash equivalents, beginning of period -- 1,202,748
--------- -----------
Cash and cash equivalents, end of period $ -- $ 241,320
========= ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ -- $ 19,649
========= ===========
Cash paid for income taxes $ -- $ --
========= ===========
Non-cash investing and financing activities
Common stock issued for preferred stock dividends $ -- $ 5,907
========= ===========
See accompanying notes to condensed consolidated financial statements.
Techalt, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
March 31, 2006
(Unaudited)
Note 1 Description of Business and Summary of Significant Accounting Policies
Description of Business and Organization - TechAlt, Inc. ("TechAlt") and its
wholly-owned subsidiary Technology Alternatives, Inc. ("TAI", and together, the
"Company") is engaged in the business of providing 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.
Excess of Liabilities Extinguished Over Recorded Value of Assets Seized in
Foreclosure and Compensatory Damages and Discontinued Operations- In September
2005, a creditor foreclosed on all the assets of the Company and the Company
ceased all operations. Effective 90 days after the foreclosure date, the Company
has no rights to foreclosed assets nor to obligations foreclosed and
extinguished. The excess of liabilities over the recorded value of assets seized
and of compensatory damages approximated $951,000 and was recorded as other
income during 2005. The accompanying financial statements do not present
discontinued operations for the foreclosed business as there was only one
operating segment.
Basis of Presentation and 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 recurring net losses including a net loss in 2005 of approximately $3.9
million, used cash by operating activities in 2005 of $973,000, and at December
31, 2005 had a working capital deficit of $4.3 million (including $1.5 million
of fair value of registration rights liability), and a stockholders' deficit of
$9.5 million. During the three months ended March 31, 2006, the Company reported
a net loss of approximately $118,000, and at March 31, 2006 has a working
capital deficit of approximately $4.3 million (including $1.5 million of fair
value of registration rights liability), and a stockholders' deficit of
approximately $9.5 million. Additionally, in 2005 a creditor foreclosed and
seized all of the Company's assets and the Company ceased all operations. These
factors, 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, its merger with
Cypher Wireless as disclosed in Note 2, additional financing activities, the
expansion of 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.
Principals 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 include
valuation of capital stock and warrants issued for services, valuation of
registration rights liability and valuation of deferred tax assets. Actual
results could differ from those estimates.
Unaudited Interim Condensed Consolidated Financial Statements - The unaudited
interim condensed consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission with regard to interim financial information. Accordingly, the
condensed consolidated financial statements do not include all of the
information and notes to financial statements required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments, considered necessary to present fairly the Company's financial
position, results of operations and cash flows for the interim periods presented
have been included. Results for the three months ended March 31, 2006 are not
necessarily indicative of results to be expected for the year ending December
31, 2006 or for any other future period. These interim condensed consolidated
financial statements should be read in conjunction with the Company's audited
annual financial statements and related notes thereto, which are included in the
Company's December 31, 2005 Annual Report on Form 10-KSB.
Cash and Cash Equivalents - The Company considers all highly liquid debt
investments purchased with a maturity of three months or less to be cash
equivalents.
Revenue Recognition - The Company recognizes revenue when there is persuasive
evidence of an arrangement, the product has been delivered or the services have
been provided to the customer, the sales price is fixed or determinable, and
collectibility is reasonably assured. Customer payments received that do not
meet the revenue recognition criteria are recorded as a deferred revenue
liability until such revenue recognition criteria are met.
Techalt, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
March 31, 2006
(Unaudited)
Delivery terms for product sales are generally FOB shipping point, typically the
Company's facility. Accordingly, revenues from product sales are recognized when
the product is shipped to the customer and there are no unfulfilled obligations
that affect the customer's acceptance.
The Company intends to provide other services in 2006 and thereafter to
potentially include grant writing, integration services, project implementation
services and maintenance and support services. Revenues from providing services
such as grant writing, integration, project implementation or maintenance and
support services will be recognized pro rata as the services are provided.
In the event that a contract with a customer includes multiple elements (e.g.
product, integration services and maintenance and support services), the total
sale amount of the contract will be allocated to these multiple elements based
on vendor specific evidence of the fair value of each of these elements. The
applicable revenue recognition criteria as discussed above will then be applied
to each of these individual elements. If the delivered items do not have
standalone value to the customer, then the contract will be accounted for as one
element. Generally the Company's products and services each have standalone
value to the customers since the customer may engage other service providers to
provide integration, project implementation or maintenance and support services.
Stock-based Compensation - Prior to 2006, the Company accounted 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 followed the
disclosure-only 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. Had the Company accounted for stock-based compensation
utilizing the fair value method, its reported net loss and net loss per share
attributable to holders of common stock would not have differed from actual
amounts reported.
In 2004, the Financial Accounting Standards Board ("FASB") released a revision
to Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for
Stock-Based Compensation ("FAS 123R"). FAS 123R addresses accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The statement eliminates accounting for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees, and
generally requires instead that such transactions be accounted for using a
fair-value-based method. The Company adopted FAS 123R effective January 1, 2006.
Research and Development - Research and development costs are comprised
primarily of compensation, consulting costs, supplies, materials and related
costs, and expensed as incurred.
Income taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes". SFAS 109 requires the Company to provide a net deferred tax
asset/liability equal to the expected future tax benefit/expense of temporary
reporting differences between book and tax and any available operating loss or
tax credits. 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.
Accounting for Derivatives - The Company evaluates its convertible debt,
options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted
for under Statement of Financial Accounting Standards 133 "Accounting for
Derivative Instruments and Hedging Activities" and related interpretations
including EITF 00-19 "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock".
Techalt, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
March 31, 2006
(Unaudited)
The result of this accounting treatment is that the fair value of the embedded
derivative is marked-to-market each balance sheet date and recorded as a
liability. In the event that the fair value is recorded as a liability, the
change in fair value is recorded in the condensed consolidated statement of
operations as other income or expense. Upon conversion or exercise of a
derivative instrument, the instrument is marked to fair value at the conversion
date and then that fair value is reclassified to equity. Equity instruments that
are initially classified as equity that become subject to reclassification under
SFAS 133 are reclassified to liability at the fair value of the instrument on
the reclassification date.
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 would be
anti-dilutive. Computations of net loss per share for the three months ended
March 31, 2005 and 2006, exclude 9,632,520 common shares potentially issuable
pursuant to terms of outstanding Series A Convertible Preferred Stock, and
12,915,772 and 14,151,664 common shares issuable upon exercise of outstanding
options and warrants, respectively. Such common stock equivalents may dilute
future net income per share.
Fair Value of Financial Instruments-The Company's financial instruments consist
of accounts payable, amounts payable to related parties, notes payable and
Series A Convertible Preferred Stock, and their carrying amounts approximate
fair value due to their short maturities and recent occurrences.
Recent Accounting Pronouncements - 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 2006. 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.
Note 2 - Merger with Cypher Wireless
Pursuant to terms of a February 2006 Agreement and Plan of Reorganization, on
April 26, 2006, the Company acquired all of the outstanding shares of common
stock of Cypher Wireless, Inc. ("Cypher Wireless"), in exchange for 35% of the
Company's issued and outstanding common stock (approximately 7,165,694 shares).
A wholly-owned subsidiary of Techalt was merged with and into Cypher Wireless
and the merged company was renamed "TechAlt Security Technologies, Inc.", which
exists as an operating subsidiary of the Company. The transaction may be
cancelled and unwound during the following twelve (12) month period for material
breach of representations and warranties or covenants of the merger agreement if
such breach is not cured within thirty days of written notice, if the parties
fail to obtain external financing of not less than $2 million, or for failure to
acceptably resolve the existing debt and material liabilities of the parties.
The merger will be accounted for as a business combination utilizing the
purchase method with the Company being the acquirer.
Note 3 - Agreement and Plan of Merger, Settlement Agreement and Foreclosure
In December 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:
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 owned
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 owned approximately 17%. The transaction, in which TechAlt
Acquisitions, Inc. was merged with and into TAI, was accounted for as a
recapitalization of TAI and combination of entities under common control as of
the August 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 owned a majority of TechAlt common stock after the merger and
obtained management control, TAI is considered to be the acquiring corporation
for accounting purposes.
Techalt, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
March 31, 2006
(Unaudited)
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 minimum annual equipment purchase commitment for the
Company to purchase equipment from SBD and to pay 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 - In August 2004, the predecessor company's then majority
(52%) shareholder and sole member of its board of directors entered into an
Intellectual Property License Agreement with TAI, which agreement (the "License
Agreement") was consummated on August 24, 2004. Pursuant to the License
Agreement, in exchange for 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, extendable for additional 6
month terms until terminated by mutual agreement. In connection with the License
Agreement the Company made payments to the former shareholders of approximately
$77,000 for the cancellation of 27,219,000 shares of predecessor 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 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, and 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 $1.15 million promissory note, and in July 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." In September 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 approximately $1.9 million. 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 could be disturbed if within 90 days
of the settlement date the Company is put into bankruptcy. Inasmuch as the
Company has not entered into bankruptcy, liabilities foreclosed upon were
written off at December 31, 2005.
Note 4 - Notes Payable
In 2004, the Company entered into promissory notes payable to a bank totaling
$54,201, due in April and May 2007, bearing interest at an annual rate of 5.75%,
and payable in equal monthly payments for 30 months. The promissory notes are
collateralized by automobiles owned by the Company and guaranteed by TechAlt.
Principal payments on the notes approximate $23,000 and $10,000 in 2006 and
2007, respectively. In April 2006, the bank repossessed the automobiles in
partial satisfaction of lease obligations.
During 2005 the Company issued a $135,000 10% secured convertible promissory
note, due August 15, 2006. This note is convertible at the same price of a
future Offering and therefore it is not considered convertible for (due to the
contingency of the future offering) purposes of considering if there is an
embedded derivative. In addition, 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 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.
Techalt, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
March 31, 2006
(Unaudited)
Note 5 - Stockholders' Equity
Series A Convertible Preferred Stock, Warrants and Additional Investment Rights
- - During 2004, pursuant to the private offering exemption provided in Rule 506
of Regulation D of the Securities Act of 1933 (the "Securities Act"), in
exchange for $3,835,000, the Company sold 3,835,000 shares of its Series A
Convertible Preferred Voting 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. 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.
During 2005, pursuant to the private offering exemption provided in Rule 506 of
Regulation D of the Securities Act, 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.
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. 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 $1,490,000 as of March 31,
2006 and December 31, 2005. The expense for the change in fair value of the
derivative for the three months ended March 31, 2006 and 2005 was $0 and
$210,000, respectively.
Series A Convertible 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 determined
that a rescission is not probable, although it may be possible, no accrual is
required under SFAS 5. As of March 31, 2006, the Company's condensed
consolidated balance sheet reflects a temporary equity value of approximately
$5.2 million, comprised of $4.8 million of preferred stock value less offering
costs of $1.4 million plus the value of the beneficial conversion feature of
$1.8 million relating to that portion of Series A Preferred Stock subject to
potential rescission, in accordance with Emerging Issues Task Force Topic D-98,
Classification and Measurement of Redeemable Securities.
Techalt, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
March 31, 2006
(Unaudited)
Common Stock - During 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 as an offering cost.
Warrants and Options - During 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, serving
as a Committee of the whole, or if the Board elects, by a 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. A
summary of options issued, all of which are exercisable, as of March 31, 2006,
and changes during the three months then ended is as follows:
Number of Weighted-Average
Warrants/Options Exercise Price
---------------- ----------------
Balance at January 1, 2006 16,001,664 $0.88
Options granted to employees and directors -- --
Exercised -- --
Cancellations and terminations (1,850,000) 0.50
----------
Balance at March 31, 2006 14,151,664 $0.93
==========
The following summarizes information about warrants and options outstanding, all
of which are exercisable, at March 31, 2006:
Weighted average
remaining contractual
Exercise price Number life (in years)
- -------------- ---------- ---------------------
$0.50 1,961,664 3.9
$1.00 12,190,000 3.9
----------
14,151,664
==========
Note 6 - Related Party Transactions
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 during the
three months ended March 31, 2005 and 2006 approximated $624,000 and $100,000,
respectively. Accounts payable of $522,280 were due to this law firm at March
31, 2006 and reported as accounts payable-related party.
Advances payable to the Company's former Chairman and Chief Executive Officer
and 55% shareholder were $183,201 at March 31, 2006 and December 31, 2005. These
advances are due on demand, unsecured and non-interest bearing.
Note 7 - Commitments and Contingencies
The settlement agreement discussed in Note 3 stipulates that the creditor may
not sue the Company to recover the approximate $1.9 million 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.
Agreement with IBM - In 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.
Pursuant to terms of the SOW, the Company would be providing hardware and
software, and maintenance services for which it was to receive payments of
approximately $2.9 million. Prior to foreclosure and discontinuance of the
project, the Company received payments of approximately $1.8 million, and
recognized revenue of approximately $1.6 million. The Company advised the
customer it could no longer perform under the contract and this contract was
ultimately cancelled. (see Notes 1 and 3)
Techalt, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
March 31, 2006
(Unaudited)
Operating Lease Agreement - In 2005, the Company 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 was twenty-four months with
monthly 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
Debt forbearance - The Company has been contacted by certain convertible note
holders regarding repayment of the notes. No claims have been filed, but certain
note holders have expressed intent to do so in the event repayment does not
commence in a reasonable period of time. The Company continues to be in the
process of meetings and discussions with note holders with respect to continued
forbearance.
Legal Matters - 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.
Note 8 - Subsequent Events
In April 2006, the bank repossessed all automobiles that the Company owned due
to defaults on the loans. (See Note 4)
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 2005 Annual Report on Form 10-KSB. This discussion regarding the
Company contains forward-looking statements that relate to projections regarding
future events or 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 that may be 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, 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.
OVERVIEW
TechAlt and its subsidiaries, TAI and Techalt Security Technologies, Inc.
(together, the "Company") is engaged in the homeland security sector with a
focus on emergency first responders in the public sector and on communications
interoperability, integration of multi source communications and collaboration
enhancement solutions within both the public and private sectors. 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.
The Company is currently targeting local, state, and federal public safety and
service agencies that are interested in pooling their communications resources
into a single, shared standards-based infrastructure that will support public
safety first responders within Department of Homeland Security designated Urban
Area Security Initiative ("UASI") communities, as well as privately operated,
public events security firms and systems managers.
In June 2005, the Company received a letter from Service By Designwise, Ltd. and
Paul Masanek (collectively, "Designwise"), a creditor of the Company claiming
that the Company had defaulted on its payment obligations under its promissory
note and that SBD has the right to accelerate the full payment of the $1.15
million promissory note, and in July 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." In September 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 approximately $1.9 million. 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 could be disturbed if within 90 days of the
settlement date the Company is put into bankruptcy. Inasmuch as the Company has
not entered into bankruptcy, liabilities foreclosed upon were written off at
December 31, 2005.
As a result of the above foreclosure, the Company ceased substantially all
operations in connection with its IBM and Cook County related contracts and
closed its offices in Arlington Heights, IL, but continues to focus on the
development of technologies in the homeland security sector.
Pursuant to terms of a February 2006 Agreement and Plan of Reorganization, on
April 26, 2006, the Company acquired all of the outstanding shares of common
stock of Cypher Wireless, Inc. ("Cypher Wireless"), in exchange for 35% of the
Company's issued and outstanding common stock (approximately 7,165,694 shares).
A wholly-owned subsidiary of Techalt was merged with and into Cypher Wireless
and the merged company was renamed "TechAlt Security Technologies, Inc.", which
exists as an operating subsidiary of the Company. The transaction may be
cancelled and unwound during the following twelve (12) month period for material
breach of representations and warranties or covenants of the merger agreement if
such breach is not cured within thirty days of written notice, if the parties
fail to obtain external financing of not less than $2 million, or for failure to
acceptably resolve the existing debt and material liabilities of the parties.
The merger will be accounted for as a business combination utilizing the
purchase method with the Company being the acquirer.
Cypher was formed in February 2006 to license certain assets of Ascentry
Technologies, Inc., a five year-old technology communications company focusing
on the homeland security market, pursuant to an agreement under which Cypher
licenses, with an option to purchase, the intellectual property of Ascentry.
Cypher is an innovator in communication software and security solutions,
primarily focusing within the communications platform to serve first responder
teams in public safety, physical security organizations across a variety of
industries, and federal, state, and local governments. Cypher's software and
technology solutions create environments where both equipment and individuals
can communicate between a variety of platforms, and seeks to create additional
value for customers by linking together existing equipment and new technologies
without having to replace entire systems to gain the benefits of digital
control, collaboration, and creation. The Company expects that the Acquisition
will be an important step in TechAlt's continuing plans to diversify its
opportunities in the homeland security sector through the acquisition of
proprietary, sustainable security technologies.
SALE OF SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANTS - Through June 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 provide 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 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 March 31, 2006.
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
expects to file 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.
Three months ended March 31, 2006 AND 2005
The following discussion and analysis provides information, which management
believes is relevant to an assessment and understanding of the Company's results
of operation for the three months ended March 31, 2006 as compared to the three
months ended March 31, 2006 and financial condition at March 31, 2006. The
discussion should be read in conjunction with the financial statements and notes
thereto included in this Quarterly Report.
Subsequent to foreclosure through March 2006, the Company has had no revenues.
Revenue of approximately $996,000 was recognized for the three months ended
March 31, 2005 relating to Phase 1 implementation for the IBM contract relating
to the Cook County project.
General and administrative expenses of approximately $112,000 for the three
months ended March 31, 2006 was comprised primarily of legal fees. General and
administrative expenses for the same period in 2005 were approximately $806,000.
The decrease is attributed to reduction in staff and related expenses to support
the IBM contract, which was cancelled in the fourth quarter of 2005.
The Company incurred no research and development or business development
expenses in the three months ended March 31, 2006 as a result of the
discontinuance of operations subsequent to foreclosure.
LIQUIDITY AND CAPITAL RESOURCES
During the three-months ended March 31, 2006, cash used by operating activities
was $36,500, and is primarily due to its net loss of $117,806 offset by an
increase of net accounts payable of $70,522 and accrued liabilities of $5,363.
Cash provided by financing activities was $36,500 during the three months ended
March 31, 2006 relating to advances made to the Company. There was no cash
provided or used by investing activities during the three months ended March 31,
2006 as a result of the foreclosure.
Off-Balance sheet arrangements - 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 unaudited 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 recurring net losses
including a net loss in 2005 of approximately $3.9 million, used cash by
operating activities in 2005 of $973,000, and at December 31, 2005 had a working
capital deficit of $4.3 million (including $1.5 million of fair value of
registration rights liability), and a stockholders' deficit of $9.5 million.
During the three months ended March 31, 2006, the Company reported a net loss of
approximately $118,000, and at March 31, 2006 has a working capital deficit of
approximately $4.3 million (including $1.5 million of fair value of registration
rights liability), and a stockholders' deficit of approximately $9.5 million.
Additionally, in 2005 a creditor foreclosed and seized all of the Company's
assets and the Company ceased all operations. These factors, among others, raise
substantial doubt about the ability of the Company to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties. Management's plans
include, among other things, its merger with Cypher Wireless as disclosed in
Note 2, additional financing activities, the expansion of 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.
As disclosed in report of Independent Registered Public Accounting Firm on the
Company's financial statements included in the Company's 2005 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.
BASIS OF PRESENTATION OF INTERIM FINANCIAL STATEMENTS - The accompanying
unaudited condensed consolidated financial statements reflect, in the opinion of
Company 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 2006, are not necessarily indicative of future results that may be expected
for the year ending December 31, 2006. 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, 2005 (the
"2005 Form 10-KSB").
Other Matters
Series A Convertible Preferred Stock Subject to Recission - 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 provide 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 Company 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.
Company management became aware that holders of shares of the Company's Series A
Preferred Stock may be entitled to certain rescission rights. The resale
registration statement of shares of common stock underlying these securities was
initially filed by the Company in November 2004, and was subsequently 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 when the resale
registration statement was initially 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,
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 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 limited
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", Company
management evaluated the above factors and 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 recorded as
temporary equity on the December 31, 2005 consolidated balance sheet 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.
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 the accompanying financial statements include
accounting for revenue recognition, accounting for issuances of capital stock,
and accounting for income taxes.
Revenue Recognition - The Company recognizes revenue when there is persuasive
evidence of an arrangement, the product has been delivered or the services have
been provided to the customer, the sales price is fixed or determinable, and
collectibility is reasonably assured. Customer payments received that do not
meet the revenue recognition criteria are recorded as a deferred revenue
liability until such revenue recognition criteria are met.
Delivery terms for product sales are generally FOB shipping point, typically the
Company's facility. Accordingly, revenues from product sales are recognized when
the product is shipped to the customer and there are no unfulfilled obligations
that affect the customer's acceptance.
The Company intends to provide other services in 2006 and thereafter to
potentially include grant writing, integration services, project implementation
services and maintenance and support services. Revenues from providing services
such as grant writing, integration, project implementation or maintenance and
support services will be recognized pro rata as the services are provided.
In the event that a contract with a customer includes multiple elements (e.g.
product, integration services and maintenance and support services), the total
sale amount of the contract will be allocated to these multiple elements based
on vendor specific evidence of the fair value of each of these elements. The
applicable revenue recognition criteria as discussed above will then be applied
to each of these individual elements. If the delivered items do not have
standalone value to the customer, then the contract will be accounted for as one
element. Generally the Company's products and services each have standalone
value to the customers since the customer may engage other service providers to
provide integration, project implementation or maintenance and support services.
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
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer/Chief Financial Officer, as appropriate, to allow timely decisions in
accordance with the required "disclosure controls and procedures" as defined in
Rule 13a-15(e). The Company's disclosure and control procedures are designed to
provide reasonable assurance of achieving their objectives, and the principal
executive officer and principal financial officer of the Company concluded that
the Company's disclosure controls and procedures were effective at the
reasonable assurance level.
At the end of the period covered by this Quarterly Report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's principal executive officer and
principal financial officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based of the foregoing, the
principal executive officer and principal financial officer of the Company
concluded that the Company's disclosure controls and procedures were effective
to ensure that the information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to the Company's management including the
Company's principal executive officer and principal financial officer to allow
timely decisions regarding required disclosure.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 filed a
response to Mr. Riegl's claim and subsequently entered settlement discussions
for settlement of the claim.
On March 10, 2006, the Company received notice that Francine Winters, a former
employee of the Company, filed a Wage Claim against the Company in the State of
Illinois, Department of Labor, Fair Labor Standards Division, seeking $5,083,24
in accrued salary and expenses, Wage Claim No. 05-005086. The Company and Ms.
Winters have entered settlement discussions for settlement of the claim.
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
(a) Exhibits
2.1 Form of Agreement and Plan of Merger
2.2 Agreement and Plan of Reorganization
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
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
(b) Reports on Form 8-K.
During the period ended March 31, 2006, 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*
- ----------------------------------------- --------------------------------------
February 22, 2006 Items 1.01
- ----------------------------------------- --------------------------------------
* Previously filed.
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.
June 20, 2006 /s/ David M. Otto
- ------------- ----------------------------------------
David M. Otto
Chairman & Chief Executive Officer
June 20, 2006 /s/ David M. Otto
- ------------- ----------------------------------------
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
2.1 Form of Agreement and Plan of Merger*
2.2 Agreement and Plan of Reorganization*
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.