<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ________________ TO _______________.
COMMISSION FILE NUMBER 0-25115
TERAGLOBAL COMMUNICATIONS CORP.
(Exact name of small business issuer as specified in its charter)
DELEWARE 33-0827963
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
9171 TOWNE CENTRE DRIVE, SUITE 600
SAN DIEGO, CALIFORNIA 92122
(Address of principal executive offices)
(858) 404-5500
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports,
and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 8, 2000, 19,855,663 shares
of the issuer's common stock were outstanding.
Transitional Small Business Disclosure Format (Check One): [ ] Yes [X] No
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP. AND SUBSIDIARIES
FORM 10-QSB FOR THE PERIOD ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Page
----
<S> <C>
COVER PAGE 1
INDEX 2
PART I. FINANCIAL INFORMATION 3
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 (unaudited) and December 3
31, 1999 (audited)
Consolidated Statement of Operations - Three Months Ended March 31, 2000 5
and March 31, 1999 (unaudited)
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2000 6
and March 31, 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements - March 31, 2000 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results 11
of Operations
PART II. OTHER INFORMATION 15
ITEM 1. Legal Proceedings 15
ITEM 2. Change in Securities 15
ITEM 3. Defaults upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
</TABLE>
TeraGlobal, TeraMedia, TeraConference and Unified Computing and
Communications Architecture are trademarks of TeraGlobal Communications Corp.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
2000 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 3,721,633 $ 7,893,036
Accounts receivable 124,309 208,115
Notes receivable-related parties 412,602 370,095
Inventory 173,303 171,940
Prepaid expenses and other current assets, including $23,592
and $19,173, respectively, to related parties 139,686 274,512
------------------ ------------------
Total current assets 4,571,533 8,917,698
FURNITURE AND EQUIPMENT, net 2,587,359 2,222,265
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED,
net of accumulated amortization of $1,685,280 at
March 31, 2000 (unaudited) and $1,494,374 at
December 31, 1999 2,146,611 2,329,715
OTHER ASSETS 500,000 500,000
------------------ ------------------
TOTAL ASSETS $ 9,805,203 $ 13,969,678
================== ==================
</TABLE>
3
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
2000 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable, including $0 to related parties at
March 31, 2000 (unaudited) and $1,054 at
December 31, 1999 $ 1,323,770 $ 1,763,489
Short-term loans 68,799 67,865
Accrued vacation 162,972 124,604
Accrued expenses 127,672 102,009
Convertible promissory notes - current 475,000 475,000
Current portion of capitalized lease obligations 1,948 708,636
------------------ ------------------
Total current liabilities 2,160,161 3,241,603
------------------ ------------------
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value, non-voting
1,000,000 shares authorized
no shares issued and outstanding -- --
Common stock, $0.001 par value
200,000,000 shares authorized
19,701,113 shares issued and outstanding at December 31, 1999
19,854,663 shares issued and outstanding at March 31, 2000 19,855 19,701
Additional paid-in capital 29,904,522 28,800,519
Accumulated deficit (22,237,188) (18,063,886)
Other comprehensive loss (42,147) (28,259)
------------------ ------------------
Total shareholders' equity 7,645,042 10,728,075
------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,805,203 $ 13,969,678
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDING MARCH 31, 2000 AND 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE 3 MONTHS FOR THE 3 MONTHS
ENDING MARCH 31, ENDING MARCH 31,
2000 1999
-----------------------------------------------
<S> <C> <C>
NET SALES $ 106,548 $ 87,485
COST OF SALES 68,132 40,959
--------------------- ---------------------
GROSS PROFIT 38,416 46,526
--------------------- ---------------------
OPERATING EXPENSES
General and administrative 2,827,167 1,022,677
Sales and marketing 308,038 26,760
Research and development 1,148,658 1,332,172
--------------------- ---------------------
Total operating expenses 4,283,863 2,381,609
--------------------- ---------------------
LOSS FROM OPERATIONS (4,245,447) (2,335,083)
--------------------- ---------------------
OTHER INCOME (EXPENSES)
Interest income 83,781 6,438
Interest expense (11,635) (117,004)
--------------------- ---------------------
Total other income (expense) 72,146 (110,566)
--------------------- ---------------------
NET LOSS $ (4,173,301) $ (2,445,649)
===================== =====================
BASIC LOSS PER COMMON SHARE $ (0.21) $ (0.14)
===================== =====================
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 19,721,835 16,874,065
===================== =====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2000 1999
------------------- -----------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net loss $ (4,173,301) $ (2,445,649)
Adjustments to reconcile net loss to net cash used in
Operating activities
Stock issued for services rendered 1,051,125 --
Depreciation 221,184 127,701
Amortization of goodwill 190,905 190,905
(Increase) decrease in
Accounts receivable 83,806 (61,466)
Prepaid expenses and other current assets 134,826 (87,038)
Inventory (1,364) 8,253
Increase (decrease) in
Accounts payable (439,721) (66,619)
Accrued expenses 64,031 (20,337)
------------------- -----------------
Net cash used in operating activities (2,868,509) (2,354,252)
------------------- -----------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Purchase of furniture and equipment (586,277) (70,356)
Notes receivable - related parties (42,507) (20,000)
------------------- -----------------
Net cashed used in investing activities (628,784) (90,356)
------------------- -----------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Payment of short-term loans 934 (627)
Payment of note payable - related party -- (96,508)
Payment of capital lease obligations (706,688) (5,339)
Proceeds from note payable-related party -- 50,000
Payment of convertible promissory notes -- (650,000)
Proceeds from issuance of common stock, net of fees -- 6,748,394
Proceeds from exercise of stock options 45,533 40,650
------------------- -----------------
Net cashed provided (used) by financing activities (660,221) 6,086,570
------------------- -----------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
CUMULATIVE TRANSLATION ADJUSTMENT (13,889) -
Net increase (decrease) in cash and cash equivalents (4,171,403) 3,641,962
CASH AND CASH EQUIVALENTS., BEGINNING OF PERIOD 7,893,036 48,524
------------------- -----------------
CASH AND CASH EQUIVALENTS., END OF PERIOD $ 3,721,633 $ 3,690,486
================== =================
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three months ended March 31, 2000, the Company issued 7,500 shares of
common stock valued at $7,500 as payment for the acquisition of additional
shares of TechnoVision Communications, Inc. The TechnoVision Communications,
Inc. shares were tendered pursuant to the Company's exchange offer which was
consummated on August 10,1998; however, the Company's shares were never issued
at the time of the exchange offer.
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31,
2000 are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 2000. These condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes thereto
included in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1999.
The consolidated financial statements include the accounts of
TeraGlobal Communications, Corp. (the "Company"), and its wholly owned
subsidiaries, TeraGlobal Communications (Canada), Corp. and TGC
Acquisition Inc. In addition, the accounts of TechnoVision
Communications, Inc., the Company's 99.2% owned subsidiary are
consolidated. All material inter-company balances and transactions have
been eliminated in the consolidation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MINORITY INTEREST
The accompanying consolidated balance sheet as of March 31, 2000 does
not reflect a minority interest liability because TechnoVision, on a
stand-alone basis, had a shareholders' deficit as of that date. The
accompanying consolidated statements of operations for the three months
ended March 31, 2000, and three months ended March 31, 1999, do not
reflect the minority interest's share of TechnoVision's losses for said
periods because the related accrual would result in the Company's
recording of a minority interest receivable.
NOTE 3 - NOTE RECEIVABLE - RELATED PARTY
During the three months ended March 31, 2000 the Company loaned $42,507
to certain officers and directors of the Company. The promissory notes
are unsecured, payable on demand, and bear interest at the minimum
applicable rate.
8
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
March 31,2000 December 31, 1999
(Unaudited)
<S> <C> <C>
Furniture and Fixtures $ 425,696 $ 358,886
Office Equipment 1,052,228 910,119
Computer Equipment 2,422,382 2,045,023
---------- ----------
3,900,306 3,314,028
Less Accumulated Depreciation 1,312,947 1,091,764
---------- ----------
TOTAL $2,587,359 $2,222,265
========== ==========
</TABLE>
Depreciation expense for the three months ended March 31, 2000 and the
year ended December 31, 1999 was $221,184 and $669,553, respectively.
Depreciation for the first quarter of 2000 includes amounts related to
network infrastructure equipment and computers that are revenue
generating. As such, depreciation related to those assets, $23,484 has
been charged to cost of sales. The remaining $197,700 is expensed as a
general and administrative expense.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Leases
The Company's TechnoVision subsidiary had entered into certain
non-cancelable capital leases for computers and software. The Company
entered into an agreement with the bankruptcy trustee for the leasing
company to purchase those assets in December 1999. The Company paid
$700,000 in January 2000 to consummate that purchase.
NOTE 6 - SHAREHOLDERS' EQUITY
Common Stock
During the three months ended March 31, 2000 the Company issued 127,000
shares of common stock for services rendered by employees and an
officer of the Company valued at $1,051,125.
During the three months ended March 31, 2000, the Company received
$45,533 in connection with the exercise of stock options for an
aggregate of 19,050 shares of common stock.
During the three months ended March 31, 2000, the Company issued 7,500
shares of common stock valued at $7,500 as payment for the acquisition
of additional shares of TechnoVision Communications, Inc.
9
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
Stock Option Plan
During the three months ended March 31, 2000 the Company granted 13,500
options under its 1997 Stock Option Plan (the "1997 Plan") at exercise
prices ranging from $8.87 to $10.94 per share to certain employees.
Additionally, the Company granted 225,000 options under its 1999 Stock
Option Plan (the "1999 Plan") at exercise prices ranging from $7.13 to
$8.56 per share to certain employees, and an additional 75,000 options
were granted to certain Directors of the Company at an exercise price
of $8.56 per share.
Employees exercised 19,050 options during the same time period.
The following schedule summarizes the stock options transactions:
<TABLE>
<CAPTION>
Stock Options Weighted Average
Outstanding Exercise Price
--------------------------------------------------
<S> <C> <C>
Outstanding, December 31, 1999 2,635,610 $ 6.31
Granted 313,500 $ 8.67
Forfeited (69,500) $ 8.99
Exercised (19,050) $ 2.39
-------------------- -----------------------
Outstanding, March 31, 2000 2,860,560 $ 6.45
==================== =======================
Exercisable, March 31, 2000 1,945,060
====================
</TABLE>
NOTE 7 - SUBSEQUENT EVENTS
Subsequent to March 31, 2000 the Company granted 22,000 options under
the 1997 Plan at exercise prices ranging from $5.56 to $7.50 per share
to certain employees.
Subsequent to March 31, 2000 the Company issued 1,000 shares of common
stock in connection with the exercise of stock options for proceeds of
$1,500.00.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE MATTERS DISCUSSED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND OTHER SECTIONS OF THIS REPORT
CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON CURRENT EXPECTATIONS,
ESTIMATES, FORECASTS AND PROJECTIONS ABOUT THE COMPANY AND THE INDUSTRY IN WHICH
IT OPERATES. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES
AND ARE NOT GUARANTEES OF FUTURE PERFORMANCE. FORWARD-LOOKING STATEMENTS
INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS CONCERNING ANTICIPATED TRENDS IN
REVENUES AND NET INCOME, THE DATE OF INTRODUCTION OR COMPLETION OF THE COMPANY'S
PRODUCTS, PROJECTIONS CONCERNING THE LEVEL AND NATURE OF COMPETITION, THE
ADEQUACY OF EXISTING STAFF AND INFRASTRUCTURE TO SUSTAIN OPERATIONS AND
PROJECTIONS CONCERNING THE ADEQUACY OF CASH FLOW. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING
STATEMENTS BASED ON A NUMBER OF FACTORS INCLUDING THOSE SET FORTH UNDER "FACTORS
THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION" BELOW AND MORE
COMPLETELY IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1999. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY
ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. THE FOLLOWING DISCUSSION OF THE COMPANY'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO APPEARING ELSEWHERE
IN THIS REPORT.
OVERVIEW
TeraGlobal Communications Corp. is a communications technology company.
It commenced operations in this business in February 1997. Since that time, the
Company has devoted substantially all of its resources to the development of a
Unified Computing and Communications Architecture--a next generation network
that combines the functionality of data networks with traditional communication
networks, such as the telephone and video collaboration, over a single
infrastructure. TeraGlobal has also developed its TeraMedia service to take
advantage of that network design to deliver real-time interactive communications
and collaboration solutions, including voice, video and data.
In July 1998, the Company acquired all of the membership interests of
ISG Acquisition LLC, a Delaware limited liability company, and with that
substantially all of the assets of Interactive Solutions Group, Inc., a North
Carolina corporation, for $251,000. In August 1998, the Company completed a
successful exchange offer acquiring 99% of the outstanding stock of TechnoVision
Communications, Inc., a Georgia corporation, ("TechnoVision") for an aggregate
of 3,563,506 shares. In a transaction completed in December 1998, the Company
completed the acquisition of Design Analysis Associates, Inc., a Utah
corporation, in exchange for an aggregate of 250,000 shares of stock. Each of
these acquisitions was accounted for on a purchase method of accounting.
The Company's financial statements consolidate the information relating
to its subsidiaries, including TechnoVision. At the time it was acquired,
TechnoVision was generating revenue from the sale of hardware based
videoconferencing products. Consequently financial statements for 1999 include
revenue from TechnoVision. Substantially all of the revenues and costs of goods
sold by the Company in the 1999 period relate to sales of TechnoVision's
TeraConference product. Conversely substantially all of the revenues and costs
of goods sold in 2000 relate to sales of the Company's TeraMedia service under
Service Agreements.
Commencing in late 1998 and early 1999, the Company worked with a
group of early adopters on beta versions of the TeraMedia service. The first
commercial version of service was launched in September 1999 at Motorola's
Horizons '99 Analyst Conference. The Company will release version 2.0 of the
TeraMedia service in May 2000, with enhanced reliability, robustness and
market oriented features.
During the first quarter of 2000, the Company continued its sales
efforts on direct and indirect sales focusing on the government, education and
entertainment markets. However, it did not secure significant sales of the
TeraMedia service during the quarter. The primary emphasis during this time was
to solidly institute the transition from development to sales, confirm product
definition and marketability in respective market segments through trade show
participation, and to establish the processes, infrastructure, and sales
personnel to successfully conduct and support sales.
The Company is continuing to generate significant leads, and has
established contact with several potential channel partners. It is developing
Value Added Reseller programs for specific vertical markets. It actively
recruited experienced sales personnel to its direct sales staff, and will
continue to do so for the foreseeable future. It has negotiated with additional
carriers to reduce the cost of connectivity for the customers. It has revised
its business models to also address those markets where customers already own a
high-speed network, thereby broadening its product line.
11
<PAGE>
The Company believes that these efforts will enable it to secure purchases from
early adopters within its target markets, and to use the feedback from those
customers to shape the product offerings for specific vertical markets for the
future.
RESULTS OF OPERATIONS
The following table sets forth the selected unaudited quarterly results
of operations for the three months ending March 31, 2000 and March 31, 1999.
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
MARCH 31, 2000 MARCH 31, 1999
(UNAUDITED) (UNAUDITED)
--------------------- ----------------------
<S> <C> <C>
Cash and cash equivalents $3,721,633 $3,690,484
Furniture and equipment, net 2,587,359 1,037,005
Total assets 9,805,203 8,496,954
Current liabilities 2,160,161 2,035,842
Total Shareholders' Equity 7,645,042 5,563,058
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS DATA: THREE MONTHS ENDING THREE MONTHS ENDING
MARCH 31, 2000 MARCH 31, 1999
(UNAUDITED) (UNAUDITED)
--------------------- ----------------------
<S> <C> <C>
Sales $ 106,548 87,485
Cost of Sales 68,132 40,959
General and administrative 2,827,167 1,022,677
Research and development 1,148,657 1,332,172
Net Loss $ (4,173,301) $ (2,445,649)
Basic loss per common share $ (0.21) $ (0.14)
Weighted average common shares
Outstanding 19,721,835 16,874,065
</TABLE>
12
<PAGE>
FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999.
SALES. Sales for the three months ended March 31, 2000, were $106,548
compared to $87,485 in the three months ended March 31, 1999, an increase of
25%.
Sales for the first quarter of 1999 were exclusively attributable to
the TeraConference product by the Company's Technovision subsidiary. Sales
for the first quarter of 2000 were exclusively attributable to the Company's
sale of TeraMedia, consisting of revenues generated from existing service
contracts with early adopters and one time sales of TeraMedia related
hardware.
COST OF SALES. Cost of sales for the period ended March 31, 1999 was
$40,959, resulting in a gross margin of 53% for the period, and were related
to sales of TeraConference by the Company's TechnoVision subsidiary.
TeraConference is a hardware-based solution with third party components
integrated into a video conferencing solution. The Company does not expect
demand for the TeraConference product to increase or expect that it will
significantly contribute to revenues or cost of sales in the future. Cost of
sales for the period ended March 31, 2000 was $68,132, resulting in a gross
margin of 36% for the period. This was associated primarily with charges for
services rendered under service agreements.
Cost of sales is expected to vary from period to period based on a
number of factors. First, the Company sells products and services under several
pricing models: software licenses, service contracts, service with network
included, and service with network and hardware included. Cost of sales will
vary widely depending upon the mix of products and services sold in any period.
Second, the Company deploys network infrastructure at the inception of a service
contract. To the extent that the infrastructure is not fully saturated at
inception, cost of sales will decline as more users are placed on the network.
Third, the Company's software solutions include licensed software from third
parties. Those licenses generally carry a royalty fee, which is front end
loaded. The fee per unit declines as additional units are sold. As a result cost
of sales associated with licensing fees will decline as additional units are
sold.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$2,827,167 for the three months ended March 31, 2000, compared to $1,022,677 for
the three months ended March 31, 1999, an increase of $1,804,490, or 176%.
The increase is primarily attributable to expanded facilities and an
increase in personnel. Legal expenses increased from $136,142 for the three
months ended March 31, 1999 to $164,968 for the three months ended March 31,
2000, an increase of 21%. Additionally, in March of 2000 there was a one-time
non-cash charge of $1,034,375 due to the issuance of stock to certain officers
and employees of the Company. Other non-cash charges include depreciation
expense of $197,700 for the period ended March 31, 2000 compared to $127,700 for
the period ended March 31, 1999.
RESEARCH AND DEVELOPMENT. Research and Development expenses were
$1,148,657 for the three months ended March 31, 2000, as compared to $1,332,172
for the three months ended March 31, 1999, a decrease of $183,515, or 13%.
Research and development expenses are comprised principally of network,
equipment and software expenses to support the research and development efforts
and salaries for engineers. The decline in research and development expenses
from the prior period is the result of decreased expenditures for network,
equipment and software expenses, as the Company has established its core
infrastructure needs for its current development efforts.
The Company views its technological strength as a key to its success
and will continue to pursue research and development efforts. However research
and development expenses as a percentage of total revenues or operating expenses
is expected to decline going forward because of the transition to a
product-oriented operating company. As TeraMedia and other products are
finalized, development efforts aimed at refining the product or supporting
access to specific vertical markets will be charged to general and
administrative expenses.
SALES AND MARKETING. Sales and marketing expenditures were $308,038 in
the three months ended March 31, 2000, as compared to $26,760 in the three
months ended March 31, 1999, an increase of $281,278 or 1,051%.
Personnel in sales and marketing activities grew from two in the
three months ended March 31, 1999 to six in the three months ended March 31,
2000. Also, a significant portion of the increase was due to the attendance
at several tradeshows and industry events where the TeraMedia Service was
showcased. This included attending the AFCEA tradeshow and DODIIS Symposium,
focused on government and department of defense contractors, Gartner Group, a
tradeshow targeted to industry leaders and StarCom, an event for local
industry leaders.
Selling expenses are expected to increase significantly in connection
with the rollout of the TeraMedia product group and significant efforts to build
brand awareness, identify sales opportunities, and increase sales staff.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000 the Company had cash and cash equivalents totaling
$3,721,633, with a working capital surplus of $2,411,372.
For the three months ended March 31, 2000, net cash used in
operating activities was $2,868,509. The Company also made capital
expenditures of $628,784. Of this, $120,620 was invested in revenue
generating TeraMedia Network deployments, bringing the total base of revenue
generating assets to $347,939. This equipment is depreciated over the life of
the service contract and the associated depreciation is charged directly to
cost of sales. The acquisition of computers for infrastructure development
and furniture and equipment purchases associated with the expansion of the
Company's Utah and Massachusetts offices totaled $465,657. The Company also
used a net of $660,221 in financing transactions, the result of a favorable
settlement with the trustee for the leasing company of certain non-cancelable
leases requiring a one-time payment of $700,000. The Company also received
$45,533 in connection with the exercise of stock options for an aggregate of
19,050 shares of common stock.
The Company expects cash flows from operating activities to be
negative over the next six months with spending continuing for sales,
marketing, and product development. The Company believes available cash and
anticipated operating revenue together with proceeds from financing proposals
that it has received from institutional investors will be sufficient to fund
the Company's operations for at least the next year. If the Company does not
receive sufficient orders by the end of the second quarter of 2000, the
Company may scale back all non-essential operations in order to conserve its
cash position. The Company is evaluating options regarding debt or equity
financing as presented in the financing proposals. No assurances can be given
as to the timing or terms of such financing or whether a financing will occur
at all.
The Company does not have any long-term debt. The Company is continuing
to discuss lease financing and working capital line of credit arrangements with
commercial lenders. To date, the Company has not entered into any new
arrangements and no assurances can be given that the Company will secure
commercial financing under terms that are acceptable to it.
SUBSEQUENT EVENTS
Commencing May 12, 2000, the Company's common stock began trading on
the NASDAQ National Market. The Company believes that listing on this Market
will enhance its visibility within the investment community and financial media.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company operates in a rapidly changing environment that involves a
number of uncertainties, some of which are beyond the Company's control. In
addition to the uncertainties described elsewhere in this report, there are many
factors that will affect the Company's future results and business, which may
cause the actual results to differ from those currently expected. The Company's
future operating results and financial condition are dependent upon the
Company's ability to successfully develop, manufacture, and market
technologically innovative products and services in order to meet dynamic
customer demand patterns. Inherent in this process are a number of factors that
the Company must successfully manage in order to achieve favorable future
operating results and a favorable financial condition.
Potential risks and uncertainties that could affect the Company's
future operating results and financial condition include, among other things,
continued competitive pressures in the marketplace and the effect of any
reaction by the Company to such competitive pressures; the availability of key
components on terms acceptable to the Company; the Company's ability to deliver
products and services at a certain price point in the marketplace; the Company's
ability to supply products free of latent defects or other faults; the Company's
ability to make timely delivery to the marketplace of technological innovations,
including its ability to continue to make timely delivery of planned
enhancements to the current TeraMedia Service and timely delivery of future
versions of the TeraMedia Service; the availability of third-party software for
particular applications; and the Company's ability to attract, motivate and
retain key employees.
For a discussion of these and other factors affecting the Company's
future results and financial condition, see "Item 6 Management's Discussion and
Analysis - Risk Factors That May Affect Operating Results" in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to certain litigation matters as described in
its Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999.
The following information updates the disclosure in that report.
ANTHONY YOHE V. VIDEO STREAM INTERNATIONAL, INC., ET AL. The Annual
Report discloses that Mr. Yohe has alleged 10 causes of action against the
Company, its TechnoVision subsidiary and certain officers and directors of each
arising out of a private placement of TechnoVision common stock and the
Company's subsequent exchange offer for Technovision common shares, including:
unregistered securities; control personal liability; violation of section 10(b)
of the Securities and Exchange Act of 1934; violation of section 20(a) of the
Securities and Exchange Act of 1934; fraud; material misrepresentations;
management principals materially aiding personnel; management personnel
materially assisting persons; negligent misrepresentation; and negligence. The
Complaint seeks cancellation of the exchange offer, or in the alternative
damages, interest and attorneys' fees. Since the date of the Annual Report, the
Company has answered the Complaint and has filed a Counter-Complaint against Mr.
Yohe, alleging causes of action for breach of contract, fraud, negligent
misrepresentation, indemnity and declaratory relief. The Counter Complaint seeks
declaratory relief and damages in an amount to be proved at trial.
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
a) Exhibits.
<TABLE>
<CAPTION>
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
27 Financial Data Schedule Filed herewith
</TABLE>
b) Reports on Form 8-K
On May 12, 2000, the Company filed a report on Form 8-K to
announce its listing on the NASDAQ National Market.
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
DATED: May 15, 2000 TERAGLOBAL COMMUNICATIONS CORP.
BY: /s/ FRED MCGEE
-----------------------------------
Fred McGee, Chief Financial Officer
BY: /s/ DAVID FANN
-----------------------------------
David Fann, Chief Executive Officer
15
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,721,633
<SECURITIES> 0
<RECEIVABLES> 124,309
<ALLOWANCES> 0
<INVENTORY> 173,303
<CURRENT-ASSETS> 4,571,533
<PP&E> 3,900,306
<DEPRECIATION> 1,312,947
<TOTAL-ASSETS> 9,805,203
<CURRENT-LIABILITIES> 2,160,161
<BONDS> 0
0
0
<COMMON> 19,855
<OTHER-SE> 29,904,522
<TOTAL-LIABILITY-AND-EQUITY> 9,805,203
<SALES> 106,548
<TOTAL-REVENUES> 106,548
<CGS> 68,132
<TOTAL-COSTS> 376,170
<OTHER-EXPENSES> 3,975,824
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,636
<INCOME-PRETAX> (4,173,301)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,173,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,173,301)
<EPS-BASIC> (0.21)
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