<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 JUNE 30, 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)
DELAWARE 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 August 1, 2000 there were
22,691,922 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 JUNE 30, 2000
<TABLE>
<CAPTION>
PAGE
<S> <C>
COVER PAGE 1
INDEX 2
PART I. FINANCIAL INFORMATION 3
ITEM 1. Financial Statements
Consolidated Balance Sheet as of June 30, 2000 (unaudited) and
December 31, 1999 (audited) 3
Consolidated Statements of Operations - Six Months and Three Months
Ended June 30, 2000 and June 30, 1999 (unaudited) 5
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2000
and June 30, 1999 (unaudited) 6
Notes to Condensed Consolidated Financial Statements - June 30, 2000 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
PART II. OTHER INFORMATION 17
ITEM 1. Legal Proceedings 17
ITEM 2. Change in Securities 17
ITEM 3. Defaults upon Senior Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
</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
JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,251,119 $ 7,893,036
Accounts receivable 118,529 208,115
Notes receivable-related parties 488,210 370,095
Common stock subscriptions receivable 2,718,942 -
Inventory 191,136 171,940
Prepaid expenses and other current assets, including $23,874
and $19,173, respectively, to related parties 179,362 274,512
------------------ ------------------
Total current assets 8,947,298 8,917,698
FURNITURE AND EQUIPMENT, net 2,419,958 2,222,265
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED,
net of accumulated amortization of $1,876,184 at
June 30, 2000 (unaudited) and $1,494,374 at
December 31, 1999 1,966,406 2,329,715
OTHER ASSETS 500,000 500,000
------------------ ------------------
TOTAL ASSETS $ 13,833,662 $ 13,969,678
================== ==================
</TABLE>
3
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, including $0 to related parties at
June 30, 2000 (unaudited) and $1,054 at
December 31, 1999 $ 983,880 $ 1,763,489
Short-term loans 67,600 67,865
Accrued vacation 152,001 124,604
Accrued expenses 142,363 102,009
Accrued commission payable 476,383 -
Convertible promissory notes - current 475,000 475,000
Current portion of capitalized lease obligations - 708,636
------------------ ------------------
Total current liabilities 2,297,227 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
22,668,672 shares issued and outstanding at June 30, 2000 22,669 19,701
Additional paid-in capital 36,979,216 28,800,519
Accumulated deficit (25,440,303) (18,063,886)
Other comprehensive loss (25,147) (28,259)
------------------- -------------------
Total shareholders' equity 11,536,435 10,728,075
------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,833,662 $ 13,969,678
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND THE SIX MONTHS ENDING JUNE 30, 2000 AND 1999 (UNAUDITED)
---------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
-------------------- ------------------- ------------------ -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES $ 118,180 $ 56,380 $ 224,728 $ 143,865
COST OF SALES 75,660 38,151 143,792 79,110
-------------------- ------------------- ------------------ -------------------
GROSS PROFIT 42,520 18,229 80,936 64,755
-------------------- ------------------- ------------------ -------------------
OPERATING EXPENSES
General and administrative 1,960,730 2,010,559 4,787,897 3,033,236
Sales and marketing 403,364 84,315 711,402 111,074
Research and development 911,309 1,708,495 2,059,966 3,040,667
-------------------- ------------------- ------------------ -------------------
Total operating expenses 3,275,403 3,803,369 7,559,265 6,184,977
-------------------- ------------------- ------------------ -------------------
LOSS FROM OPERATIONS (3,232,883) (3,785,140) (7,478,329) (6,120,222)
-------------------- ------------------- ------------------ -------------------
OTHER INCOME (EXPENSES)
Interest income 42,638 75,244 126,419 81,682
Interest expense (12,870) (114,720) (24,506) (231,725)
-------------------- ------------------- ------------------ -------------------
Total other income (expense) 29,768 (39,476) 101,913 (150,043)
-------------------- ------------------- ------------------ -------------------
NET LOSS $ (3,203,115) $ (3,824,616) $ (7,376,416) $ (6,270,265)
==================== =================== ================== ===================
BASIC LOSS PER COMMON SHARE $ (0.16) $ (0.21) $ (0.37) $ (0.36)
==================== =================== ================== ===================
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING 20,134,498 18,063,992 19,928,166 17,409,468
==================== =================== ================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
2000 1999
----------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,376,416) $ (6,270,265)
Adjustments to reconcile net loss to net cash used in
operating activities
Stock issued for services rendered 1,059,625 1,000,000
Options issued for services rendered - 450,000
Depreciation 629,506 274,533
Amortization of goodwill 381,809 381,809
(Increase) decrease in
Accounts receivable 89,611 (74,752)
Prepaid expenses and other current assets 95,150 (20,533)
Inventory (19,197) (56,858)
Increase (decrease) in
Accounts payable (779,610) 112,116
Accrued expenses 40,355 (6,500)
Accrued vacation 27,397 -
Customer deposits - 26,000
------------------ ----------------
Net cash used in operating activities (5,851,770) (4,184,450)
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Notes receivable - related parties (118,114) (198,595)
Purchase of furniture and equipment (827,200) (403,900)
------------------ ----------------
Net cash used in investing activities (945,314) (602,495)
------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations (708,636) (11,150)
Proceeds (payments) on short-term loans (265) 681
Payments on note payable - related party - (293,846)
Proceeds from note payable - related party - 50,000
Payments on convertible promissory notes - (650,000)
Proceeds from common stock subscriptions - 12,514,800
Proceeds from issuance of common stock, net of fees 4,610,000 6,748,394
Proceeds from exercise of stock options 250,957 62,550
------------------ ----------------
Net cash provided by financing activities 4,152,056 18,421,429
------------------ ----------------
</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 SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
2000 1999
------------------ ----------------
<S> <C> <C>
CUMULATIVE TRANSLATION ADJUSTMENT 3,111 (14,789)
Net increase (decrease) in cash and cash equivalents (2,641,917) 13,619,695
CASH AND CASH EQUIVALENTS., BEGINNING OF PERIOD 7,893,036 48,524
------------------ ----------------
CASH AND CASH EQUIVALENTS., END OF PERIOD $ 5,251,119 $ 13,668,219
------------------ ----------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the six months ended June 30, 2000, the Company issued 18,500 shares of
common stock valued at $18,500 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.
During the six months ended June 30, 2000, the Company issued 106,603
warrants valued at $23,122 as compensation to placement agents in connection
with a private placement that was completed June 22, 2000. The warrants
confer upon the holder the right to purchase one share of common stock at
$4.00 per share, expire on December 23, 2001, and can be redeemed by the
Company for $0.01 per warrant in the event the Company's stock trades at a
price in excess of $7.00 for twenty consecutive trading days.
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 six-month period ended June 30,
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., ("TechnoVision") 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 June 30, 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 six months
ended June 30, 2000, and six months ended June 30, 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 - NOTES RECEIVABLE - RELATED PARTIES
During the six months ended June 30, 2000, the Company loaned $118,115
to certain officers and directors of the Company. The promissory notes
are unsecured, payable on demand, and bear interest at the minimum
applicable rate.
NOTE 4 - COMMON STOCK SUBSCRIPTION RECEIVABLE
During the three months ended June 30, 2000, the Company conducted an
offering of units comprised of common stock and warrants (the "Units
Offering"). In connection with the Units Offering, the Company received
subscriptions totaling $7,328,967. As of June 30, 2000, the Company had
collected $4,610,000. The balance of $2,718,967, received in July 2000,
is reflected as a common stock subscription receivable.
8
<PAGE>
NOTE 5 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30,2000 December 31, 1999
(Unaudited)
<S> <C> <C>
Furniture and Fixtures $446,635 $358,886
Office Equipment 1,078,765 910,119
Computer Equipment 2,615,827 2,045,023
--------- ---------
4,141,227 3,314,028
Less Accumulated Depreciation 1,721,269 1,091,764
--------- ---------
TOTAL $2,419,958 $2,222,265
========== ==========
</TABLE>
Depreciation expense for the six months ended June 30, 2000, and the
year ended December 31, 1999, was $629,505 (unaudited) and $669,553,
respectively. Depreciation for the six months ended June 30, 2000,
includes amounts related to network infrastructure equipment and
computers that are revenue generating. As such, depreciation related
to those assets in the amount of $61,770 has been charged to cost of
sales. The remaining $567,735 is expensed as a general and
administrative expense.
NOTE 6 - 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 7 - 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 same period
the Company received $45,533 in connection with the exercise of stock
options for an aggregate of 19,050 shares of common stock. The Company
also issued 7,500 shares of common stock valued at $7,500 as payment
for the acquisition of additional shares of TechnoVision. The
TechnoVision shares were tendered pursuant to the Company's exchange
offer, which was consummated on August 10, 1998; however, the shares
were never issued at the time of the exchange offer.
During the three months ended June 30, 2000, the Company issued 2000
shares of common stock for services rendered by an employee valued at
$8,500. During the same period
9
<PAGE>
the Company received $205,424 in connection with the exercise of stock
options for an aggregate of 135,930 shares of common stock. The Company
also issued 11,000 shares of common stock valued at $11,000 as payment
for additional shares of TechnoVision Communications, Inc. The
TechnoVision shares were tendered pursuant to the Company's exchange
offer, which was consummated on August 10, 1998; however, the shares
were never issued at the time of the exchange offer.
In conjunction with the Unit Offering, the Company also sold 2,665,079
units of shares of common stock and warrants, for a total of
$6,852,584, net of offering costs of $499,505. Each unit sold for $2.75
and consisted of one share of common stock and a warrant conferring to
the holder the right to purchase an additional one-half share of common
stock at $4.00 per share. The warrants expire on December 23, 2001, and
are redeemable for $0.01 per warrant by the Company in the event that
the Company's common stock trades at a price in excess of $7.00 per
share for twenty consecutive trading days. Using the Black-Scholes
pricing model, the warrants have a value of $0.2169 per warrant, or a
total of $289,023.
The offering costs of the Unit Offering consisted of $476,383, or
6.5 percent of the gross offering, and 106,603 warrants, or 4
percent of units subscribed, valued at $23,122.
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. Employees exercised 19,050 options during the same time
period.
During the three months ended June 30, 2000, the Company granted 38,500
stock options under the 1997 Plan and 1,200 stock options under the
1999 Plan at exercise prices ranging from $7.86 to $8.67. Employees
exercised 135,930 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 $ 7.82
Granted 353,200 $ 7.86
Forfeited (131,370) $ 8.89
Exercised (154,980) $ 1.62
-------------------- -----------------------
Outstanding, June 30, 2000 2,702,460 $ 6.45
==================== =======================
Exercisable, June 30, 2000 1,958,700
====================
</TABLE>
10
<PAGE>
NOTE 8 - SUBSEQUENT EVENTS
Subsequent to June 30, 2000, the Company granted certain employees
31,730 options under the 1997 Plan at an exercise price of $3.31, and
71,520 options under the 1999 Plan at exercise prices ranging from
$2.53 to $3.31 per share.
11
<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 acquired 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 using the 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.
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. In May 2000, the Company released version 2.0
of its TeraMedia service with enhanced reliability, robustness and market
oriented features.
During the quarter ended June 30, 2000, the Company successfully listed
its stock for trading on the NASDAQ National Market, under the symbol "TGCC",
and secured additional equity funding. The Company sold units, each consisting
of one share of common stock and one-half a warrant to purchase one share of
common stock, to a group of institutional investors in Europe. The units,
offered at $2.75, secured an aggregate of $7.3 million in gross proceeds. Of
this amount, $4.6 million was received prior to the end of the quarter. The
balance was received in July 2000. The warrants were issued with an exercise
price of $4.00 per share and are redeemable by the Company for $0.01 per
warrant if its common stock
12
<PAGE>
trades above $7.00 per share for twenty consecutive trading days. If all of the
warrants were exercised, the Company would receive an additional $5.3 million in
gross financing proceeds.
Also during the quarter, the Company's research and development efforts
continued the transition to a product driven, rather than technology driven,
model. The Company's development focus is to move from "cool technology" to
"indispensable utility". In May 2000, the Company released version 2.0 of its
TeraMedia product. This release improved the reliability and robustness of the
product. In addition, the new release included an enhanced WhiteBoard
collaboration tool and an enhanced Assessment tool, with features designed to
meet market demand in the education and corporate training markets.
The Company continued active marketing efforts during the quarter,
targeting a number of trade shows and product demonstrations. In April 2000,
the Company presented TeraMedia at the Gartner Group Spring Symposium/ITxpo
2000. Also in April 2000, the Company, in conjunction with Marconi
Communications, demonstrated the live collaboration features of TeraMedia to
a group of entertainment industry executives at the Los Angeles Entertainment
Council. During the week of April 16, 2000, the Company was spotlighted at
the Department of Defense Intelligent Information Systems WorldWide 2000
Conference. On May 14, 2000, the Company was featured on "San Diego Business
In Focus", a local television program hosted by the publisher of the San
Diego Business Journal. From June 20 through June 22, 2000, the Company
presented at the Technet International 2000 convention hosted by AFCEA.
Technet is the world's largest forum for communications, electronics,
intelligence, and information systems.
The Company continued to build its direct sales team during the
quarter, adding two additional sales executives to manage sales to the
government and education markets. The Company also continued its foray into the
indirect sales market, initiating value added reseller and original equipment
manufacturer programs. Negotiations during the quarter resulted in the Company
securing its first Value Added Reseller Agreement with Universal Communications,
Inc., a regional service provider to the manufacturing industry, just following
the end of the quarter. As a result of these marketing and sales efforts the
Company is demonstrating its TeraMedia solution to greater numbers of qualified,
prospective customers.
RESULTS OF OPERATIONS
The following table sets forth the selected unaudited results of
operations for the six months ending June 30, 2000 and June 30, 1999.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDING SIX MONTHS ENDING
JUNE 30, 2000 JUNE 30, 1999
(UNAUDITED) (UNAUDITED)
----------------------- -------------------------
<S> <C> <C>
Sales $224,728 143,685
Cost of Sales 143,792 79,110
General and administrative 4,787,897 3,033,236
Research and development 2,059,966 3,040,667
Net Loss $(7,376,416) $(6,270,265)
Basic loss per common share $(0.37) $(0.36)
Weighted average common shares 19,928,166 17,409,468
Outstanding
</TABLE>
13
<PAGE>
SECOND QUARTER 2000 COMPARED TO SECOND QUARTER 1999.
SALES. Sales for the three months ended June 30, 2000, and June 30,
1999, were $118,180 and $56,380, respectively, an increase of 109 percent.
Sales for the six months ended June 30, 2000, and June 30, 1999, were
$224,728 and $143,865, respectively, an increase of 91 percent. Sales during
the three and six months ended June 30, 2000, were primarily attributable to
existing service contracts with early adopters of the Company's TeraMedia
service. Sales during the three and six months ended June 30, 1999 were
primarily generated from the Company's TechnoVision subsidiary.
COST OF SALES. Cost of sales for the three months ended June 30, 2000
were $75,660, resulting in a gross margin of 36 percent. Cost of sales for
the three months ended June 30, 1999, were $38,151, resulting in a gross
margin of 32 percent. Cost of sales for the six months ended June 30, 2000,
were $143,792, resulting in a gross margin of 36 percent. Cost of sales for
the six months ended June 30, 1999, were $64,755, resulting in a gross margin
of 45 percent. Cost of sales for the six months ended June 30, 2000, consists
primarily of network equipment and connectivity related to service
agreements. Cost of sales for the six months ended June 30, 1999, was
primarily hardware costs.
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
$1,960,731 for the three months ended June 30, 2000, compared to $2,010,559
for the three months ended June 30, 1999, a reduction of $49,828, or 2
percent. General and administrative expenses for the six months ended June
30, 2000, were $4,787,898, compared to $3,033,236 for the six months ended
June 30, 1999, an increase of 57 percent.
The Company has taken measures in the second quarter of 2000 to reduce
general and administrative expenses, which included a 10 percent reduction in
staff. Legal expenses increased from $95,284 for the three months ended June
30, 1999, to $120,026 for the three months ended June 30, 2000, an increase
of 25 percent. Legal expense for the six months ended June 30, 2000, and June
30, 1999, were $284,994 and $231,426, an increase of 23 percent. Non-cash
charges include depreciation expense of $370,035 for the three months ended
June 30, 2000, compared to $274,534 for the same period ended June 30, 1999.
Depreciation for the six months ended June 30, 2000, were $567,735, compared
to $274,534 for the three months ended June 30, 1999, an increase of 106
percent.
RESEARCH AND DEVELOPMENT. Research and Development expenses were
$911,309 for the three months ended June 30, 2000, as compared to $1,708,495
for the three months ended June 30, 1999, a decrease of $797,186, or 214
percent. Research and development expense for the six months ended June 30,
2000, and June 30, 1999 was $2,059,966 and $3,040,667, respectively,
resulting in a reduction of 35 percent.
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. Additionally,
research and development staff is currently being re-tasked to enhance the
features of existing products to facilitate sales and marketing.
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 $403,364 in
the three months ended June 30, 2000, as compared to $84,315 in the three
months ended June 30, 1999, an increase of $319,049 or 378 percent. Sales and
marketing expense for the six months ended June 30, 2000 and June 30, 1999,
were $711,402 and $111,074, respectively, or an increase of 540 percent.
Sales and marketing personnel has increased 350 percent in the six months
ended June 30, 2000, compared to the six months ended June 30, 1999. A
significant portion of the increase from the six months ended June 30, 2000,
compared to the six months ended June 30, 1999, was also due to the
attendance at tradeshows and industry events where the TeraMedia Service was
showcased, including the AFCEA Technet 2000. Additionally, the Company has
significantly increased expenditures related to demonstrations and travel to
target specific clients.
Selling expenses are expected to increase significantly in connection with
the rollout of the TereMedia product group. The Company in continuing to
build brand awareness through the attendance of tradeshows, target market
demonstrations and the addition of sales and marketing staff.
INTEREST REVENUE AND INTEREST EXPENSE. Interest revenue for the three months
ended June 30, 2000, and June 30, 1999, was $42,638 and $75,244,
respectively, a decrease of $32,606, or 43 percent. Interest revenue for the
six months ended June 30, 2000, and June 30, 1999, was $126,419 and $81,682,
respectively, an increase of 54 percent. Interest revenue is generated from
short-term investments of available cash. Interest expense for the three
months ended June 30, 2000, and June 30, 1999, was $12,870 and $114,720,
respectively, a reduction of 89 percent. Interest expense for the six months
ended June 30, 2000, and June 30, 1999, was $24,506 and $231,725,
respectively. Interest expense for the three and six months ended June 30,
1999, was primarily due to interest related to certain capital leases. The
Company entered into an agreement to purchase the leased equipment in
December 1999 and completed the terms of that agreement in January 2000.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had cash and cash equivalents
totaling $5,251,119, with a working capital surplus of $6,650,071.
For the three months ended June 30, 2000, and June 30, 1999, net cash
used in operating activities was $2,519,936 and $1,180,198, respectively, an
increase of 40 percent. Net cash used in operating activities for the six
months ended June 30, 2000, and June 30, 1999, was $5,851,770 and $4,184,450,
respectively, also an increase of 40 percent, due primarily to increased
operating losses.
During the three months ended June 30, 2000, the Company made capital
expenditures of $240,922. Of this amount, $57,129 was invested in revenue
generating TeraMedia Network deployments, bringing the total base of revenue
generating assets to $405,068. The equipment in the TeraMedia network
deployments is depreciated over the life of the service contract and the
associated depreciation is charged directly to cost of sales. Additionally,
$183,794 was used to purchase demonstration equipment and to upgrade existing
computer hardware.
To date, the Company's principle source of capital has been from the
sale of equity securities in financing transactions. During June 2000 the
Company conducted an offering of units consisting of common stock and
one-half warrant to purchase a share of common stock (the "Unit Offering").
The Unit Offering included the sale of 2,665,079 units at $2.75 for aggregate
proceeds of $7,328,967. Of this amount, $4,610,000 was received before June
30, 2000, with the balance being received in July 2000. The Company also
received $205,424 in connection with the exercise of stock options for an
aggregate of 135,930 shares of common stock. Accordingly, financing
transactions generated $4,335,919, net of commissions, for the period.
The Company expects cash flows from operating activities to be negative
for the foreseeable future with spending continuing for sales, marketing, and
product development. The Company believes available cash and anticipated
operating revenue will be sufficient to fund the Company's operations through
the end of the current fiscal year. The Company has taken steps to scale back
non-essential operations in order to conserve its cash position.
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.
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 results and financial condition include the following. The Company is an
early stage company moving from research and development to operations and as
such is subject to the uncertainties of any new enterprise such as the ability
to effectively establish a market for its products and services and competently
service and support its customers. Because the Company is dealing in high
technology and rapidly evolving markets, it is subject to risks associated with
uncertain market demand, intense competition, short product cycles and the
possibility of product defects. To date the Company has relied on external
financing activities to support its operations. If the Company does not
successfully generate adequate revenues to meet operating expenses in the
future, the Company will be forced to seek additional external financing or
curtail operations. The Company does not currently have any commitments for
additional financing at this time and is subject to the risk that such
financing, if needed, will not be available on terms favorable to the Company or
at all.
15
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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.
16
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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,
and its quarterly report on Form 10-QSB for the period ended June 30, 2000.
ITEM 2. CHANGE IN SECURITIES
In June 2000 the Company conducted a private placement of units,
each consisting of one share of common stock and one-half warrant conferring
upon the holder the right to acquire an additional share of common stock.
Each warrant entitles the holder to purchase common stock at a price of $4.00
per share and expires December 23, 2001. The Company has the right to redeem
the warrants for $.01 in the event the Company's common stock trades above
$7.00 per share for twenty consecutive trading days. The units were offered
without registration pursuant to the exemption provided by Rule 506 under
Regulation D. NC Fuller Associates, Ltd. acted as placement agent for the
Company. The units were sold exclusively to institutional investors in
Europe, which represented that they were accredited within the meaning of
Regulation D. For their services rendered in connection with the offering NC
Fuller Associates, Ltd. and its agents received aggregate cash compensation
of $476,383, or 6.5 percent of the offering proceeds, plus 106,603 warrants
or 4 percent of units sold, with the same terms as those offered in the
units. These warrants were valued at $23,122. The units were offered at $2.75
per unit. During the period ended June 30, 2000, the Company received
subscriptions for the sale of 2,665,079 units aggregating to $7,328,967. Of
this amount, $4,610,000 was received prior to June 30,2000. The balance of
$2,718,967 was received in July 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 30,2000. At
the meeting, the Company's officers provided a business update reviewing the
steps management has taken and intends to take to build a foundation for
additional sales, including completion of TeraMedia version 2.0, realignment of
research and development to a product focus, building a sales team, and the
retention of additional management expertise in the areas of sales and finance.
The only item voted on at that meeting was the election of directors. The votes
tabulated by the Inspector of Elections at the meeting for the election of
Directors was as follows.
Paul Cox For 13,974,520 Withheld 62,245
David Fann For 13,962,020 Withheld 73,745
Grant K. Holcomb For 13,974,520 Withheld 62,245
Lawrence Lacerte For 13,974,520 Withheld 62,245
John F.A.V Cecil For 13,974,520 Withheld 62,245
William O. McCoy For 13,974,520 Withheld 62,245
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
a) Exhibits.
NUMBER DESCRIPTION METHOD OF FILING
------ ----------- ----------------
27 Financial Data Schedule Filed herewith
b) Reports on Form 8-K
On June 23, 2000, the Company filed a report on Form 8-K
announcing the completion of the Unit Offering.
On June 7, 2000, the Company filed a report on Form 8-K
announcing a reorganization and reduction of workforce.
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: August 14, 2000 TERAGLOBAL COMMUNICATIONS CORP.
BY: /s/ FRED MCGEE
-----------------------------------
Fred McGee, Chief Financial Officer
BY: /s/ DAVID FANN
-----------------------------------
David Fann, Chief Executive Officer
17
