<PAGE>
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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[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 0-16580
------------------------------
TELENETICS CORPORATION
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 33-0061894
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25111 ARCTIC OCEAN
LAKE FOREST, CALIFORNIA 92630
(Address of principal executive offices)
(949) 455-4000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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.
Yes [X] No [ ]
As of May 19, 2000, there were 14,428,845 shares of the Company's common stock
outstanding.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
TELENETICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(Unaudited)
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash $ 72,594
Accounts receivable 2,763,055
Receivable from related parties 175,391
Inventories 1,703,403
Prepaid expenses and other current assets 294,463
-------------
Total current assets 5,008,906
Property, plant and equipment, net 849,385
Goodwill, net 364,894
Investments in technology and other intangible assets, net 3,023,565
Other assets 73,743
-------------
$ 9,320,493
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ 279,337
Revolving line of credit 399,106
Subordinated promissory notes 720,506
Current portion of related party debt 366,262
Current portion of obligations under capital leases 23,348
Accounts payable 1,151,193
Accrued expenses 664,549
Advance payments from customers 54,670
-------------
Total current liabilities 3,658,971
Subordinated promissory notes 681,741
Obligations under capital leases, less current portion 55,289
-------------
Total liabilities 4,396,001
-------------
Shareholders' equity:
Preferred stock, no par value. Authorized 5,000,000 shares;
no shares issued and outstanding 0
Common stock, no par value. Authorized 25,000,000 shares;
issued and outstanding 14,260,416 shares 19,733,263
Unearned compensation (780,169)
Accumulated deficit (14,028,602)
-------------
Total shareholders' equity 4,924,492
-------------
$ 9,320,493
=============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
TELENETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
MARCH 31, 2000
(Unaudited)
<CAPTION>
Three Months Ended March 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Net sales $ 2,928,014 $ 3,838,050
Cost of sales 1,939,797 2,837,836
--------------- ---------------
Gross profit 988,217 1,000,214
Operating expenses:
Selling, general and administrative 1,524,929 391,299
Engineering and product development 559,842 155,178
--------------- ---------------
Income (loss) from operations (1,096,554) 453,737
Interest expense (104,729) (88,773)
Debt termination costs (7,771) 0
Other income 0 36,298
--------------- ---------------
Income (loss) before income taxes (1,209,054) 401,262
Income taxes 800 829
--------------- ---------------
Net income (loss) $ (1,209,854) $ 400,433
=============== ===============
Earnings (loss) per share:
Basic $ .096 $ .042
=============== ===============
Diluted $ .096 $ .038
=============== ===============
Common shares used in computing earnings (loss) per share:
Basic 12,767,215 9,527,165
=============== ===============
Diluted 12,767,215 10,468,785
=============== ===============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
TELENETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
MARCH 31, 2000
(Unaudited)
<CAPTION>
Three Months Ended March 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (1,209,854) $ 400,433
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Depreciation and amortization 130,603 24,743
Compensation for non-employee stock options 176,725 --
Amortization of unearned compensation for
employee stock and options 70,631 --
Provision for doubtful accounts 8,500 --
Changes in operating assets and liabilities, net
of business acquisition:
Accounts receivable (1,195,924) 362,692
Inventories 202,836 1,194,438
Prepaid expenses and other current assets (55,973) (34,783)
Other assets -- 3,424
Accounts payable (281,365) (871,683)
Accrued expenses (109,668) (18,491)
Advance payments from customers (35,189) (573,965)
--------------- ---------------
Net cash provided by (used in) operating activities (2,298,678) 486,808
--------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (124,048) (6,435)
Cash acquired in connection with business acquisition 19,909 --
Amounts collected from (advanced to) related parties (16,769) (35,363)
--------------- ---------------
Net cash used in investing activities (120,908) (41,798)
--------------- ---------------
Cash flows from financing activities:
Bank overdraft (39,250) (18,010)
Net decrease in obligations under factoring agreement -- (475,836)
Net proceeds from revolving line of credit (398,696) --
Repayments of obligation under capital leases (8,697) --
Repayments of notes payable (322,890) --
Repayments of related party debt (10,000) (30,000)
Proceeds of convertible promissory notes 871,000 --
Proceeds from exercise of warrants and options 2,412,163 --
Proceeds from subscription receivable -- 224,959
Costs of private placement -- (14,067)
Dividends on preferred stock (12,095) --
--------------- ---------------
Net cash provided by (used in) financing activities 2,491,535 (312,954)
-------------- --------------
Net increase in cash 71,949 132,056
Cash, beginning of period 645 --
--------------- ---------------
Cash, end of period $ 72,594 $ 132,056
=============== ==============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
TELENETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
MARCH 31, 2000
(Unaudited)
<CAPTION>
Three Months Ended March 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 81,480 $ 60,609
=============== ==============
Income taxes -- --
=============== ==============
Supplemental disclosures of non-cash investing
and financing activities:
Issuance of common stock upon conversion of preferred stock:
Class "A" $ 775,976 --
Class "B" 249,106 --
Class "C" 550,000 --
--------------- ---------------
1,575,082 --
=============== ==============
Issuance of common stock upon conversion of debt 147,983 --
=============== ==============
Issuance of common stock for services 153,720 --
=============== ==============
Issuance of common stock upon exercise of warrants
pursuant to subscription agreements 84,375 --
=============== ==============
Warrants issued in connection with issuance
of subordinated promissory notes 10,013 --
=============== ==============
Subordinated promissory note issued in exchange
for related party note payable 62,500 --
=============== ==============
Issuance of common stock in connection with
acquisition 2,070,000 --
=============== ==============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
TELENETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. Basis of Presentation and Business
The accompanying condensed consolidated financial statements have been
prepared by Telenetics Corporation (the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures included herein are adequate to make the
information presented not misleading. The unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, which are, in the opinion of management, necessary to
fairly state the financial position as of March 31, 2000 and the results of
operations and cash flows for the related interim periods ended March 31, 2000
and 1999. The results of operations for the three months ended March 31, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000 or any other period.
The accounting policies followed by the Company and other information are
contained in the notes to the Company's financial statements filed on April 14,
2000 as part of the Company's annual report on Form 10-KSB. This quarterly
report should be read in conjunction with such annual report.
2. Inventories
Inventories consist of the following:
March 31,
2000
---------------
Raw materials $ 917,500
Work-in-process 693,053
Finished goods 92,850
---------------
$ 1,703,403
===============
3. Litigation
The Company is subject to certain legal proceedings, claims and litigation
arising in the ordinary course of business. While the amounts claimed may be
substantial, the ultimate liability cannot presently be determined because of
considerable uncertainties that exist. Therefore, it is possible that the
outcome of such legal proceedings, claims and litigation could have a material
effect on quarterly or annual operating results or cash flows when resolved in a
future period. However, based on facts currently available, management believes
such matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
On August 18, 1999, Drake & Drummond, a Nevada corporation, initiated an
action in the Orange County Superior Court, Central (Case No. 813430) against
the Company alleging, among other things, breach of contract, common count and
declaratory relief arising out of a consulting agreement entered into between
Drake & Drummond and the Company. The complaint seeks damages as follows: (i)
cash in the amount of $535,000, plus interest, and (ii) judicial order directing
the Company to sell to Drake & Drummond 950,000 shares of common stock for $.01
per share. On October 8, 1999, the Company filed an answer to the complaint and
filed a cross-complaint against Drake & Drummond alleging, among other things,
breach of contract, rescission based upon fraud, and declaratory relief arising
out of the same consulting agreement. The cross-complaint seeks: (i) damages
according to proof at trial, (ii) rescission of the consulting agreement and
restitution of all consideration received by Drake & Drummond, and (iii) a
judicial declaration of the rights and liabilities of the parties. The Company
intends to vigorously defend this action and pursue the cross-complaint against
Drake & Drummond.
On October 18, 1999, the Company initiated an action in the Orange County
Superior Court, Central (Case No. 815922) by filing a complaint against Bibicoff
& Associates and Harvey A. Bibicoff, its primary shareholder and chief executive
officer, alleging, among other things, breach of contract, rescission based upon
fraud, breach of fiduciary duty and declaratory relief arising out of a
consulting agreement entered into between defendants and the Company. The
complaint seeks damages according to proof at trial, rescission of the
consulting agreement and restitution of all consideration received by defendants
and a judicial declaration of the rights and liabilities of the parties. On
December 6, 1999, defendants filed an answer to the complaint denying all
material allegations contained therein. Defendants, together with five of the
Company's subordinated promissory note holders and shareholders affiliated with
<PAGE>
defendants, concurrently filed a cross-complaint against the Company and Michael
Armani, who is a director and the President and Chief Executive Officer of the
Company, for damages and rescission based upon alleged misrepresentations, false
promises, and non-disclosures by the Company and Mr. Armani in connection with
the cross-complainants' purchase of their interests in the Company. The
cross-complaint also contains breach of contract claims arising out of the
consulting agreement between the Company and certain of the defendants and
purported oral contracts between the Company and certain of the
cross-complainants. The Company and Mr. Armani filed an answer to the
cross-complaint denying all material allegations contained therein. The Company
intends to vigorously defend the cross-complaint action.
On January 28, 2000, Aeris Communications, Inc., a California corporation,
initiated an action in the United States District Court for the Northern
District of California (Case No. C00-00328) against the Company alleging, among
other things, patent infringement of two United States patents held by Aeris
Communications. The alleged patent infringement relates to certain technology
the Company acquired in connection with the acquisition of eflex Wireless, Inc.
The litigation is in its initial stages. Management believes that the
allegations in the complaint are without merit and intends to vigorously defend
this action.
4. Earnings (Loss) Per Common Share
Basic earnings (loss) per share are computed by dividing earnings available
to common shareholders by the weighted average number of common shares
outstanding during the periods. Diluted earnings per share reflect per share
amounts that would have resulted from the dilutive potential effect of common
stock instruments. The net loss for the three months ended March 31, 2000 has
been adjusted by $12,095 for dividends during such period on the Company's
preferred stock to arrive at the basic loss per share of common stock.
5. Acquisition of eflex Wireless, Inc.
On January 7, 2000, the Company issued 750,000 shares of common stock, with
a fair market value of $2,070,000, in exchange for all the outstanding common
stock of eflex Wireless, Inc. ("eflex"). The agreement includes a provision for
the issuance up to an additional 6,000,558 shares of common stock, contingent
upon the successful implementation of the acquired technology and installation
of a specified number units ending on the earlier of December 31, 2004 or the
date upon which all shares of additional common stock have become issuable. In
connection with the acquisition, the Company entered into certain employment and
consulting agreements for periods up to five years with the principals of eflex,
which include the granting of 1,150,000 options at $1.75 per share, which is at
a discount to market.
6. Conversion of Preferred Stock
Between January and March 2000, all shares of each class of preferred stock
were converted to common stock pursuant to formula provisions for an automatic
compulsory conversion based on the public trading price of the Company's common
stock. These provisions were met in January 2000 for the Series A Preferred
Stock, in February 2000 for the Series B Preferred Stock, and in March 2000 for
the Series C Preferred Stock. In connection with the conversion of preferred
stock, the Company issued an aggregate of 1,285,455 shares of common stock.
7. Subordinated Promissory Note Offering and Exercise of Warrants
In January 2000, the Company completed its offering of $1,250,000 of
Subordinated Unsecured Promissory Notes due 2001. In February 2000, conditions
enabling the Company to call the warrants issued in connection with this
offering were met. All of the warrants were exercised for cash in the amount of
$1,590,625, reduction in the subordinated promissory notes of $512,500,
subscriptions receivable of $84,375 and repayments of $50,000. After the
exercise of warrants, the aggregate amount of notes remaining outstanding
amounted to $687,500, less unamortized warrant valuation of $5,759.
8. Subsequent Events -- Private Equity Offerings
Subsequent to March 31, 2000, the Company completed private equity
offerings of an aggregate of 100,000 shares of common stock for $395,000. The
Company intends to use the proceeds of these offerings for working capital and
other corporate purposes.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the Company's condensed consolidated financial statements and notes thereto
included elsewhere in this quarterly report on Form 10-QSB. Except for the
historical information contained herein, the following discussion contains
certain forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this quarterly report on Form 10-QSB should be
read as being applicable to all related forward-looking statements wherever they
appear herein. See "Forward Looking Statements; Cautionary Statement." The
Company's actual results may differ materially from the results discussed in the
forward-looking statements.
OVERVIEW
Telenetics Corporation (the "Company") designs and manufactures wireless
and landline remote monitoring products and systems that collect data from
industrial devices such as meters, remote terminal units, traffic controllers,
industrial controls, remote sensors and data loggers. The collected data is sent
through wireless cellular and radio frequency networks or telephone lines to a
host site, direct or via the Internet. The Company is an innovator of
proprietary wireless data-communications solutions for utility, transportation,
oil and gas and other industrial automation applications.
The Company's results of operations have been and may continue to be
subject to significant fluctuations. The results for a particular period may
vary due to a number of factors, many of which are beyond the Company's control,
including the timing and nature of revenues from product sales that are
recognized during any particular quarter, the impact of price competition upon
the Company's average selling prices, the availability and pricing of components
for the Company's products, market acceptance of new product introductions by
the Company and its competitors, the timing of expenditures in anticipation of
future sales, product returns, the financial health of the Company's customers,
the overall state of the modem, data and wireless communications industries, and
economic conditions generally. In addition, the volume and timing of orders
received during a quarter are difficult to forecast. The Company expects that
its quarterly operating results will continue to fluctuate in the future as a
result of these and other factors.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Net sales.................................................. 100.0% 100.0%
Cost of sales.............................................. 66.2 73.9
--------------- ---------------
Gross profit............................................... 33.8 26.1
Operating expenses:
Selling, general and administrative...................... 52.1 10.2
Engineering and product development...................... 19.1 4.1
--------------- ---------------
Income (loss) from operations.............................. (37.4) 11.8
Interest expense........................................... (3.6) (2.3)
Debt termination costs..................................... (0.3) --
Other income............................................... 0 0.9
--------------- ---------------
Net income (loss).......................................... (41.3%) 10.4%
=============== ==============
</TABLE>
<PAGE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999
NET SALES. Net sales for the three months ended March 31, 2000 were $2.9
million as compared to $3.8 million for the three months ended March 31, 1999, a
decrease of $910,000 or approximately 24%. The decrease in net sales was
primarily a result of decreased sales of the Company's products to Duquesne
Light Company, through its subcontractor Sargent Electric Company, Itron and
Bailey Network Systems, partially offset by revenues from the Company's GDI
traffic management division, which was acquired in June 1999.
GROSS PROFIT. Gross profit increased as a percentage of net sales by 7.7%
to 33.8% for the three months ended March 31, 2000 as compared to 26.1% for the
same period in 1999. This increase was primarily the result of the existence of
significant revenues from the Company's GDI traffic management division, which
typically carries higher gross margins. The Company acquired GDI in June 1999.
The cost of sales decreased by $898,000 or approximately 32% to approximately
$1.9 million during the three months ended March 31, 2000 from $2.8 million
during the three months ended March 31, 1999. The decrease in cost of sales
resulted primarily from the decrease in the volume of sales.
SELLING GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $1.1 million, or
approximately 289%, to $1.5 million during the three months ended March 31, 2000
from $391,000 during the three months ended March 31, 1999, and increased as a
percentage of net sales from approximately 10% during the three months ended
March 31, 1999 to approximately 52% during the three months ended March 31,
2000. The increase in expenses resulted primarily from four areas: the existence
of selling, general and administrative expenses for the Company's GDI traffic
management division and the eflex subsidiary, which were acquired in June 1999
and January 2000, respectively; an increase in salary expense associated with
the Company's rapid internal growth and the addition of personnel that were
previously employed by GDI and Sierra Digital, which the Company acquired during
1999, and eflex, which the Company acquired in January 2000; an increase in
professional fees, primarily audit, accounting and legal costs; and an increase
in non-cash amortization expense. Amortization expense amounted to $126,000
during the three months ended March 31, 2000 as compared to $8,000 during the
same period in 1999. Amortization expense during the three months ended March
31, 2000 includes $90,000 in connection with deferred compensation arrangements,
and $22,000 in amortization of goodwill.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering and product development
expense increased by $405,000 or approximately 261% to $560,000 during the three
months ended March 31, 2000 from $155,000 during the three months ended March
31, 1999, and increased as a percentage of sales from approximately 4% during
the three months ended March 31, 1999 to approximately 19% during the three
months ended March 31, 2000. This increase in engineering and product
development expense was primarily attributable to the creation and support of a
research and development operation associated with the Company's acquisition of
the eflex Wireless technology in January 2000. The increase was also due to an
increase in professional services and outside consulting associated with the
expansion of product development efforts of the Company. Engineering and product
development expense during the three months ended March 31, 2000 includes
$157,000 in amortization for deferred compensation arrangements in connection
with the eflex acquisition, and $27,000 in amortization of investments in
technology.
INTEREST EXPENSE. Interest expense during the three months ended March 31,
2000 increased by $16,000 or approximately 18%, to $105,000, or 4% of net sales
from $89,000 or approximately 2% of net sales during the same period for 1999.
This increase in interest expense was primarily attributable to interest on the
Company's 10% Subordinated Notes, of which $1,250,000 were issued in December
1999 and January 2000.
OTHER INCOME. Other income was zero during the three months ended March 31,
2000, as compared to $36,000 during the three months ended March 31, 1999. Other
income in the three months ended March 31, 1999 was primarily attributable to
the resolution of certain liabilities for amounts less than the carrying value
of those obligations.
NET LOSS. Net loss for the three months ended March 31, 2000 was
approximately $1.2 million or approximately 41% of net sales as compared to net
income of $400,000 or 10% of net sales for the three months ended March 31,
1999. The increase in net loss was primarily due to increased operating expenses
and to the decrease in net sales.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2000, the Company financed its
operations and capital expenditures primarily through working capital, proceeds
from the Company's offering of 10% Subordinated Unsecured Promissory Notes due
2001 and proceeds under the Company's revolving line of credit. As of March 31,
2000, the Company had approximately $2.5 million in backlog orders for its
products.
As of March 31, 2000, the Company had working capital of approximately
$1.35 million and an accumulated deficit of approximately $14 million. As of
that date, the Company had a net bank overdraft of $279,000 and $2.8 million in
accounts receivable. The Company also had promissory notes outstanding in the
aggregate amount of approximately $1.4 million (net of $30,000 of unamortized
discount) as of March 31, 2000, of which $75,000 was due to related parties.
On April 2, 1999, the Company secured a revolving line of credit with
Celtic Capital Corporation, a division of Foothill Capital Corporation. The line
of credit bears interest at the greater of prime rate plus 3% (11.9% at March
31, 2000) or 10.75% per annum, is collateralized by substantially all of the
assets of the Company and expires on October 2, 2000. The borrowing base under
the line of credit is 80% of eligible accounts receivable up to a maximum
borrowing of $3.0 million. As of March 31, 2000, the Company had borrowings of
approximately $399,000 under the line of credit.
Between November 15, 1999 and December 31, 1999, the Company issued
$312,500 of 10% Subordinated Unsecured Promissory Notes due 2001. The Company
closed the note offering in January 2000 after issuing additional notes totaling
$937,500. Included with the sale of the notes were warrants to purchase one
share of common stock of the Company for each dollar amount of the notes
purchased, with an exercise price of $1.75 per share. In February 2000,
conditions enabling the Company to call the warrants issued in connection with
this offering were met. All of the warrants were exercised for cash in the
amount of $1,590,625, reduction in the subordinated promissory notes of
$512,500, subscriptions receivable of $84,375. After the exercise of warrants
and repayments of $50,000, the aggregate amount of notes remaining outstanding
as of March 31, 2000 was $687,500, less unamortized warrant valuation of $5,759.
The cash proceeds from the offering of 10% Subordinated Unsecured
Promissory Notes due 2001, together with current and anticipated borrowings
under the Company's line of credit with Celtic Capital Corporation, have been,
and will continue to be, used as working capital to fund research and
development costs associated with the Company's products, costs associated with
manufacturing and marketing such products and costs associated with the
Company's continued growth and expansion.
Effective as of January 7, 2000, the Company entered into a Stock Purchase
Agreement in connection with the purchase by the Company of all of the issued
and outstanding shares of capital stock of eflex Wireless, Inc. In connection
with this transaction, the Company issued an aggregate of 750,000 shares of
common stock, with an aggregate fair market value of $2,070,000. In addition,
the Company agreed to issue up to 6,000,558 shares of common stock contingent
upon the successful implementation of the acquired technology and installation
of a specified number units and payable in certain increments between January 7,
2000 and December 31, 2004. In connection with the acquisition, the Company
entered into certain employment and consulting agreements for periods up to five
years with the principals of eflex which include the granting of options to
purchase up to 1,150,000 shares of common stock at $1.75 per share.
In April 2000, the Company completed a private equity offering of 40,000
shares of common stock at a price of $5.00 per share, with gross proceeds of
$200,000. In May 2000, the Company closed another private equity offering of an
aggregate of 60,000 shares of its common stock at $3.25 per share, with gross
proceeds aggregating $195,000. The Company intends to use the proceeds of these
private offerings for working capital and other corporate purposes.
<PAGE>
While the Company believes that cash flow from operations and its revolving
line of credit with Celtic Capital Corporation will be adequate to fund its
continuing operations for the next twelve months, the Company further believes
that additional financing will be required to fund its plans to utilize the
technology it obtained in connection with its acquisition of eflex and to fund
other plans for future growth. The Company will require additional sources of
liquidity through debt and/or equity financing, which it believes it has
identified. However, there can be no assurance that any additional financing
will be available to the Company on acceptable terms, or at all. The inability
to obtain such financing could have a material adverse effect on the Company's
business, financial condition and results of operations. If additional funds are
raised by issuing equity or convertible debt securities, options or warrants,
further dilution to the existing shareholders of the Company may result.
If adequate funds are not available, the Company may also be required to
delay, scale back or eliminate its product development efforts or to obtain
funds through arrangements with strategic partners or others that may require
the Company to relinquish rights to certain of its technologies or potential
products or other assets. Accordingly, the inability to obtain such financing
could result in a significant loss of ownership and/or control of its
proprietary technology and other important Company assets and could also
adversely affect the Company's ability to continue its product development
efforts, which the Company believes contributes significantly to its competitive
advantage. If any of such circumstances were to arise, the Company's business,
financial condition and results of operations could be materially and adversely
affected.
YEAR 2000 COMPLIANCE
The Company has not experienced any significant problems as a result of the
arrival of the Year 2000. Although no significant problems have materialized to
date, the Company will continue to monitor its systems throughout the Year 2000,
including the proper recognition of the leap year.
LOOKING AHEAD
The Company believes that during 2000, a significant portion of revenues
will be realized from certain opportunities that were uncovered and developed
during fiscal 1999 and during the first quarter of 2000. Some of these
opportunities are as follows:
o WIRELESS SOLUTIONS. The Company believes that a significant portion of
its future revenues will be generated through sales of its wireless
products, the cellular-based Omega(TM) System and the TrafficWatch(TM)
and patent pending AirWave(TM) module. The Company's acquisition of
millimeter wave radio technology from Sierra Digital is also expected
to contribute to this trend.
o TRANSPORTATION INDUSTRY. The Company anticipates that its significant
activities within the transportation industry and close work with
several departments of transportation such as CALTRANS, Los Angeles
Department of Transportation, Wyoming Department of Transportation,
Pennsylvania Department of Transportation and several others that are
currently customers of the Company will result in a significant
increase in its business during 2000.
o GROWTH THROUGH ACQUISITIONS. To expand its markets, the Company's
business strategy includes growth through acquisitions. During the year
ended December 31, 1999, the Company acquired certain assets of
Greenland Corporation as well as all of the assets of GDI and Sierra
Digital. In addition, in January 2000, the Company acquired all of the
outstanding capital stock of eflex. The Company anticipates continuing
this acquisition strategy during 2000.
o DISTRIBUTION. The Company believes that its on-going aggressive plan in
identifying and hiring distributors, VARs and system integrators will
result in additional revenues in this sector in 2000 and beyond.
o INTERNATIONAL BUSINESS. The Company anticipates a significant increase
in international business. Current opportunities in China, Mexico,
India, Spain and several other countries with which the Company has
been involved may result in approximately $2.0 million of revenues
during the next 18 months.
<PAGE>
FORWARD-LOOKING STATEMENTS; CAUTIONARY STATEMENT
Certain of the statements contained in this report, including those under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and especially those contained under "Liquidity and Capital
Resources" and "Looking Ahead" sections are "forward-looking statements" that
involve risks and uncertainties. The actual future results of the Company could
differ materially from those statements. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in this
quarterly report on Form 10-QSB and risks associated with managing the Company's
growth. While the Company believes that these statements are accurate, the
Company's business is dependent upon general economic conditions and various
conditions specific to the modem, data and wireless communications industries,
and future trends and results cannot be predicted with certainty. In particular:
o Although the Company's business strategy includes growth through
acquisitions, identifying and pursuing acquisition opportunities and
integrating acquired products and businesses requires a significant
amount of management time and skill. There can be no assurance that the
Company will be able to continue to identify suitable acquisition
candidates, consummate additional acquisitions on acceptable terms or
successfully integrate any acquired business into its operations. There
also can be no assurance that any future acquisition will not have an
adverse effect upon the Company's operating results, particularly in
the fiscal quarters immediately following consummation of the
acquisition while the acquired business is being integrated into the
Company's operations.
o In the past, the Company has experienced problems associated with
under-capitalization, including the inability to ship products in a
timely manner, which in some cases has caused customers to cancel a
portion or all of their orders. Although the Company believes that it
has identified sources of liquidity that will be adequate to fund its
operations for the next twelve months, there can be no assurance that
sufficient funds will be available or that the Company will not in the
future experience problems associated with under-capitalization.
o The Company has experienced significant growth during the last 18
months. As a result of this rapid growth, the Company has had to raise
equity capital to fund its liquidity needs, the timing of which has, on
occasion, resulted in the Company being required to purchase product
components at less than optimal price points. As a result, the
Company's gross margins on many of its product lines may fluctuate on a
quarterly basis.
o The Company has limited experience in marketing and selling its
products in international markets. International customs, standards,
approvals and political and economic uncertainties may adversely affect
the Company's ability to ship its products internationally in a timely
and profitable manner.
o The trading price of the Company's common stock, like other technology
stocks, is subject to significant volatility due to factors impacting
the overall market that are unrelated to the Company's performance. The
historical results of the Company's operations and financial position
are not necessarily indicative of future financial performance. If
revenues or earnings fail to meet securities analysts' expectations,
there could be an immediate and significant adverse impact on the
trading price of the Company's common stock.
The Company has not experienced a material adverse impact of such risks and
uncertainties and does not anticipate such an impact. However, no assurance can
be given that such risks and uncertainties will not affect the Company's future
results of operations or its financial position.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On August 18, 1999, Drake & Drummond, a Nevada corporation, initiated an
action in the Orange County Superior Court, Central (Case No. 813430) against
the Company alleging, among other things, breach of contract, common count and
declaratory relief arising out of a consulting agreement entered into between
Drake & Drummond and the Company. The complaint seeks damages as follows: (i)
cash in the amount of $535,000, plus interest, and (ii) judicial order directing
the Company to sell to Drake & Drummond 950,000 shares of its common stock for
$.01 per share. On October 8, 1999, the Company filed an answer to the complaint
and filed a cross-complaint against Drake & Drummond alleging, among other
things, breach of contract, rescission based upon fraud, and declaratory relief
arising out of the same consulting agreement. The cross-complaint seeks: (i)
damages according to proof at trial, (ii) rescission of the consulting agreement
and restitution of all consideration received by Drake & Drummond, and (iii) a
judicial declaration of the rights and liabilities of the parties. The Company
intends to vigorously defend this action and pursue its cross-complaint against
Drake & Drummond. At this point, the Company cannot determine what impact, if
any, the ultimate resolution of this matter would have on its financial position
or results of operations.
On October 18, 1999, the Company initiated an action in the Orange County
Superior Court, Central (Case No. 815922) by filing a complaint against Bibicoff
& Associates and Harvey A. Bibicoff, its primary shareholder and chief executive
officer, alleging, among other things, breach of contract, rescission based upon
fraud, breach of fiduciary duty and declaratory relief arising out of a
consulting agreement entered into between defendants and the Company. The
complaint seeks damages according to proof at trial, rescission of the
consulting agreement and restitution of all consideration received by defendants
and a judicial declaration of the rights and liabilities of the parties. On
December 6, 1999, defendants filed an answer to the complaint denying all
material allegations contained therein. Defendants, together with five of the
Company's debenture holders and shareholders affiliated with defendants,
concurrently filed a cross-complaint against the Company and Michael Armani, who
is a director and the President and Chief Executive Officer of the Company, for
damages and rescission based upon alleged misrepresentations, false promises and
non-disclosures by the Company and Mr. Armani in connection with the
cross-complainants' purchase of their interests in the Company. The
cross-complaint also contains breach of contract claims arising out of the
consulting agreement between the Company and certain of the defendants and
purported oral contracts between the Company and certain of the
cross-complainants. The Company and Mr. Armani filed an answer to the
cross-complaint denying all material allegations contained therein. The Company
intends to vigorously defend the cross-complaint that was filed against it. At
this point, the Company cannot determine what impact, if any, the ultimate
resolution of this matter would have on its financial position or results of
operations.
On January 28, 2000, Aeris Communications, Inc., a California corporation,
initiated an action in the United States District Court for the Northern
District of California (Case No. C00-00328) against the Company alleging, among
other things, patent infringement of two United States patents held by Aeris
Communications. The alleged patent infringement relates to certain technology
the Company acquired in connection with its acquisition of eflex. The litigation
is in its initial stages. The Company believes that the allegations in the
complaint are without merit and it intends to vigorously defend this action. At
this point, the Company cannot determine what impact, if any, the ultimate
resolution of this matter would have on its financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Securities.
In January 2000, in connection with the Company's acquisition of all of the
issued and outstanding shares of eflex Wireless, Inc., the Company issued a
total of 750,000 shares of common stock to four individuals, with an aggregate
value of $2,070,000. In connection with this transaction, the Company also
issued options to purchase up to 1,150,000 shares at $1.75 per share to three
principals of eflex and to one entity, Saunders & Parker, Inc., which provides
consulting services to the Company.
<PAGE>
In January 2000, the Company issued 34,425 shares to its legal counsel in
consideration of cancellation of debt in the aggregate amount of $147,983.
In January 2000, a consultant of the Company exercised options to purchase
100,000 shares of common stock through a cashless exercise at a price of $0.75
per share. The Company issued 90,840 shares of common stock pursuant to the
cashless exercise.
In January 2000, the Company issued an aggregate of 60,000 shares of common
stock at $2.56 per share to an employee of the Company in connection with
services to be rendered to the Company.
Effective January 2000, the Company granted to Brookstreet Securities, a
corporate finance consultant, non-qualified options to purchase up to 180,000
shares of common stock of the Company at an exercise price of $2.56 per share,
of which options to purchase 90,000 shares were immediately exercisable, and
options to purchase the remaining shares are exercisable in twelve equal monthly
installments beginning February 3, 2000. In March 2000, Brookstreet exercised
its option to purchase 90,000 shares of common stock of the Company.
Effective January 2000, the Company granted non-qualified options to
purchase up to 200,000 shares of its common stock at $3.00 per share to M.H.
Meyerson & Co., Inc., a company providing investment banking services to the
Company on a non-exclusive basis.
Between January and February 2000, the Company issued 30,000 shares of its
common stock upon the exercise of certain warrants, at an exercise price of
$1.00 per share, that had been issued in connection with the Company's offering
of Subordinated Unsecured Promissory Notes due 2000.
During January and February 2000, Interfirst Capital Corp., a consultant of
the Company, exercised options to purchase an aggregate of 200,000 shares of
common stock at an exercise price of $1.75 per share.
In February 2000, all warrants issued in connection with the Company's
issuance of $1,250,000 of 10% Subordinated Unsecured Promissory Notes due 2001
were called by the Company and such warrants were exercised for an aggregate of
1,250,000 shares of common stock at an exercise price of $1.75 per share.
In February 2000, the Company issued 15,000 shares of common stock upon the
exercise of warrants issued in connection with the Company's 1999 exchange
offering. The warrants were exercisable at $1.875 per share.
Between January and March 2000, the Company issued an aggregate of
1,285,455 shares of common stock upon the automatic conversion of all shares of
each class of preferred stock of the Company as follows: in January 2000, an
aggregate of 756,884 shares of common stock were issued upon the conversion of
all shares of Series A 7.0% Convertible Redeemable Preferred Stock; in February
2000, an aggregate of 128,571 shares of common stock were issued upon the
conversion of all shares of Series B Convertible Preferred Stock; and in March
2000, the Company issued an aggregate of 400,000 shares of common stock upon the
conversion of its Series C 7.0% Convertible Preferred Stock.
Between January and March 2000, the Company issued an aggregate of 23,923
shares upon the exercise of certain five-year warrants issued to the Company's
placement agent, Taglich Brothers, D'Amadeo, Wagner & Company, in connection
with the Company's offering of shares of its Series A Convertible Redeemable
Preferred Stock in April 1999. The warrants were exercisable at a price of $2.10
per share.
The issuances of securities of the Company in the above-referenced
transactions were effected in reliance upon the exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), as transactions not involving a public offering. Exemption from the
registration provisions of the Securities Act is claimed on the basis that such
transaction did not involve any public offering and the purchasers were
sophisticated with access to the kind of information registration would provide.
Dividends.
Pursuant to the terms of the Company's 10% Subordinated Unsecured
Promissory Notes due 2000 and 10% Subordinated Unsecured Promissory Notes due
2001, the Company is restricted in its ability to declare and pay dividends and
redeem or repurchase any shares of its common stock. The Company was in
compliance with all covenants of these notes at March 31, 2000.
In addition, pursuant to state law, the Company may be restricted from
paying dividends to its holders of common stock as a result of its accumulated
deficit as of March 31, 2000.
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended March 31, 2000, no matters were submitted to a
vote of the holders of the Company's securities.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
On January 21, 2000, the Company filed a Form 8-K reporting on
the acquisition of all of the issued and outstanding stock of eflex
Wireless, Inc., as amended by a Form 8-K/A filed March 22, 2000.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TELENETICS CORPORATION
Dated: May 22, 2000 By: /s/ DAVID L. STONE
------------------------------------------
David L. Stone
Chief Financial Officer
(principal financial and accounting
officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 72,594
<SECURITIES> 0
<RECEIVABLES> 2,811,950
<ALLOWANCES> 48,895
<INVENTORY> 1,703,403
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<PP&E> 1,154,694
<DEPRECIATION> 305,309
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0
0
<COMMON> 19,733,263
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<INTEREST-EXPENSE> 104,729
<INCOME-PRETAX> (1,209,054)
<INCOME-TAX> 800
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