UNITED STATES
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: April 29, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _________________to_______________
Commission File Number: 0-25002
TELEHUBLINK CORPORATION
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(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 59-3200879
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
24 NEW ENGLAND EXECUTIVE PARK
BURLINGTON, MA 01803
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (781) 229-1102
N/A
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(Former Name, Former Address, and Former Fiscal Year, if Changed Since
Last Report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: At July 18, 2000, there were
26,585,106 shares outstanding of common stock, $.01 par value per share.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
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TELEHUBLINK CORPORATION.
INDEX
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets--April 29, 2000 (unaudited) and January 29, 2000...........3
Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended
April 29, 2000 and May 1, 1999 (unaudited).......................................................4
Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended
April 29, 2000 and May 1, 1999 (unaudited).......................................................5
Notes to Condensed Consolidated Financial Statements.............................................6
Item 2. Management's Discussion and Analysis or Plan of Operation................................8
PART II. OTHER INFORMATION
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Item 2. Changes in Securities ..................................................................15
Item 6. Exhibits and Reports on Form 8-K .......................................................16
SIGNATURES......................................................................................17
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TELEHUBLINK CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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APRIL 29, JANUARY 29,
ASSETS 2000 2000
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(Unaudited)
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Current assets:
Cash and cash equivalents $ 6,848,947 26,549
Accounts receivable, net 273,995 44,223
Amount due from sale of assets -- 125,000
Prepaid expenses and other current assets 18,862 37,095
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Total current assets 7,141,804 232,867
Property and equipment, net 326,860 336,645
Intangible assets, net 2,105,715 1,981,793
Other assets -- 7,929
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$ 9,574,379 2,559,234
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 297,651 213,219
Accrued expenses 772,004 1,092,087
Subordinated convertible debentures, at accreted value
(liquidation value $600,000) 430,300 280,300
Equipment loan 196,395 196,395
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Total current liabilities 1,696,350 1,782,001
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Total liabilities 1,696,350 1,782,001
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Stockholders' equity:
Common stock 265,851 237,534
Additional paid-in capital 26,746,536 17,814,241
Stockholders' notes receivable -- (3,763)
Deferred compensation (515,885) (9,600)
Accumulated deficit (18,618,473) (17,261,179)
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Total stockholders' equity 7,878,029 777,233
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Total liabilities and stockholders' equity $ 9,574,379 2,559,234
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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TELEHUBLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THIRTEEN WEEKS ENDED
APRIL 29, MAY 1,
2000 1999
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Revenue $ 338,546 320,832
Cost of revenue 251,172 202,149
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Gross profit 87,374 118,683
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Operating expenses:
Stock-based charges 143,008 1,745,190
Research and development 489,451 --
Selling, general and administrative expenses 418,881 159,469
Depreciation and amortization 284,045 10,886
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Total operating expenses 1,335,385 1,915,545
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Operating loss (1,248,011) (1,796,862)
Other income (expense):
Interest expense (165,839) (1,399)
Interest and other income 56,556 14,386
------------ ------------
Net loss (1,357,294) (1,783,875)
============ ============
Basic and diluted net loss per share $ (0.05) (0.10)
============ ===========
Weighted average shares of common stock outstanding used
in computing basic and diluted net loss per share 25,401,188 17,631,219
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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TELEHUBLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
THIRTEEN WEEKS ENDED
APRIL 29, MAY 1,
2000 1999
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Cash flows from operating activities:
Net loss $(1,357,294) (1,783,875)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 284,045 10,886
Amortization of debt discount 150,000 --
Stock-based charges 143,008 1,745,190
Changes in operating assets and liabilities, net of impact of business acquisition:
Accounts receivable (205,731) (159,073)
Prepaid expenses and other current assets 18,233 27,325
Other assets 7,929 8,388
Accounts payable 22,209 123,538
Accrued expenses (320,083) (100,237)
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Net cash used in operating activities (1,257,684) (127,858)
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Cash flows from investing activities:
Proceeds from sale of business 125,000 --
Purchases of property and equipment -- (42,074)
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Net cash provided by (used in) investing activities 125,000 (42,074)
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Cash flows from financing activities:
Proceeds from issuances of common stock, net of issuance costs 7,939,132 165,214
Proceeds from exercise of stock options 12,187 --
Proceeds from stockholders' notes receivable 3,763 --
Proceeds from equipment loan -- 7,480
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Net cash provided by financing activities 7,955,082 172,694
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Net increase in cash and cash equivalents 6,822,398 2,762
Cash and cash equivalents, beginning of period 26,549 --
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Cash and cash equivalents, end of period $ 6,848,947 2,762
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Supplemental disclosure information:
Cash paid during the period for interest $ 839 1,399
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Non-cash investing and financing activities:
Net liabilities assumed on reverse merger with WAW $ -- 569,451
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Business acquisition:
Fair value of assets acquired $ 422,222 --
Liabilities assumed (62,222) --
Issuance of common stock (360,000) --
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Cash paid $ -- --
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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TELEHUBLINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of
Telehublink Corporation (the "Company") have been prepared in accordance with
the instructions to Form 10-QSB and do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. The unaudited consolidated condensed financial statements
have not been examined by independent accountants in accordance with generally
accepted auditing standards, but in the opinion of management, all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
presentation have been included. These unaudited interim consolidated condensed
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-KSB for the fiscal year ended January 29, 2000 filed on July
19, 2000.
The unaudited consolidated condensed financial statements as of and for the
thirteen weeks ended May 1, 1999 have been restated to reflect various
adjustments to previously reported financial statements and are presented in the
Company's amended Form 10-QSB/A as filed on July 24, 2000.
Operating results for the thirteen weeks ended April 29, 2000, are not
necessarily indicative of the results that may be expected for a full fiscal
year.
(2) SALE OF COMMON STOCK AND ISSUANCE OF WARRANTS
On March 6, 2000, the Company raised $8.1 million through its sale of 2,699,999
shares of restricted common stock at $3.00 per share and the issuance of
warrants to purchase up to 2,699,999 shares of common stock. The warrants are
exercisable at the option of the holder at any time up to the expiration date of
March 4, 2005 at a price of $4.50 per share. Among the purchasers of these
securities were the Company's President and its Chairman of the Board, who
acquired an aggregate of 116,666 shares for $350,000.
In connection with this transaction, the Company issued 16,666 shares of common
stock and warrants to individuals for services rendered in connection with the
above sale of common stock and warrants. The value of the shares and warrants of
approximately $144,000 was recognized as offering costs and charged directly to
paid in capital.
(3) ACQUISITION OF BUSINESS
On March 24, 2000, the Company acquired 100% of the membership interest in
COMSEC Solutions, LLC ("COMSEC") for 100,000 shares of its unregistered common
stock. COMSEC is a consulting company with expertise in the field of encryption,
both radio and wireless, authentication, web security and e-commerce. The
acquisition was accounted for under the purchase method. The results of
operations of COMSEC are included in the Company's consolidated statements of
operations from the date of acquisition. The total purchase price of
approximately $360,000 has been allocated to the identifiable tangible and
intangible assets acquired based upon management's best preliminary estimate of
fair value. The Company is in the process of completing a full valuation of the
acquired tangible and intangible assets. In management's opinion, the
preliminary estimates regarding the allocation of the purchase price and
amortization periods are not expected to differ materially from the final
allocation.
6
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The following pro forma financial information presents the combined results of
operations of the Company and COMSEC as if the acquisition had occurred as of
the beginning of the periods presented, after giving effect to certain
adjustments, mainly amortization of intangible assets. The pro forma information
does not necessarily reflect the results of operations that would have occurred
had the Company and COMSEC constituted a single entity during the thirteen-week
periods ending April 29, 2000 and May 1, 1999.
FOR THE THIRTEEN WEEKS ENDED
APRIL 29, 2000 MAY 1, 1999
-------------- -----------
Revenue $ 376,177 377,766
Net loss (1,418,821) (1,897,926)
Net loss per share (0.06) (0.11)
(4) TRANSACTIONS WITH PLATINUM 2000
During fiscal 2000, the Company entered into an agreement to acquire Platinum
2000, a Canadian company. In May 2000, the companies mutually agreed not to
close the deal because certain financial representations were not met. During
the quarter ended April 29, 2000, the Company issued invoices to Platinum 2000
for call center customer services rendered totaling approximately $290,000.
Revenue from services to Platinum 2000 represented approximately 86% of the
Company's revenue for the quarter ended April 29, 2000. At April 29, 2000,
approximately $236,000 remains outstanding and is included in accounts
receivable. Management is confident that the remaining balance due from Platinum
2000 will be collected.
(5) STOCK OPTION GRANTS
On February 9, 2000, the Company's Board of Directors granted 1,250,000 options
to certain employees, directors and a former director of the Company at an
exercise price of $4.50. Of the total options granted, 1,200,000 options become
exercisable on February 4, 2001, while the remaining options become exercisable
on February 4, 2002.
Included in the February 9, 2000 grant was 200,000 stock options issued to the
Company's former chairman and a principal stockholder for consulting services.
The Company calculated the value of the stock option grant using the
Black-Scholes option valuation model. The estimated fair value of the stock
options of approximately $544,000 was recorded as deferred compensation and is
being recognized over the service period and vesting period of one-year.
(6) EXTENSION OF EXERCISE PERIOD OF REDEEMABLE COMMON STOCK WARRANTS AND
UNDERWRITERS' UNDERLYING WARRANTS
On March 27, 2000, the Company's Board of Directors approved an exercise period
extension of its publicly held redeemable common stock warrants and
underwriters' underlying warrants from May 17, 2000 to October 31, 2000.
(7) SEGMENT REPORTING
As of April 29, 2000, the Company's operations are classified in three
reportable business segments; secure wireless encryption segment, Internet
customer contact service center segment, and telecom services segment. The
secure wireless encryption segment began in fiscal 2000 and is in its
development stage. Research and development costs totaling $489,451 for the
thirteen-week period ending April 29, 2000 relate solely to the secure wireless
encryption segment. The Internet customer service center segment began in fiscal
2001 and is also in its development stage. All of the Company's revenue is
derived from call center teleservices which are provided through the telecom
services segment by the Canadian operating branch.
(8) SUBSEQUENT EVENTS
ACQUISITION OF BUSINESS
7
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In June 2000, the Company signed a letter of intent to acquire the issued and
outstanding stock of MVP Systems, Inc. for $100,000 in cash and the issuance of
600,000 shares of the Company's common stock. The acquisition will be accounted
for under the purchase method and, accordingly, the purchase price will be
allocated to the identifiable tangible and intangible assets based on their
estimated fair values.
CONVERSION OF SUBORDINATED CONVERTIBLE DEBENTURES
On July 14, 2000, the Company received notice that all holders of the
subordinated convertible debentures have chosen to convert the debt to shares of
the Company's common stock. As a result, the Company will issue 1,200,000 shares
of its common stock and issue 1,200,000 warrants at an exercise price of $2.00
per warrant. The conversion of the subordinated convertible debentures has
substantially reduced the Company's outstanding debt.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BACKGROUND AND OVERVIEW OF THE COMPANY
TeleHubLink Corporation, formerly known as What A World!, Inc. ("WAW"
or the "Company") was incorporated under the laws of the State of Delaware in
July 1993. Until May 1997, we operated as a mall-based specialty retailer. In
May 1997, we sold substantially all of our assets to Natural Wonders, Inc. for
cash in the amount of $517,795 plus the assumption by Natural Wonders, Inc. of
specified liabilities. The completion of this sale terminated our active
operations, and for the period May 1997 through February 3, 1999, we sought to
serve as a vehicle to effect an acquisition, whether by merger, exchange of
capital stock, acquisition of assets or other similar business combination.
In February 1999, we acquired the outstanding capital stock of Tele Hub
Link Corporation ("TeleHub"), a privately held company organized under the laws
of the Province of Ontario, Canada. TeleHub was engaged in the business of
providing teleservices to business clients. We acquired all the outstanding
capital stock of TeleHub from the TeleHub shareholders in exchange for an
aggregate of 13,011,339 shares of our common stock. As a result of this
transaction, TeleHub became a branch or operating entity of the Company. In
connection with the TeleHub transaction, we changed our corporate name to
TeleHubLink Corporation.
For accounting purposes, this transaction has been treated as a reverse
acquisition. TeleHub has been deemed the acquiring enterprise for financial
statement purposes, as it received a majority of the voting interests in the
combined enterprise. The Securities and Exchange Commission ("SEC") staff has
taken the position that a business combination between an operating enterprise
and a "shell company" in which the shell company is the issuer of securities and
the operating enterprise is determined to be the acquiring enterprise for
financial statement purposes, the transaction should be treated for financial
statement purposes as an issuance of securities by the operating enterprise.
Therefore, the tangible net liabilities of WAW at the date of the transaction of
approximately $207,288 have been recorded at their fair market value with an
offset credit to paid-in capital and the operations of WAW are reflected in the
operations of combined enterprise from the date of acquisition. In addition, the
1999 financial statements have been retroactively restated to reflect the number
of shares TeleHub received in the business combination. Costs related to this
transaction of approximately $362,163 have been charged directly to paid-in
capital. As a result of this and other transactions, the Company will restate
its quarterly financial statements, for the year ended on January 29, 2000. The
majority of these transactions are non-cash related valuation items and do not
affect the Company's liquidity, cash and operating capabilities. We intend to
restate the quarterly financial statements in the very near term.
8
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OUR BUSINESSES
We separate our company's function into the following business areas:
Secure Wireless Encryption Technology, Internet Customer Contact Service Center
and Telecom Services.
SECURE WIRELESS ENCRYPTION
On January 27, 2000, we acquired the outstanding capital stock of
wirelessEncryption.com, Inc., or WEC. WEC is developing, under its trademark,
iNSECT(TM), a technology which we believe may, if successfully developed, permit
ultra-secure communication signal protection and enhanced communication signal
recovery. iNSECT(TM) is based on advanced cryptographic and mathematical
principles and sophisticated signal processing techniques, for wireless and
Internet communications and other data transmission methods. We believe that
this technology, if successfully developed, can be embedded in low-cost
microchip devices known as application specific integrated circuits, or ASICS,
which are used in mobile and hard wired telephones, computers, fax machines,
fiber optic transmission devices, and smart cards. The simulation is conducted
using two computers that represent sending and receiving parties. The simulation
produces a transmission of data, in an advanced compressed, encrypted and
"smeared" form, on one computer, and decompresses or "de-smears" on the other
computer after authentication. The simulator is expected to be used to analyze
what the characteristics and detailed behavior of the ASIC will be and how the
technology may perform between communication devices. Communications devices may
include cellular phones and other wireless products in real time. We believe
that our technology may offer a cost effective solution to wireless device
manufacturers such as makers of cellular phones.
In April 2000, we announced the completion of the iNSECT(TM) Simulator. Our
Simulator is intended to be used as an engineering and business development tool
to demonstrate the secured wireless encryption technology iNSECT(TM). We cannot
assure you that we will successfully complete the development and testing of our
technology, obtain any patent protection for our technology or that our
technology will not infringe the intellectual property rights of others or we
will achieve commercial acceptance of our technology.
INTERNET CUSTOMER CONTACT SERVICE CENTER
Our Internet Customer Contact Center is being developed with advanced
existing technology offering traditional voice, voice over IP (Internet
protocol), video over IP, chat, e-mail and fax. The Company plans to offer
business clients the opportunity to outsource their customer care functions in a
cost-effective manner. Our planned customer contact center may utilize an
integrated mix of traditional call center and e-commerce customer services for
our clients that require "customer care." While in the past online consumers
were obliged to communicate by phone or e-mail with a Web-based company to
obtain responses to inquiries concerning a company's products, new Computer
Telephony Integration and Internet telephony technologies allow consumers to
have live interactions via the Internet with sales and technical support
personnel. We envision that our customer contact center will be a support
facility in which our customer contact representatives will interact with our
clients' customers over multiple communications channels, including traditional
telephone, fax, e-mail and online voice and data exchange via the Internet.
9
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TELECOM SERVICES
Our Telecom Services Division is a multi-station call center located in
Montreal, Canada. Telecom Services are provided through facilities known as call
centers. Call centers make the direct communication by telephone of information
to, and from, current and prospective customers of the call center's business
clients. Call campaigns provided by call centers involve outbound and/or inbound
calling programs that follow prepared scripts targeted at specific markets or
customers previously determined by the call center business clients.
We believe the Telecom Services business can expand by further providing
"content" products to the industry. We plan to develop and sell group discount
packages that permit consumers to buy goods and services at reduced prices over
traditional providers or brick and mortar retailers throughout North America.
OUR LONG TERM BUSINESS STRATEGY
The Company's long-term strategy is to migrate to a technology-based
company. We intend to develop our secure wireless encryption technology business
while providing cash from the other two businesses, Internet customer care
service center and telecom services. This focus would re-direct the primary
resources of the Company toward secure wireless encryption technology while
attempting to drive cash-flow enhancing operations in the other businesses.
SECURE WIRELESS ENCRYPTION TECHNOLOGY STRATEGY
The Company intends to build an infrastructure for the secured wireless
encryption business that supports the development of the iNSECT(TM) technology.
We plan to hire the necessary people to support all functional areas of the
business. We plan to subcontract the manufacturing of the ASICs. We also intend
to acquire companies that may enhance the internal development of the iNSECT(TM)
technology including software engineering, cryptography and ASIC architecture.
INTERNET CUSTOMER CONTACT SERVICE CENTER STRATEGY
During fiscal 2001, we plan to transition from the traditional call center
approach to Internet customer contact care, which will service Internet clients.
We plan to provide various services to clients in the emerging electronic
commerce service market through our Internet Customer Contact Center or
World-Wide Assist business. Worldwide Assist is planning to provide a Web-based
customer contact center which offers Internet-related inbound/outbound
communications services.
TELECOM SERVICES STRATEGY
Another part of our strategy is to expand our telecom services by providing
content products to consumers through selected telecom call center clients. We
plan on restructuring the existing call center in Montreal to support our
existing business clients, new customers and expand into providing content to
traditional North American teleservicing companies. We plan to transition from
the traditional call center approach to an Internet Customer Contact Center,
which will service Internet clients. We are in the early stages of developing
the process of establishing a Web-based customer contact center which may
provide these Internet-related inbound/outbound communications services.
The Company's proposed plan of operation and prospects will be largely
dependent on the Company's ability to successfully establish a technology
development team, and establish and equip an Internet customer contact center on
a timely and cost effective basis; hire and retain skilled technical, marketing
and other personnel; successfully expand into the Internet market and attract
and retain significant numbers of clients.
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OUR MARKETS
SECURE WIRELESS ENCRYPTION TECHNOLOGY
We believe if this technology is developed, tested, and accepted by the
industry, we may be able to offer original equipment manufacturers (OEM's) and
others a family of low-cost SICs that may provide security or enhanced signal
recovery or both. This may also allow us to license this technology to others on
a per-unit royalty basis. We may pursue strategic relationships with wireless
hardware manufacturers and companies involved in the development of secured
wireless encryption. We may also pursue strategic alliances with manufacturers
and other companies through a licensing program using the iNSECT(TM) technology.
INTERNET CUSTOMER CONTACT SERVICE CENTER AND TELECOM SERVICES
Traditionally, businesses that have included teleservices in their
marketing and customer service programs have primarily used in-house personnel
and facilities. We believe that businesses are increasingly outsourcing their
telephone-based marketing and customer services needs to third party providers
as part of overall efforts to reduce costs and focus internal resources on their
core competencies.
Companies that outsource their customer care activities are likely to
demand an integrated customer care provider that can deliver consistent support
across multiple communication channels voice, video, fax and the Internet. In
addition, being able to provide an end-to-end solution is expected to be a key
competitive factor. In particular, the Internet has created a new market for
customer care. Forrester Research shows that 75% to 90% of online customers
prefer human interaction. Research also indicates that spending on Internet and
e-commerce services, including customer support services, may grow to $22
billion by 2002. As e-commerce grows, companies are seeing an increasing
percentage of their revenue becoming dependent on their ability to service
customers over the Internet.
RECENT FINANCING
In March 2000, the Company raised $8.1 million through a private placement
sale of 2,699,999 shares of its restricted common stock at $3.00 per share and
the issuance of warrants to purchase up to 2,699,999 shares of common stock at
$4.50 per share with GE Capital, ZERO.NET, Inc., First Global Ventures LLC and
other individuals. Other purchasers of these securities include the Company's
Chief Executive Officer and its Chairman of the Board, who acquired an aggregate
of 116,666 shares of common stock for $350,000. The proceeds are planned to be
used for the development of its secured wireless encryption technology, the
expansion of the telecom business and developing its business into servicing the
Internet customer care market.
RESEARCH AND DEVELOPMENT
In January 2000, we acquired all the issued and outstanding shares of
capital stock of wirelessEncryption.com, Inc. ("WEC"). The secure wireless
encryption technology, iNSECT(TM), is in the development stage. We have made a
significant non-cash investment in the research and development, and expect that
we will be required to continue to make substantial investments in our
technology. Our focus on the research and development of the iNSECT(TM)
technology has allowed us to develop our initial working simulator model of the
technology.
11
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RECENT ACQUISITION AND DEVELOPMENTS
In March 2000, we acquired all the outstanding equity of COMSEC Solutions,
LLC, a technology-consulting firm with expertise in the fields of encryption,
authentication and Web and e-commerce security. We believe that the acquisition
of COMSEC and the hiring of its founder and sole stockholder, as our Vice
President of Cryptography, will enhance our internal technical team developing
our iNSECT(TM) technology. We believe that this acquisition brings additional
talent with the technical expertise needed for our secured wireless encryption
technology business.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 29, 2000 COMPARED TO THE THIRTEEN WEEKS ENDED
MAY 1, 1999
Revenue for the thirteen weeks ended April 29, 2000 (the "First Quarter of
Fiscal 2001") increased to $338,546 from revenue of $320,832 for the comparable
thirteen weeks ended May 1, 1999 (the "First Quarter of Fiscal 2000"). The
increase was from providing customer service to a client of the Company's
Canadian operating branch. The cost of revenue for the First Quarter of Fiscal
2001 was approximately 74 percent of revenue as compared to approximately 63
percent for the First Quarter of Fiscal 2000. The increase in cost of revenue
was primarily attributable to the increase in labor costs.
Stock-based charges for the First Quarter of Fiscal 2001 was $143,008 as
compared to approximately $1.7 million for the First Quarter of Fiscal 2000. The
stock-based charge for the First Quarter of Fiscal 2000 primarily consists of
charges recognized in connection with the February 5, 1999 private placement and
represents the difference between the fair value of the Company's common stock
issued and the cash proceeds received. The stock-based charges recognized in
Fiscal 2001 represents amortization of deferred compensation in connection with
stock options granted.
Research and development expenses for the First Quarter of Fiscal 2001
were $489,451 as compared to zero for the comparable period in Fiscal 2000. This
increase is due to the Company's focus on development of the secure wireless
encryption segment. The Company had no research and development activity in the
First Quarter of Fiscal 2000.
Selling, general and administrative expenses ("SG&A") increased to
$418,881 in the First Quarter of Fiscal 2001, as compared to $159,469 for the
comparable period in fiscal 2000. The major increase in selling, general and
administrative expenses was primarily attributable to an increase in personnel,
professional fees and other costs associated with the development and growth of
the Company. The Company has also experienced increased legal and audit fees
resulting from significant efforts to bring the Company's 10KSB and other
regulatory filings up-to-date. The balance of the increase is related to growth
in infrastructure costs. The primary components of SG&A are rent, salaries
(including commissions and fringe benefits), consulting fees, travel and
promotion, and corporate overhead expenses (including primarily professional
fees, insurance and administrative salaries including fringe benefits).
12
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Depreciation and amortization for the First Quarter of Fiscal 2001 was
$284,045 as compared to $10,886 for the First Quarter of Fiscal 2000. The
increase results from increased depreciation relating to additions of
telecommunications equipment added during fiscal 2000 and increased amortization
relating to additions of intangible assets from business acquisitions and
customer lists purchased during fiscal 2000. The increase also reflects the
additional amortization relating to intangible assets capitalized in connection
with the March 24, 2000 acquisition of COMSEC Solutions, LLC.
Interest expense for the First Quarter of Fiscal 2001 was $165,839 as
compared to $1,339 for the First Quarter of Fiscal 2000. This increase in
interest expense is primarily attributable to the non-cash charge for
amortization of the value assigned to the beneficial conversion feature of the
subordinated convertible debentures. This value is being treated as a debt
discount and is being amortized over the one-year term of the subordinated
convertible debentures. The total amortization of the debt discount was $150,000
for the First Quarter of Fiscal 2001.
No provision for income taxes has been recorded for the First Quarter of
Fiscal 2001 and the First Quarter of Fiscal 2000 as the Company has incurred net
operating losses for tax purposes. The Company has established a full valuation
allowance against its deferred tax assets because we believe that it is more
likely than not the tax benefits may not be realized under the criteria
established by FAS No. 109.
LIQUIDITY AND CAPITAL RESOURCES
Since inception (July 31, 1998), the Company financed operating and
capital needs, including cash used for acquisitions, capital expenditures and
working capital, from sales of equity securities, issuance of subordinated
convertible debentures and an equipment loan borrowing. At April 29, 2000, the
Company had cash and cash equivalents of $6,848,947 and a working capital of
$5,445,454. At January 29, 2000, the Company had cash and cash equivalents of
$26,549 and working capital deficit of $1,549,134. The increase in cash and cash
equivalents is primarily attributable to cash proceeds from a private placement
during the first quarter of fiscal 2001. In March 2000, the Company raised $8.1
million through a private placement sale of 2,699,999 shares of its common stock
and the issuance of warrants to purchase up to 2,699,999 shares of common stock.
In July 2000, the Company received notice from the holders of the
subordinated convertible debentures that they have chosen to convert the debt to
shares of the Company's common stock. As a result, the Company will issue
1,200,000 shares of its common stock and issue 1,200,000 warrants at an exercise
price of $2.00 per warrant. This conversion of the subordinated convertible
debentures has substantially reduced a major portion of the Company's
outstanding debt.
Since its inception, the Company has experienced net losses from
operations and, as of April 29, 2000 had an accumulated deficit of $18,618,473.
A majority of this accumulated deficit is related to non-cash stock based
changes related to issuances of the Company's common stock and stock options.
The Company expects to incur substantial additional expenses resulting in losses
at least through the period ending January 27, 2001 due to minimal revenues
associated with the initial market entry of the secured wireless encryption
technology, continued research and development costs as well as increased sales,
marketing and other operational expenses associated with telecom services and
Internet customer care business.
If the Company's cash flow proves to be insufficient to fund operations,
the cash available to the Company would satisfy its contemplated cash
requirements for developing its secure wireless technology, on-going telecom
service operations, and expanding its business into servicing the Internet
market through at least January 2001. In the event that the Company does not
provide sufficient revenue and operating cash to sustain this level of
development and expenditure the Company would be required to seek additional
financing and/or revise its plans, including making significant reductions in
operating costs.
YEAR 2000
The company did not incur material expenses in fiscal 2000, or in the
first quarter ending April 29, 2001, in connection with remediating its systems
to become Year 2000 ready. The company is not aware of any material problems
resulting from Year 2000 issues, either with its iNSECT(TM) technology, internal
systems or the products and services of third parties. The company will continue
to monitor its computer applications and those of its suppliers and vendors
through the year 2000 to ensure that latent Year 2000 matters that may arise are
addressed.
RECENTLY ISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 (the "Interpretation"), "Accounting for Certain
Transactions Involving Stock Compensation," an interpretation of APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25"). This
Interpretation clarifies the application of APB No. 25 for only certain issues,
which include, among others, (i) definition of an employee for purposes of
applying APB No. 25, (ii) criteria for determining whether a plan qualifies as a
non-compensatory plan, (iii) the accounting consequences for various
modifications to the terms of a previously fixed stock option or award and (iv)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation covers specific events that occur after
December 15, 1998 or January 12, 2000. We do not believe the adoption of the
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Interpretation will have a material effect on our consolidated financial
position, results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
Certain statements in the foregoing discussion of financial condition and
the results of operations, or elsewhere in this document, represent
"forward-looking" statements as defined in the Private Securities Litigation
Reform Act of 1996. Such statements involve matters that are subject to risks
and uncertainties, as a result of which actual future results or events may
differ materially depending on a variety of factors.
FACTORS AFFECTING FUTURE RESULTS
Our future operations are subject to various risk factors, including the
following:
The limited funds currently available to us may not be adequate for us to
pursue our business objectives, and there is no assurance funds will be
available from any source and, if not available, we will be required to limit
our operations to those that can be financed from existing funds.
We have a limited operating history and we cannot assure you that any of
our future activities will be profitable.
As a holding company, our success will depend on the operations, financial
condition and management of our subsidiaries. If we do not have the resources or
are otherwise unable to diversify our operation into a number of areas, we may
become subject to economic fluctuations within a particular business or industry
and thereby increase the risks associated with our operations.
We may be unable to successfully complete acquisitions of assets or shares
of complementary companies which are necessary to expand our business, and we
may be not be able to successfully integrate into our operations the operations
of any business we may acquire.
Although we previously operated a retail sales business, our current
operations commenced in July 1998. Accordingly, we may be considered to be a
start-up company and, as such, may be subject to the problems, expenses,
difficulties, complications and delays a company establishing a new business
frequently encounters.
The Internet customer care center we plan to open in Montreal may be unable
to: secure contracts with clients or generate revenues under any such contracts
it does secure; successfully develop and utilize its acquired infrastructure and
develop databases to perform for our clients; successfully implement marketing
and sales methods for its services; acquire and implement quality
telecommunications and computer technology and equipment and end user database
and software products necessary for our operations; correspond to changing
technological developments and acquire and implement new equipment and systems
to meet changing customer needs on a timely and cost-effective basis; all of
which could have a material adverse effect on our future financial condition,
operations, results and cash flow.
Our inability to obtain adequate local or long distance telephone service,
for our Montreal call center or our planned Internet customer care center or any
interruption in such service or rate increases relating thereto, could
materially adversely affect our future cash flows, results of operations and
financial condition.
We may be unable to successfully complete the development our secure
wireless encryption technology thereby being unable to produce products to
successfully provide a business.
We may not be able to procure, hire and train on a timely basis a
sufficient labor force of qualified employees or independent contractors to
operate our businesses, which could have a material adverse effect on our future
financial condition, operations, results and cash flow.
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Our failure to retain the services of our key employees or our failure to
hire additional qualified management personnel when required to support our
planned growth could have a material adverse effect on us.
The security encryption and customer communications industry is highly
competitive. We may not be able to compete effectively against our current
competitors or future competitors, many of whom may be substantially larger and
better capitalized than we are.
Any changes to existing U.S. federal or Canadian provincial or state laws
or regulations governing our existing business or any additional laws or
regulations, could limit our current or future activities or could significantly
increase our cost of compliance.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In January 2000, the Registrant acquired, in a private transaction, all the
issued and outstanding shares of capital stock of wirelessEncryption.com, Inc.
in exchange for 5,000,000 shares of the Registrant's common stock. The
Registrant relied upon the exemption provided by Section 4(2) of the Securities
Act of 1933 in connection with the issuance of such securities.
On March 6, 2000, the Registrant consummated a private placement of
2,699,999 shares of its common stock at $3.00 per share and issued warrants to
purchase up to 2,699,999 shares of common stock at $4.50 per share. The warrants
are exercisable at the option of the holder at any time up to the expiration
date of March 4, 2005. In connection with the private placement, the Registrant
issued an additional 16,666 shares and warrants to purchase 16,666 shares at a
price of $4.50 per share. The proceeds of this private placement are being used
for the development of its secured wireless encryption technology, the expansion
of the telecom business, developing its business into servicing the Internet
customer care market and working capital. The Registrant relied upon the
exemption provided by Section 4(2) of the Securities Act of 1933 in connection
with the issuance of such securities.
On March 24, 2000, the Registrant acquired, in a private transaction, 100%
of the membership interests in COMSEC Solutions, LLC for 100,000 shares of
common stock. The Registrant relied upon the exemption provided by Section 4 (2)
of the Securities Act of 1933 in connection with the issuance of such
securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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10.1 Common Stock and Warrant Purchase Agreement dated as of March 6,
2000 by and among the Registrant and the investor parties thereto
(incorporated by reference to Exhibit 10.21 to the Registrant's
Form 10-KSB for the fiscal year ended January 29, 2000, as filed
July 19, 2000 (the "fiscal 2000 10-KSB")).
10.2 Stockholders' Agreement dated as of March 6, 2000 by and among
the Registrant and the investor parties thereto (incorporated by
reference to Exhibit 10.22 to the Fiscal 2000 10-KSB).
10.3 Registration Agreement dated as of March 6, 2000 by and among the
Registrant and the investor parties thereto (incorporated by
reference to Exhibit 10.23 to the Fiscal 2000 10-KSB).
10.4 Employment Agreement dated as of March 24, 2000 between the
Registrant and Randall K. Nichols (incorporated by reference to
Exhibit 10.24 to the Fiscal 2000 10-KSB).
11 Statement re Computation of Per Share Earnings (not required
because the relevant computations can be clearly determined from
material contained in the financial statements included herein).
27 Financial Data Schedule (For SEC Use Only)
99.1 The COMSEC Agreement dated March 24, 2000 between and among
TeleHubLink Corporation and COMSEC Solutions, LLC.
(b) Reports on Form 8-K:
We filed with the Securities and Exchange Commission on February
17, 2000 a Current Report on Form 8-K regarding the consummation
of the acquisition by the Company of all the issued and
outstanding stock of wirelessEncription.com Inc., and filed on
March 17, 2000 a Current Report on Form 8-K regarding the change
in our independent auditors.
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SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TeleHubLink Corporation
Date: July 24, 2000 By: /s/ BRUCE W. YOUNG
----------------------------------
Bruce W. Young
Chief Executive Officer and President
Date: July 24, 2000 By: /s/ DOUGLAS MILLER
----------------------------------
Douglas Miller
Vice President of Finance
(Principal Financial and Accounting
Officer)
