<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the period ended JUNE 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File No.: 0-27878
MCGLEN INTERNET GROUP, INC.
(Name of small business issuer in its charter)
Delaware 13-3779546
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
3002 Dow Avenue Suite 114 Tustin, California 92780
(Address of principal executive offices)(Zip code)
Issuer's telephone number: (714) 838-1240
(formally known as Adrenalin Interactive, Inc.; 5301 Beethoven Street, Los
Angeles, CA 90066; former fiscal year end for Adrenalin Interactive, Inc. was
June 30)
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 [ ]
The number of shares outstanding of each of the issuer's classes of publicly
traded common equity, as of August 11, 2000 was 31,937,685 shares of Common
Stock.
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MCGLEN INTERNET GROUP, INC.
Index to Form 10-QSB
PART I - FINANCIAL INFORMATION.................................................3
ITEM 1 FINANCIAL STATEMENTS...............................................3
CONDENSED CONSOLIDATED BALANCE SHEETS.......................................4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS.............................5
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS..............................6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................8
Business Factors...........................................................12
Part II - OTHER INFORMATION...................................................13
Item 2. Changes in Securities and Use of Proceeds.........................13
Item 6. Exhibits and Reports on Form 8-K..................................13
SIGNATURE..................................................................13
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PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
<TABLE>
MCGLEN INTERNET GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS JUNE 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Current Assets: (unaudited)
Cash and cash equivalents $ 194,339 $ 961,666
Accounts receivable, net of allowance for doubtful accounts and
estimated returns of $70,000 at June 30, 2000 and December 31, 1999 742,108 558,356
Inventories 468,530 436,017
Prepaid expenses and other current assets 116,993 52,776
Deposits 705,655 386,074
------------- -------------
Total current assets 2,227,625 2,394,889
------------- -------------
Equipment, net 436,958 519,576
Intangible assets 294,578 337,584
Other assets 61,559 52,314
------------- -------------
$ 3,020,720 $ 3,304,363
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 2,104,353 $ 1,933,122
Accrued expenses 618,814 379,768
Line of credit 90,000
Capital lease obligations - current portion 101,189 96,989
Convertible notes payable 1,809,000 200,000
Net current liabilities of discontinued operations 596,684 1,342,620
------------- -------------
Total current 5,320,040 3,952,499
------------- -------------
liabilities
Capital lease obligations 186,830 216,172
------------- -------------
Total liabilities 5,506,870 4,168,671
------------- -------------
Stockholders' deficit
Preferred stock, $0.01 par value; 5,000,000 shares authorized,
none issued or outstanding - -
Common stock, $0.03 par value; authorized 50,000,000 shares,
31,877,033 at June 30, 2000 and 31,733,893 at December 31, 1999, 956,312 952,017
shares issued and outstanding
Additional paid in capital 2,215,480 2,204,143
Deferred compensation (44,999) (575,971)
Accumulated deficit (5,612,943) (3,444,497)
------------- -------------
Total Stockholders' Deficit (2,486,150) (864,308)
------------- -------------
$ 3,020,720 $ 3,304,363
============= =============
See condensed notes to the consolidated financial statements
</TABLE>
4
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<TABLE>
MCGLEN INTERNET GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 8,155,322 $ 6,397,529 $ 19,064,368 $ 9,969,425
COST OF SALES 7,520,905 5,651,223 17,178,583 8,828,301
------------- ------------- ------------- -------------
GROSS PROFIT 634,418 746,306 1,885,785 1,141,124
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative (including
$155,550 and $157,351 amortization of deferred
compensation for the three and six months ended 2,046,115 691,436 3,895,301 1,121,845
June 30, 2000, respectively)
Interest expense 74,617 11,169 79,465 11,586
------------- ------------- ------------- -------------
Total operating expenses 2,120,732 702,605 3,974,766 1,133,431
------------- ------------- ------------- -------------
(LOSS) INCOME BEFORE INCOME TAXES (1,554,847) 43,701 (2,168,446) 7,693
------------- ------------- ------------- -------------
PROVISION FOR INCOME TAXES - - - -
------------- ------------- ------------- -------------
NET (LOSS) INCOME ($ 1,554,847) $ 43,701 ($ 2,168,446) $ 7,693
============= ============= ============= =============
BASIC AND DILUTED (LOSS) INCOME PER SHARE ($ 0.05) $ - ($ 0.07) $ -
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
BASIC AND DILUTED 31,877,033 20,200,000 31,877,033 20,200,000
============= ============= ============= =============
See condensed notes to the consolidated financial statements
</TABLE>
5
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<TABLE>
MCGLEN INTERNET GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ($2,168,446) $ 7,693
------------ ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 185,480 -
Amortization of deferred compensation 312,901 -
Changes in operating assets and liabilities:
Accounts receivable (183,752) (129,013)
Inventories (32,513) (191,863)
Prepaid expenses and other current assets (64,217) 2,661
Deposits (319,581) (224,504)
Other assets (7,387) (6,600)
Accounts payable 485,513 87,509
Accrued expenses (75,235) 133,606
Net current liabilities of discontinued operations (512,233) -
------------ ------------
Total adjustments (211,024) (328,204)
------------ ------------
Net cash used in operating activities (2,379,470) (320,511)
------------ ------------
Cash flows from investing activities:
Other assets - note receivable - related party (1,858)
Purchases of equipment (40,984) (42,051)
------------ ------------
Net cash used in investing activities (42,842) (42,051)
------------ ------------
Cash flows from financing activities:
Borrowings under convertible notes payable 1,609,000 200,000
Borrowings under line of credit 90,000 -
Payments on related party notes payable - (70,000)
Distributions to stockholders' - (8,000)
Payments on capital lease obligations (44,015) -
------------ ------------
Net cash provided by financing activities 1,654,985 122,000
------------ ------------
Net decrease in cash and cash equivalents (767,327) (240,562)
Beginning of period 961,666 436,692
------------ ------------
End of period $ 194,339 $ 196,130
============ ============
See condensed notes to the consolidated financial statements
</TABLE>
6
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MCGLEN INTERNET GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated interim financial statements include the accounts of Mcglen
Internet Group, Inc. (a Delaware corporation) and its wholly owned subsidiaries
(the "Company") and have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). 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 regulations. These financial statements should be read
in conjunction with the audited financial statements and the notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999.
In the opinion of management, the accompanying financial statements contain all
adjustments necessary to present fairly the financial position of the Company at
June 30, 2000 and the results of operations and cash flows for the three and six
months ended June 30, 2000 and 1999. The results of operations for the interim
periods are not necessarily indicative of the results of operations for the full
year.
2. OVERVIEW AND RECENT DEVELOPMENTS
Mcglen Internet Group (Mcglen or the Company), formerly Adrenalin Interactive,
Inc. (Adrenalin), was acquired by Mcglen Micro, Inc. in December 1999 through a
transaction in which the stockholders of Mcglen Micro, Inc. acquired control of
the Company through a reverse acquisition. As a result of the acquisition, each
share of Mcglen Micro, Inc. was converted into 0.9889611 shares of the Company,
with 25,485,527 shares being issued. In addition, under the terms of the
acquisition agreement between the Company, Mcglen Micro, Inc., and a consulting
firm, who arranged the acquisition, the consulting firm received 2,010,932
shares of common stock upon completion of the acquisition. The value of these
shares has been accounted for as a cost of the recapitalization. The equity
section of the balance sheet and earnings per share information have been
retroactively restated to reflect the exchange ratio established in the
acquisition agreement and the issuance of shares to the consulting firm.
In connection with the acquisition, the Board of Directors of the Company
adopted a formal plan to discontinue the operations of Western Technologies,
Inc. (Western), the operating subsidiary of Adrenalin that developed video
games. As such, the accounting treatment for the reverse acquisition is that of
a recapitalization. The net liabilities of Western have been reclassified as
discontinued operations on the balance sheets for all periods presented.
In March 1999, the Company acquired all of the assets and assumed the
liabilities of AMT Components, Inc., (AMT) dba AccessMicro.com, in exchange for
4,500,000 shares of stock (pre recapitalization). The purchase price of the AMT
acquisition was allocated to the acquired assets based on the estimated fair
values at the date of acquisition. This resulted in an excess of purchase price
over net assets acquired of approximately $400,000, which has been allocated to
goodwill, and customer lists acquired and is being amortized on a straight-line
basis over 3 to 7 years. The operating results for AMT have been included in the
consolidated financial statements from the date of acquisition.
Mcglen Internet Group, Inc. is an Internet operating company focused on creating
multiple on-line business divisions targeting specific business-to-business
markets. The Company offers over 150,000 computer hardware, software, and
peripheral products servicing resellers, aggregators, information technology
professionals, small offices/home offices, and the corporate market through its
three web sites; Mcglen.com, AccessMicro.com, and Techsumer.com.
7
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3. GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that we will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. We
had a loss of approximately $3.5 million for the year ended December 31, 1999
and had a negative working capital of approximately $1.6 million as of December
31, 1999. Additionally, we are in violation of certain covenants related to a
line of credit. As a result, our independent certified public accountants have
expressed substantial doubt about our ability to continue as a going concern.
The Company has recently taken a number of steps to conserve its available cash
and eliminate unprofitable business. In July 2000, the Company refocused its
efforts on its key customer base and on SKU's where the Company believes it has
a competitive advantage. As a result, sales have declined and the Company
laid-off approximately 35% of its workforce. During July 2000, the Company also
stopped making payments to certain creditors and its largest supplier.
Management has successfully negotiated to convert the then outstanding balance
with its largest supplier to a note with payments weekly beginning August 4,
2000. Interest is at 18% and the note is scheduled to be repaid prior to
December 31, 2000. As a result of the covenant violation discussed above, and
the Company being is arrears on their payments to the Creditors, they can
initiate a default notice on the facilities at any time. However, management is
currently in discussions with both Creditors and believes that the overdue
balances can be converted to notes which will be repaid over time. The debt owed
to these creditors is secured by substantially all of the Company's assets and
personal guarantees of the Company's majority shareholder.
Management is in the process of redesigning its AccessMicro.com and Mcglen.com
websites to focus on the Company's core business to business customers.
Management expects the new websites to be deployed in the third quarter of 2000.
During 1999, we relied on the proceeds from short-term loans and private
placement of our common stock, which aggregated approximately $2.9 million, to
fund our operating requirements. We are exploring various options to raise
additional operating capital during 2000.
4. DEBT AND EQUITY TRANSACTIONS
In April 2000, the Company signed agreements, which provided the Company with a
$1.5 million bridge loan, and a $24 million equity line of credit. The $24
million equity line of credit can be funded through twelve (12) monthly draws of
up to $2 million each, commencing one month after the effective date of a SB-2
registration statement which the Company filed in July 2000. The shares sold
under the equity line of credit will be at a price equal to 87% of the volume
weighted average price for the Company's common stock for 22 days prior to the
draw down. The equity line of credit agreement contains certain conditions
whereby the investor's obligation to fund the draw down is reduced if the
Company's stock price drops below a threshold price, as defined. Accordingly,
the Company cannot make any assurances that it will be able to complete any draw
down's under this line. At August 11, 2000, the Company would not be permitted
to make a draw down under the line.
The investors also received warrants to purchase 372,449 shares of our common
stock at $1.875 and 100,000 warrants priced at $2.316 per share.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's unaudited
condensed consolidated financial statements and the notes thereto included
elsewhere herein.
RESULTS OF OPERATIONS
The discussion of the "Results of Operations" includes Mcglen Micro, Inc. and
AMT Components, Inc. for the six months ended June 30, 2000. For the six months
ended June 30, 1999, AMT Components, Inc. is not included for the first three
months of the period as the acquisition of AMT Components occurred on March 31,
1999.
8
<PAGE>
Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30,
1999
Net sales increased by $1.8 million, or 27.5%, to $8.2 million for the three
months ended June 30, 2000, compared to $6.4 million for the three months ended
June 30, 1999. The increase in net sales was a result of an increase in the
Company's installed customer base, increased repeat purchases and increased
advertising as a percentage of sales. This growth was a result of increased
product offerings, an increase in the Company's linking programs with targeted
Mcglen sites, personalized direct marketing programs designed to generate repeat
sales from existing customers, and strategic alliances with Internet content
providers and portal sites.
Gross profit decreased by $112,000, or 15.0%, to $634,000 for the three months
ended June 30, 2000, compared to $746,000 for the three months ended June 30,
1999. The decrease in gross profit was due to downward pricing pressure from
competitors, instability in the pricing of memory, a shortage of memory and
CPU's at times during the second quarter of 2000, causing less attractive
pricing being offered to the Company by its suppliers, and, finally, increased
costs for shipping which the Company was not able to pass along to its customers
for the three months ended June 30, 2000 as compared to the three months ended
June 30, 1999. Additionally, with the fluctuations of prices of memory many
customers purchased smaller quantities of these items that caused increased
shipping costs as the Company's average order size decreased. Gross profit, as a
percentage of net sales, decreased to 7.8% for the quarter ended June 30, 2000
from 11.7% for the same period in 1999. The decrease in gross profit margin was
due to the items noted above as well as a change in the Company's product mix.
In 1999, the Company sold a higher proportion of memory to its core customer
base, which, had a higher profit margin than the business to consumer products
sold in the quarter ended June 30, 2000.
On a forward-looking basis, future gross profit margins may decline from recent
levels. The statement concerning future gross profit is a forward looking
statement that involves certain risks and uncertainties which could result in a
fluctuation of gross margins below those achieved for the three months ended
June 30, 2000. Although the Company believes it provides a high level of value
added services, pricing and gross profit could be negatively impacted by the
activities of larger Internet resellers.
Operating expenses increased by $1.4 million or 201.8%, to $2.1 million for the
three months ended June 30, 2000, from $703,000 for same period in the prior
year. The increase in operating expenses was attributable to an increase in
personnel costs associated with the increased sales volume, an increase in
advertising costs resulting from increased spending on the Company's websites,
increased credit card processing fees with higher sales as well as an increase
in the rate charged by the Company's credit card processor, and increased rent,
telephone charges and deferred compensation charges. Advertising increased by
approximately $253,000, or 152.2%, as Mcglen increased spending to promote its
brand name awareness and acquire customers. Mcglen conducted almost all of its
advertising on the Internet, primarily through price comparison search engines
and product placements on websites. Payroll and related costs increased by
approximately $149,000, or 65.5%, for the three months ended June 30, 2000
compared to the same quarter of 1999, as Mcglen hired senior and mid-level
management to support the Company's growth. Deferred compensation charges of
approximately $156,000, or 2.0% of sales, was recorded during the three months
ended June 30, 2000 resulting from options granted to management and
consultants; no such charges occurred during the three months ended June 30,
1999. Rent increased as Mcglen increased the size of its facilities in April
2000 to support the growth in sales. Depreciation and amortization increased by
approximately $90,000 due to the infrastructure development during 1999 and
2000. Finally, as a result of the Company's growth, credit card processing and
phone charges increased by approximately $100,000 and $10,000, respectively, or
71.1% and 21.3%, respectively, for the three months ended June 30, 2000 compared
to the same period in 1999.
9
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Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Net sales increased by $9.1 million, or 91.2%, to $19.1 million for the six
months ended June 30, 2000, compared to $10.0 million for the six months ended
June 30, 1999. The increase in net sales was a result of the acquisition of AMT
Components, Inc. (AccessMicro.com) by Mcglen in March 1999, as well as the
Company achieving overall sales and customer growth through its other two
websites, Mcglen.com and Techsumer.com. This growth was achieved through
increased product offerings, an increase in the Company's linking programs with
targeted Mcglen sites, personalized direct marketing programs designed to
generate repeat sales from existing customers, and strategic alliances with
Internet content providers and portal sites.
Gross profit increased by $745,000, or 65.3%, to $1.9 million for the six months
ended June 30, 2000, compared to $1.1 million for the six months ended June 30,
1999. The increase in gross profit was due to increased sales in 2000 as a
result of the Company's marketing efforts, which were described in the preceding
paragraph, and the acquisition of AMT Components, Inc. in March 1999. Gross
profit, as a percentage of net sales decreased to 9.9 % for the six months ended
June 30, 2000 from 11.4% for the same period in 1999. The decrease in gross
profit margin was the result of increased margin pressure in the overall
marketplace, a change in the Company's sales mix during the six months ended
June 30, 2000 to more products purchased by consumers which carry a lower margin
than the products sold to Mcglen's core customers in the prior year. Mcglen also
experienced instability in the pricing of memory, a shortage of memory and CPU's
at times during the second quarter of 2000, causing less attractive pricing
being offered to the Company by its suppliers, and, finally, increased costs for
shipping which the Company was not able to pass along to its customers.
Operating expenses increased by $2.8 million, or 250.7 %, to $4.0 million for
the six months ended June 30, 2000, from $1.1 million for same period in the
prior year. The increase in operating expenses was attributable to an increase
in personnel costs associated with the increased sales volume, an increase in
advertising costs resulting from increased spending on the Company's websites,
increased credit card processing fees with higher sales as well as an increase
in the rate charged by the Company's credit card processor, and increased rent,
telephone charges and deferred compensation charges. Advertising increased by
approximately $485,000, or 204.8%, as Mcglen increased spending to promote its
brand name awareness and acquire customers. Mcglen conducted almost all of its
advertising on the Internet, primarily through price comparison search engines
and product placements on websites. Payroll and related costs increased by
approximately $777,000, or 178.5%, for the six months ended June 30, 2000
compared to the same period of 1999, as Mcglen hired senior and mid-level
management to support the Company's growth. Deferred compensation charges of
approximately $313,000 was recorded during the six months ended June 30, 2000
resulting from options granted to management and consultants; no such charges
occurred during the six months ended June 30, 1999. Rent increased as Mcglen
increased the size of its facilities in April 2000 to support the growth in
sales. Depreciation and amortization increased by approximately $186,000 due to
the infrastructure development during 1999 and 2000. Finally, as a result of the
Company's growth, credit card processing and phone charges increased by
approximately $376,000 and $78,000, respectively, or 173.1% and 115.0%,
respectively, for the six months ended June 30, 2000, compared to the same
period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital need has been the funding of operations and
working capital requirements created by its rapid growth. Historically, the
Company's primary sources of financing have been private placements of stock and
borrowings from its stockholders, private investors, and financial institutions.
Cash used by operations was approximately $1.7 million for the six months ended
June 30, 2000. Cash was used to fund the Company's growth in sales, to establish
brand name awareness of its websites and to fund the Company's loss from
operations.
The Company has incurred a loss from operations during the last twelve months
and had a working capital deficit and shareholders' deficit at June 30, 2000.
For the year ended December 31, 1999, the Company's independent certified public
accountants included a modification to their opinion, which indicated there is
substantial doubt about the Company's ability to continue as a going concern.
The Company is attempting to raise additional capital to meet future working
capital requirements, but may not be able to do so. Should the Company not be
able to raise additional capital, it may have to severely curtail operations.
10
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During the six months ended June 30, 2000, the Company's capital expenditures
were approximately $41,000, compared to $42,000 in 1999, primarily for computer
software and hardware.
The Company has two credit facilities of up to $1.0 million with a financial
institution and a supplier (the Creditors). The credit facilities function in
lieu of a vendor trade payable for inventory purchases and are included in
accounts payable. The facilities are cancelable upon 30 days or less advance
notice and do not bear interest if paid within 30 days of the date the inventory
is purchased. The credit facilities are secured by substantially all of the
Company's assets and are personally guaranteed by the Company's majority
shareholders. One of the credit facilities requires the Company to maintain a
minimum level of subordinated debt plus tangible net worth. At June 30, 2000,
the Company was not in compliance with this covenant and management has entered
into discussions with the lender to waive the covenant through September 30,
2000.
Since computer retailers typically have low product gross margins, Mcglen's
ability to regain profitability is dependent upon its ability to increase net
sales. To the extent that Mcglen's marketing efforts do not result in
significantly higher net sales, Mcglen will be materially adversely affected.
There can be no assurance that sufficient revenues will be generated from the
sale of its products to enable Mcglen to regain profitability on a quarterly or
annual basis. In view of the rapidly evolving nature of Mcglen's business and
its limited operating history, Mcglen believes that period-to-period comparisons
of its operating results, including gross profit and operating expenses as
percentage of net sales are not necessarily meaningful and should not be relied
upon as an indication of future performance.
Mcglen believes that the key factor affecting its long-term financial success is
its ability to attract and retain customers in a cost effective manner.
Currently, Mcglen seeks to expand its customer base and encourage repeat buying
through internal and other sales and marketing programs. Such programs include:
(i) brand development, (ii) online and off-line marketing and promotional
campaigns, (iii) linking programs with targeted Mcglen sites, (iv) personalized
direct marketing programs designed to generate repeat sales from existing
customers, (v) strategic alliances with Internet content providers and portal
sites, and (vi) the development of a one-stop online marketplace.
Mcglen expects to experience significant fluctuations in its future operating
results due to a variety of factors, many of which are outside its control.
Factors that may affect its operating results include the frequency of new
product releases, success of strategic alliances, mix of product sales and
seasonality of sales typically experienced by retailers. Sales in the computer
retail industry are significantly affected by the release of new products.
Infrequent or delayed new product releases can negatively impact the overall
growth in retail sales. Gross profit margins for hardware, software and
peripheral products vary widely, with computer hardware generally having the
lowest gross profit margins. While Mcglen has some ability to affect its product
mix through effective up-selling of high margin products, its sales mix will
vary from period to period and Mcglen's gross margins will fluctuate
accordingly.
The Company incurred a net loss from operations for the three and six months
ended June 30, 2000, and had a working capital deficit of over $3.2 million and
shareholders' deficit of approximately $2.5 million at June 30, 2000. The
Company will require additional equity and/or debt capital in order to meet
future working capital needs and to accomplish its combined short-term and
long-term business objectives. The Company has identified several corporate
finance consultants who have signed agreements to assist the Company in raising
additional capital. In April 2000, the Company signed agreements, which provided
the Company with a $1.5 million bridge loan, and a $24 million equity line of
credit. The $24 million equity line of credit can be funded through twelve (12)
monthly draws of up to $2 million each, commencing one month after the effective
date of a SB-2 registration statement which the Company filed in July 2000. The
shares sold under the equity line of credit will be at a price equal to 87% of
the volume weighted average price for the Company's common stock for 22 days
prior to the draw down. The equity line of credit agreement contains certain
conditions whereby the investor's obligation to fund the draw down is reduced if
the Company's stock price drops below a threshold price, as defined.
Accordingly, the Company cannot make any assurances that it will be able to
complete any draw down's under this line. At August 11, 2000, the Company would
not be permitted to make a draw down under the line.
11
<PAGE>
Our ability to complete any such future equity and/or debt financing will depend
upon our then financial condition, results of operations and future business
prospects as well as market conditions at the time such additional equity and/or
debt financing is consummated. Many of the factors that will influence the
Company's ability to conduct any such future financing will be outside of its
control. For these reasons, it cannot make any assurances that it will
successfully complete the equity financing discussed above. Should the Company
be unable to raise additional capital, it may have to severely curtail
operations.
The Company has recently taken a number of steps to conserve its available cash
and eliminate unprofitable business. In July 2000, the Company refocused its
efforts on its key customer base and on SKU's where the Company believes it has
a competitive advantage. As a result, sales have declined and the Company
laid-off approximately 35% of its workforce. During July 2000, the Company also
stopped making payments to the Creditors and its largest supplier. Management
has successfully negotiated to convert the then outstanding balance with its
largest supplier to a note with payments weekly beginning August 4, 2000.
Interest is at 18% and the note is scheduled to be repaid prior to December 31,
2000. As a result of the covenant violation discussed above, and the Company
being is arrears on their payments to the Creditors, they can initiate a default
notice on the facilities at any time. However, management is currently in
discussions with both Creditors and believes that the overdue balances can be
converted to notes which will be repaid over time.
Management is in the process of redesigning its AccessMicro.com and Mcglen.com
websites to focus on the Company's core business to business customers.
Management expects the new websites to be deployed in the third quarter of 2000.
If Mcglen is successful in securing additional capital, the Company anticipates
expenditures of up to $1.5 million for improvements in software, hardware, and
other infrastructure investments.
As part of its growth strategy, the Company may, in the future, acquire other
companies or websites, in the same or complementary lines of business. Any such
acquisition and the ensuing integration of the operations of the acquired
company with those of Mcglen would place additional demands on Mcglen's
management and operating and financial resources. Additionally, the Company is
engaged in an ongoing evaluation of potential new websites, which may be created
internally. Any such development and the ensuing integration of the operations
of the new website with those of Mcglen would place additional demands on
Mcglen's management and operating and financial resources. Management has been
approached by several acquisition candidates over the past three months and will
continue to evaluate each potential candidate as they are presented. Management
cannot be certain any such acquisition will occur, or the outcome if one were to
occur.
BUSINESS FACTORS
Except for historical information, all of the statements, expectations and
assumptions contained in the foregoing are forward-looking statements. The
realization of any or all of these expectations is subject to a number of risks
and uncertainties and it is possible that the assumptions made by management may
not materialize. In addition, there can be no assurances that momentum in the
Company's sales will be sustained, that the six month trends for sales will
continue in future periods, or that the Company's Internet sales will continue
to grow. In addition to the factors set forth above, other important factors
that could cause actual results to differ materially from our expectations
include competition from companies either currently in the market or entering
the market; competition from other Internet, catalog and retail store resellers
and price pressures related thereto; uncertainties surrounding the supply of and
demand for computer and computer related products; reliance on the Company's
vendors; and risks due to shifts in market demand and/or price erosion of owned
inventory. This list of risk factors is not intended to be exhaustive. Reference
should also be made to the risk factors set forth from time to time in the
Company's SEC reports, including but not limited to those set forth in the
section entitled "Certain Factors Affecting Future Results" in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
1. The Company entered into a purchase agreement to sell 293,255 shares of
common stock to Escaldade Investors, LLC ("Escaldade") in July 1999, which
allowed for repricing rights if Mcglen's stock price dropped below certain
prices as defined in the agreement. Escaldade exercised its repricing
rights relating to two-thirds of the shares it obtained in the financing in
January 2000 and received 103,775 shares of the Company's common stock.
Escaldade exercised its repricing rights relating to the final one-third of
the shares it obtained in the financing in April 2000 and received an
additional 39,352 shares of the Company's common stock.
2. On April 10, 2000, the Company issued a $1.5 million convertible debenture
to AMRO International, S.A. (the Convertible Debenture). The Convertible
Debenture is convertible, at the option of the holder, into shares of
Common Stock of the Company at a conversion price equal to 90% of the
market price of a share of Common Stock of the Company on the date of
conversion. The Convertible Debenture was issued without registration under
he Securities Act of 1933, as amended (the Securities Act), in reliance
upon the exemption from the registration requirements of the Securities Act
set forth in Section 4(2) of the Securities Act.
3. On April 10, 2000, in connection with the issuance of the Convertible
Debenture, the Company issued to AMRO International, S.A. a warrant to
purchase 372,449 shares of Common Stock of the Company (the AMRO Warrant)
at a price of $2.316 per share. The AMRO Warrant was issued without
registration under he Securities Act of 1933, as amended (the Securities
Act), in reliance upon the exemption from the registration requirements of
the Securities Act set forth in Section 4(2) of the Securities Act.
4. On April 10, 2000, the Company issued to Ladenburg Thalman & Co. a warrant
to purchase 49,660 shares of Common Stock of the Company (the Ladenburg
Warrant) at a price of $2.0137 per share in connection with its role as
placement agent in connection with the issuance of the Convertible
Debenture to AMRO International, S.A.. The Ladenburg Warrant was issued
without registration under he Securities Act of 1933, as amended (the
Securities Act), in reliance upon the exemption from the registration
requirements of the Securities Act set forth in Section 4(2) of the
Securities Act.
5. On April 26, 2000, the Company issued to Plumrose Holdings, Inc. a warrant
to purchase 100,000 shares of Common Stock of the Company (the Plumrose
Warrant) at a price of $1.875 per share. The Plumrose Warrant was issued
under the terms of a Common Stock Purchase Agreement between the Company
and Plumrose Holdings, Inc.. The Plumrose Warrant was issued without
registration under he Securities Act of 1933, as amended (the Securities
Act), in reliance upon the exemption from the registration requirements of
the Securities Act set forth in Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. Exhibits. The exhibit index attached hereto is incorporated
herein by reference.
b. Reports on Form 8-K - none
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Mcglen Internet Group, Inc.
Date: August 14, 2000 By /s/ Grant Trexler
---------------------------------
Grant Trexler
Chief Financial Officer
(Duly Authorized Officer of the Registrant
and Principal Financial Officer)
EXHIBIT INDEX
Exhibit Number Description
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27 Financial Data Schedule
