SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to ___________
COMMISSION FILE NUMBER 0-21999
-----------------------
NHANCEMENT TECHNOLOGIES INC.
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1360852
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6663 OWENS DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices)
(925) 251-3200
(Issuer's telephone number)
----------------
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 August 14, 2000, there were 11,067,700 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
During the course of the year-end financial audit process for the fiscal year
ended September 30, 2000, Nhancement Technologies Inc. ("Nhancement" or the
"Company") recorded certain adjustments to its previously reported interim
results. The most significant of the adjustments affecting the quarterly period
ended June 30, 2000 is the recalculated deemed interest charge related to a
beneficial conversion feature of a prior convertible notes offering; the
correction increases deemed interest charges from $1.1 million to $1.6 million.
The Company has recalculated stock-based compensation related to net exercise
warrants issued to the Company's directors and warrants granted to certain
non-employees. Consistent with variable accounting requirements the Company has
"marked-to-market" the net change in the value of the warrants for the third
quarter ended June 30, 2000. The restatement has resulted in a decrease in
stock-based compensation charges of $624,000 in the third quarter ended June 30,
2000. Additionally, the Company has adopted SOP 98-1 and has capitalized $10.7
million of software assets, including warrants issued in connection with the
acquisition of the software. The Company has also capitalized approximately $2.1
million associated with warrants issued in connection with a $50 million equity
line of financing.
As a result of the adjustments recorded by the Company, we have revised our
reported results of operations for the quarter ended June 30, 2000. This Form
10-QSB reflects the effects of these adjustments.
The following items are amended hereby:
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
This report continues to speak as of the date of the original filing of the Form
10-QSB for the quarter ended June 30, 2000, and we have not updated the
disclosure in this report to speak to any later date.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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 the rules and regulations of the
Securities and Exchange Commission (the "Commission"), although the Company
believes the disclosures made are adequate to make the information presented not
misleading, and, in the opinion of management, all adjustments have been
reflected which are necessary for a fair presentation of the information shown
and the accompanying notes. These condensed unaudited financial statements
should be read in conjunction with the audited financial statements for the year
ended September 30, 1999. The results for the nine months ended June 30, 2000
are not necessarily indicative of the results of operations for a full year or
of future periods.
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30,
2000
-------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . $ 4,232,000
Restricted cash. . . . . . . . . . . . . . 116,400
Accounts receivable, net of allowance for
doubtful accounts of $229,200. . . . . . . 3,514,000
Inventory. . . . . . . . . . . . . . . . . 2,239,100
Prepaid expenses and other . . . . . . . . 332,400
-------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . 10,433,900
Property and equipment, net. . . . . . . . 3,001,100
Capitalized software . . . . . . . . . . . 17,987,900
Goodwill and other intangible assets, net. 2,709,300
Other assets . . . . . . . . . . . . . . . 2,335,300
-------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . $ 36,467,500
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . 11,022,100
Accrued liabilities. . . . . . . . . . . . 3,202,500
Deferred revenue . . . . . . . . . . . . . 2,369,800
Income tax payable . . . . . . . . . . . . 264,700
Note payable . . . . . . . . . . . . . . . 212,900
Convertible debentures . . . . . . . . . . 5,443,600
Capital lease obligations, current portion 155,900
-------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . 22,671,500
Capital lease obligations, net of
current portion . . . . . . . . . . . . . 220,300
-------------
TOTAL LIABILITIES . . . . . . . . . . . . . . 22,891,800
STOCKHOLDERS' EQUITY
Common stock . . . . . . . . . . . . . . . 110,400
Additional paid-in capital . . . . . . . . 36,981,400
Accumulated deficit. . . . . . . . . . . . (23,279,200)
Accumulated other comprehensive loss . . . (236,900)
-------------
TOTAL STOCKHOLDERS' EQUITY. . . . . . . . . . 13,575,700
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . $ 36,467,500
=============
See notes to condensed consolidated financial statements.
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30, June 30,
1999 2000 1999 2000
----------- ------------ ------------ ------------
Net Revenues. . . . . . . . . . . . . . . . $6,652,800 $ 4,273,000 $15,629,300 $21,615,800
Cost of sales . . . . . . . . . . . . . . . 4,309,200 3,094,600 10,220,200 14,658,100
----------- ------------ ------------ ------------
GROSS PROFIT 2,343,600 1,178,400 5,409,100 6,957,700
OPERATING EXPENSES
Selling, general and administrative . . . . 1,901,900 2,532,900 5,894,800 9,400,900
Restructuring charges . . . . . . . . . . . -- -- 189,000 --
Goodwill amortization . . . . . . . . . . . 110,700 159,300 331,900 478,000
----------- ------------ ------------ ------------
TOTAL OPERATING EXPENSES 2,012,600 2,692,200 6,415,700 9,878,900
INCOME (LOSS) FROM OPERATIONS 331,000 (1,513,800) (1,006,600) (2,921,200)
OTHER INCOME (EXPENSE)
Interest income . . . . . . . . . . . . . . 37,100 44,700 56,800 157,700
Interest expense. . . . . . . . . . . . . . (131,000) (1,836,700) (228,600) (2,122,800)
Other . . . . . . . . . . . . . . . . . . . 15,800 (166,900) 37,100 (154,900)
----------- ------------ ------------ ------------
Total other expense (78,100) (1,958,900) (134,700) (2,120,000)
Income (loss) before income tax 252,900 (3,472,700) (1,141,300) (5,041,200)
Provision for income tax. . . . . . . . . . 1,100 146,500 1,100 270,300
----------- ------------ ------------ ------------
NET INCOME (LOSS) 251,800 (3,619,200) (1,142,400) (5,311,500)
Preferred dividends . . . . . . . . . . . . (717,200) -- (724,000) (2,400)
----------- ------------ ------------ ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (465,400) $(3,619,200) $(1,866,400) $(5,313,900)
=========== ============ ============ ============
BASIC AND DILUTIVE NET INCOME (LOSS) PER
COMMON SHARE $ (0.08) $ (0.33) $ (0.32) $ (0.54)
SHARES USED IN PER SHARE CALCUATIONS -
BASIC AND DILUTIVE 6,201,000 10,833,900 5,912,400 9,899,700
COMPREHENSIVE INCOME (LOSS):
Net income (loss) $ 251,800 $(3,619,200) $(1,142,400) $(5,311,500)
Other comprehensive income (loss)
Translation gain (loss) 48,000 (29,800) (28,500) (28,300)
----------- ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 299,800 $(3,649,000) $(1,170,900) $(5,339,800)
=========== ============ ============ ============
See notes to condensed consolidated financial statements.
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
(UNAUDITED)
Preferred Stock Common Stock Additional Cumulative
Par Value Par Value Paid In Accumulated Translation
Shares Amount Shares Amount Capital Deficit Loss Total
-------- ----------- ----------- --------- ------------ ------------- ---------- ------------
Balance, September 30, 1999. 11,300 $ 854,800 8,219,700 $ 82,200 $24,472,800 ($17,965,300) ($208,600) $ 7,235,900
Preferred Shares converted
into common stock (11,300) ($854,800) 1,056,500 10,300 844,500
Dividends on preferred stock
Converted to common shares 23,700 200 24,000 (2,400) 21,800
Common Stock and warrants
issued for Trimark, Inc.
acquisition 750,000 7,500 3,452,500 3,460,000
Common Stock issued for SVG
Software acquisition 250,000 2,500 2,175,000 2,177,500
Exercise of warrants for
Common Stock 737,200 7,400 241,000 248,400
Exercise of options for
Common Stock 247,100 2,500 322,900 325,400
Stock based compensation for
the issuance of warrants
to:
Employees 1,482,700 1,482,700
Other third parties 2,244,900 2,244,900
Cost of warrants issued in
connection with purchased
software 683,800 683,800
Stock-based compensation
Related to benefit
associated with accelerated
vesting of options 230,700 230,700
Deemed interest expense
related to convertible
debentures issued at a
discount 1,595,500 1,595,500
Repurchase of common stock (216,500) (2,200) (788,900) (791,100)
Net loss (5,311,500) (5,311,500)
Translation loss (28,300) (28,300)
-------- ----------- ----------- --------- ------------ ------------- ---------- ------------
Balance, June 30, 2000 -- $ -- 11,067,700 $110,400 $36,981,400 ($23,279,200) ($236,900) $13,575,700
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Nine Months Ended
June 30,
---------------------------
1999 2000
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,142,400) $ (5,311,500)
Adjustments to reconcile net loss to net cash provided by
(used in)operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 300,300 379,800
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . 331,900 478,000
(Loss) gain on sale of fixed assets. . . . . . . . . . . . . . . (11,600) 1,000
Stock-based compensation . . . . . . . . . . . . . . . . . . . . 71,700 1,813,900
Deemed interest expense related to beneficial conversion feature
on debentures. . . . . . . . . . . . . . . . . . . . . . . . . -- 1,595,500
Amortization of deferred financing charges on convertible
debentures . . . . . . . . . . . . . . . . . . . . . . . . . . 46,600
Allowance for doubtful accounts. . . . . . . . . . . . . . . . . -- (166,900)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,100 --
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . (1,402,300) 2,350,800
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . (166,500) (880,100)
Prepaid expenses and other . . . . . . . . . . . . . . . . . . (100,300) (91,200)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 221,500 (135,200)
Income tax payable . . . . . . . . . . . . . . . . . . . . . . (174,700) 214,000
Accounts payable and other current liabilities . . . . . . . . 2,001,800 (4,700)
------------ -------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. . . . . . . . . . (52,500) 290,000
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . 93,100 70,000
Note receivable from related party . . . . . . . . . . . . . . . 12,100 296,800
Proceeds on sale of property and equipment . . . . . . . . . . . 145,800 17,000
Cash acquired in connection with purchase of Trimark, Inc. . . . -- 44,700
Acquired software assets . . . . . . . . . . . . . . . . . . . . -- (2,000,000)
Capitalization of software development costs . . . . . . . . . . -- (353,900)
Purchase of property and equipment . . . . . . . . . . . . . . . (192,200) (727,400)
------------ -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . . . . . . . 58,800 (2,652,800)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Share repurchase . . . . . . . . . . . . . . . . . . . . . . . . -- (791,100)
Borrowing under line of credit . . . . . . . . . . . . . . . . . 9,088,700 13,708,400
Repayment under line of credit . . . . . . . . . . . . . . . . . (8,232,300) (14,248,000)
Repayment of note payable to related party . . . . . . . . . . . -- (150,000)
Proceeds from sale of preferred stock. . . . . . . . . . . . . . 1,485,000 --
Proceeds from warrants and options exercised
for common stock. . . . . . . . . . . . . . . . . . . . . . . . -- 573,800
Proceeds from issuance of convertible debentures, net of
issuance costs of $403,000. . . . . . . . . . . . . . . . . . . -- 5,397,000
Principal payments on capital leases . . . . . . . . . . . . . . (50,200) (119,500)
Principal payment on notes payable . . . . . . . . . . . . . . . (741,600) (119,300)
------------ -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . . . . 1,549,600 4,251,300
------------ -------------
Effect of exchange rate changes on cash. . . . . . . . . . . . . (22,000) 14,400
------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . 1,533,900 1,902,900
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . $ 1,677,200 $ 2,329,100
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . $ 3,211,100 $ 4,232,000
============ =============
Supplemental Data:
Interest paid $ 317,000 $ 134,500
Income taxes paid $ -- $ 5,800
See notes to condensed consolidated financial statements.
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In December 1999, the Company accepted cabling and wiring improvements
of $53,200 made to its leased office by a related party in lieu of payment on a
note due from this related party.
In the nine months ended June 30, 2000, property and equipment
additions of $350,800 were financed by capital lease obligations. Further, the
Company plans to finance purchases of $1,019,000 made during the nine months
ended June 30, 2000 through capital lease arrangements that will be consummated
during the fourth quarter. As of June 30, 2000, the Company's obligations for
these purchases are included in the accounts payables and accrued liabilities.
During the nine months ended June 30, 1999, property and equipment
additions of $150,400 were financed by capital lease obligations.
On June 7, 1999, the Company issued 116,600 shares of its Common Stock
for conversion of $116,600 of debt from a stockholder.
On June 15, 1999, the Company recorded the final additional purchase
consideration of $494,600 based on Infotel's profits in fiscal year 1999. The
Company issued 559,100 shares of its Common Stock for conversion of $634,600 of
the additional consideration due to the former stockholders of Infotel.
During the nine months ended June 30, 2000, the Company completed its
acquisition of Trimark Inc. in exchange for 750,000 shares of its Common Stock
and warrants to purchase 250,000 shares of the Company's Common Stock at an
exercise price of $1.53 per share. The common stock issued was valued at
$3,000,000 based on a guaranteed price of $4.00 per share. The warrants issued
to purchase the Company's common stock were estimated at $460,000 using the
Black-Scholes option pricing model using the following assumptions: expected
volatility of 90%, weighted-average risk free interest rate of 6%, term of 3
years and no expected dividends.
During the nine months ended June 30, 2000, the Company completed its
acquisition of certain assets of SVG Software Services, Inc. in exchange for
250,000 shares of the Company's Common Stock, valued at $2,178,000 based on the
average of a share price two days before and after the announcement date of
February 4, 2000.
During the nine months ended June 30, 2000, the Company purchased a
non-exclusive license for certain software for internal use for the Company's
inUnison-TM- portal service application. The Company paid the software vendor
$2,000,000 and recorded accounts payable of $8,010,000. In connection with the
software purchase, the Company issued a warrant to purchase 45,600 shares of its
common stock with a value of $683,800.
During the nine months ended June 30, 2000, 11,300 shares of preferred
stock were converted into 1,056,500 shares of common stock with a total value of
$854,800 and an equity dividend of $21,800 was converted into 23,700 shares of
common stock.
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
(UNAUDITED)
1. ORGANIZATION
NHancement Technologies Inc., a Delaware corporation ("NHancement" or
the "Company"), was incorporated in October 1996 as a holding company. The
business of NHancement is conducted by its operating company subsidiaries:
NHancement Technologies North America, Inc. ("NHAN NA", formerly Voice Plus,
Inc.), Infotel Technologies Pte Ltd ("INFOTEL"), NHancement Technologies
Software Group, Inc. ("NHAN SWG"), commencing in January 2000, NHancement
Acquisition Corp., formerly Trimark Incorporated ("Trimark") and commencing in
February 2000, the assets of SVG Software Services, Inc ("SVG") and Enhancement
Technologies (India) Pte Ltd, ("NHAN India"). NHAN NA, a California corporation
headquartered in Fremont, California, is a systems integrator and national
distributor of voice processing and multimedia messaging equipment. INFOTEL, a
Singapore corporation acquired on June 22, 1998 is (i) a systems integrator of
infrastructure data communications equipment, turnkey project management
services, and radar systems; and (ii) a provider of test measuring systems. NHAN
SWG, a California corporation, was recently created upon the acquisition of
certain software assets from Eastern Systems Technology, Inc., and is engaged in
software product development. TRIMARK, a California corporation headquartered in
San Diego that designs, manufactures and markets profile selling software
products to corporate clients, was acquired by the Company following the end of
the first fiscal quarter. NHAN India, a company incorporated in Chennai, India
conducts software development activities for the inUnison-TM- portal and also
focuses on call center solutions and outsourcing for companies seeking to
establish call centers in India. Accordingly, the consolidated financial
statements include the results of operations from NHancement and its NHAN NA and
Infotel subsidiaries for both periods presented and those of NHAN SWG for the
three and nine months ended June 30, 2000.
2. FINANCIAL STATEMENT PRESENTATION AND RESTATEMENT OF FINANCIAL
STATEMENTS
The accompanying condensed consolidated financial statements as of June
30, 2000, and for the three and nine months ended June 30, 2000 and 1999 are
unaudited. 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 the rules and regulations
of the Securities and Exchange Commission (the "Commission"), although the
Company believes the disclosures made are adequate to make the information
presented not misleading.
In the opinion of the management of the Company, the accompanying
unaudited condensed consolidated financial statements contain all adjustments
necessary to present fairly its financial position as of June 30, 2000 and the
results of its operations and changes in its cash flows for all periods
presented. These adjustments represent normal recurring items.
These consolidated financial statements should be read in conjunction
with the audited financial statements and accompanying notes for the year ended
September 30, 1999 presented in the Company's latest annual report on Form
10-KSB. The results for the nine months ended June 30, 2000 are not necessarily
indicative of the results of operations for a full year or of future periods.
The preparation of condensed consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts or
revenues and expenses during the reported period. Actual results could differ
from these estimates.
During the course of the year-end financial audit process for the
fiscal year ended September 30, 2000, the Company recorded certain adjustments
to its previously reported interim results. The most significant of the
adjustments affecting the quarterly period ended June 30, 2000 is the
recalculated deemed interest charge related to a beneficial conversion feature
of a prior convertible notes offering; the correction increases deemed interest
charges from $1.1 million to $1.6 million.
The Company has recalculated stock-based compensation related to net
exercise warrants issued to the Company's directors and warrants granted to
certain non-employees. Consistent with variable accounting requirements the
Company has "marked-to-market" the net change in the value of the warrants for
the third quarter ended June 30, 2000. The restatement has resulted in a
decrease in stock-based compensation charges of $624,000 in the third quarter
ended June 30, 2000. Additionally, the Company has adopted SOP 98-1 and has
capitalized $10.7 million of software assets, including warrants issued in
connection with the acquisition of the software. The Company has also
capitalized approximately $2.1 million associated with warrants issued in
connection with a $50 million equity line of financing.
As a result of the adjustments recorded by the Company, we have revised
our reported results of operations for the quarter ended June 30, 2000 as
follows:
Three Months Ended
June 30, 2000
As Reported As Restated
Total Assets $ 25,660,600 $ 36,467,500
Total Liabilities 14,481,500 22,891,800
Net Revenue 4,273,000 4,273,000
Gross Profit 1,178,400 1,178,400
Net loss (3,868,100) (3,619,200)
Basic and diluted net
loss per share $ (0.36) $ (0.33)
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standard Board issued Statement
of Financial Standard No. 133 "Accounting for Derivative Instruments and Hedging
Activities"("FAS 133") which requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet, and to measure them at fair
market value. If certain conditions are met, a derivative may be specially
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition of the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are attributable
to the risk, or (ii) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. FAS 133 is effective for all
fiscal years beginning after June 15, 2000, and the Company will not be adopting
FAS 133 until fiscal year 2001. Historically, the Company has not entered into
derivative contracts for speculative purpose. In the quarter ended June 30,
2000, the Company's subsidiary, INFOTEL Technologies Pte Ltd ("INFOTEL"),
entered into a derivative contract for trade hedging purpose. Management may
enter into derivative contracts to hedge foreign currency risks in the future.
The Company is assessing the possible impact of the new accounting
pronouncement.
In December 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-9 "Modification of SOP 97-2,
"Software Revenue Recognition" and the Company has adopted the statement for all
applicable transactions. The adoption of this statement did not have a material
impact on the Company's operating results, financial position or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") and amended it in March 2000. The Company has considered the
guidance under the provisions of SAB 101 for its fiscal year 2000, and also
believes that its current policies are in compliance.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation an Interpretation of APB 25." FIN 44 becomes effective July
1, 2000, but certain conclusions cover specific events that occur after either
December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a
material effect on the Company's financial position or results of operations.
4. WARRANTS
In December 1999, the Company issued warrants to purchase 50,000 shares
of its Common Stock to an independent consultant and warrants to purchase
150,000 shares and 175,000 shares of its Common Stock to its outside advisors,
all for services rendered, with an exercise price of $3.43 per share. The
Company valued these warrants using the Black Scholes option pricing model and
the following assumptions: contractual term of one to two years, a risk free
interest rate of 5.15%, a dividend yield of 0% and volatility of 142%. The fair
value of $100,800 was expensed during nine months ended June 30, 2000.
During the nine months ended June 30, 2000, the Company issued warrants
to the President and Chief Executive Officer to purchase 100,000 shares of its
Common Stock and warrants to the Company s Board members to purchase 100,000
shares of Common Stock at $3.43 per share, all of which were fully exercisable.
Under the terms of the warrant agreements, upon exercise of the warrant, the
warrant holders can pay the exercise price by having the Company issue the
number of shares under the warrant less the number of shares having a fair value
on the date exercised equal to the exercise price. As a result, the Company has
used variable accounting to account for these awards and has recorded a decrease
of $600,000 in stock based compensation related to the warrants during the three
months ended June 30, 2000. The stock based compensation will continue to be
remeasured each reporting period until the awards are exercised or cancelled.
During the three months ended June 30, 2000, the Company cancelled
50,000 warrants previously issued to a director who had resigned. The exercise
price of these warrants was $11.50 per share.
In connection with a software purchase agreement, on May 1, 2000, the
Company issued to the supplier 45,613 warrants to purchase shares of Common
Stock of the Company at an exercise price of $15.50 per share. The warrants are
immediately exercisable and expire five years from the date of issuance. The
Company valued these warrants using the Black-Scholes's model and the following
assumptions: contractual term of five years, a risk free interest rate of 5.8%,
a dividend yield of 0% and volatility of 135%. The fair value of $683,800 has
been accounted for as purchased capitalized software.
In connection with the stock purchase agreement (See "Stock Purchase
Agreement"), the Company issued warrants to purchase 120,000 shares of Common
Stock at an exercise price of $20.82 per share. The warrant exercise price was
subsequently adjusted to $13.50 per share on November 15, 2000 in exchange for
securing a waiver from the investment corporation allowing us to issue Series B
preferred stock to other investors. The Black-Scholes option pricing model, was
used to value the warrants and the following assumptions: contractual term of 3
years, a risk free interest rate of 5,8%, a dividend yield of 0% and a
volatility of 135%. The fair value of $2,144,000 was accounted for as a
non-current asset. As and when stock is purchased under the terms of
reclassification agreement, the costs will be reclassified from "Other assets"
to "Additional paid in capital", on a dollar for dollar basis with the amount of
proceeds received from the sale of common stock. As of September 30, 2000 there
is a total of $2,144,000 costs included in "Other assets". If at termination of
the agreement the proceeds received from the sale of common stock are less than
the costs associated with this agreement, then the residual costs remaining in
"Other assets" will be charged to expenses.
At June 30, 2000, the following warrants to purchase the Company s common stock
were outstanding, all of which were exercisable:
EXPIRATION DATE SHARES UNDER EXERCISE
WARRANTS PRICE
December 10, 2000 566,700 $ 3.43
January 30, 2001 193,700 4.80
February 3, 2001 130,600 4.80
December 10, 2001 50,000 3.43
February 3, 2002 50,000 4.80
December 10, 2001 3,600 1.53
December 1, 2002 250,000 1.53
August 4, 2004 170,000 2.37
May 1, 2005 45,600 15.50
------------
Total 1,460,200
5. FINANCING ACTIVITIES
The Company's INFOTEL subsidiary completed a line of credit agreement
providing for banking facilities up to SGD 3.5 million (approximately US$ 2.0
million) bearing interest at the Singapore prime rate plus 1.25%, collateralized
by the assets of the subsidiary and the Company's guarantee.
On May 19, 2000, the Company entered into a convertible debentures
purchase agreement with certain investors in the aggregate principal amount of
$5,850,000. The convertible debentures accrued interest at 8% per annum from the
date such convertible debentures were issued until the earlier of conversion
into shares of our common stock or May 30, 2001, and was payable quarterly in
arrears. The convertible debentures were convertible by the holder into shares
of our common stock at any time prior to the close of business on May 30, 2001.
The conversion price, as amended, is equal to the lesser of $13.00 per share or
91% of the average of the three lowest bid prices during the ten trading days
immediately preceding the date on which the holder of the debenture gives us
notice of the intent to convert the debenture, provided that the conversion
price shall not be less than $8.00 per share. The convertible debentures are
convertible by the holder into shares of our common stock at any time prior to
the close of business on May 30, 2001. The Company has the right to redeem the
convertible debentures for the sum of 105% of the unpaid principal and any
accrued or unpaid interest. The Company is obligated to reserve for issuance
upon conversion a sufficient number of shares of common stock and to register
such reserved shares of common stock and maintain an effective registration
statement for such shares of common stock. The beneficial conversion feature
associated with the issuance of the convertible debenture and subsequent
amendment of the conversion terms resulted in a non-cash deemed interest charge
of $1,595,500 during the three months ended June 30, 2000.
On June 6, 2000, the Company exercised its right under the terms of the
Infotel Purchase and Sale Agreement to repurchase 216,500 shares of our common
stock at a price of approximately $3.65 per share from the former Infotel
stockholders for $791,100. The reacquired shares were originally issued to the
Infotel stockholders in connection with the Company's acquisition of Infotel in
June
1998.
The Company entered into a common stock purchase agreement, dated May 24,
2000 and amended as of June 30, 2000 with an investment corporation under which
the Company may require the investment corporation to purchase up to $50 million
of its common stock. Under the terms of the agreement, the Company is under no
obligation to sell its common stock to the investment corporation. However, the
Company may make up to a maximum of twelve requests for the purchase of its
common stock with no single purchase exceeding $4 million unless otherwise
agreed to by the investment corporation. In addition, the common stock purchase
agreement does not require the investment corporation to purchase the Company's
common stock if it would result in the investment corporation owning more than
9.9% of the Company's outstanding common stock. The purchase price of the common
stock is 92% of the volume weighted average price per share of the Company's
common stock over the eighteen-day period prior to the date the Company requests
the investment corporation to purchase its common stock. In addition, the
investment corporation will receive a 2% placement fee and an escrow agent fee
from the proceeds due to the Company. In conjunction with the stock purchase
agreement, the Company issued a warrant to purchase 120,000 shares of its common
stock at an exercise price of $20.82. (See "Warrants").
In lieu of providing the investment corporation with a minimum
aggregate drawdown commitment, we have issued to the investment corporation
stock purchase warrants to purchase 120,000 shares of our common stock with an
exercise price of $20.82 (see note 4). The warrants expire May 24, 2003.
6. ACQUISITION TRANSACTION AND UNAUDITED PRO FORMA FINANCIAL DATA
On January 21, 2000, the Company completed its acquisition of all of
the outstanding shares of common stock of Nhancement Enterprise Software
Solutions, Inc., dba Triad Marketing, formerly Nhancement Acquisition
Corporation, being the surviving corporation that was merged with Trimark
Incorporated ("TRIMARK"), in exchange for approximately 750,000 shares of Common
Stock of the Company, and warrants to purchase 250,000 shares of the Company's
Common Stock at an exercise price of $1.53 per share. The transaction was
structured as a tax free reorganization. The purchase agreement provides that in
the event that the average closing price of NHancement Common Stock for the five
consecutive trading days ending on the trading day immediately prior to the
first anniversary and second anniversary of the transaction s closing (the
"Valuation Formula") falls below $4.00, the Triad shareholders are entitled to
additional consideration either in cash or Nhancement Common Stock, at the
Company's option. On the first anniversary date, Triad shareholders are entitled
to additional consideration equal to one half of the unregistered shares of the
Company's Common Stock that they still own plus all of the registered shares of
the Company's Common Stock that they still own, multiplied by the lesser of (i)
$4.00 minus the Valuation Formula, or (ii) $2.50. At the second anniversary
date, the Triad shareholders are entitled to additional consideration of equal
to 250,000 unregistered shares owned by the Triad shareholders multiplied by the
lesser of (i) $4.00 minus the Valuation Formula, or (ii) $2.50. As the
guaranteed price of $4.00 per share was in excess of the fair value of the
Company's common stock two days before and after the announcement of the
acquisition on December 10, 1999, the common stock issued was valued at $4.00
per share or $3,000.000. The warrants issued to purchase the Company's common
stock were estimated at $460,000 using the Black-Scholes option pricing model
using the following assumptions: expected volatility of 90%, weighted average
risk free interest rate of 6%, term of 3 years and no expected dividends. The
acquisition has been accounted for as a purchase, which means the purchase price
was allocated to the assets acquired and liabilities assumed based on estimated
fair values at the date of the acquisition. The results of operations of Triad
have been included with the Company's results of operations since January 21,
2000, the date of acquisition. The total purchase price of $3,460,000 was
allocated based on establish valuation techniques used in the software industry
as follows:
As of June 30, 2000, the purchase price of TRIMARK and the net assets acquired
recorded in connection with the TRIMARK acquisition are summarized as follows:
Common Stock 750,000 shares subject to
share price guarantee and
250,000 warrants not subject
to share price guarantee $3,460,000
Net assets acquired consists principally of the
following:
Tangible assets, primarily
Cash, accounts receivable
and property and equipment $ 11,000
Software asset 3,325,000
Assembled workforce 206,000
Goodwill 250,000
Liabilities assumed (332,000)
-----------
$3,460,000
On February 4, 2000, the Company completed its acquisition of certain
assets of SVG Software Services, Inc. ("SVG") pursuant to the Plan and Agreement
of Reorganization between NHancement and SVG. The transaction was structured as
a tax free reorganization. Under terms of the Agreement, the Company acquired
all rights to SVG's intellectual property, primarily software, and the right to
use its corporate name in exchange for 250,000 shares of the Company's Common
Stock valued at $2,178,000, calculated based on the average of the share price
two days before and after the announcement date on February 4, 2000. The
purchase allocation price was allocated to software and goodwill of $2,129,000
and $49,000, respectively. The software was acquired for internal use for the
Company's hosted internet inUnison TM portal service applications and was
capitalized. Amortization of the software will commence when the hosted internet
portal is substantially complete and ready for its intended use.
On February 4, 2000, the Company acquired all the shares of Enhancement
Technologies (India) Pte. Ltd. ("NHAN INDIA") a company incorporated in Chennai,
India that engages in the business of web design and software products
development for a cash payment of $50,000. The results of NHAN INDIA have been
excluded from the pro forma financial data presented below as the acquisition
closed on April 4, 2000.
The condensed unaudited pro forma statements of operations combine the
results of operations of the Company and TRIMARK for the nine months ended June
30, 2000 and June 30, 1999, as if the acquisition had occurred at the beginning
of the period, after giving effect to certain adjustments including amortization
of goodwill and interest expense on notes payable to related parties. The
following unaudited pro forma summary does not necessarily reflect the results
of operations as they would have been had the TRIMARK acquisition occurred at
the beginning of the period presented, nor is it necessarily indicative of the
results of operations for any future period. The pro forma results do not
include the acquisition of NHAN India as they were not significant on an
individual or an aggregate basis.
UNAUDITED UNAUDITED
PRO FORMA PRO FORMA
NINE MONTHS ENDED NINE MONTHS ENDED
June 30, June 30,
1999 2000
Net revenues $ 17,042,800 $ 22,304,300
Net loss ($1,154,800) ($5,846,600)
Preferred stock dividends ($724,000) ($2,400)
Net loss available common
stockholders ($1,878,800) ($5,849,000)
Net loss per common share
-Basic and diluted ($0.27) ($0.57)
Shares used in per share
calculations
-Basic and diluted 6,951,000 9,460,500
7. NET INCOME (LOSS) PER SHARE
Net income (loss) per share were computed under the provisions of SFAS
128, Earnings Per Share. The following is a reconciliation of the numerators and
denominators of the basic and diluted net income (loss) per share computations:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
NET LOSS - NUMERATOR 1999 2000 1999 2000
------------------------------------------------------------------------------------------------------
Net income (loss) $251,800 ($3,619,200) ($1,142,400) ($5,311,500)
Preferred stock dividends (717,200) -- (724,000) (2,400)
------------------------------------------------------------------------------------------------------
Net income (loss) available to
common stockholders ($465,400) $3,619,200) ($1,866,400) ($5,313,900)
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Weighted average common shares used in
net income (loss) per share
basic and diluted 6,201,000 10,883,900 5,912,400 9,899,700
Options and warrants to purchase 3,056,700 shares of Common Stock were
outstanding as of June 30, 2000, and options and warrants to purchase 2,568,900
shares and Preferred Stock convertible into approximately 1,750,000 shares of
Common Stock were outstanding at June 30, 1999 but were not included in the
computation of diluted loss per common share because the effect would be
anti-dilutive.
8. SEGMENT REPORTING
NHancement's reportable operating segments include NHancement
Technologies North America, Inc. ("NHAN NA"), INFOTEL and Nhancement
Technologies Software Group, Inc. ("NHAN SWG"). NHAN NA is a systems integrator
and distributor of voice processing equipment, which includes equipment
installation, technical support and ongoing maintenance. NHAN NA derives
substantially all of its revenues from sales in the United States. INFOTEL is a
provider and integrator of infrastructure communications equipment products
operating in Singapore, providing radar system integration, turnkey project
management services and test instrumentation. INFOTEL derives substantially all
of its revenue from sales in Asia. NHAN SWG was formed late in fiscal year 1999
to develop and sell integration and application software products. TRIMARK,
headquartered in San Diego and acquired on January 21, 2000, designs,
manufactures and markets profile selling software products to corporate clients.
Corporate expenses have been charged to the Company under the heading "OTHER."
Financial information for these segments includes the following:
THREE MONTHS ENDED JUNE 30, 2000
-------------------------------------------------------------------------------------------------------------------------------
NHAN NA INFOTEL NHAN SWG TRIMARK OTHER TOTAL
-------------------------------------------------------------------------------------------------------------------------------
Net revenue from external customers $1,555,300 $2,448,000 -- $269,700 -- $4,273,000
Net income (loss) ($1,761,500) 346,300 (23,500) (451,000) (1,729,500) ($3,619,200)
Total assets (includes goodwill) 3,835,400 8,777,700 2,122,400 3,687,200 18,044,800 36,467,500
-------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------------------------------------------------------------------
NHAN NA INFOTEL NHAN SWG TRIMARK OTHER TOTAL
-------------------------------------------------------------------------------------------------------------------------------
Net revenue from external customers $4,062,000 $2,590,800 -- -- -- $6,652,800
Net income (loss) 615,300 240,300 -- -- (603,800) $251,800
Total assets (includes goodwill) 5,306,400 8,027,000 -- -- 2,238,600 15,572,000
-------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED JUNE 30, 2000
-------------------------------------------------------------------------------------------------------------------------------
NHAN NA INFOTEL NHAN SWG TRIMARK OTHER TOTAL
-------------------------------------------------------------------------------------------------------------------------------
Net revenue from external customers $11,890,400 $9,010,200 -- $715,200 -- $21,615,800
Net income (loss) (824,600) 918,900 (171,700) (443,800) (4,790,300) ($5,311,500)
Total assets (includes goodwill) 3,835,400 8,777,700 2,122,400 3,687,200 18,044,800 36,467,500
-------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------------------------------------------------------------------
NHAN NA INFOTEL NHAN SWG TRIMARK OTHER TOTAL
-------------------------------------------------------------------------------------------------------------------------------
Net revenue from external customers $9,096,000 $6,533,300 -- -- -- $15,629,300
Net income (loss) 649,000 480,000 -- -- ($2,271,400) ($1,142,400)
Total assets (includes goodwill) 5,306,400 8,027,000 -- -- 2,238,600 15,572,000
-------------------------------------------------------------------------------------------------------------------------------
9. COMMITMENTS
The Company entered into an agreement whereby the Company purchased a
non-exclusive license for certain software for cash of $10,010,000 and
warrants to purchase 45,600 shares of the Company's Common Stock with an
estimated fair value of $684,000. Concurrently, the Company paid
the software vendor $2,000,000 and recorded accounts payable of $8,010,000.
The software was acquired for internal use for the Company's inUnison-TM-
portal service application. Amortization of the software will commence when
the hosted internet portal is substantially complete and ready for its
intended use.
On June 9, 2000, the Company entered into a Project Development
Agreement ("PDA") with a hardware manufacturer to help design and build its
Personalized Communication Hub network architecture and infrastructure.
Ninety-percent of the total project costs related to consulting services and
100% of the hardware and other product costs will be financed by a capital lease
to be structured by the hardware manufacturer. The Company anticipates that
as it implements its new business plan it will require additional material
capital to fund needed capital equipment, and that such funding needs may be
financed through similar capital equipment leases which will not require
significant direct outlays of cash.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NHancement Technologies Inc. ("NHancement" or the "Company") is a
software applications and services company that specializes in unified
communications and information, collaborative commerce and multimedia solutions
to help companies improve internal and external communications. These solutions
include the facilitation of an enterprise's electronic business transactions and
customer service interactions. The Company's telephony solutions and services
work in both Internet-enabled environments and over standard telephone lines.
Our products facilitate client use of telephone, e-mail, faxing, paging and
Internet based communications to keep in touch with customers and with one
another. We have developed an end-to-end solutions suite to enable companies to
do business in the office and on the road. By simplifying business
communications and improving access to distributed corporate information (data)
resources, our products are designed to help clients build solid customer
relationships and maximize revenue opportunities.
Our primary objective is to become a leading provider of communications
and data software products, systems and services for enterprise customers. Our
management believes that increased competition, and the reduced importance of
geographical borders make it imperative that corporations achieve and maintain
state-of-the-art communication and information systems that provide a unified
view of an enterprise's business functions on a worldwide basis. We provide
corporations and other businesses with communication systems, data products and
technological innovations designed to enhance efficiency.
In addition, we design, develop, market and service profile selling
software products and services to corporate enterprises. This software is
designed to ascertain one-to-one customer-selling opportunities based on
marketing characteristics that are unique to the individual customer.
On May 23, 2000, we announced our plan to introduce "Personal
Communications Hub", a new product offering suite that is intended to provide
our customers with unifying communications and unifying information solutions.
Personal Communications Hub will utilize the unified communications
platform, Unified Open Network Exchange. Our management believes that the
Personal Communications Hub suite of products and applications on the Unified
Open Network Exchange platform will provide our customers with scaled, carrier
grade IP-based solutions seamlessly across multiple channels. We expect to incur
substantial expenditures for equipment, systems, research and development,
consultants and personnel to implement this new service. As a result, our
short-term operating results and cash flows and overall financial condition may
be adversely affected for several quarters.
The Company's condensed consolidated financial statements include the
results of the Company and four of its operating subsidiaries: NHancement
Technologies North America, Inc. ("NHAN NA"), INFOTEL Technologies (Pte) Ltd
("INFOTEL"), NHancement Technologies Software Group, Inc. ("NHAN SWG") and
Nhancement Acquisition Corp. (formerly, Trimark Incorporated, "TRIMARK"). The
condensed consolidated financial statements contain results of operations from
NHancement and its NHAN NA, INFOTEL subsidiaries for all periods presented, and
those of NHAN SWG for the three and nine months ended June 30, 2000, and those
of TRIMARK for the period from January 21, 2000 to June 30, 2000.
The statements contained in this Report on Form 10-QSB that are not
purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's
expectation, hopes, intentions or strategies regarding the future.
Forward-looking statements include: statements regarding future product or
product development; statement regarding future research and development
spending and the Company's product development strategies; statements
regarding the levels of international sales; statements regarding future
expansion or utilization of manufacturing capacity; statements regarding
future expenditures; and statements regarding current or future acquisitions.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements
(or industry results, performance or achievements) expressed or implied by
these forward-looking statements to be substantially different from those
predicted. The factors that could affect our actual results include the
following:
- general economic and business conditions, both nationally and
in the regions in which we operate
- adoption of our new recurring revenue service model
- competition
- changes in business strategy or development plans
- delays in the development or testing of our products
- technological, manufacturing, quality control or other
problems that could delay the sale of our products
- our inability to obtain appropriate licenses from third
parties, protect our trade secrets, operate without infringing
upon the proprietary rights of others, or prevent others from
infringing on our proprietary rights
- our inability to obtain sufficient financing to continue to
expand operations
- changes in demand for products by our customers
Certain of these factors are discussed in more detail elsewhere in this
Report, including under the caption "Risks Factors; Factors That May Affect
Operating Results".
We do not undertake any obligation to publicly update or revise any
forward-looking statements contained in this Report or incorporated by
reference, whether as a result of new information, future events or otherwise.
Because of these risks and uncertainties, the forward-looking events and
circumstances discussed in this Report might not transpire.
GENERAL
Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") should be read in conjunction with the consolidated
financial statements included herein. Further, this third quarter report on Form
10-QSB should be read in conjunction with the Company's Consolidated Financial
Statements and Notes to Consolidated Financial Statements included in its 1999
Annual Report on Form 10-KSB. In addition, you are urged to read this report in
conjunction with the risk factors described herein.
In this MD&A, the Company explains its results of operations for the
three and nine month period ended June 30, 2000, as compared to the
corresponding periods in 1999 and discusses its financial condition at June 30,
2000. The discussion of financial condition includes changes taking place or
believed to be taking place in the software, voice processing, data processing
and communications industry, and how the Company expects these changes to
influence future results of operations; and liquidity and capital resources,
including discussions of capital financing activities and uncertainties that
could affect future results.
RESULTS OF OPERATIONS
In this section, the Company provides the components of its earnings
for the three and nine month periods ended June 30, 2000 and June 30, 1999. The
Company then explains variances within revenues and expenses for these same
periods.
The following table shows results of operations, as a percentage of net
sales, for the three and nine-month periods ended June 30, 2000 and June 30,
1999:
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
-----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1999 2000 1999 2000
-----------------------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 64.8% 72.4% 65.4% 67.8%
Gross profit 35.2% 27.6% 34.6% 32.2%
Restructuring, selling, general and administrative expenses 28.6% 59.3% 38.9% 43.5%
Amortization of goodwill 1.7% 3.7% 2.1% 2.2%
Income (loss) from operation 5.0% (35.4)% (6.4)% (13.5)%
Other income (expense) (1.2)% (45.8)% (0.9)% (9.8)%
Income (loss) before taxes 3.8% (81.3)% (7.3)% (23.3)%
Income tax 0.0% 3.4% 0.0 % 1.3 %
Net income (loss) 3.8% (84.7)% (7.3)% (24.6)%
-----------------------------------------------------------------------------------------------------------------------
Revenues
Company revenues for the quarter ended June 30, 2000 decreased $2.3
million or 34.8% to $4.3 million for the three months ended June 30, 2000 as
compared to $6.6 million for the same period in 1999. On a year-to-date basis,
the Company's revenues increased by $6.0 million to $21.6 million or 38.5%
during the nine months ended June 30, 2000, from $15.6 million during the nine
months ended June 30, 1999. The substantial decrease in revenue for the three
months period ended June 30, 2000 from the same period in 1999 was due primarily
to (i) the transition of our company to a service-based, unified communications
and information provider operating a recurring revenue model from our historic
systems integrator model; and (ii) the decline in legacy system revenue which
made up approximately 64.1% of our total revenue and 80.7% of our North America
revenue for the quarter ended March 31, 2000 as many of our customers have
postponed purchase decisions until we release our new Personal Communications
Hub suite of unified communication and unified information solutions. The
increases in revenues for the nine months ended June 30, 2000, were due
primarily to: (i) increased INFOTEL revenues associated with test and
measurement for the nine months ended June 30, 2000, and (ii) strong NHAN NA
legacy systems sales for quarter ended March 31, 2000.
NHAN NA's net revenue on a stand-alone basis decreased $2.5 million or
61.7% to $1.6 million for the three months ended June 30, 2000, from $4.1
million for the three months ended June 30, 1999. The decrease in NHAN revenue
was due to a decrease in legacy sales in voicemail system revenue as many
customers have delayed purchasing decisions pending the Company's new hosted
services. On a year-to-date basis, NHAN NA's net revenue increased by $2.8
million or 30.8% to $11.9 million for the nine months ended June 30, 2000, from
$9.1 million for the nine months ended June 30, 1999. The year-to-date increase
in NHAN NA revenues came from increased enterprise information center product
sales as well as legacy system sales within its existing customer base and from
new customers in the past two quarters of fiscal year 2000.
Revenues for the Company's INFOTEL subsidiary on a stand-alone basis
decreased slightly by 7.7% or $0.2 million from $2.6 million for the quarter
ended June 30, 1999 to $2.4 million for the same period in 2000 due to lower
demand for test instrument products in that quarter. On a year-to-date basis,
revenues grew by $2.3 million or 34.3% or from $ 6.7 million for the nine months
ended June 30, 1999 to $9.0 million for the nine months ended June 30, 2000. The
increase in revenues occurred within the test instrument products and networking
business segments due to high demand from key customers.
The Company's TRIMARK subsidiary, acquired on January 21, 2000, added
revenues of $0.3 million for the quarter ended June 30, 2000 from profile sales
of software products to corporate clients. On a stand-alone pro forma basis,
TRIMARK's net sales for the third quarter decreased by 50% or $0.3 million from
$0.6 million in June 30, 1999 to $0.3 million for the same period in 2000. On a
year-to-date pro forma basis, revenues decreased by $0.3 million or 21.4% from
$1.4 million to $1.1 million. The decreases were due to declining sales of
marketing communication information files ("MCIF") sales for both periods.
The Company's backlog increased to $7.2 million at June 30, 2000 as
compared to $4.0 million as of March 31, 2000. NHAN NA's order backlog increased
slightly to $2.7 from $2.4 million and INFOTEL's backlog increased substantially
to $4.4 million at June 30, 2000 from $1.3 million at March 31, 2000. Backlog
for NHAN SWG as of June 30, 2000 was about $0.1 million and TRIMARK's backlog
was insignificant at June 30, 2000.
Gross Margin
Company gross margin for the three months ended June 30, 2000,
decreased to 27.6% as compared to the 35.2% for same the period in 1999. The
decrease was mainly due to substantial reduction in revenues coupled with the
fixed nature of operating costs in our NHAN NA operation. For the nine months
ended June 30, 1999 and 2000, gross margin remained constant and was 32.2% to
34.6% for these periods respectively. NHAN NA's gross margin percentage on a
stand-alone basis decreased substantially from 38.8% to 6.8% for the quarter
ended June 30, 2000, as compared to the same period of 1999 due to substantial
reduction in revenues coupled with the fixed nature of operating costs, and the
migration to our unified communications and unified information solutions
business. NHAN NA's gross margin percentage decreased slightly from 36.4% for
the period ended June 30, 1999 to 31.7% for the nine months ended June 30, 2000.
INFOTEL's gross margin percentage on a stand-alone basis improved from 23.3% to
36.4% for the quarter ended June 30, 2000. For the nine months ended June 30,
1999 and 2000, INFOTEL's gross margin also improved from 25.0% to 29.0%. This
increase in gross margin was due to (i) improved selling prices for test
equipment product and project management services which represents 56.7% and
68.8% of total revenue for the three and nine months period ended June 30, 2000
respectively, and (ii) lower operating expenses. On a pro forma stand-alone
basis TRIMARK had a gross margin decrease from 75.0% for the quarter ended June
30, 1999 to 67.3% for the quarter ended June 30, 2000, and increase from 77.5%
for the nine months ended June 30, 1999 to 80.3% for the nine month ended June
30, 2000. The decrease in gross margin for the three months were due to lower
billing levels for the MCIF sales. The direct costs associated with MCIF sales
is minimal.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses ("SG&A")
including goodwill and amortization, as a percentage of net sales increased to
63% for the three months ended June 30, 2000 compared to 30.3% for the same
period in 1999. For the nine months ended June 30, 2000, the Company's SG&A
increased to 45.7% from 41% for the nine months ended June 30, 1999. SG&A for
NHAN NA on a stand-alone basis increased to 105.6% for the third fiscal quarter
of 2000 as compared to 21.2% for the same period in 1999. For the nine months
ended June 30, 2000, NHAN NA's SG&A expenses as a percentage of revenue also
increased to 33.1% from 27.1% for the nine months ended June 30, 1999. The
increases were due primarily increase in salary expenses for significant
additional hires of sales, marketing, and administrative personnel; and sales
and marketing related expenses and other expenses in relation to the
introduction of our new hosted unified communication and information business
model.
On a stand-alone basis, INFOTEL's SG&A as a percentage of revenues
increased to 19.7% for the three months ended June 30, 2000, compared to 16.9%
for the three months ended June 30, 1999. For the nine months ended June 30,
2000, INFOTEL's SG&A expenses as a percentage of revenue declined to 18% from
20.6% for the nine months ended June 30, 1999. INFOTEL's SG&A expenses as a
percentage of revenues decreased mainly because of the significant increase in
INFOTEL's revenues during the second quarter of 2000 and for the nine months
ended June 30, 2000.
On a stand-alone pro forma basis, TRIMARK's SG&A as a percentage of
revenues increased to 226.1% for the three months ended June 30, 2000 compared
to 70.7% for the three months ended June 30, 1999. On a pro forma basis, for the
nine months ended June 30, 2000, TRIMARK's SG&A expenses as a percentage of
revenue increased to 126.6% from 76.9%. TRIMARK's SG&A expenses as a percentage
of revenues increased mainly because of a significant decline in revenue for the
subject periods and because of the re-focus of TRIMARK personnel to the
Company's new hosted unified communications and unified information business. In
addition, there was significant increase in marketing team to support a large
project during the three and for the nine months ended June 30, 2000.
NHancement's corporate overhead costs increased by $1.1 million or 183%
for the three months ended June 30, 2000, compared to $0.6 million for the same
period in the prior year due primarily to an interest expense related to a
beneficial conversion feature associated with debentures issued offset by the
third quarter mark-to-market net change in warrants and options issued to the
company's Directors and certain employees consistent with variable accounting .
NHancement's corporate overhead costs increased by 113% or $2.6 million from
$2.3 million for the nine months ended June 30, 1999 to $4.9 million for the
nine months ended June 30, 2000 due primarily to the mark-to market net change
in warrants and options consistent with variable accounting.
Income taxes
The Company currently has approximately $7 million in US federal net
operating loss carry-forwards. The majority of these net operating losses are
subject to an annual limitation of $250,000. At June 30, 2000, the Company
provided a 100% reserve against its deferred tax assets. The Company believes
that since sufficient uncertainty exists regarding the realizability of the
deferred tax assets, a full valuation allowance is required. Income taxes of
$270,000 shown in the condensed consolidated statement of operations relates to
accrued income tax liabilities for Infotel, our subsidiary in Singapore.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 2000, net cash provided by
operating activities was $290,000. Although we incurred a loss of $5.3
million during this period, $4.1 million of this loss was attributed to various
non-cash charges. Further, this loss was offset by a substantial decrease in
accounts receivables. Net cash provided by investing and financing activities
totaled $1.6 million consisting of the proceeds from issuance of convertible
debentures offset by the purchase of software assets, the down payment of $2.0
million towards the purchase of the unified communications software, the
repayments of the Company's line of credit, repurchase of Company's Common Stock
from former owners of Infotel and purchases of software, property and equipment.
At June 30, 2000, the Company had negative working capital of $12.2 million, a
decrease of $14.3 million from the quarter ended March 31, 2000 due to the
acquisition of $8.0 million of capitalized software included in accounts payable
at June 30, 2000. The Company had a cash balance of $4.3 million (including
restricted cash of $116,000) at June 30, 2000.
During the quarter ended June 30, 2000, the Company paid off
approximately $1.7 million on a credit line collateralized by its receivables.
The Company, through its INFOTEL subsidiary, has completed a credit
line with a major Singapore bank for S$3.5 million (approximately US$2.0
million) with interest at 1.25% above the bank prime rate to be used for
INFOTEL's overdraft protection, letters of credit, letters of guarantee,
foreign exchange and revolving credit. This credit line is guaranteed by the
Company.
The Company entered into an agreement whereby the Company purchased a
non-exclusive license for certain software for cash of $10,010,000 and warrants
to purchase 45,600 shares of the Company's Common Stock with an estimated fair
value of $684,000. Concurrently, the Company paid the software vendor $2,000,000
and recorded accounts payable of $8,010,000. The software was acquired for
internal use for the Company's inUnison-TM- portal service application.
Amortization of the software will commence when the hosted internet portal is
substantially complete and ready for its intended use.
The Company has entered into a common stock purchase agreement, dated
May 24, 2000 and amended as of June 30, 2000 with an investment corporation
under which the Company may require the investment corporation to purchase up to
$50 million of its common stock. Under the terms of the agreement, the Company
is under no obligation to sell its common stock to the investment corporation.
However, the Company may make up to a maximum of twelve requests for the
purchase of its common stock with no single purchase exceeding $4 million unless
otherwise agreed to by the investment corporation. In addition, the common stock
purchase agreement does not require the investment corporation to purchase the
Company's common stock if it would result in the investment corporation owning
more than 9.9% of the Company's outstanding common stock. The purchase price of
the common stock is 92% of the volume weighted average price per share of the
Company's common stock over the eighteen-day period prior to the date the
Company requests the investment corporation to purchase its common stock. In
addition, the investment corporation will receive a 2% placement fee and an
escrow agent fee from the proceeds due to the Company. In conjunction with the
stock purchase agreement, the Company issued a warrant to purchase 120,000
shares of its common stock at an exercise price of $20.82.
On June 9, 2000, the Company entered into a Project Development
Agreement ("PDA") with a hardware manufacturer to help design and build its
Personalized Communication Hub network architecture and infrastructure.
Ninety-percent of the total project costs related to consulting services and
100% of the hardware and other product costs will be financed by a capital lease
structured by the hardware manufacturer. The Company anticipates that as it
implements its new business plans it will require significant additional capital
to fund needed capital equipment, and that such funding needs may be financed
through similar capital equipment leases which may require significant direct
outlays of cash.
Despite its negative working capital at June 30, 2000, management
believes that the available cash and financing available through its equity line
of $50.0 million, and potential other credit facilities are adequate to meet the
working capital needs of the Company and its subsidiaries during the next 12
months. There can be no assurance that the Company will be able to obtain either
debt or equity financing, if and when it is needed, for working capital and
other needs.
RISK FACTORS; FACTORS THAT MAY AFFECT OPERATING RESULTS
The following risk factors, as well as the risks described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may cause actual results to differ materially from those in any
forward-looking statements contained in the MD&A or elsewhere in this report or
made in the future by the Company or its representatives. Such forward-looking
statements involve known risks, unknown risks and uncertainties and other
factors, which may cause the actual results, performance or achievements
expressed or implied by such forward-looking statements to differ significantly
from such forward-looking statements.
WE HAVE CURRENTLY RECORDED A NET LOSS, WE HAVE A HISTORY OF NET LOSSES AND WE
CANNOT BE CERTAIN OF FUTURE PROFITABILITY.
We recorded net loss of approximately $3.6 million on net revenues of
$4.3 million for our third quarter ended June 30, 2000, and net loss of $5.3
million on $21.6 million in revenue for the nine months ended June 30, 2000 and
we also sustained significant losses for the fiscal year ended September 30,
1999 and for the nine-month period ended September 30, 1998. We also anticipate
incurring a net operating loss for our fiscal year ended September 30, 2000.
Our financial condition and results of operations will be adversely
affected if we fail to continue to produce positive operating results. This
could also:
- Adversely affect the future value of our common stock
- Adversely affect our ability to obtain debt or equity
financing on acceptable terms
- Prevent us from engaging in acquisition activity
OUR EQUITY AND DEBT FUNDING SOURCES MAY BE INADEQUATE TO FINANCE FUTURE
ACQUISITIONS.
The acquisition of complementary businesses and products has been and
may continue to be a key to our business strategy. Our ability to engage in
acquisition activities depends on us obtaining debt or equity financing, neither
of which may be available or, if available, may not be on terms acceptable to
us. Our inability to obtain such financing would have a material adverse effect
on our acquisition strategy.
Both debt and equity financing involve certain risks. Debt financing
may require us to pay significant amounts of interest and principal payments,
reducing the cash resources we needed to expand or transform our existing
businesses. Certain types of equity financing may be dilutive to our
stockholders' interest in our assets and earnings.
OUR SALE OF SHARES UPON CONVERSION OF DEBENTURES AT A PRICE BELOW THE MARKET
PRICE OF OUR COMMON STOCK WILL HAVE A DILUTIVE IMPACT ON OUR STOCKHOLDERS.
We have issued debentures to certain investors that may be converted
into common stock at a discount to the then-prevailing market price of our
common stock. The issuance of shares upon conversion of the principal and
interest under the debentures may have a dilutive impact on our stockholders.
The conversion of the debentures could have an immediate adverse effect on the
market price of our common stock. To the extent that debenture and warrant
holders convert their securities and sell the underlying shares into the market,
the price of our shares may decrease due to the additional shares in the market.
OUR NEW PRODUCTS AND STRATEGIC PARTNERING RELATIONSHIPS MAY NOT BE SUCCESSFUL.
We have announced a new product offering referred to as "personal
communications hub" that is intended to provide our customers with hosted and
non-hosted unifying communications and unifying information solutions. Personal
communications hub will utilize the unified communications platform,
Unified Open Network Exchange. While we believe that the personal communications
hub suite of products and applications on the Unified Open Network Exchange
platform will provide our customers with scaled, carrier grade IP-based
solutions seamlessly across multiple channels, there can be no assurance of our
customers' acceptance or adoption of personal communications hub products.
Moreover, we will need to conform our existing products and applications onto
the Unified Open Network Exchange platform. Such efforts could prove
unsuccessful, and could result in delays and cost overruns.
Further, we expect to incur substantial expenditures for equipment,
systems, research and development, consultants and personnel to implement this
new business model. As a result, our operating results and cash flows may be
adversely affected, and we anticipate incurring a net operating loss for our
fiscal year ended September 30, 2000. Although we believe that this new product
offering will ultimately result in profitable operations, there can be no
assurance that the implementation of our new business model will be successful.
WE PRESENTLY RELY UPON LEGACY VOICEMAIL SYSTEMS REVENUES.
For the quarter ended June 30, 2000, legacy voicemail systems revenues
(which includes customer premises equipment revenues) accounted for
approximately 48.5% of Company's total revenues and 81.3% of our North American
revenues. Management believes that future revenues from legacy voicemail systems
will steadily decline over the next two years, due to the introduction of new
unified messaging communication and information systems. Our ability to
transition our product sales to the new unified communication and information
platforms will be critical to our future growth. Revenue from the sales of
enterprise information center products accounted for approximately 10% of our
North America subsidiaries revenue for the two quarters ended September 30,
1999, approximately 8.3% and 51.5% of our North America subsidiaries revenues
for the two quarters ended March 31, 2000 and June 30, 2000, respectively.
WE RELY UPON OUR DISTRIBUTOR AND SUPPLIER RELATIONSHIPS.
Our current North American operations are based upon the integration
of hardware, software, and communications and data processing equipment
manufactured by others into systems designed to meet the needs of our
customers. Although we have agreements with a number of equipment
manufacturers, a major portion of our revenues is generated from the sale of
products manufactured by three companies. In this regard, we rely to a
significant extent on products manufactured (and services provided) by
Centigram Communications Corporation, Baypoint Innovations, a division of
Mitel, Inc., and Interactive Intelligence, Inc. Any disruption in our
relationships with Centigram Communications Corporation, Baypoint
Innovations, or Interactive Intelligence, Inc. would have a significant
adverse effect on our business for an indeterminate period of time until new
supplier relationships could be established. On June 9, 2000, Centigram
Communications Corporation announced that it was being acquired by ADC
Telecommunications, Inc. We have not had a prior contractual relationship
with ADC Telecommunications, Inc. and, therefore, our relationship with
Centigram Communications Corporation may be adversely affected. Any
interruption in the delivery of products by key suppliers would materially
adversely affect our results of operations and financial conditions.
WE ARE DEPENDENT UPON SIGNIFICANT CUSTOMERS.
We currently service approximately 1,000 customers worldwide. However,
the revenues from our four largest customers accounted for approximately 11.1%,
8.2%, 5.4% and 5.2%, respectively, of total revenues during the quarter ended
June 30, 2000. No other customer accounted for over 5% of total revenues during
this period. This concentration of revenue results in additional risk to our
operations, and any disruption of orders from our largest customers would
adversely affect on our results of operations and financial condition.
Our Singapore subsidiary, Infotel, offers a wide range of
infrastructure communications equipment products. It has an established business
providing test measuring instrumentation and testing environments, and is the
regional distributor and test and repair center for Rohde & Schwarz test
instruments. This subsidiary's profitability depends in part on a steady stream
of revenues relating to the services performed for Rohde & Schwarz test
instruments. Since the subsidiary's revenues constituted approximately 41% of
our total revenues for the fiscal year ended September 30, 1999, approximately
30.7% of our total revenues for the quarter ended March 31, 2000, and
approximately 57.3% of our total revenues for the quarter ended June 30, 2000,
any material change in our relationship with our manufacturers, including Rohde
& Schwarz, would materially adversely affect our results of operations and
financial condition.
OUR MARKET IS HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, WE MAY
SUFFER PRICE REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE.
The voice processing and customer premises equipment and related
software markets are highly competitive, and competition in this industry is
expected to further intensify with the introduction of new product enhancements
and new competitors. We currently compete with a number of larger integrated
companies that provide competitive voice-processing products and services as
subsets of larger product offerings. Our existing and potential competitors
include many large domestic and international companies that have better name
and product recognition in the market for our products and services and related
software, a larger installed base of customers, and substantially greater
financial, marketing and technical resources than ourselves.
Our Singapore subsidiary, Infotel Technologies (Pte) Ltd., competes
against several large companies in Singapore that are better capitalized.
Although Infotel Technologies (Pte) Ltd. has in the past managed to compete
successfully against these larger companies on the basis of its engineerings,
systems and product management expertise, no assurances can be given that this
expertise will allow Infotel Technologies (Pte) Ltd. to compete effectively with
these larger companies in the future. Further, various large manufacturers
headquartered outside of Singapore have established their own branch offices in
Singapore and also compete with Infotel Technologies (Pte) Ltd.
OUR REVENUES WILL LIKELY DECLINE IF WE DO NOT DEVELOP AND INTEGRATE THE
COMPANIES WE ACQUIRE.
We have in the past pursued, and may continue to pursue, acquisition
opportunities. Acquisitions involve a number of special risks, including, but
not limited to:
- Adverse short-term effects on our operating results
- The disruption of our ongoing business
- The risk of reduced management attention to existing
operations
- Our dependence on the retention, hiring and training of key
personnel and the potential risk of loss of such personnel
- Our potential inability to successfully integrate the
personnel, operations, technology and products of acquired
companies
- Unanticipated problems or unknown legal liabilities
- Adverse tax or financial consequences
Two of our prior acquisitions, namely the acquisition of Voice Plus (now known
as NHancement Technologies North America, Inc.) and Advantis Network & Systems
Sdn Bhd, a Malaysian company ("Advantis"), in the past yielded operating results
that were significantly lower than expected. In fact, the poor performance of
Advantis led to its divestiture less than one year after we acquired the
company. Accordingly, no assurances can be given that the future performance of
our subsidiaries will be commensurate with the consideration paid to acquire
these companies. If we fail to establish the needed controls to manage growth
effectively, our operating results, cash flows and overall financial condition
will be adversely affected.
OUR INTERNATIONAL OPERATIONS INVOLVE RISKS THAT MAY ADVERSELY AFFECT OUR
OPERATING RESULTS.
Infotel Technologies (Pte) Ltd., our Singapore subsidiary, accounted
for approximately 41% of our revenues for the fiscal year ended September 30,
1999, approximately 30.7% of our revenues for the quarter ended March 31, 2000,
and approximately 57.3% of our revenues for the quarter ended June 30, 2000.
There are risks associated with our international operations, including, but not
limited to:
- Our dependence on members of management of Infotel
Technologies (Pte) Ltd. and the risk of loss of customers in
the event of the departure of key personnel
- Unexpected changes in or impositions of legislative or
regulatory requirements
- Potentially adverse taxes and adverse tax consequences
- The burdens of complying with a variety of foreign laws
- Political, social and economic instability
- Changes in diplomatic and trade relationships
- Foreign exchange risks
Any one or more of these factors could negatively affect the performance of
Infotel Technologies (Pte) Ltd. and result in a material adverse change in our
business, results of operations and financial condition.
OUR STOCK PRICE COULD EXPERIENCE PRICE AND VOLUME FLUCTUATIONS.
The markets for securities such as our common stock historically have
experienced extreme price and volume fluctuations during certain periods. Other
factors that also may adversely affect the market price of our common stock
include the following:
- New product developments
- Technological and other changes in the voice-messaging and
communications industries
- Fluctuations in the financial markets
- General economic conditions
- Quarterly variations in our results of operations
IT WOULD REQUIRE SIGNIFICANT TIME AND EFFORT TO REPLACE OUR KEY PERSONNEL.
Our business depends upon the services of its executives and certain
key personnel, including Douglas S. Zorn, our President and Chief Executive
Officer, John R. Zavoli, our Vice President of Finance and Chief Financial
Officer, and Ken Murray, our Executive Vice President, Global Sales. Management
changes often have a disruptive effect on businesses and can lead to the loss of
employees because of the uncertainty inherent in change. In 1999 and early
2000, we had significant changes in our key personnel. We cannot be certain that
we will be able to successfully attract and retain key personnel since the job
market in the greater San Francisco Bay Area is intensely competitive. The loss
of the services of any one or more of such key personnel, if not replaced, or
the inability to attract such key personnel, could harm our business.
While hiring efforts are underway to fill the vacancies created by the
departure of other key employees, there is no assurance that these posts will be
filled in the near future since the job market in the greater San Francisco Bay
and Silicon Valley areas is intensely competitive. The loss of these or other
key employees could have a material adverse effect on our operations.
Furthermore, the recent changes in management may not be adequate to sustain our
profitability or to meet our future growth targets.
FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS WILL HARM OUR
ABILITY TO COMPETE.
We do not have any patents or copyrights, and while we intend to file
for copyright and patent protection, we currently rely on general common law and
confidentiality and non-disclosure agreements with our key employees to protect
our trade secrets. Our success depends on our ability adequately to protect our
intellectual property rights. Our efforts to protect our intellectual property
may not be sufficient against unauthorized third-party copying or use or the
application of reverse engineering, and existing laws afford only limited
protection. In addition, existing laws may change in a manner that adversely
affects our proprietary rights. Furthermore, policing the unauthorized use of
our product is difficult, and expensive litigation may be necessary in the
future to enforce our intellectual property rights.
OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
RESULTING IN COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.
We may be subject to legal proceedings and claims for alleged
infringement of proprietary rights of others, particularly as the number of
products and competitors in our industry grow and functionalities of products
overlap. This risk is higher in a new market in which a large number of patent
applications have been filed but are not yet publicly disclosed. We have limited
ability to determine which patents our products may infringe and take measures
to avoid infringement. Any litigation could result in substantial costs and
diversion of management's attention and resources. Further, parties making
infringement claims against us may be able to obtain injunctive or other
equitable relief, which could prevent us from selling our products or require us
to enter into royalty or license agreements which are not advantageous to us.
IF WE FAIL TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR EXISTING
PRODUCTS WILL BECOME OBSOLETE OR UNMARKETABLE.
Advances in technology could render our current products obsolete and
unmarketable. We believe that to succeed we must enhance our software products
and underlying technology, develop new products and technologies on a timely
basis, and satisfy the increasingly sophisticated requirements of our customers.
We may not successfully respond to technological change, evolving industry
standards or customer requirements. If we are unable to respond adequately to
these changes, our revenues could decline. In connection with the introduction
of new products and enhancements, we have experienced development delays and
related cost overruns, which are not unusual in the software industry. To date,
these delays have not had a material impact on our revenues. If new releases or
products are delayed or do not achieve broad market acceptance, we could
experience a delay or loss of revenues and customer dissatisfaction.
IF OUR SOFTWARE CONTAINS DEFECTS, WE COULD LOSE CUSTOMERS AND REVENUES.
Software as complex as ours often contains unknown and undetected
errors or performance problems. Many defects are frequently found during the
period immediately following the introduction of new software or enhancements to
existing software. Although we attempt to resolve all errors that we believe
would be considered serious by our customers, our software may not be
error-free. Undetected errors or performance problems may be discovered in the
future and errors considered minor by us may be considered serious by our
customers. This could result in lost revenues or delays in customer acceptance
and would be detrimental to our reputation, which could harm our business.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not subject to any material litigation nor, to the
Company's knowledge, is any material litigation currently threatened against the
company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) RECENT SALES OF UNREGISTERED SECURITIES
WARRANTS ISSUED DURING THE QUARTER ENDED JUNE 30, 2000
On May 1, 2000, the Company issued 45,613 warrants to purchase
shares of common stock to a software vendor in lieu of cash
payment for the purchase of certain software products. The warrants are
immediately exercisable and expire five years from the date of issuance. The
exercise price on the date of issuance was $15.50 per share.
On May 24, 2000, the Company issued 120,000 warrants to purchase
shares of common stock to an investment corporation in lieu of providing
them with a minimum aggregate drawdown commitment pursuant to that certain
Common Stock Purchase Agreement entered into on May 24, 2000. The warrants
are immediately exercisable and expire three years from the date of issuance.
The exercise price on the date of issuance was $20.82 per share.
ITEM 5. OTHER INFORMATION
On June 23, 2000, William M. Stephens resigned as Director of the
company. On June 23, 2000, the Company cancelled 50,000 warrants issued to Mr.
Stephens on March 1, 2000. These warrants had an issue price of $11.50 per share
equal to the closing price of February 29, 2000.
The Company entered into an agreement whereby the Company purchased a
non-exclusive license for certain software for cash of $10,010,000 and
warrants to purchase 45,600 shares of the Company's Common Stock with an
estimated fair value of $684,000. Concurrently, the Company paid
the software vendor $2,000,000 and recorded accounts payable of $8,010,000.
The software was acquired for internal use for the Company's inUnison-TM-
portal service application. Amortization of the software will commence when
the hosted internet portal is substantially complete and ready for its
intended use.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of the Quarterly Report on
Form 10-QSB
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
-------------------------------------------------------------------------------
4.29* Warrant dated May 1, 2000, issued to Cisco Systems
Capital Corporation
4.30* Warrant dated May 24, 2000, issued to Kedrick
Investments Limited
10.59* Master Agreement to lease equipment entered into as of
April 21, 2000 with Cisco Systems Capital Corporation
*Incorporated by reference to original Report on Form 10-QSB filed with the
Commission on August 14, 2000.
(b) Reports on Form 8-K:
None.
29
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NHANCEMENT TECHNOLOGIES INC.
Date: August 14, 2000 By: /s/ Douglas S. Zorn
---------------------------------------
Douglas S. Zorn
President & Chief Executive Officer