VIANET TECHNOLOGIES INC (VNTK.OB)
Quarterly Report (SEC form 10QSB)
Results Of Operations
The following is a discussion of the financial condition and results of our operations for the three and six months ended June 30, 2001 and 2000, respectively. This
discussion should be read in conjunction with our Consolidated Financial Statements, the notes related thereto, and the other financial data included elsewhere in this
filing.
Periods ended June 30, 2001 and 2000
Revenues and other income
Revenues and other income for the three-months ended June 30, 2001 decreased to $50,619 as compared to revenues and other income of $460,677 during the
three-month period ended June 30, 2000. In 2000, $390,000 was generated from one-time software licensing of our Lightning Strike Suite of Products in the Korean
market.
Revenues and other income for the six months ended June 30, 2001 decreased to $79,067 as compared to revenues and other income of $579,148 during the
six-month period ended June 30, 2000. In 2000, $74,334 was attributable to OEM sales, while $390,000 was generated from one-time software licensing of our
Lightning Strike Suite of Products in the Korean market.
The Company has not yet generated any significant sales. Efforts have been concentrated on the development of distributor relationships, which has necessitated
extensive testing of our products and the training of distributors staff. This effort is now well advanced and the Company expects to generate revenues in the second
half of the year, although no assurances can be given that these sales will be generated. In addition, the Company has expended a substantial effort in completing the
development work on a Licensing Server for delivery to a customer from which the first revenue is expected to be received in the third quarter 2001.
Costs and Expenses
Costs of goods and services sold
Costs of goods and services sold for the three-months ended June 30, 2001 increased $10,145 from nil as compared to the three-months ended June 30, 2000. The
increase was due to the fact that the sales in 2001 consisted primarily of servers and cameras as opposed the software sale in 2000.
Costs of goods and services sold for the six-months ended June 30, 2001 increased $8,578 to $11,061, as compared to Costs of good and services sold of $2,483
during the six-months ended June 30, 2000. The increase was due to the fact that the sales in 2001 consisted primarily of servers and cameras as opposed to the
software sale in 2000, in which the Company incurred nominal costs.
Selling, general and administrative
Selling, general and administrative expenses for the three-month period ended June 30, 2001 decreased $1,843,014 to $914,991, as compared to selling, general and
administrative of $2,758,005 during the three-month period ended June 30, 2000. The company's operations were dramatically reduced in January 2001 due to a lack
of available funding. All areas were affected including administrative staffing, sales support and sales personnel. The current staffing levels for selling, general and
administrative have been reduced to fifteen as compared to thirty-five in 2000.
Selling, general and administrative expenses for the six-month period ended June 30, 2001 decreased $1,693,914 to $2,974,369, as compared to selling, general and
administrative of $4,668,283 during the six-month period ended June 30, 2000. The company's operations were dramatically reduced in January 2001 due to a lack of
available funding. All areas were affected including administrative staffing, sales support and sales personnel. The current staffing levels for selling, general and
administrative have been reduced to fifteen as compared to thirty-five in 2000.
The company's expenditures in 2000 included (a) a consolidation of four separate office locations in to one location; (b) increased marketing expenditures to introduce
its products to potential customers; (c) human resource acquisition costs in the deployment of personnel to execute its strategy and (d) legal and other administrative
costs caused by the acquisitions.
Research and development
Research and development for the three-month period ended June 30, 2001 decreased $208,221 to $278,094, as compared to research and development of $486,315
during the three-month period ended June 30, 2000. The research and development efforts in 2001 have been primarily focused on the development of a Licensing
Server and the completion of the Company's multi-point video conferencing product.
Research and development for the six-month period ended June 30, 2001 decreased $549,331 to $813,112, as compared to research and development of $1,362,443
during the six-month period ended June 30, 2000. The research and development efforts in 2001 have been primarily focused on the development of a Licensing
Server and the completion of the Company's multi-point video conferencing product.
Provision for loss on Develcon receivable
Provision for loss on Develcon receivable was $936,386 and $1,386,386 for the three and six months ended June 30, 2000, respectively and nil for both the three and
six-months ended June 30, 2001.
Depreciation and Amortization Expenses
Depreciation and Amortization expenses for the three-month period ended June 30, 2001 decreased $425,544 to $83,915, as compared to depreciation and
amortization expense of $509,459 during the three-month period ended June 30, 2000. The decrease was primarily attributable to the fact that the Company wrote off
all intangible assets at December 31, 2000.
Depreciation and Amortization expenses for the six-month period ended June 30, 2001 decreased $795,919 to $209,322, as compared to depreciation and amortization
expense of $1,005,241 during the six-month period ended June 30, 2000. The decrease was primarily attributable to the fact that the Company wrote off all intangible
assets at December 31, 2000.
Interest Expense and Other Financing Charges
Interest expense and other financing charges for the three-month period ended June 20, 2001 was $3,662,292, as compared to $33,259 during the three-month period
ended June 30, 2001. The year 2001 expense was primarily attributable to interest on convertible notes, amortization of debt discount and non cash charges relating to
the issuance of warrants. The 2000 expense primarily relates to interest on notes payable.
Interest expense and other financing charges for the six-month period ended June 20, 2001 was $6,843,994, as compared to $358,397 during the six-month period
ended June 30, 2001. The year 2001 expense was primarily attributable to interest on convertible notes, amortization of debt discount and non cash charges relating to
the issuance of warrants. The 2000 expense primarily relates to interest on notes payable.
Loss from Discontinued Operations
Loss from discontinued operations for the three-month period ended June 30, 2001 was nil, as compared to $1,978,387 during the three-month period ended June 30,
2000. The 2000 operating loss was attributable to the operations of Access, our former subsidiary, which was discontinued in January 2001. The 2000 loss on disposal
relates to Develcon, our former subsidiary, which was sold in January 2000.
Loss from discontinued operations for the six-month period ended June 30, 2001 was nil, as compared to $2,494,347 during the six-month period ended June 30,
2000. The 2000 operating loss was attributable to the operations of Access, our former subsidiary, which was discontinued in January 2001. The 2000 loss on disposal
relates to Develcon, our former subsidiary, which was sold in January 2000.
Net Gain on Extinguishment of Debt
Net gain on extinguishment of debt includes an extraordinary net gain of approximately $718,800 in connection with the settlement of Develcon debt to Royal Bank
Capital Corp. that Vianet guaranteed and a loss of approximately $60,600 related to issuing stock and warrants for debt for the six-months ended June 30, 2001.
Net Loss
Net loss during the three-month period ended June 30, 2001 was $4,898,818, as compared to $6,241,134 during the three-month period ended June 30, 2000.
Net loss during the six-month period ended June 30, 2001 was $10,114,587, as compared to $10,698,432 during the six-month period ended June 30, 2000.
Cash Position
For the six-month period ended June 30, 2001, the Company's cash position increased by $186,172 from $7,546 to $193,718. The principal source of cash was
$3,404,905 that was generated from the Company's private placement offerings. The funds received were used to fund operating costs.
Inflation
Vianet has experienced minimal impact from inflation and changing prices on its net sales and on its income from continuing operations for the periods it has been
engaged in business.
Liquidity and Capital Resources
The working capital deficiency at June 30, 2001, was $11,530,146 compared to a working capital deficiency of approximately $7,177,756 at December 31, 2000. This
increase in working capital deficiency was due to continued operating losses and the conversion of capital into secured debt as part of the company's funding
arrangements in January through June 2001.
The Company has historically sustained its operations from the sale of debt and equity securities, through institutional debt financing and through agreements or
arrangements for financing with certain creditors.
As of June 30, 2001, the Company had the following financing arrangements in place:
o In September 1999, we borrowed $500,000 from a private investor at an interest rate of 11%. This loan is currently in default and can be converted at the option of
the holder into common shares at an exchange rate of $3.75 per share.
o We assumed convertible debentures (the "Debentures") as part of the acquisition of Vianet Labs in the amount of $1,125,000. The Debentures bear interest ranging
from 6% to 8%, are convertible into a maximum of 370,170 shares of common stock through September 30, 2002.
o In March 2000, we purchased a $1,000,000 (face amount) note receivable from Develcon (a former Subsidiary) from a creditor of Develcon in exchange for the
issuance of 250,000 shares of common stock issued at $3.00 per share and 375,000 Class D three year common stock purchase warrants, which are exercisable at
$4.50 per share. The note has no carrying value as of June 30, 2001.
o In December 2000, we completed a partial tender offer for our class A, B and C warrants, pursuant to which we agreed to (i) reduce the exercise price of 100% of the
class A common stock purchase warrants from $1.53 to $0.01, and (ii) reduce the exercise price of 50% of the class B common stock purchase warrants from $1.91
to $0.01, in consideration of the holders of such securities agreeing to (i) exercise 100% of the reduced price class A and B common stock purchase warrants, and (ii)
cancel the remaining class B and C common stock purchase warrants which they currently hold or are entitled to receive.
In addition, the terms of the Tender Offer provide that 50% of the shares of common stock to be issued upon the exercise of the reduced price class A and B common
stock purchase warrants shall be freely tradable at such time as a registration covering the sale of the common stock underlying the class A and B warrants is declared
effective by the Securities and Exchange Commission and the 50% balance of such shares of common stock shall be subject to a lock-up expiring on the earlier of (i)
one hundred twenty (120) days after the date of issuance of such shares, or (ii) sixty (60) days after the effectiveness of any registration statement covering the resale
of any shares sold in a private placement offering conducted by the Issuer.
The completion of the Tender Offer shall result in the Company receiving an aggregate of approximately $64,650 from the exercise of our class A and B warrants,
which are dependent upon the declaration of effectiveness of a registration statement covering the shares issuable by the Securities and Exchange Commission, which
registration statement was filed with the Securities and Exchange Commission on May 9, 2001. Such registration statement has not been declared effective.
o In January 2001, the Company issued an aggregate of $2,100,000 principal amount of 8% Secured Convertible Notes (the "Notes") due January 9, 2002 in a private
placement to eight investors. In addition, 9,999,999 five-year warrants to purchase common stock were issued at an exercise price not to exceed $0.28875, in
connection with the issuance of the Notes. The exercise price of the warrants approximated 110% of the fair market value of our common stock at the time of issuance.
Simultaneously with such transaction, shareholders of 1,566,666 shares of previously issued common stock agreed to return such shares for cancellation in
consideration for the issuance of $4,700,000 convertible notes which is an amount equal to the original purchase price for such shares. The notes are due on January 9,
2002 and bear interest at a rate of 8% per annum. In connection with such transactions, the Placement Agents received cash fees of $103,750, warrants to purchase an
aggregate of approximately 1,036,962 common shares, and $56,250 principal amount of the Notes. The Notes are considered to contain a beneficial conversion feature
as they were issued at a conversion price, which was less than the fair value of the common stock at the date of issuance. The Company determined the fair value of the
beneficial conversion feature of the Notes to be approximately $2,015,000. This amount was immediately expensed and included in Interest and other financing costs,
as the conversion feature was immediately available to the investors. The Company also determined the fair value of the warrants issued to be approximately
$3,168,000 by using commonly accepted valuation methodologies including the Black Scholes Model, which utilizes risk free interest rates, volatility and available
market information. This amount is being amortized using the interest method over the term of the Notes. The amount included in Interest and other financing costs in
the Consolidated Statement of Operations for the six-months ended June 30, 2001 was approximately $1,338,000. The Notes are collateralized by all of the Company's
assets and approximately 3,800,000 shares (the "Secured Shares") owned by the Company's Chairman and its CFO. In the second quarter 2001, the collateral was sold
by the note-holders. The proceeds received by the note-holders approximated $216,000. This amount was used to reduce the liability of the Company and is reflected
in the Consolidated Balance Sheet as of June 30, 2001.
o In January 2001, the Company issued 1,000,000 shares of common stock and warrants to purchase 4,392,004 common shares at an exercise price not to exceed
$0.28875 to a private investment group in consideration of their entering into an agreement to furnish a $10 million, 2-year equity line of credit. This agreement has
been subsequently amended so as to provide that the Company will only be required to issue up to a maximum of 100,000,000 shares pursuant to the agreement. The
Company determined the market value of the shares at the date of issuance to be $406,200 and the fair value of the warrants to be approximately $1,097,000 by using
commonly accepted valuation methodologies including the Black Scholes Model, which utilizes risk free interest rates, volatility and available market information.
These amounts are included in Deferred offering costs in the Consolidated Balance Sheet as of June 30, 2001. The terms of the agreement allows the Company to
request funds on a monthly basis. The funds available each month from this line shall be based upon the average daily price of our shares on each separate trading day
during the twenty-two trading days following the delivery of our request for funds. There is a funding limit of $1.0 million in any one month. The Company will issue
common shares to the investors in exchange for each month's credit line draw down. These common shares will be issued at 85% of the average daily price of our
shares that are traded during the twenty-two trading days following the date the Company requests the funds. The utilization of the line of credit is dependent upon the
declaration of effectiveness of a registration statement covering the shares issuable pursuant to the line of credit by the Securities and Exchange
Commission, which registration statement was filed with the Securities and Exchange Commission on May 9, 2001. Such registration statement has not been declared
effective.
o In February 2001, the Company agreed to issue 1,427,623 shares of common stock to an existing shareholder in exchange for a $100,000 non-interest bearing
demand loan. 867,623 and 560,000 of these shares were issued in March and April 2001, respectively. The Company determined the market value of the shares at the
date of agreement to be approximately $379,000 and such amount is included in interest and other financing costs in the Consolidated Statement of Operations for the
six-months ended June 30, 2001.
o In April 2001 through June 2001, the Company issued $1,358,750 one-year 8% convertible notes and 7,045,238 five-year warrants to purchase shares of common
stock at a price not to exceed $0.28875. Simultaneously with and as a condition to these transactions, the shareholders of 334,000 shares of the common stock and
501,000 related warrants issued pursuant to previous private placement offerings agreed to return such shares and warrants for cancellation in consideration for the
issuance of $1,002,000 one-year 8% convertible notes, which is the amount equal to their original purchase price for such securities. In connection with such
transactions, the Placement Agents received cash fees of approximately $103,000, such amount is included in interest and other financing costs in the Consolidated
Statement of Operations for the six-months ended June 30, 2001. Placement Agents also received warrants to purchase an aggregate of approximately 228,380
common shares at a price not to exceed $0.28875. In addition, the Company issued 14,160,109 shares of common stock to shareholders that participated in financings
prior to March 2000 and participated in the June 2001 financing. The Company received no proceeds from the 14,160,109 stock issuance. The Company recorded the
par value of the shares issued as a reduction of additional paid-in capital on the Consolidated Balance Sheet as at June 30, 2001. The Company determined the fair
value of the warrants issued to be approximately $893,000 by using commonly accepted valuation methodologies including the Black Scholes Model, which utilizes
risk free interest rates, volatility and available market information. This amount is being amortized using the interest method over the term of the Notes. The amount
included in Interest and other financing costs in the Consolidated Statement of Operations for the six-months ended June 30, 2001 was approximately $47,000.
o In April 2001, the Company issued 1,254,618 shares of common stock in exchange for services previously performed and accrued in 2000 approximating $183,700
and issued 736,938 shares of common stock to employees in settlement of compensation approximating $103,000, such amount is included in Selling, general and
administrative expenses in the Consolidated Statement of Operations for the six-months ended June 30, 2001.
o In June 2001, the Company issued 949,733 shares of common stock to existing shareholders pursuant to clauses in the financing agreements completed prior to
March 2000. The Company received no proceeds from this stock issuance. The Company recorded the par value of the shares issued as a reduction of additional
paid-in capital on the Consolidated Balance Sheet as at June 30, 2001.
o In June 2001, the Company issued 1,406,250 shares of common stock to two investors in lieu of interest payments on notes payable. Approximately $298,000 is
included in interest and other financing costs in the Consolidated Statement of Operations for the six-months ended June 30, 2001.
Going Concern
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate our continuation as a going
concern. However, we have experienced net losses of $10,114,587 for the six-month period ended June 30, 2001 and losses of $27,134,210 for the year ended
December 31, 2000. We also had a net working capital deficit of $11,530,146 as of June 30, 2001 and $7,177,756 as of December 31, 2000. We must raise additional
capital to meet our continuing operational needs. These factors raise doubt about our ability to continue as a going concern. In view of the matters described above,
recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon our ability to generate sufficient sales
volume to cover our operating expenses and to raise sufficient capital to meet our payment obligations. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should we be unable to continue in
existence.
The Company has commitments under various agreements to issue shares beyond its authorized capital as required by the financing transactions described above and
these can only be met if our shareholders approve a proposed increase in authorized shares. Unless our shareholders approve these transactions and approve an
amendment to our certificate of incorporation to increase the number of authorized shares of common stock from 100,000,000 to 500,000,000, we will be unable to
perform our obligations under the agreements and will be in default pursuant to the terms of the agreements. Management of the Company believes that it is highly
likely that such default will require the Company to substantially curtail or cease its operations, and may result in a total loss of shareholder's investment in the
Company.
Potential Future Sources of Capital
After completing the above financings, we have a total of 83,487,577 warrants and options outstanding as of the date of this filing at an average issue price of $0.66. In
the event that these warrants and options are all exercised we would receive approximately $55,448,000 in cash proceeds. The exercise of these warrants and options
will depend on, among other things, the liquidity and price for our common shares. We do not control the exercise of these warrants and options and therefore no
assurances can be given that any warrants will be exercised.
We are currently seeking sources of additional financing, either in the form of equity and/or debt financing, to provide the additional capital in order to fund our current
operations, expand our scope of operations and pursue our business strategy. We intend to complete any equity financing by issuing securities at prices equal to the
current market value on the date of such financing. In addition, we anticipate that we will be required to issue equity securities in consideration of obtaining any such
debt financing. However, no assurance can be given that we will be successful in completing any financing. If we are unsuccessful in completing any financing, we will
not be able to fund our current expenses.
We have used and intend to continue to use the proceeds from the financings described to execute our sales plan. Our ability to become a serious competitor may be
dependent upon obtaining additional financing.
Future Sources of Revenue
As of the date of this filing, we have completed several distribution agreements and trial sales that could generate future revenues. While we anticipate significant
revenues from these agreements and others that we will complete in the future, there can be no guarantees these revenues will be realized. Should the contracts be
cancelled or if our customers do not generate revenues utilizing our products, our future expected revenues could be adversely affected.
Summary
Our management believes that upon full implementation of our business plan, sufficient revenues will be generated to meet operating requirements. However, no
assurance can be given that such goal will be obtained or that our expected revenues will be realized at sufficient levels and profitability to fund our operations without
additional capital. Such inability could have a materially adverse effect on our business, operating results and financial condition. Moreover, the estimated cost of the
proposed expansion of our production and marketing activities is subject to numerous uncertainties, including the problems, expenses, difficulties, complications and
delays, many of which are beyond our control, frequently encountered in connection with the establishment and development of new business activities, and may be
affected by the competitive environment in which we are operating. Accordingly, there can be no assurance that we will complete the proposed expansion of our
production and marketing activities described herein. |
