-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GnEa1G5Z+4nbAFKLKJdCUqVM4acAqoD+Rm2WEKqc+qVA7R+SWSTT+Z0nrHoGWQVZ 78H9Ru9RCSIDDWQin5nYAg== 0000912057-00-011540.txt : 20000316 0000912057-00-011540.hdr.sgml : 20000316 ACCESSION NUMBER: 0000912057-00-011540 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IXATA GROUP INC CENTRAL INDEX KEY: 0000929425 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 944453386 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 033-83526 FILM NUMBER: 569495 BUSINESS ADDRESS: STREET 1: 8080 DAGGETT STREET SUITE 220 STREET 2: SUITE 400 CITY: SAN DIEGO STATE: CA ZIP: 92111 BUSINESS PHONE: 6196775580 MAIL ADDRESS: STREET 1: 8080 DAGGETT STREET SUITE 220 STREET 2: SUITE 400 CITY: SAN DIEGO STATE: CA ZIP: 92111 FORMER COMPANY: FORMER CONFORMED NAME: SECURFONE AMERICA INC DATE OF NAME CHANGE: 19971114 FORMER COMPANY: FORMER CONFORMED NAME: MATERIAL TECHNOLOGY INC DATE OF NAME CHANGE: 19970326 FORMER COMPANY: FORMER CONFORMED NAME: MATERIAL TECHNOLOGIES INC DATE OF NAME CHANGE: 19970313 10QSB 1 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) /x/ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1999. / / Transition report under Section 13 or 15(d) of the Exchange Act For the transition period from to Commission file number: 33-83526 THE IXATA GROUP, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 95-4453386 - ------------------------------------- ----------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 8080 DAGGET, SUITE 220 SAN DIEGO, CALIFORNIA 92111 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) 858-677-5580 ---------------------------------------------- (Issuer's Telephone Number, Including Area Code) - -------------------------------------------------------------------------------- Check whether issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / / State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: COMMON STOCK, $0.001 PAR VALUE PER SHARE: 11,938,142 (AS OF FEBRUARY 1, 2000) - -------------------------------------------------------------------------------- Transition Small Business Disclosure Format (check one): Yes / / No /x/ THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- THE IXATA GROUP, INC. QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1999 TABLE OF CONTENTS
ITEM Page - ---- ---- PART I -- FINANCIAL INFORMATION 2 Item 1. Financial Statements. 2 Item 2. Management's Discussion and Analysis or Plan of Operations. 16 Overview 16 Recent Events 18 Results of Operations: 19 Third Quarter of 1999 Compared to Third Quarter of 1998 20 First Nine Months of 1999 Compared to First Nine Months of 1998 21 Liquidity and Capital Resources 22 Related Party Transactions 22 Forward-Looking Statements 23 PART II -- OTHER INFORMATION 28 Item 1. Legal Proceedings. 28 Item 2. Changes in Securities and Use of Proceeds. 28 Item 3. Defaults Upon Senior Securities. 28 Item 4. Submission of Matters to a Vote of Security Holders. 28 Item 5. Other Information. 28 Item 6. Exhibits and Reports on Form 8-K. 28
- -------------------------------------------------------------------------------- Page 1 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- PART I -- FINANCIAL INFORMATIOn
ITEM 1. FINANCIAL STATEMENTS. Consolidated Balance Sheets..............................................................................3 Consolidated Statements of Operations....................................................................4 Consolidated Statements of Stockholders' Equity..........................................................5 Consolidated Statements of Cash Flows....................................................................6 Notes to Financial Statements.........................................................................7-15
- -------------------------------------------------------------------------------- Page 2 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1999 AND 1998
ASSETS 1999 1998 ------------ ------------ CURRENT ASSETS: Cash & cash equivalents $ 22,538 $ 2,925 Accounts receivable, net 165,163 41,383 Marketable securities 56,250 490,000 Prepaid expenses --- 70,000 ------------ ------------ Total current assets 243,951 604,308 PROPERTY AND EQUIPMENT, net of accumulated depreciation 142,275 200,772 OTHER ASSETS: Goodwill - net of accumulated depreciation 6,369,619 --- Intangible assets, net of accumulated amortization 8,833 214,655 Deposits 1,225 1,225 ------------ ------------ Total other assets 6,379,676 215,880 ------------ ------------ Total assets $ 6,765,903 $ 1,020,959 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1999 1998 ------------ ------------ CURRENT LIABILITIES: Bank overdraft $ --- $ 19,033 Deferred revenue 114,856 --- Current portion of long term liabilities 94,976 59,236 Accounts payable 433,506 368,215 Accrued interest 235,783 44,685 Accrued payroll 195,262 64,163 Related parties payable 269,016 --- Accrued acquistion payable 744,000 --- Notes payable 190,000 315,000 ------------ ------------ Total current liabilities 2,277,400 870,331 ------------ ------------ LONG-TERM LIABILITIES: Advances payable --- 140,000 Notes payable-net of current portion 1,798,250 911,000 Obligation under capital leases-net of current portion 23,131 66,473 ------------ ------------ Total long term liabilities 1,821,381 1,117,473 ------------ ------------ Total liabilities 4,098,780 1,987,805 ------------ ------------ STOCKHOLDERS' EQUITY (DEFICIT) Common stock - The IXATA Group, Inc. 10,784 5,930 $.001 par value, authorized 100,000,000 shares, outstanding 6,275,169 shares at September 30, 1999 and 5,965,216 shares at September 30, 1998 Subscription receivable (2,963) --- Additional paid-in capital 10,284,638 4,330,145 Additional paid-in capital-stock options 2,883,966 2,874,475 Deficit accumulated during the development stage (10,265,553) (8,667,395) Accumulated other comprehensive income (loss) Unrealized holding (loss) on marketable securities (243,750) 490,000 ------------ ------------ Total stockholders' equity (deficit) 2,667,123 (966,845) ------------ ------------ Total liabilities and stockholders' equity (deficit) $ 6,765,903 $ 1,020,959 ============ ============
See accompanying notes. - -------------------------------------------------------------------------------- Page 3 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND THE PERIOD FROM MAY 20, 1996 (DATE OF INCEPTION) TO SEPTEMBER 30, 1999
1999 1998 May 20, 1996 ------------------------- -------------------------- (Date of Inception) Three Months Nine Months Three Months Nine Months September 30, 1999 ------------ ----------- ------------ ----------- ------------------ REVENUES $ 86,468 $ 86,468 $ --- $ --- $ 542,922 COST OF GOODS SOLD 6,938 6,938 --- --- 549,678 ------------ ----------- ------------ ----------- ------------- Gross profit 79,531 79,531 --- --- (6,755) ------------ ----------- ------------ ----------- ------------- OPERATING EXPENSES Selling, general and administrative 599,280 741,256 --- --- 5,427,807 Amortization of goodwill 335,243 335,243 --- --- 335,243 Restructuring charge --- 499,382 679,737 3,509,229 10,002,127 Stock-based compensation --- --- --- --- 5,947,250 ------------ ----------- ------------ ----------- ------------- Total Operating Expenses 934,523 1,575,882 679,737 3,509,229 21,712,428 Income (loss) from continuing operation (854,992) (1,496,351) (679,737) (3,509,229) (21,719,183) ------------ ----------- ------------ ----------- ------------- OTHER INCOME (EXPENSE): Gain on disposal of cellular assets --- 708,419 --- --- 708,419 Realized stock gains --- --- --- --- 50,000 Interest expense (60,938) (60,938) --- --- (60,938) Interest expense - capital lease --- --- --- --- (22,629) Interest income --- --- --- --- 14,949 ------------ ----------- ------------ ----------- ------------- Total other income (expense) (60,938) 647,481 --- --- 689,801 ------------ ----------- ------------ ----------- ------------- Income (Loss) Before Income Taxes and Extraordinary Item (915,931) (848,870) (679,737) (3,509,229) (21,029,382) ------------ ----------- ------------ ----------- ------------- PROVISION FOR INCOME TAXES --- 1,600 1,818 3,467 4,849 ------------ ----------- ------------ ----------- ------------- Loss before extraordinary items (915,931) (850,470) (681,555) (3,512,696) (21,034,231) ------------ ----------- ------------ ----------- ------------- EXTRAORDINARY ITEMS Gain on debt extinguishment (less $0.0 income tax) --- 43,451 --- --- 43,451 ------------ ----------- ------------ ----------- ------------- Net income (loss) (915,931) (807,019) (681,555) (3,512,696) (20,990,780) OTHER COMPREHENSIVE INCOME (LOSS): Unrealized gain (loss) on securities (93,750) (243,750) (280,000) 490,000 (243,750) ------------ ----------- ------------ ----------- ------------- Comprehensive income (loss) $ (1,009,681) $(1,050,769) $ (961,555) $(3,022,696) $ (21,234,530) ============ =========== ============ =========== ============= Net (loss) per share - basic Income (loss) from continuing operations $ (0.08) $ (0.14) $ (0.11) $ (0.58) ============ =========== ============ =========== Gain (loss) on extraordinary Items $ - $ - $ - $ - ============ =========== ============ =========== Net income (loss) $ (0.08) $ (0.07) $ (0.11) $ (0.58) ============ =========== ============ =========== Net (loss) per share - fully diluted Income (loss) from continuing operations $ (0.08) $ (0.14) $ (0.11) $ (0.58) ============ =========== ============ =========== Gain (loss) on extraordinary Items $ - $ - $ - $ - ============ =========== ============ =========== Net income (loss) $ (0.08) $ (0.07) $ (0.11) $ (0.58) ============ =========== ============ ===========
See accompanying notes. - -------------------------------------------------------------------------------- Page 4 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY MAY 20, 1996 THROUGH SEPTEMBER 30, 1999
Additional Paid-In Stock Additional Capital- Common Subscription Paid-In Stock Stock Receivable Capital Options ------- ------------ ----------- ---------- Initial issuance of common stock - May 20, 1996 $ 3 $ --- $ 975,797 $ --- Stock split 1,333.33 to 1 - March 6, 1997 39,970 --- (39,970) --- Sale of stock - 1997 1,200 --- 118,800 --- Acquisition - August 1, 1997 (36,173) --- 36,173 --- Stock options granted August-November, 1997 --- --- --- 1,227,250 Contingent shares issued - December 31, 1997 and March 18, 1998 740 --- 3,099,260 --- Stock options exercised - March 19, 1998 225 --- --- 22,275 Stock options granted - January 6, 1998 --- --- --- 1,620,000 Stock issued - May 12, 1998 35 --- 139,965 --- Stock options exercised - August 6, 1998 50 --- --- 4,950 Stock issued - November 17, 1998 42 --- 33,290 --- Stock issued - May 11-19, 1999 122 --- 242,066 --- Stock issued - June 30, 1999 61 --- 103,757 --- Stock issued - July 1, 1999 4,500 (3,107) 5,575,500 --- Stock options exercised - August 15, 1999 9 --- --- 9,491 Stock subscription received - August 25, 1999 --- 144 --- --- Unrealized holding gains on securities - September 30, 1999 --- --- --- --- Deficit accumulated during the development stage to September 30, 1999 --- --- --- --- ------- -------- ------------ ---------- Balance September 30, 1999 $ 10,784 $ (2,963) $ 10,284,638 $ 2,883,966 ======= ======== ============ ========== See accompanying notes. Deficit Accumulated Accumulated during the Other Development Comprehensive Stage Income (Loss) Total ------------ ----------- ---------- Initial issuance of common stock - May 20, 1996 $ --- $ --- $ 975,800 Stock split 1,333.33 to 1 - March 6, 1997 --- --- --- Sale of stock - 1997 --- --- 120,000 Acquisition - August 1, 1997 --- --- --- Stock options granted August-November, 1997 --- --- 1,227,250 Contingent shares issued - December 31, 1997 and March 18, 1998 --- --- 3,100,000 Stock options exercised - March 19, 1998 --- --- 22,500 Stock options granted - January 6, 1998 --- --- 1,620,000 Stock issued - May 12, 1998 --- --- 140,000 Stock options exercised - August 6, 1998 --- --- 5,000 Stock issued - November 17, 1998 --- --- 33,332 Stock issued - May 11-19, 1999 --- --- 242,188 Stock issued - June 30, 1999 --- --- 103,818 Stock issued - July1, 1999 --- --- 5,576,893 Stock options exercised - August 15, 1999 --- --- 9,500 Stock subscription received - August 25, 1999 --- --- 144 Unrealized holding gains on securities - September 30, 1999 --- (243,750) (243,750) Deficit accumulated during the development stage to September 30, 1999 (10,265,553) --- (10,265,553) ------------ ---------- ------------ Balance September 30, 1999 $ (10,265,553) $ (243,750) $ 2,667,123 ============ ========== ============
See accompanying notes. - -------------------------------------------------------------------------------- Page 5 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND THE PERIOD FROM MAY 20, 1996 (DATE OF INCEPTION) TO SEPTEMBER 30, 1999
May 20, 1996 (Date of 1999 1998 Inception) -------------------------- --------------------- to September Three Months Nine Months Three Months Nine Months 30, 1999 -------------- ----------- ---------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(915,931) $ (807,019) $ (681,555) $(3,512,696) $(10,269,093) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 347,850 375,349 29,623 88,869 564,354 Sale of subsidiary --- (708,419) --- --- (708,419) Stock options granted and contingent shares issued --- --- --- 1,620,000 4,327,250 Decrease (increase) in accounts receivable (157,066) (154,430) 22,055 (6,268) (161,568) Decrease (increase) in notes receivable --- --- --- 89,353 5,833 Decrease (increase) in royalities receivable --- --- --- 100,000 --- Decrease (increase) in inventory --- --- --- 22,153 --- Decrease (increase) in prepaid expenses 3,425 38,425 35,100 (70,000) 3,425 Decrease (increase) in intangible and other assets --- --- --- --- (56,680) (Decrease) increase in deferred revenue 104,329 104,329 --- --- 104,329 (Decrease) increase in accounts payable, --- payroll payable and accrued expenses 254,773 199,144 73,922 306,784 880,355 (Decrease) increase in deferred royalty revenue --- --- --- (100,000) --- ---------- ---------- ---------- ---------- ------------ NET CASH USED IN OPERATING ACTIVITIES (362,620) (952,621) (520,855) (1,461,805) (5,310,214) ---------- ---------- ---------- ---------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds impact from purchase of subsidiary (31,930) (31,930) --- --- (31,930) Net proceeds from sale of SecurFone, Inc. and related asset --- 472,257 --- --- 472,257 Investment in subsidiary --- (150,000) --- --- (150,000) Purchase of property and equipment (47,351) (47,509) --- (12,014) (361,983) ---------- ---------- ---------- ---------- ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (79,281) 242,818 --- (12,014) (71,656) ---------- ---------- ---------- ---------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Contributions to paid-in capital 9,491 355,314 5,000 167,500 1,638,323 Issuance of stock options and contingent shares --- --- --- --- 1,647,500 Issuance of stock for debt 9 192 --- --- 183 Proceeds from stock subscription receivable 144 144 --- --- 159,794 Proceeds from advances payable --- --- --- 140,000 --- Proceeds from notes payable 400,000 816,221 474,000 1,176,000 2,466,273 Repayments on advances --- (338,000) --- --- (338,000) Repayments on notes payable --- (143,095) (3,942) (11,641) (143,095) Repayments of capital lease obligations --- (6,946) (6,266) (21,487) (83,206) ---------- ---------- ---------- ---------- ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 409,644 683,830 468,792 1,450,372 5,347,772 ---------- ---------- ---------- ---------- ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (32,258) (25,973) (52,063) (23,447) (34,098) BEGINNING CASH AND CASH EQUIVALENTS 54,796 48,511 36,123 7,507 48,511 ---------- ---------- ---------- ---------- ------------ CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 22,538 $ 22,538 $ (15,940) $ (15,940) $ 14,413 ========== ========== ========== ========== ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for interest $ 3,839 $ 27,806 $ 21,718 $ 71,569 $ 384,114 ========== ========== ========== ========== ============ Cash paid during the period for income taxes $ --- $ 1,600 $ 1,018 $ 3,517 $ 2,400 ========== ========== ========== ========== ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS Amortization of prepaid loan fees paid by stock issued $ --- $ 35,000 $ 35,000 $ 70,000 $ 140,000 ========== ========== ========== ========== ============ Issuance of stock for operating services $ --- $ 346,006 --- --- $ 346,006 ========== ========== ========== ========== ============ (Decrease) Increase in fair value of marketable securities $ (93,750) $ (243,750) $ (280,000) $ 490,000 $ (243,750) ========== ========== ========== ========== ============ Conversion of advances payable to notes payable $ --- $ --- $ 702,000 $ --- $ --- ========== ========== ========== ========== ============ Purchase of stock and options in exchange for sale of subsidiary $ --- $ 300,000 --- --- $ 300,000 ========== ========== ========== ========== ============
See accompanying notes. - -------------------------------------------------------------------------------- Page 6 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND THE PERIOD FROM MAY 20, 1996 (DATE OF INCEPTION) TO SEPTEMBER 30, 1999 Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of The IXATA Group, Inc. and its wholly owned subsidiaries, SecurFone Services, Inc. and IXATA, Inc. (collectively referred to as the "Company"). Inter-company transactions and balances have been eliminated in the consolidated financial statements. NATURE OF OPERATIONS The Company is principally engaged in providing global Internet based Business-to-Business ("B2B") electronic commerce services for the corporate travel and hospitality markets. The Company also contracts authorizing certain strategic partners to sublicense its software. RFP ExpressSM, the Company's flagship service, is an Internet-based system that automates the request for proposal ("RFP") process for the hospitality sector. RFP Express-SM- integrates a user-friendly Internet interface, sophisticated data-warehousing system, powerful relational database system and e-mail, interactive telephone and fax technologies to deliver automated solutions for the RFP process. RFP Express-SM- is a commercial, proven end-to-end, B2B electronic commerce solution that automates users' RFP business processes and dramatically reduces costs, eliminates paper-based communications, improves operations and enhances management control of labor and capital. The Company currently offers B2B e-commerce solutions to all market participants including: - - Global Corporate Users - - Property Management and Hotel Chains, and - - Mega-Agencies. The Company was originally organized to develop and market prepaid wireless products and services in various markets throughout the United States. In late 1998, the Company established a new strategic objective of refocusing the Company's mission to pursue new complimentary Internet-related and e-commerce opportunities. In 1999, the Company actively implemented its new mission by, among other actions, selling a portion of the Company's business no longer considered essential for the new strategy and purchasing a company whose business thrust is in line with the new strategy. On August 1, 1997, SecurFone, Inc. was acquired by Material Technology, Inc. (formerly Tensiodyne Scientific Corporation) and became a publicly traded corporation. On August 1, 1997, Material Technology, Inc. was renamed SecurFone America, Inc. In April of 1999 the name of SecurFone, Inc. was changed to SecurFone Services, Inc. and a new subsidiary was formed named SecurFone, Inc. This new subsidiary was subsequently sold. On July 1, 1999, the Company acquired IXATA, Inc. On January 31, 2000, SecurFone America, Inc. changed its name to The IXATA Group, Inc. DEVELOPMENT STAGE OPERATIONS The Company is organized to develop, market, and provide a global Internet-based B2B electronic marketplace for the corporate travel and hospitality markets. The Company invested significant capital and effort in development of its databases, software and customer base throughout 1999. - -------------------------------------------------------------------------------- Page 7 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- Prior to establishing the Company's objective to pursue opportunities in the internet and e-commerce market sectors, the Company was organized to develop and market prepaid wireless products and services in various U.S. markets. The Company invested significant capital and effort in development of its network, software, routing and carrier interface technology throughout 1997 and 1998. In 1998, the Company began its initial introduction of services to various U.S. markets. During development and market testing, the industry experienced price reductions, new competition and other margin pressures. In late 1998 the Company revised its business plan to reflect the significant additional funding that would be required to achieve the business scale needed to create significant shareholder value. Recognizing the explosive growth of the internet and e-commerce markets, and the long-term prospects for integrating new wireless and internet-based services, the Company established a new objective which is to pursue opportunities in the internet and e-commerce market sectors. CASH AND CASH EQUIVALENTS For the purpose of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to credit risk include temporary cash investments and trade receivables. Concentration of credit risk with respect to trade receivables is limited due to the Company's large number of customers and wide range of locations served. The Company maintains its cash accounts in three commercial banks. Accounts are guaranteed by the Federal Deposit Insurance Company (FDIC) up to $100,000. The Company occasionally maintains deposits in excess of federally insured limits. Management believes that the risk is limited by maintaining all deposits in high quality financial institutions. PROPERTY AND EQUIPMENT The cost of property and equipment is depreciated over the estimated useful lives of the related assets. Depreciation is calculated using the accelerated depreciation method for both financial reporting and income tax purposes. For the quarters ended September 30, 1999 and 1998, depreciation expense of $12,107 and $14,077, respectively, was charged to operations. For the nine months ended September 30, 1999 and 1998, depreciation expense of $35,096 and $42,231, respectively, was charged to operations. REVENUE AND EXPENSE RECOGNITION The Company recognizes revenue from transaction revenues and sales of subscription . Transaction revenues are recognized, net of an allowance for uncollectible amounts, when substantially all significant services to be provided by the Company have been performed. Subscription revenues are recognized over the period of the subscription. Expenses are recognized in the period in which they are incurred. An allowance has been provided for uncollectible accounts based on management's evaluation of the accounts and the customer's history. CHANGE IN ACCOUNTING PRINCIPLE Effective December 1, 1998, the Company retroactively changed its method of recognizing start-up costs in its consolidated financial statements to conform with the pronouncement of the AICPA, SOP 98-5 Reporting on the Costs of Start-Up Activities. The Company previously amortized these costs over a five-year period beginning January 1, 1997, using the straight-line method. The pronouncement requires start-up costs to be expensed as incurred. As a result, the cumulative effect of applying the new method retroactively as of January 1, 1997 was charged to 1998 earnings as required by the SOP. Amortization in the amount of $15,546 was charged to expense for the quarter ended September 30, 1998. Amortization in the amount of $46,638 was charged to expense for the nine months ended September 30, 1998. - -------------------------------------------------------------------------------- Page 8 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- USE OF ESTIMATES In preparing the Company's consolidated financial statements, management is required to make estimates and assumptions that effect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are based on management's knowledge and experience. Accordingly, actual results could differ from those estimates. COMPENSATED ABSENCES The Company does not have a vacation policy as of September 30, 1999. Unpaid vacation has not been accrued since it is immaterial. RECLASSIFICATIONS Certain accounts in the prior year's consolidated financial statements have been reclassified for comparative purposes to conform with the presentation in the current year's consolidated financial statements. Note 2. MARKETABLE SECURITIES Cost and fair value of marketable securities available for sale at September 30, 1999 and 1998 consisted of equities as follows:
------------------------ ------------------ ---------------------------- ------------------- Cost Unrealized Gain (Loss) Fair Value ------------------------ ------------------ ---------------------------- ------------------- September 30, 1999 $ 300,000 $(243,750) $ 56,250 ------------------------ ------------------ ---------------------------- ------------------- September 30, 1998 $ 0 $ 490,000 $ 490,000 ------------------------ ------------------ ---------------------------- -------------------
At September 30, 1999 and 1998, the Company held securities that have unrealized losses and gains of $(243,750) and $490,000, respectively. As a result of the net loss carry forwards there is no tax expense (benefit) on the realization of this loss or gain. Note 3. PROPERTY AND EQUIPMENT Property and equipment at September 30, 1999 and 1998 is comprised of the following:
1999 1998 ---- ---- Office Furniture and Equipment $ 40,295 $ 35,043 Computer Software 2,172 88,802 Computer Hardware 221,463 190,373 ------- ------- 263,930 314,118 Accumulated Depreciation (121,655) (113,346) -------- -------- $ 142,275 $ 200,772 ======== =======
Note 4. INTELLECTUAL PROPERTY AGREEMENT On February 16, 1999 and prior to being purchased by the Company, the Company's wholly-owned subsidiary, IXATA.COM Inc., purchased intellectual property for $10,000 from a company with substantially the same stockholders of the subsidiary at that time. The intellectual property consisted of the key software program used in operations. This asset is being amortized over five years. Amortization expense of $500 was charged to expense for the quarter ended September 30, 1999. Amortization in the amount of $1,167 was charged to expense for the nine months ended September 30, 1999. - -------------------------------------------------------------------------------- Page 9 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- Subsequent to acquiring this software, the Company received approximately $14,000 of revenue earned by the prior owner. This amount, net of approximately $4,900 of related expenses, was recorded as additional paid-in capital. Note 5. SHORT TERM NOTES PAYABLE As of September 30, 1999 and 1998 notes payable and other short-term obligations consisted of the following:
1999 1998 ---- ---- Note payable to a limited partnership bearing 15% interest, principal and interest due November 1, 1999; secured by a Stock Pledge Agreement. 300,000 -- Notes payable (formerly treated as an advances payable) to unrelated parties for advances of $35,000 and $130,000 that were due February 18, 1999 and January 30, 1999, respectively with 10% interest. The notes are unsecured. 130,000 165,000 Notes payable dated September 1, 1998 for advances made to the Company by a Nevada corporation and an individual bearing 10% interest per annum; principal and interest due August 31, 1999. 130,000 130,000 Note payable for a settlement with the Company's former CEO to resolve all outstanding Company obligations related to his employment due April 1, 1999. 50,000 -- Account payable converted to note on June 21, 1999; interest at 8%; payable in $2,000 installments of principal and interest beginning July 1, 1999. 11,365 -- Notes payable (formerly treated as an advances payable) to an unrelated party for advances of $100,000 that was due November 21, 1998, with 10% interest. The note was secured with security interest in 50,000 shares of the Company's common stock. -- 100,000 Note payable to Material Technology, Inc. $ -- $ 50,000 --------- --------- $ 621,365 $ 445,000 ========= =========
Note 6. LONG TERM DEBT As of September 30, 1999 and 1998 notes payable and other long-term obligations consisted of the following:
1999 1998 ---- ---- Convertible debenture in the amount of $1,000,000 issued August 21, 1998 for advances made to the Company. The debenture has 12% interest rate payable quarterly. The principal is payable on the earlier of (1) the Company's receipt of at least $8 million proceeds from a public offering of Company securities or (2) August 21, 2001. Non-detachable warrants for 500,000 shares exercisable at $2.72 per share were issued in connection with the convertible debenture. The warrants expire August 21, 2003. 1,000,000 911,000 Advances payable to unrelated parties and potential investors who have committed the funds on a long term basis. Negotiations with various parties have not characterized the debt and equity nature of the funds or finalized interest rates, $ 368,250 $ 140,000 - -------------------------------------------------------------------------------- Page 10 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- maturity dates, repayment terms or other features for the advances Note payable to a related party; interest at 5%; principal and interest are due February 16, 2004 (See Note 4) 10,000 --- Note payable to a vendor under an agreement dated October, 1997 a two-year, unsecured note with an annual interest rate of 6% and monthly payments of $1,407 including interest. The balance at September 30, 1999 is payable within twelve months 6,928 16,356 CAPITAL LEASE In March 1997, the Company entered into a sale-leaseback arrangement under which computer equipment capitalized at $159,649 is being accounted for as a capital lease. Under the agreement, the Company sold certain equipment and leased it back for a period of 48 months, at which time the Company will repurchase the equipment from the lessor 99,814 109,353 ------ ------- Total 1,106,742 1,176,709 Less current portion of notes and other long-term obligations (83,611) (59,236) ------- ------- Total long-term liabilities $ 1,034,323 $ 1,117,473 ========= =========
Minimum future lease payments under non-cancelable capital leases \are as follows: Year Ending September 30, 2000 $76,683 2001 23,131 ------ Total minimum future lease payments $99,814 ======
The note payable maturities on long-term debt for the next five years are as follows: Years ending September 30,: 2000 $ 6,928 2001 1,000,000 2002 0 2003 0 2004 10,000 ------ Total $ 1,016,928 ===========
Note 7. COMMON STOCK At December 31, 1996, 30,000 shares of SecurFone America, Inc.'s stock were authorized and 3,000 shares were issued and outstanding. On March 5, 1997, an additional 4,700,000 shares were authorized by the Board of Directors. - -------------------------------------------------------------------------------- Page 11 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- On March 6, 1997, the shareholders of SecurFone America, Inc. approved a stock split of 1,333,333 to 1 shares, increasing the 3,000 shares issued and outstanding to 4,000,000 shares with a par value of $.01 per share. The amount of $39,970 was transferred from the paid-in capital account to common stock account to record the split. Prior to the reorganization between SecurFone America, Inc. and Material Technology, Inc.; as of July 31, 1997 Material Technology, Inc. had 100,000,000 shares authorized and 5,000,000 shares outstanding with a reverse split of 1 for 10 resulting in 500,216 shares issued and outstanding. Also, Material Technology, Inc. issued an additional 4,500,000 shares on July 31, 1997 for a total of 5,000,216 shares issued and outstanding. On August 1, 1997, SecurFone America, Inc. completed a reorganization with Material Technology, Inc. whereby 4,000,000 shares issued and outstanding common stock of SecurFone, Inc. were exchanged for 4,500,000 shares issued and outstanding common stock of Material Technology, Inc. As a result of the reorganization, there were 5,000,216 shares issued and outstanding and 100,000,000 authorized shares of the Company's common stock. The amount of $36,173 was transferred from the common stock account to the additional paid-in capital account to reflect the par value change from $.01 to $.001 per share. On November 13, 1997, the Company registered with the Securities and Exchange Commission on Form S-8 (the "S-8 filing") 1,000,000 shares under the 1997 Stock Option Plan to grant incentive stock options and non-qualified stock options to officers and key employees. At the same time, a similar registration for 250,000 shares under the 1997 Director Non-qualified Stock Option Plan was made. At various dates, the Company has granted stock options under the two stock option plans totaling 830,900 shares consisting of 300,000 shares at an option price of $1.00 per share, 130,900 shares at an option price of $2.50 per share and 400,000 shares at an option price of $0.10 per share. These options are exercisable during 1997 and 1998. These shares were recorded as $1,227,250 of selling, general & administrative (SG&A) expense and additional paid-in capital - - stock options at the grant date in accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123) "Accounting for Stock-Based Compensation." On December 3, 1997, the Company issued 620,000 conditional shares of common stock with a par value of $.001 per share registered with the S-8 filing. These shares were issued pursuant to various employment, retainer, consulting and fee agreements. As of December 31, 1997, all conditions of these shares had been met and $3,100,000 was recorded as SG&A expense, and additions to the common stock and additional paid in capital accounts at the issue date. On January 6, 1998, the Company granted stock options under the 1997 Stock Option Plan for 400,000 shares at an option price of $.10 per share. These options are exercisable immediately and are recorded as $1,620,000 of SG&A expense and additional paid in capital - stock options at the grant date in accordance with SFAS 123. On February 18, 1999 the 350,000 unexercised options were returned. On March 19, 1998, an additional 345,000 shares were issued as a result of the following transactions: 225,000 shares of stock issued pursuant to warrants exercised by the individuals providing credit accommodations in connection with letters of credit issued by the Company and 120,000 shares were issued as the result of two stock subscriptions in private placements. On May 12, 1998, 35,000 shares were issued in connection with credit accommodations provided to the Company by investors (see Note 1). On August 6, 1998, 50,000 shares were issued on the exercise of stock options. On November 17, 1998, the Company issued 41,665 unregistered shares common stock in exchange for investment banking services and bridge funding and a cash payment of $2,500. On April 23, 1999 the Company granted a director 20,000 fully-vested stock options under the 1997 Stock Option Plan that are exercisable at $.125 per share and expire on April 23, 2009. On May 11, 1999, the Company satisfied a $50,000 debt for legal services by issuing of 50,000 unregistered shares of common stock. On May 12, 1999, the Company converted debt to an unrelated individual in the amount of $25,000 by issuing of 12,500 unregistered shares of common stock. On May 19, 1999, the Company converted $118,532 of debt including a note payable of $115,000 due to Young Management Company by issuing of 59,266 unregistered shares of common stock. - -------------------------------------------------------------------------------- Page 12 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- On June 30, 1999, the Company settled a dispute with Associated Barter Services, Inc. ("ABS") for advertising services in the amount of $103,818 by issuing of 61,522 shares of common stock. On June 30, 1999, the Company granted 50,000 stock options (fully vested June 30, 2000) under the 1997 Directors Stock Option Plan to a director exercisable at $1.28 per share with an expiration date of June 30, 2009. On July 1, 1999, the Company executed an agreement to acquire all outstanding common stock of IXATA.COM, Inc., a privately held provider of Internet-based e-commerce services in exchange for 4,500,000 shares of common stock. On August 18, 1999, an individual exercised options under the Directors Option Plan for 9,500 shares of common stock. As of September 30, 1999, a total of 100,000,000 shares of common stock were authorized and 10,784,669 shares were issued and outstanding. Note 8. RELATED PARTIES The Secretary of the Company is also a partner in the law firm that represents the Company in its legal matters. The accrued payroll is due to officers and directors of the Company. The expense recognized for the quarters ended September 30, 1999 and 1998 is $57,815 and $17,499, respectively. The expense recognized for the nine months ended September 30, 1999 and 1998 is $198,026 and $64,163, respectively. Prior to being purchased by the Company, the Company's wholly owned subsidiary, IXATA.COM, Inc., purchased intellectual property and received the proceeds of accounts receivable generated by the prior owner of the intellectual property, an entity having substantially the same owners as IXATA.COM at that time. See Note 4. The Company has entered into a management and services agreement with a company that is owned and controlled by shareholders with significant ownership of the Company. Related expenses for the three and nine months ended September 30, 1999 were $70,020 and $186,720 respectively. Related payables included $170,440 at September 30, 1999. The Company has consulting contracts with members of its Board of Directors. Related expense for the three and nine months ended September 30, 1999 were $57,000 and $152,000, respectively. Related party payables included $85,000 at September 30, 1999. Note 9. LOSS ON SECURFONE NEW YORK In August 1996, the Company entered into a licensing agreement with SecurFone New York, Inc (SFNY). In accordance with terms of the agreement, the Company forwarded monies to SFNY to cover various start up costs. Shortly thereafter, SFNY fell into default under the term of the licensing agreement and ceased operations. The monies paid by the Company to SFNY were written off as a one-time charge to income of $48,980. Note 10. INCOME TAXES Income taxes are provided based on earnings reported for financial statement purposes pursuant to the provisions of Statement of Financial Accounting Standards No. 109 (FASB 109). The provision for income taxes differs from the amounts currently payable because of timing differences in the recognition of certain income and expense items for financial and tax reporting purposes. FASB 109 uses the asset and liability method to account for income taxes which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax basis and financial reporting basis of assets and liabilities. For the year ended December 31, 1998, the Company had net operating loss carry-forwards for federal and state income tax purposes. These carry-forwards may provide future tax benefits. The federal net operating loss carry-forwards will begin to expire in 2011, if not utilized to offset taxable income. Various state net operating loss carry - -------------------------------------------------------------------------------- Page 13 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- forwards will begin to expire earlier. Future changes in ownership, as defined by Section 382 of the Internal Revenue Code, could limit the amount of net operating loss carry forwards used in any one year. A valuation allowance has been recorded by the Company that reduced the deferred tax benefits for the net operating losses to zero. It cannot be determined when, or if, the tax benefits derived from these losses will materialize. Income taxes in the amounts of $0 and $1,118 were paid in the quarters ended September 30, 1999 and 1998, respectively. Income taxes in the amounts of $1,600 and $3,711 were paid in the nine months ended September 30, 1999 and 1998, respectively. Note 11. SALE OF SUBSIDIARY (NET OF TAX EFFECT) On January 30, 1999, the Company executed an agreement with Teledata World Services, Inc., a publicly traded company ("TWOS"), whereby certain prepaid cellular assets would be sold to TWOS for cash and TWOS common stock. On April 22, 1999, the Company executed a final agreement to sell a wholly-owned subsidiary, SecurFone, Inc., to TWOS for cash and stock. Under the agreement, TWOS acquired all outstanding shares of SecurFone, Inc. for $498,000 in cash, 600,000 shares of unregistered TWOS common stock (subject to Rule 144) valued at $300,000 and the option to sell the stock back to TWOS at a price of $2.50 per share effective one year from the date of the transaction if the market price of the TWOS stock is less than $2.50 per share. As of September 30, 1999, no value has been recorded for the option. SecurFone, Inc. assets include certain cellular service resale agreements, the Company's Miami customer service center, rights to the Buy-The-Minute-TM- product and selected distribution channels. Under the agreement, the Company could continue to offer prepaid cellular services and could establish resale and joint service arrangements to serve selected markets. As a result of the net operating loss carry-forwards, there are no income taxes arising from this sale. Given the B2B e-commerce opportunity presented in conjunction with the IXATA acquisition, subsequent to the sale of certain prepaid cellular assets to TWOS, the Company disposed of its prepaid cellular operations in its entirety, effective June 30, 1999. The loss from operations of the disposed cellular operations is a reflection of the historic financial performance of this business line, which the Company has elected not to pursue further. The Company retains the net operating loss carry-forwards from this disposed business line. Note 12. EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT The extraordinary gain is a result of the settlement agreement with the Company's former CEO to resolve all outstanding Company obligations related to his employment with the Company in exchange for a payment of $50,000 payable not later than April 1,1999. As a result of the net operating losses carry-forwards, there is no tax effect arising from this gain. Note 13. COMMITMENTS AND CONTINGENCIES The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern. However, the Company has sustained losses totaling $9,918,031 since its inception, of which $5,157,131 represents expenses associated with stock-based compensation plans as discussed in Note 6. The continuing losses resulting from operations are an indication that the Company may not be able to continue to operate without an additional cash infusion. The Company has been and is currently seeking private and public equity and bridge loans in order to finance operations. The Company has retained business advisory firms to assist the Company in meeting its financing needs. See Note 14. Subsequent Events. Paul Silverman executed an employment agreement assuming the role of Chief Executive Officer as of November 1, 1998 and was elected to the Board of Directors on December 11, 1998. Mr. Silverman was also granted options to acquire 100,000 shares of the Company's stock at $0.10 per share upon execution of the employment agreement, and qualified incentive stock options to acquire up to 300,000 additional shares of the Company's stock based on achievement of Company goals established by the Board of Directors. Mr. Silverman was granted options to acquire 50,000 shares of the Company's stock at $0.28 per share under the Company's 1997 Directors Option Plan. Total deferred compensation liability as of September 30, 1999 is approximately $111,479. - -------------------------------------------------------------------------------- Page 14 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- Note 14. QUARTERLY INFORMATION Following is computational information for earnings per share information calculated under Statement of Financial Accounting Standards No. 130, Earnings Per Share (EPS), which is effective for periods beginning after December 15, 1997.
Quarter Ended September 30, 1999 Quarter Ended September 30, 1998 -------------------------------- -------------------------------- Income (Loss) Shares Per Share Income (Loss) Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ---------- ------------- ------ ----------- ------------- ------ BASIC EPS Income (loss) available to common Stockholders $ (916,108) 10,784,669 $(.08) $(681,555) 5,998,549 $(.11) EFFECT OF DILUTIVE SECURITIES Stock Options 0 0* -------------- ------------- DILUTED EPS Income available to common stockholders and assumed conversions $ (916,108) 10,784,669 $(.08) $(681,555) 5,998,549 $(.11)
*SFAS 128 requires the use of weighted averages for stock outstanding during the quarter. Although stock options issued under Company plans had exercise prices which were below the average market price of the common shares, they were not computed in calculating diluted earnings per share because SFAS 128 does not include stock dilutions that would reduce per share losses. If computed, outstanding stock options would have increased outstanding shares by 199,254. As of September 30, 1999, 1,370,900 stock options were issued, 391,400 were vested, 500,000 had been forfeited and 59,500 had been exercised. Note 15. SUBSEQUENT EVENTS The Company has agreed to pay Global One, Inc. (Global) 600,000 shares of common stock for brokering services as a part of the purchase of IXATA.COM. Global is an international business corporation in Nevis, British Virgin Islands. The Company intends to issue the shares to Global in the first quarter of 2000. In the fourth quarter of 1999, the Company issued 50,000 unregistered shares of common stock to eliminate debts to Kohrman Jackson & Krantz P.L.L. ("KJK"), the Company's legal counsel, in the amount of $50,000. In November 1999, the Company offered shares of its common stock to investors in an offering exempt from registration pursuant to Regulation D of the Securities Act of 1933. As of January 21, 2000, the Company has sold 1,344,651 shares of common stock for total proceeds to the Company of $1,075,721 after deduction of the placement agent fee of $0.05 per share. In connection with this financing, the Company entered into an agreement under which the placement agent can purchase 643,553 warrants at a price of $0.01 per warrant. These warrants will be exercisable for 643,553 shares of common stock at an exercise price of $1.687 per share. The warrants will be excercisable upon the earlier of a) one year from November 2, 1999, b) a change of control transaction, or c) the closing of a firmly underwritten public offering of the Company's equity securities. Effective January 31, 2000, the Company changed its name to The IXATA Group, Inc. from SecurFone America, Inc. - -------------------------------------------------------------------------------- Page 15 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS. The following describes certain factors which produced changes in the results of operations of The IXATA Group, Inc. (the "Company") during the three and nine months ended September 30, 1999 and as compared with the three and nine months ended September 30, 1998 as indicated in the Company's Consolidated Financial Statements. The following should be read in conjunction with the Consolidated Financial Statements and related notes. Historical results of operations are not necessarily indicative of results for any future period. All material inter-company transactions have been eliminated in the results presented in this Quarterly Report. Certain matters discussed in this Quarterly Report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act") and involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which the Company operates, projections of future performance, perceived opportunities in the market and statements regarding the Company's mission and vision. The Company's actual results, performance or achievements may differ significantly from the results, performance, or achievements expressed or implied in these forward-looking statements. See "-- Forward-Looking Statements." OVERVIEW THE COMPANY The Company was organized to develop and market prepaid wireless products and services in various markets throughout the United States. In late 1998, the Company established a new strategic objective of refocusing the Company's mission to pursue new complimentary Internet-related and e-commerce opportunities. In 1999, the Company actively implemented its new mission by, among other actions, selling a portion of the Company's business no longer considered essential for the new strategy and purchasing a company whose business thrust is in line with the new strategy. See "The Company's Business Case for New Electronic Commerce and Internet Business Directions." On May 7, 1999, the Company executed an agreement to acquire all outstanding common stock of IXATA, Inc. ("IXATA.COM"), a privately held provider of Internet-based information and electronic commerce services servicing the travel and hospitality market. The acquisition was finalized on July 1, 1999 and is consistent with the Company's new business objectives of pursuing Internet-based, business-to-business e-commerce opportunities. The Company is now operating IXATA.COM as a wholly-owned subsidiary and plans to significantly expand IXATA.COM's operations to offer new enhanced information services in the travel market, targeting existing and new corporate clients, hotel and property management groups, major travel agencies and worldwide strategic partners. Upon closing the IXATA.COM acquisition, the Company established itself as a provider of Internet-based, B2B electronic commerce services in rapidly growing market for travel information services, serving an expanding base of more than seventy major Fortune 500 firms and other organizations. IXATA.COM's principal service, RFP Express-SM-, integrates a user-friendly, Internet-based interface with a sophisticated data-warehousing system, interactive telephone and fax technology to deliver automated solutions for creating, sending, receiving and managing the preferred lodging programs request for proposal process in the hospitality services market ("RFP process"), typically involving hundreds or, in some cases, thousands of properties worldwide. By automating the users' RFP business process, and also providing user-friendly Internet access to a sophisticated data warehousing system, RFP Express-SM- provides dramatic cost savings to users, typically 70% or more compared to costs for manual processes. Pricing for RFP Express includes an annual subscription fee and transaction fees for each RFP handled. The Internet-based, electronic commerce and operational platforms developed to support the RFP Express-SM- offering can be used to address similar needs in other vertical markets. Since closing the IXATA.COM transaction on July 1, 1999, the Company has provided new funding and achieved more than 300 percent growth of its corporate customer base. The growth of corporate users and hotel - -------------------------------------------------------------------------------- Page 16 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- property clients attests to the Company's increasing market visibility and acceptance within the global travel community. The Company's Internet-based, e-commerce services are now being used by more than 70 major corporate users, 1700 hotel properties and four major travel agencies. While there are no assurances such growth can be sustained or the Company will have sufficient funding to meet future needs, management believes the Company's growth and performance to date is consistent with the Company's objective of attaining a leadership position in the market for Internet-based, business-to-business e-commerce services. Subsequent to the sale of selected prepaid cellular assets in the second quarter of 1999 to Teledata World Services, Inc. ("Teledata") (OTC/BB:TWOS), the Company had planned to continue to offer prepaid wireless services, focusing on higher margin opportunities, primarily through resale. Given the opportunities available through IXATA.COM and the associated resources required, the Company has discontinued its prepaid cellular operations. The discontinuing of operations was consistent with the Company's planned strategy of refocusing its business objectives to pursue new e-commerce and Internet-based business opportunities to create significant shareholder value. Effective January 31, 2000, the Company changed its name to The IXATA Group, Inc. from SecurFone America, Inc. The Company believed it was in the best interest of the Company to change its corporate name to "The IXATA Group, Inc." to capitalize upon the success of the Company's IXATA.COM subsidiary and to establish an image that is consistent with the Company's focus on Internet-related and e-commerce solutions. The Company believes that the name change will act as a critical facilitator in the expansion of its business objective to pursue new opportunities in Internet-based business offerings and e-commerce markets. The Company's principal executive offices are located at 8080 Dagget Street, Suite 220, San Diego, California 92111, and its telephone number is (800) 473-6748. THE COMPANY'S BUSINESS CASE FOR NEW ELECTRONIC COMMERCE AND INTERNET BUSINESS DIRECTIONS Since inception, the Company has primarily pursued opportunities in the prepaid wireless services market. The Company developed several unique products to address the prepaid wireless services market and had achieved some success in 1998. However, the emergence of new competition, industry price reductions and other margin pressures in the prepaid wireless services market suggested that significant additional investment would be required to achieve the business scale required to create substantial shareholder value. Recognizing the explosive growth of the Internet, and the long term prospects for integrating new wireless and Internet-based services, in late 1998 the Company established a new business objective to pursue new opportunities in the Internet and business-to-business ("B2B") electronic commerce markets. In 1998, the consumer segment of electronic commerce consumer retailing revenues totaled $7.8 billion, with business-to-business e-commerce service revenues estimated at $43 billion, according to a recent study by Forrester Research, a leading information industry consulting firm. By the year 2003, B2B e-commerce is expected to increase to $1.3 trillion, representing about 9% of all projected US trade in the year 2003. The recently-closed acquisition of IXATA.COM is the Company's initial step in entering the market for B2B, Internet-based electronic commerce services, which management believes is the optimum strategy to deliver substantial value to the Company's shareholders. Another key element in the Company's new growth strategy is to focus on next generation, "pro-active" B2B electronic commerce solutions which employ e-commerce solutions to address labor intensive processes, rather than to solely displace paper-based solutions. Management believes such pro-active e-commerce solutions, which go well beyond today's basic electronic cataloging, web portals and web-based ordering services, will change users' business processes, create significant operating efficiencies and dramatically reduce users' costs. More importantly, management believes such pro-active e-commerce services will play a key role in the future market for B2B e-commerce services described above. IXATA.COM's RFP Express-SM- Service represents a pro-active e-commerce service which, in management's view, is ideally positioned to meet the needs of the travel services market. IXATA.COM's expanding corporate user base demonstrates strong, growing market acceptance for the Company's e-commerce services. Since acquiring the new IXATA.COM subsidiary, the total base of major corporate users has - -------------------------------------------------------------------------------- Page 17 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- increased to more than 70 firms as of January 2000, further attesting to the growing acceptance of the Company's RFP Express service. The Company is expanding its management team and plans to secure new financing to support both expansion of the IXATA.COM revenue base, as well as development of new enhancements and related Internet-based services targeting the travel and hospitality sectors. See "Recent Events - Management Additions." While the outlook for Internet-based, electronic commerce services is impressive, there can be no assurances that the Company will secure the additional investment capital needed to succeed in this highly competitive, rapidly changing and technology driven market, nor are there any assurances that the Company's initial acquisition of IXATA.COM will be successful. Investors should carefully review the risk factors described in this document and other documents filed by the Company with the Securities and Exchange Commission. See "Management Discussion and Analysis of Financial Condition and Results of Operations - Forward Looking Statements." PRODUCTS AND CUSTOMERS RFP Express-SM- , is the Company's current flagship service and is the first of a family of new Intenet-based e-commerce services developed to meet the needs of the Company's customers and strategic partners. RFP Express -SM- is an Internet-based system that automates the RFP process for the travel and hospitality sector. RFP Express-SM- integrates a user-friendly Internet interface, sophisticated data-warehousing system, powerful relational database system and e-mail, interactive telephone and fax technologies to deliver automated solutions for the RFP process. RFP Express-SM- is a commercial, proven end-to-end, B2B electronic commerce solution that automates users' RFP business processes and dramatically reduces costs, eliminates paper-based communications, improves operations and enhances management control of labor and capital. The Company currently offers B2B e-commerce solutions to all market participants including: - Global Corporate Users - Property Management and Hotel Chains, and - Mega-Agencies. As of February 2000, the Company is providing Internet-base e-commerce services to more than 70 major corporations, 1700 hotel properties and four major travel agencies. RECENT EVENTS ISSUANCE OF SECURITIES For rendering brokering services and as a part of the transaction to purchase IXATA.COM, the Company agreed to pay Global One, Inc. ("Global") 600,000 shares of common stock of the Company. Global is an international business corporation in Nevis, British Virgin Islands. The Company intends to issue the shares to Global in the first quarter of 2000. In 1999, agreement was secured from Kohrman Jackson & Krantz P.L.L. ("KJK"), the Company's legal counsel, to convert existing debt to unregistered shares of the Company's common stock. On October 19, 1999, KJK agreed to receive 50,000 unregistered shares of the Company's common stock to eliminate total debts of $50,000. The Company issued the shares to KJK in the fourth quarter of 1999. In November of 1999, the Company offered equity investments to private parties in an offering exempt from registration pursuant to Regulation D of the Securities Act of 1933. As of February 23, 2000, the Company had sold 1,791,713 shares of its unregistered common stock for $0.85 a share in connection with the offering. Proceeds to the Company were $1,433,369 after the deduction of Scott & Stringfellow, Inc.'s ("S&S") placement agent fee of $0.05 per share. The purchasers in the offering were granted the right in certain instances to include their shares in future offerings of registered stock by the Company. - -------------------------------------------------------------------------------- Page 18 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- For rendering investment banking services, the Company agreed to issue 643,553 warrants to S&S for the price of $0.01 per warrant. These warrants expire in October of 2004. The exercise price of the warrants is $1.687 per warrant. The warrants will be exercisable after the earlier of a) one year from November 2, 1999, b) immediately upon change of control of the Company, or c) upon closing of a firmly underwritten public offering of the Company's equity securities. MANAGEMENT ADDITIONS In October of 1999, the Company appointed Robert Steiner President of the Company's IXATA.COM subsidiary. Mr. Steiner, one of the co-founders of the IXATA.COM subsidiary, is also acting Executive Vice President, Marketing of IXATA.COM. Mr. Steiner is a co-founder of IXATA.COM and was appointed a Director of the Company, Inc. on July 1, 1999. Mr. John P. Yzaguirre joined the Company in October of 1999 as Operations Director of IXATA.COM. Prior to joining IXATA.COM, Mr. Yzaguirre has held management positions with several leading hotel and property groups. Mr. Yzaguirre is former General Manager of the Chase Hospitality L.L.C. group, where he managed systems implementation, staffing, services, sales and operations for a new hotel launch, and supported existing properties. Mr. Yzaguirre has experience in the meeting planning industry, having worked for American General Hospitality Corporation and Chateau Magdelena Catering Company where he held positions of increasing management responsibility in the areas of developing and managing operations, processes and financial controls for large scale meetings, catering and related support services. Ms. Sheila A. Leaming joined the Company in November of 1999 as Controller of IXATA.COM. Prior to joining the Company, Ms. Leaming has held various financial management and accounting, including a background in public company accounting and in the hospitality industry. Ms. Leaming's previous positions include Senior Underwriter/Financial Analyst for JT Capital and a Senior for Ernst & Young. In her role as Controller, Ms. Leaming is be responsible for general and overall day-to-day accounting administration, payroll, accounts payable, overseeing billing, and other financial management functions, including budget preparation and financial analysis. RESULTS OF OPERATIONS: The Company, in the second quarter of 1999, sold the Company's Buy-The-Minute-TM- ("BTM") product and the Company discontinued operation of the Company's SFA Local Network Solution ("SFN"). As a result of these transactions, certain accounts in the prior-year financial statements have been reclassified for comparative purposes to conform with the presentation in the current-year financial statements. Revenue, cost of goods sold and operating and other expenses relating to the prepaid cellular product line have been reclassified as a restructuring charge, resulting in these items being reported as $0 for periods prior to the sale and discontinuance of the prepaid cellular products. The loss from continuing operations in the first three quarters of 1999 decreased to $1,575,882 from $3,509,229 in the first three quarters of 1998 due to the reduction in the restructuring charge associated with the cellular operation. The Company purchased its IXATA.COM subsidiary as of July 1, 1999, and has consolidated financial results for the IXATA.COM subsidiary commencing in the third quarter of 1999. Therefore, detailed comparison of financial results of the current financial with those of a year earlier are not meaningful. - -------------------------------------------------------------------------------- Page 19 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- THIRD QUARTER OF 1999 COMPARED TO THIRD QUARTER OF 1998 REVENUES The Company only obtained the operations of its Internet-based information and electronic commerce services servicing the travel and hospitality market in the third quarter of 1999. B2B e-commerce revenues for the third quarter of 1999 increased to $86,468 from $0 in the third quarter of 1998. The increase was from the launch of its RFP Express-SM- product for the travel and hospitality sectors. The Company expects that revenues from RFP Express-SM- will continue to grow at an accelerated rate on a long-term basis. COST OF GOODS SOLD Total cost of goods sold for the third quarter of 1999 increased to $6,938 from $0 in the third quarter of 1998 primarily due to the Company introducing its its RFP Express-SM- product. GROSS PROFIT/MARGIN Gross profit for the third quarter of 1999 increased to $79,531 from $0 in the third quarter of 1998. The gross profit margin for the third quarter of 1999 of 92% is expected to decrease in the future as the company's strategic partners initiate selling the product and collect their commissions due for such sales. The Company does not expect the variable portion of cost of goods sold to increase for 1999 due to the fact that telecommunications costs are decreasing in the marketplace. OPERATING EXPENSES Selling, general and administrative expenses increased to $599,280 in the third quarter of 1999 from $0 in the third quarter of 1998. The increase in selling, general and administrative expenses was due to the hiring and development of an experienced management and operations team. Wages and associated taxes increased in the third quarter of 1999 to $318,300 from $0 in the third quarter of 1998. An increase in expenses related to consultant required while the Company was building its internal capabilities rose to $106,155 in the third quarter of 1999 from $0 in the third quarter of 1998. The Company expects to reduce its expenditures for external consultants in the future. Legal and professional fees increased to $74,396 in the third quarter of 1999 from $0 in the third quarter of 1998. Operating expenses increased to $934,523 in the third quarter of 1999 from $0 in the third quarter of 1998. In addition to the increase in selling, general and administrative expenses discussed above, the increase in operating expenses was due to amortization of goodwill in association with the IXATA.COM purchase. According to generally accepted accounting principles, the amortization expense of $335,243 was recorded in the third quarter of 1999. The net loss before extraordinary items in the third quarter of 1999 increased to $916,108 from $0 in the third quarter of 1998. This increase was due to the declaration of discontinued operation effective June 30, 1999 resulting in negligible ongoing operating expenses from continuing operations in the third quarter of 1998 due to the Company's direction was being refocused. See "The Company's Business Case for New Electronic Commerce and Internet Business Directions." OTHER EXPENSES Interest expense increased to $61,834 in the third quarter of 1999 from $0 in the third quarter of 1998 due to the Company's obligations to lenders whom have extended the Company funds for operations since inception. - -------------------------------------------------------------------------------- Page 20 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- FIRST NINE MONTHS OF 1999 COMPARED TO FIRST NINE MONTHS OF 1998 REVENUES The Company only obtained the operations of its Internet-based information and electronic commerce services servicing the travel and hospitality market in the third quarter of 1999. B2B e-commerce revenues for the first three quarters of 1999 increased to $86,468 from $0 in the first three quarters of 1998. The increase was from the launch of its RFP Express-SM- product for the travel and hospitality sectors in July 1999. The Company expects that revenues from RFP Express-SM- will continue to grow at an accelerated rate on a long-term basis. COST OF GOODS SOLD Total cost of goods sold for the first three quarters of 1999 increased to $6,938 from $0 in the first three quarters of 1998 primarily due to the Company introducing its RFP Express-SM- product. GROSS PROFIT/MARGIN Gross profit for the first three quarters of 1999 increased to $79,531 from $0 in the first three quarters of 1998. The gross profit margin for the third quarter of 1999 of 92% is expected to decrease in the future as the Company's strategic partners initiate selling the product and collect their commissions due for such sales. The Company does not expect the variable portion of cost of goods sold to increase for 1999 due to the fact that telecommunications costs are decreasing in the marketplace. OPERATING EXPENSES Selling, general and administrative expenses increased to $741,256 in the first three quarters of 1999 from $0 in the first three quarters of 1998. The increase in selling, general and administrative expenses was due to the hiring and development of an experienced management and operations team. Wages and associated taxes increased in the first three quarters of 1999 to $460,276 from $0 in the first three quarters of 1998. An increase in expenses related to consultant required while the Company was building its internal capabilities rose to $106,155 in the first three quarters of 1999 from $0 in the first three quarters of 1998. The Company expects to reduce its expenditures for external consultants in the future. Legal and professional fees increased to $74,396 in the first three quarters of 1999 from $0 in the first three quarters of 1998. The Company previously engaged in the sale of prepaid cellular phone services. The Company provided these services in some markets and, in other markets, licensed the Company's resources to unrelated parties. In a limited number of instances, certain distribution rights were offered in various markets for a license fee. As of June 30, 1999, the Company effectively ceased these operations and restructured the basic company focus. Net loss for discontinued operations decreased to $499,382 in the first three quarters of 1999 from $3,509,229 in the first three quarters of 1998. This was due to the Company's effort to control its financial exposure in a business that was under increasing revenue and profitability pressure and the Company limiting its operations as it transitioned to its new B2B e-commerce focus. Operating expenses increased to $1,575,882 in the first three quarters of 1999 from $3,509,229 in the first three quarters of 1998. In addition to the increase in selling, general and administrative expenses discussed above, the increase in operating expenses was due to amortization of goodwill in association with the IXATA.COM purchase. According to generally accepted accounting principles, the amortization expense of $335,243 was recorded in the first three quarters of 1999. The loss from continuing operations in the first three quarters of 1999 decreased to $1,575,882 from $3,509,229 in the first three quarters of 1998 due to the reduction in the restructuring charge associated with the cellular operation. - -------------------------------------------------------------------------------- Page 21 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- OTHER EXPENSES The Company recorded a gain on the sale of a product line of $708,419 in the first half of 1999. The Company did not sell any assets in the first half of 1998. The Company does not foresee selling any additional assets in the near future. The Company recorded an extraordinary gain on debt of $43,451 in the first half of 1999. This was related to a settlement to the Company's former CEO to resolve all outstanding Company obligations related to his employment. LIQUIDITY AND CAPITAL RESOURCES The Company has incurred significant operating and net losses as a result of the development and operation of its service platform and supporting networks. The Company expected that such losses would continue to increase as the Company focused on the development, construction and expansion of its service platform and underlying networks and expands its customer base. Cash provided by operations would not be sufficient to fund the expansion of the product offerings and resultant subscriber base. The Company is continually reviewing various sources of additional financing to fund its growth. As of September 30, 1999, the Company had received advances in the amount of $1,798,250 from private investors. At September 30, 1999, the Company had cash and cash equivalents of $22,538. In addition, the Company had accounts receivable totaling $165,163 from the sale of the Company's B2B e-commerce services. Net cash used by operating activities was $952,621 in the first three quarters of 1999 compared to $1,674,588 in the first three quarters of 1998. Net cash provided by investing activities in the first three quarters of 1999 was $242,818, consisting of $472,257 provided by the sale of a subsidiary and related assets, $150,000 used for investment in subsidiary, and $47,509 used to purchase equipment as compared with the use of $12,014 to purchase equipment in the first three quarters of 1998. Net cash provided by financing activities in the first three quarters of 1999 totaled $683,830 which consisted primarily of $816,221 in proceeds from notes payable to the Company from private investors as compared with $1,450,372 in the first three quarters of 1998 which consisted primarily of proceeds from advances payable of $1,176,000. On October 12, 1999, the Company entered into a relationship with Scott & Stringfellow, Inc., an investment banker, to act as the exclusive financial advisor to the Company, in connection with the exploration of potential alternative strategic transactions, including without limitation one or more private equity offerings, mergers and acquisitions and a public equity offering. See "-Overview - Recent Events - Issuances of Securities." RELATED PARTY TRANSACTIONS On February 1, 1999, IXATA.COM and Tel.n.Form, Inc. ("Tel.n.Form") entered into a management and support agreement whereby Tel.n.Form agreed to provide selected consulting services to support IXATA.COM's business development through December 31, 1999. The agreement also provided that IXATA.COM would reimburse Tel.n.Form for use of certain shared expenses such as office space and computer facilities. After completion of the acquisition of IXATA.COM by the Company on July 1, 1999, the Company continued the Tel.n.Form agreement to minimize any potential disruption of IXATA.COM's operations and support the transition to the Company. For support services provided by Tel.n.Form, the Company incurs total costs of approximately $23,840 per month. The Company believes costs incurred under the agreement are reasonable and no more than it would incur under an agreement with an unaffiliated third party. The support services agreement expired on December 31, 1999 and to minimize any disruption of operations, the Company continued selected support services, such as office space and shared computer facilities, as needed, on a month-by-month basis consistent with the agreement. Since the Company has added additional IXATA.COM management personnel, expanded the IXATA.COM staff and has now fully incorporated IXATA.COM into the Company, it no longer requires the services provided by Tel.n.Form. The Company has notified Tel.n.Form that the agreement will be terminated in its entirety as of March 31, 2000. - -------------------------------------------------------------------------------- Page 22 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- The majority owner of Tel.n.Form is the Gluckman Family Trust, which is a significant shareholder of the Company. Fred Gluckman, who currently serves as Executive Vice President - Technology and Automation of IXATA.COM, and as a Director of the Company, is the Chairman of the Board of Tel.n.Form. Mr. Gluckman also serves as a trustee of the Gluckman Family Trust. Vera Ellen Andreoli is the Trustee of the Andreoli Family Trust, which is a significant shareholder of the Company. Mrs. Andreoli also provides consulting services to Tel.n.Form, and Mrs. Andreoli's husband is a significant owner of Tel.n.Form and a Tel.n.Form employee and provided selected consulting services to IXATA.COM under the management services agreement. In October 1999, the Company appointed Robert Steiner President of the Company's IXATA.COM subsidiary. Mr. Steiner, one of the co-founders of IXATA.COM, provides services to IXATA.COM under a consulting contract entered into prior to the Company purchasing the subsidiary. The Company is currently negotiating an employment contract with Mr. Steiner. The consulting contract is a renewable, one-year contract in an amount of $9,000 per month to be paid to Mr. Steiner. The Company expects to finalize the employment agreement in March of 2000. Fred Gluckman currently serves as Executive Vice President - Technology and Automation of IXATA.COM. Mr. Gluckman, one of the co-founders of IXATA.COM, provides services to IXATA.COM under a consulting contract entered into prior to the Company purchasing the subsidiary. The Company is currently negotiating an employment contract with Mr. Gluckman. The consulting contract is a renewable, one-year contract in an amount of $10,000 per month to be paid to Mr. Gluckman. The Company expects to finalize the employment agreement in March of 2000. Mr. Wasserman, the Company's Secretary, is also a partner in Kohrman Jackson & Krantz P.L.L., which provides legal services to the Company. FORWARD-LOOKING STATEMENTS Statements that are not historical facts, including statements about the Company's confidence in its prospects and strategies and its expectations about expansion into new markets, growth in existing markets, and the Company's ability to attract new sources of financing, are forward-looking statements that involve risks and uncertainties. These risks and uncertainties include, but are not limited to: - - THE COMPANY HAS A SHORT OPERATING HISTORY UPON WHICH TO BASE AN INVESTMENT DECISION. The Company established a new strategic objective of refocusing the Company's mission to pursue Internet-related and e-commerce opportunities in the travel and hospitality service markets in late 1998. As a result, its business plan is currently in the early stage and, accordingly, the Company has a limited operating history on which to base an evaluation of its business and prospects. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development. To address these risks, the Company must, among other things, attract a number of major corporate clients/customers and strategic alliance partners, implement and successfully execute its marketing and sales strategy, and successfully recruit and motivate qualified sales and technical personnel. There can be no assurance that the Company will be successful in addressing such risks, and the failure to do so could have a material adverse effect on the Company. The likelihood of success of the Company must be considered in light of the problems, expenses, complications and delays frequently encountered in connection with the development of an early stage business. It is impossible to predict the degree of success the Company will have in achieving its objectives. - - THE COMPANY REQUIRES SIGNIFICANT ADDITIONAL CAPITAL, WHICH IT MAY NOT BE ABLE TO OBTAIN. As the Company continues to implement its business plan, present sources of financing will not be adequate to support the Company's increased cash needs. Furthermore, the Company's entry into new Internet and electronic commerce business areas will create additional demands for investment capital. The Company may not be able to obtain future equity or debt financing on satisfactory terms or at all. If the Company fails to obtain necessary short-term financing, it will not be able to continue operations. Long-term liquidity will depend on the Company's ability to obtain long-term financing and attain profitable operations. The Company's auditors issued an opinion - -------------------------------------------------------------------------------- Page 23 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- with its most recent audit of the Company's financial statements raising doubt about the Company's ability to continue as a going concern if it does not obtain additional debt or equity financing. - - IF THE COMPANY IS UNABLE TO SUCCESSFULLY INTEGRATE IXATA.COM, ITS FINANCIAL RESULTS WILL SUFFER. The Company completed its acquisition of IXATA.COM on July 1, 1999. Its future profitability will depend heavily on its ability to integrate IXATA.COM. Failure to successfully integrate the companies may cause significant operating inefficiencies and adversely affect profitability. To successfully integrate the companies, the Company must, among other things, install and standardize adequate operational, financial and control systems. Although the Company has no definitive plans to acquire any business in the near future, if it does acquire additional companies, it will face business integration risks similar to those described above. In addition, during the beginning stage of development and operation, the Company may encounter expenses and difficulties that it may not expect or are beyond its control. As a result, it may not be able to achieve or maintain profitability. - - THE COMPANY'S FAILURE TO PROTECT OR MAINTAIN ITS INTELLECTUAL PROPERTY RIGHTS COULD PLACE IT AT A COMPETITIVE DISADVANTAGE AND RESULT IN LOSS OF REVENUE AND HIGHER EXPENSES. The Company's performance and ability to compete are dependent to a significant degree on its proprietary electronic commerce system and services. The steps the Company has taken to protect its proprietary intellectual property rights may not prevent or deter someone else from using or claiming rights to its intellectual property. Third party infringement or misappropriation of trade secrets, copyrights, trademarks or other proprietary information could seriously harm the Company's business. The Company also cannot assure that it will be able to prevent the unauthorized disclosure or use of its proprietary knowledge, practices and procedures if its senior managers or other key personnel leave it. In addition, although the Company believes that its proprietary rights do not infringe on the intellectual property rights of others, other parties may claim that it has violated their intellectual property rights. These claims, even if not true, could result in significant legal and other costs and may distract management. - - THE COMPANY'S BUSINESS PROSPECTS DEPEND ON DEMAND FOR AND MARKET ACCEPTANCE OF THE INTERNET. The Company is currently dependent on the Internet as an access and transmission medium to provide its services. Although the Company believes that the acceptability and usability of the Internet will increase over time, any increase in the rates charged by Internet service providers resulting in a decreased usage of the Internet or decreased use of the Internet for electronic commerce transactions, would have a materially adverse effect on the Company's operating margins. Failure to promote Internet access as the preferred means of accessing the Company's service could also have a materially adverse effect on the Company, including the possibility that the Company may need to significantly curtail or cease its Internet based e-commerce operations or to develop its own capabilities at a cost in excess of the Company's ability to fund such undertakings. - - IF THE COMPANY'S MARKET DOES NOT GROW AS EXPECTED, ITS REVENUES WILL BE BELOW ITS EXPECTATIONS AND ITS BUSINESS AND FINANCIAL RESULTS WILL SUFFER. The Company is engaging in a developing business with an unproven market. Accordingly, it cannot accurately estimate the size of its market or the potential demand for its services. If its customer base does not expand or if there is not widespread acceptance of its products and services, its business and prospects will be harmed. The Company believes that its potential to grow and increase its market acceptance depends principally on the following factors, some of which are beyond its control: (a) the effectiveness of its marketing strategy and efforts; (b) its product and service quality; (c) its ability to provide timely, effective customer support; (d) its distribution and pricing strategies as compared to its competitors; (e) its industry reputation; and (f) general economic conditions. - - ANY FAILURE OF THE COMPANY'S INTERNET AND E-COMMERCE INFRASTRUCTURE COULD LEAD TO SIGNIFICANT COSTS AND DISRUPTIONS WHICH COULD REDUCE REVENUES AND HARM BUSINESS AND FINANCIAL RESULTS. The Company's success, - -------------------------------------------------------------------------------- Page 24 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- in particular its ability to automate the RFP process successfully, largely depends on the efficient and uninterrupted operation of its computer and communications hardware and software systems. The Company's systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, earthquake and similar events. The Company presently has very limited redundant systems. It does not have a formal disaster recovery plan and carries no business interruption insurance to compensate it for losses that may occur. Temporary or permanent loss of data or systems through casualty or operating malfunction could have a materially adverse effect on the Company's business. - - THE COMPANY COULD LOSE CUSTOMERS AND EXPOSE ITSELF TO LIABILITY IF BREACHES OF ITS NETWORK SECURITY DISRUPT SERVICE TO ITS CUSTOMERS OR JEOPARDIZE THE SECURITY OF CONFIDENTIAL INFORMATION STORED IN ITS COMPUTER SYSTEMS. Despite the implementation of network security measures, the Company's network infrastructure is vulnerable to computer viruses, break-ins and similar disruptive problems caused by its customers or Internet users. Any of these acts could lead to interruptions, delays or cessation in service to the Company's customers and subscribers. Furthermore, such inappropriate use of the network by third parties could also potentially jeopardize the security of confidential information stored in the computer systems and the Company's customers' computer systems, which may result in liability to existing customers and may also deter potential customers. Any security measures the Company implements may be circumvented in the future. The costs and resources required to eliminate computer viruses and alleviate other security problems may result in interruptions or delays to the Company's customers that could cause harm to the Company's reputation as well as its business and financial results. - - RAPID GROWTH IN THE COMPANY'S BUSINESS COULD STRAIN ITS RESOURCES AND HARM ITS BUSINESS AND FINANCIAL RESULTS. The planned expansion of the Company's operations will place a significant strain on its management, financial controls, operations systems, personnel and other resources. The Company expects that its customers increasingly will demand additional information, reports and services related to the services and products the Company currently provides. If the Company is successful in implementing its marketing strategy, it also expects the demands on its network infrastructure and technical support resources to grow rapidly, and it may experience difficulties responding to customer demand for its services and providing technical support in accordance with its customers' expectations. The Company may not be able to keep pace with any growth, successfully implement and maintain its operational and financial systems or successfully obtain, integrate and utilize the employees, facilities, third-party vendors and equipment, or management, operational and financial resources necessary to manage a developing and expanding business in an evolving industry. If the Company is unable to manage growth effectively, it may lose customers or fail to attract new customers and its business and financial results will suffer. - - THE COMPANY MAY NOT BE ABLE TO COMPETE IN ITS MARKET SINCE THIS MARKET IS HIGHLY COMPETITIVE. The Internet-based electronic commerce market has become increasingly competitive due to the entry of large, well-financed service providers into the market. Other potential competitors in the market for Internet-based electronic commerce services for the travel and hospitality industry may include companies with substantially greater financial and marketing resources than those of the Company. No assurance can be given that competitors possessing greater financial resources than the Company will not be able to develop a product which is more appealing or offer similar products at lower prices than those of the Company. The Company may not be able to operate successfully in this competitive environment. Direct competitors today include JBH and Lanyon, among others seeking to enter the market for e-commerce services targeting the travel and hospitality sectors. Other potential competitors, such as Ariba, Inc., have existing, well-established e-commerce platforms and have also indicated an interest in pursuing IXATA.COM's target market. While to date the market reaction to the Company's service has been positive vis-a-vis competitive services, there is no assurance this will continue in the future. - - THE COMPANY DEPENDS ON THE SERVICES OF SENIOR MANAGEMENT AND OTHER KEY PERSONNEL AND THE ABILITY TO HIRE, TRAIN AND RETAIN SKILLED EMPLOYEES. The success of the Company will be dependent on the skill and experience of certain key employees. The Company believes that the loss of Paul B. Silverman, CEO, or Andrew H. Kent, CFO, Robert Steiner, President and Vice-President - Marketing of IXATA.COM, or Fred Gluckman Vice-President -Technology of IXATA.COM, could disrupt or delay the Company's business or would otherwise - -------------------------------------------------------------------------------- Page 25 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- have a material adverse effect on the Company's business. The Company's future success also depends on its ability to identify, attract, hire, retain and motivate other well qualified managerial, sales and marketing personnel. There can be no assurance that these professionals will be available in the market or that the Company will be able to meet their compensation requirements. - - RISKS ASSOCIATED WITH OPERATING IN INTERNATIONAL MARKETS COULD RESTRICT THE COMPANY'S ABILITY TO EXPAND GLOBALLY AND HARM ITS BUSINESS AND PROSPECTS. The Company markets and sells its services and products in the United States and internationally. The Company's failure to manage its international operations effectively could limit the future growth of its business. There are certain risks inherent in conducting the Company's business internationally, such as: (a) changes in international regulatory requirements could restrict the Company's ability to deliver services to its international customers; (b) differing technology standards across countries that may impede the Company's ability to integrate its product offerings across international borders; (c) difficulties collecting accounts receivable in foreign jurisdictions; (d) political and economic instability could lead to appropriation of the Company's physical assets, its ability to deliver its services to customers and harm its financial results; (e) protectionist laws and business practices favoring local competitors; and (f) potentially adverse tax consequences due to unfavorable changes in tax laws. - - GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD LIMIT THE COMPANY'S BUSINESS OR SLOW ITS GROWTH. Although Internet-based electronic commerce is not currently subject to government regulation, it is under increased scrutiny by regulatory agencies and may undergo rapid and drastic regulatory changes. There can be no assurances that one or more services currently offered by the Company will not be negatively impacted by newly-created or interpreted regulations. - - THE COMPANY'S OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS WHICH MAY CAUSE VOLATILITY OR A DECLINE IN THE PRICE OF ITS COMMON STOCK. The Company may experience significant fluctuations in its future quarterly operating results due to a variety of factors, many of which are outside the Company's control. Such fluctuations may cause the price of its common stock to fall. Factors that may adversely affect the Company's quarterly operating results include, without limitation: (a) the Company's ability to retain existing customers, attract new customers at a steady rate and maintain customer satisfaction; (b) the mix of products and services sold by the Company; (c) the announcement or introduction of new products and services by the Company and its competitors; (d) price competition in the industry; (e) the amount and timing of operating costs and capital expenditures relating to any expansion of the Company's business, operations and infrastructure; (f) governmental regulation; and (g) general economic conditions and economic conditions specific to the travel and hospitality industry. Further, stock prices and trading volumes for many Internet companies fluctuate widely for a number of reasons, including some reasons which may be unrelated to their businesses or results of operations. This market volatility, as well as general domestic or international economic, market and political conditions, could materially adversely affect the price of the Company's stock without regard to the Company's operating performance. In addition, the Company's operating results may be below the expectations of public market analysts and investors. If this were to occur, the market price of the stock would likely significantly decrease. - - THE COMPANY'S EXECUTIVE OFFICERS, DIRECTORS, AND PARTIES RELATED TO THEM, IN THE AGGREGATE, CONTROL 53% OF THE COMPANY'S COMMON STOCK AND MAY HAVE THE ABILITY TO CONTROL MATTERS REQUIRING STOCKHOLDER APPROVAL. The Company's executive officers, directors and parties related to them own a large enough stake in the Company to determine matters presented to stockholders, the approval of significant corporate transactions, such as any - -------------------------------------------------------------------------------- Page 26 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- merger, consolidation or sale of all or substantially all of the Company's assets, and the control of the management and affairs of the Company. In addition, certain executive officers, directors and other shareholders, representing 65% of the Company's outstanding common stock, have entered into a Voting Agreement in which the parties agree to vote their shares for certain directors. As a result, these stockholders may have the ability to control the election and removal of directors. Accordingly, such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company, impede a merger, consolidation, takeover or other business combination involving the Company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could have an adverse effect on the market price of the Company's common stock. - - THE COMPANY'S COMMON STOCK MAY BE DELISTED FROM THE NASDAQ OVER-THE-COUNTER BULLETIN BOARD SERVICE. Because of recent changes in the Nasdaq listing rules, the Company's common stock could be delisted from trading on the Nasdaq Over-the-Counter Bulletin Board Service, unless the Company makes required filings with the Securities and Exchange Commission by April 5, 2000. If the Company's stock were to be delisted, there would be no public market for the Common Stock and stockholders would have difficulty liquidating their investment. On March 10, 2000, Nasdaq appended an "E" to the Company's trading symbol, indicating it is not in compliance with its filing requirements. Although the Company believes that the filing of this Quarterly Report with the Securities and Exchange Commission brings the Company into compliance, allowing it to retain its stock listing on the Nasdaq Bulletin Board, there can be no assurance that it will be able to do so. These and other risks described in this Quarterly Report must be considered by any investor or potential investor in the Company. - -------------------------------------------------------------------------------- Page 27 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- PART II -- OTHER INFORMATIOn ITEM 1. LEGAL PROCEEDINGS. From time to time, the Company is involved in legal matters which are incidental to its operations. In the opinion of management, the ultimate resolution of these matters has not had a material adverse effect on the Company's financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On July 1, 1999, the Company issued 4,500,000 unregistered shares of common stock in exchange for all of the stock outstanding of IXATA.COM. The Company believes the issuance to be exempt under Section 4(2) of the Securities Act. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. No defaults upon senior securities occurred during the third quarter of 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's security holders during the third quarter of 1999. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits being filed with this Quarterly Report: 27 Financial Data Schedule (b) The Company filed a Report on Form 8-K dated July 1, 1999 on July 19, 2000, relating to the Company's acquisition of IXATA, Inc. - -------------------------------------------------------------------------------- Page 28 THE IXATA GROUP, INC. Quarterly Report on Form 10-QSB For the Quarter Ended September 30, 1999 - -------------------------------------------------------------------------------- SIGNATURES In accordance with the requirements of the Exchange Act, the Company caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. The IXATA Group, Inc. Date: March 14, 2000 /s/ Paul B. Silverman --------------------- By Paul B. Silverman, Chief Executive Officer - -------------------------------------------------------------------------------- Page 29 EX-27 2 EXHIBIT 27
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 22,538 56,250 165,163 0 0 243,951 193,063 (121,412) 6,765,903 2,277,400 1,821,381 0 0 10,784 2,656,339 6,765,903 86,468 86,468 6,938 1,575,882 708,419 0 (60,938) (848,870) 1,600 (850,470) 0 43,451 0 (807,019) (0.07) (0.07)
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