<PAGE>
SECURITIES AND EXCHANGE COMMISSION
450 FIFTH STREET, N.W.
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 June 30, 1996
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________________ to _________________________
Commission file number 0-28484
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QualMark Corporation
- --------------------------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Colorado 84-1233688
- --------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
1329 West 121st Avenue, Denver, CO 80234
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(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (303) 254-8800
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- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the post 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check wither the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. [] Yes [] No
APPLICABLE ONLY TO CORPORATE ISSUERS
Since the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
The number of shares of no par value common stock at May 15, 1996 is 3,330,484.
- --------------------------------------------------------------------------------
Transitional Small Business Disclosure Format (Check one): [X] Yes [] No
<PAGE>
PART 1 ITEM 1 QUALMARK CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1996
(Unaudited) Dec. 31, 1995
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<S> <C> <C>
ASSETS
Cash and cash equivalents $2,950,304 $251,641
Trade accounts receivable, net of allowance for
doubtful accounts of $20,841 at June 30, 1996
and December 31, 1995 1,135,471 889,399
Inventories 561,080 281,406
Employee notes receivable 5,219 6,350
Other current assets 119,339 51,919
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Total current assets 4,771,414 1,480,715
Property and equipment, net 618,604 411,423
Patents, net of accumulated amortization of $242,652
and $232,078 39,602 33,485
Other assets 29,846 17,589
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Total assets $5,459,467 $1,943,212
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LIABILITIES & STOCKHOLDERS EQUITY
Accounts payable $366,406 $376,233
Customer deposits and deferred revenue 18,698 159,578
Accrued expenses 229,936 180,637
Notes payable, including stockholders notes of
$201,120 at December 31, 1995 909,472
Current portion of capital lease obligations 42,306 30,640
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Total current liabilities 657,347 1,656,560
Noncurrent portion of capital lease obligations 31,306 21,310
Stockholder's Equity
Convertible preferred stock; no par value
2,000,000 authorized; 490,929 designated as
Series A, 332,063 issued and outstanding
December 31, 1995 with liquidation preference
of $1,062,602 at December 31, 1995; 99,619 1,100,672
as Series B, none outstanding.
Common stock; no par value; 15,000,000
shares authorized; 3,330,484 and 934,100 shares
issued and outstanding at June 30, 1996 and
December 31, 1995, respectively. 6,156,914 252,928
Accumulated deficit (1,386,099) (1,088,258)
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Total stockholder's equity 4,770,815 265,342
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Total liabilities and stockholder's equity $5,459,467 $1,943,212
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</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
QUALMARK CORPORATION
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
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<S> <C> <C> <C> <C>
Net revenue $1,318,748 $1,102,608 $2,291,291 $1,699,923
Cost of revenue 817,490 677,924 1,442,308 1,170,661
------------- ------------- ------------- -------------
Gross profit 501,258 424,684 848,983 529,262
Selling, general and administrative expenses 552,291 322,821 994,415 645,272
Research and development expenses 47,301 43,325 101,365 80,025
------------- ------------- ------------- -------------
Loss from operations (98,333) 58,539 (246,797) (196,035)
Other income (expense):
Interest 19,284 (24,922) (54,281) (35,824)
Other 292 3,236 748
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Net income (loss) ($79,049) $33,908 ($297,842) ($231,111)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma net loss per share $0.02 ($0.12)
Pro forma weighted average number of common shares 1,866,483 1,866,483
Net loss per share ($0.03) ($0.12)
Weighted average number of common shares 3,131,923 2,506,233
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
QUALMARK CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six For the six
months ended months ended
June 30, 1996 June 30, 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($297,842) ($231,111)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 90,712 79,928
Discount accretion 41,748
Change in assets and liabilities:
Accounts receivable (246,072) 70,160
Inventories (279,675) 16,045
Other assets (78,546) (11,127)
Accounts payable and accrued expenses 39,472 43,540
Customer deposits and deferred revenue (140,880) 54,862
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Net cash provided by (used in) operating activities (871,083) 22,297
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (287,318) (93,994)
Acquisition of patents (16,691)
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Net cash used by investing activities (304,009) (93,994)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from borrowing 300,000
Repayments of borrowings - others (701,220) (237,838)
Proceeds from issuance of warrants 484
Proceeds from issuance of common stock 4,553,313
Principal payments on capital lease obligations 21,663 (3,909)
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Net cash provided by financing activities 3,873,756 58,737
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Net increase (decrease) in cash 2,698,664 (12,960)
Cash at beginning of period 251,640 108,953
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Cash and cash equivalents $2,950,304 $95,993
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NONCASH FINANCING ACTIVITIES
Conversion of debt to common stock $250,000
Acquisition of equipment under capital lease 43,325
SUPPLEMENTAL DISCLOSURE
Interest paid $42,894 $4,262
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
QUALMARK CORPORATION
NOTES TO FINANCIAL STATEMENTS
QualMark Corporation (the Company), was founded in 1991 and is a manufacturer of
physical stress systems. These systems rapidly and efficiently induce product
design and manufacturing related failures on its customers products, thereby
providing manufacturers the necessary information to improve product quality.
The Company also operates a nation-wide network of test centers that its
customers may use as an alternative, or in addition, to purchasing its systems.
NOTE 1 - Basis of Presentation
These financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1995 and notes thereto.
The interim financial data as of June 30, 1996 and for the six months ended June
30, 1996 and 1995 is unaudited; however, in the opinion of management of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods presented. Results for the six months are not necessarily
indicative of results for the remainder of 1996.
NOTE 2 - Inventories
Inventories consist of the following:
June 30, December 31,
1996 1995
-------------------------
Raw materials $311,629 $227,011
Finished goods 249,451 54,395
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$561,080 $281,406
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NOTE 3 - Proforma Net Income (Loss) and Net Loss Per Share
During the six month and three month periods ending June 30, 1995, the Company's
proforma net loss per share was computed as described in Note 1 of the Company's
December 31, 1995 financial statements. For the six months and the three month
periods ending June 30, 1996, the Company's net loss per common share was
computed based on the weighted average number of common shares outstanding.
Common stock equivalent shares were not considered as their effect was anti-
dilutive.
<PAGE>
NOTE 4 - Litigation
There has been no change in status in the legal matters described in the
final prospectus dated April 8, 1996 which is a part of Registration Statement
No. 333-1454-D. There have been no additional legal matters subsequent to the
registration statement.
NOTE 5 - Initial Public Offering
On April 11, 1996, the Company closed on its initial public offering, issuing
1,350,000 shares of common stock and receiving net proceeds (after expenses) of
$4,107,813. The underwriter also received warrants to purchase 135,000 shares
of common stock. Immediately prior to the closing of the initial public
offering, all preferred shareholders converted their preferred shares to common
stock. Also concurrent with the closing, the Company effected a 3-for-2 stock
split.
On May 8, 1996, the Company's underwriter exercised its option to purchase
135,000 shares of common stock from the Company. The Company received $445,500,
after the underwriter's discount and expenses, from the sale.
<PAGE>
Part 1 Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenue
Net revenue in the three months ended June 30, 1996 increased $216,140
(19.6%) as compared with the three months ended June 30, 1995, from $1,102,608
to $1,318,748. Net revenue also increased $591,368 (34.8%) in the six month
period ended June 30, 1996 as compared with the six months ended June 30, 1995,
from $1,699,923 to $2,291,291. Seminar revenue aggregating $109,914 and
$189,562 was included in the 1995 three and six month periods, respectively. On
September 30, 1995, the Company sold the seminar business to its founder and
accordingly, no revenue was recorded for the seminar business during 1996.
Excluding seminar revenue, revenue in the three months ended June 30, 1996
increased $326,054 (32.8%) and revenue in the six months ended June 30, 1996
increased $780,929 (51.7%).
System revenue increased $68,265 (8%) in the three month period from
$853,106 to $921,371 as compared to the same three month period in 1995. For
the six month period, system revenue increased $312,247 (24.0%) over the same
six month period in 1995 from $1,299,323 to $1,611,570. Unit shipments
decreased from nine to six in the comparable three month periods ended June 30,
1996 and 1995 and from thirteen to twelve systems in the comparable six month
periods ended June 30, 1996 and 1995. However, a shift in the product mix to
larger, more expensive systems resulted in a net revenue increase in the three
and six months ended June 30, 1996 over the same periods in 1995.
The Company believes that its quarterly operating results could be subject
to fluctuations for a variety of reasons. The Company operates with a small
backlog relative to its revenue; thus most of its sales in each quarter result
from orders received in the current or prior quarter. In addition, because
prices for the Company's products are relatively substantial, a significant
portion of net sales for each quarter is attributable to a relatively small
number of units.
Test center revenue for the three months ended June 30, 1996 increased
$257,789 (184.7%) from $139,588 to $397,377, over the three months ended June
30, 1995. For the six months ended June 30, 1996, test center revenue increased
$468,683 (222.0%) from $211,038 to $679,721 over the same period in 1995. The
Company operated four test centers containing five systems during the three
month period ended June 30, 1996 compared to three test centers containing three
systems during the same period in 1995.
<PAGE>
Gross Margin
The gross margin in the three months ended June 30, 1996 was 38.0% compared
to a 38.5% gross margin for the same period in 1995. For the six months ended
June 30, 1996, the gross margin was 37.0% compared to a gross margin of 31.1% in
the same six month period in 1995. The increase in gross margin is directly
attributable to the increase in revenue from systems and test centers. As a
significant portion of costs are fixed, the increased revenue enabled the
Company to better cover its manufacturing overhead and the cost of opening and
operating it regionally located test centers.
Operating Expense
General and administrative expenses increased from $188,713 to $370,691 for
the three months ended June 30, 1996 compared to the same three month period in
1995. For the six months ended June 30, 1996 general & administrative cost
increased from $365,694 to $655,719 over the same six month period in 1995. The
increase reflects added costs for test center administration and legal costs
incurred from the Company's involvement in two litigation matters.
Sales and Marketing expenses increased $79,008 from $102,592 for the three
months ended June 30, 1995 to $181,600 for the three months ended June 30, 1996.
For the six months ended June 30, 1996, the increase was $122,391, from $216,303
to $338,694 when compared to the same six month period on 1995. These increases
were primarily due to increases in department headcount and sales and marketing
efforts in expanding the sales force over the comparable periods in 1995.
Research and development costs increased from $43,325 to $47,301 for the
comparable three months and also increased in the comparable six month periods
from $80,025 to $101,365. This increase is due to increased efforts in the
Company's research and development department.
Net interest expense in the prior year's three month period ending June 30,
1995 was $24,922. Net interest income for the three months ended June 30, 1996
was $19,284. The change from a net interest expense to a net interest income
was due to the extinguishment of all interest-bearing debt as well as interest
earned from the investment in marketable securities with the proceeds received
from the Company's initial public offering early in the second quarter of 1996.
Interest expense for the six months ended June 30, 1996 was $54,281
compared to $35,824 for the same period a year ago. This increase was largely
due to $41,748 of non-cash discount accretion expense affected by interest
income from the proceeds of the Initial public offering and extinguishment of
all outstanding debt at the closing of the Initial public offering on April 11,
1996.
<PAGE>
Liquidity and Capital Resources
During the first six months of 1996, the Company's operations used $871,083
of cash in operating activities, invested $304,009 for equipment and patents and
paid $21,623 in lease payments. The initial public offering resulted in
proceeds (after expenses) of $4,553,313. The company's debt, aggregating
$701,220, was retired in connection with the offering. Together, these
activities resulted in a cash increase of approximately $2,698,664 to a quarter
ending balance of $2,950,304. Included in the cash and equivalents balance
are short term investments, with an average 90 day maturity, aggregating
$1,962,340.
The Company completed its initial public offering on April 11, 1996 and
certain of the proceeds were used to retire outstanding debt. The majority of
these funds are being and will be invested in capital equipment and working
capital necessary to sustain the growth of its business.
In connection with the initial public offering, the Company's underwriter
had an option to purchase an over-allotment amount of 135,000 shares from the
Company. The underwriter exercised this option on May 8, 1996. The net cash to
the Company from the sale, after underwriter's discount and expenses, was
$445,500.
In May 1996, the Company entered into a line of credit arrangement with a
bank during the quarter. The credit line provides for draws up to $750,000;
bears interest at prime plus 1.5%, and is secured by virtually all of the assets
of the Company. The Company must maintain certain financial and other covenants
in order to draw amounts available under the line of credit. Through June 30,
1996 the Company has not drawn any amounts under the line of credit.
The Company expects to meet long term liquidity requirements through cash
flows generated by operations and existing cash balances. The Company is
dependent, however, on its ability to maintain and grow its systems and test
center businesses in order to generate adequate operating cash flows.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
There has been no change in status in the legal matters described in the
final prospectus dated April 8, 1996 which is a part of Registration Statement
No. 333-1454-D. There have been no additional legal matters subsequent to the
registration statement.
<PAGE>
Item 6 Exhibits and Reports on Form 10-QSB.
4.1* Form of certificate for shares of Common Stock.
10.1* QualMark Corporation 1993 Incentive Stock Option Plan.
10.2* QualMark Corporation 1996 Stock Option Plan.
10.3* Employment Agreement dated March 1, 1993 by and between QualMark
Corporation and W. Preston Wilson.
10.4* Employment Agreement dated August 15, 1994 by and between
QualMark Corporation and J. Wayne Farlow.
10.5* Agreement dated September 30, 1995 by and between QualMark
Corporation and Gregg K. Hobbs.
10.6* Agreement dated December 21, 1995 by and among QualMark
Corporation and certain security holders regarding exchange of
convertible securities.
10.7* Form of Amendment No. 1 to Agreement by and among QualMark
Corporation and certain security holders regarding exchange of
convertible securities.
10.8* Addendum to Agreement dated as of December 21, 1995 by and
between QualMark Corporation and Gregg K. Hobbs.
10.9* Form of Irrevocable Power of Attorney of Selling Shareholder.
10.10* Form of Letter of Transmittal and Custody Agreement by and
between American Securities Transfer, Incorporated and Gregg K.
Hobbs.
*Similarly denoted as an exhibit to registration statement 333-1454-D and
incorporated herein by reference.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QualMark Corporation
Date: August 2, 1996 By: /s/ W. PRESTON WILSON
-------------- ------------------------------------
W. Preston Wilson
President, Chief Executive Officer
/s/ VERNON W. SETTLE
------------------------------------
Vernon W. Settle
Director, Finance & Administration
Principal Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,950,304
<SECURITIES> 0
<RECEIVABLES> 1,156,312
<ALLOWANCES> 20,841
<INVENTORY> 561,080
<CURRENT-ASSETS> 4,771,414
<PP&E> 897,139
<DEPRECIATION> 278,534
<TOTAL-ASSETS> 5,459,467
<CURRENT-LIABILITIES> 657,347
<BONDS> 0
0
0
<COMMON> 6,156,914
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,459,467
<SALES> 2,291,291
<TOTAL-REVENUES> 2,291,291
<CGS> 1,442,308
<TOTAL-COSTS> 1,095,780
<OTHER-EXPENSES> (3,236)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,281
<INCOME-PRETAX> (297,842)
<INCOME-TAX> 0
<INCOME-CONTINUING> (297,842)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (297,842)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
