<PAGE> 1
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended December 31, 1996 Commission File Number 0-21147
CD-MAX, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 87-0378128
(State of incorporation) (I.R.S. Employer Identification Number)
11480 Sunset Hills Road, Suite 110, Reston, VA 20190-5208
(Address of principal executive offices and zip code)
(703) 925-3400
(Issuer's telephone Number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 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, $.01 par value 4,718,270 shares
(Class) (Outstanding at February 13, 1997)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three and six months ended
December 31, 1995 and 1996 and for the period from
July 1, 1993 (inception) to December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Balance Sheets at June 30, 1996 and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows for the six months ended
December 31, 1995 and 1996 and for the period from
July 1, 1993 (inception) to December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
CD-MAX, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1993
THREE MONTHS ENDED SIX MONTHS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1995 1996 1996
----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues $ 3,500 $ 15,000 $ 8,500 $ 27,504 $ 43,398
Costs and expenses:
Selling 47,971 119,231 92,938 213,224 654,721
General and administrative 257,347 224,126 431,355 498,323 2,624,620
Research and development 117,865 262,966 217,926 483,915 1,523,294
Depreciation and
amortization 2,591 15,846 4,108 21,121 104,522
----------------- ---------------- ----------------- ---------------- -----------------
Total costs and expenses 425,774 622,169 746,327 1,216,583 4,907,157
Other income (expense):
Interest income 4,074 64,401 10,733 90,210 108,305
Interest expense (1,120) (7,287) (1,627) (37,246) (108,404)
----------------- ---------------- ----------------- ---------------- -----------------
Net loss $ (419,320) $ (550,055) $ (728,721) $ (1,136,115) $ (4,863,858)
================= ================ ================= ================ =================
Net loss per share $ (.22) $ (.12) $ (.39) $ (.28)
================= ================ ================= ================
Weighted average number of
common shares outstanding 1,936,943 4,718,270 1,861,719 4,023,769
================= ================ ================= ================
</TABLE>
See accompanying notes.
2
<PAGE> 4
CD MAX, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 296,012 $ 4,606,490
Accounts receivable 5,994 55,514
Short-term investments 20,000 20,000
Prepaid expenses 25,263 -
------------------- --------------------
Total current assets 347,269 4,682,004
Computer equipment 67,518 190,882
Less accumulated depreciation (13,446) (34,567)
------------------- --------------------
54,072 156,315
Deposits 11,829 11,829
Debt issuance costs, net 69,954 -
------------------- --------------------
Total assets $ 483,124 $ 4,850,148
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 48,861 $ 101,768
Accrued expenses 341,220 171,036
Unearned royalties 17,180 17,180
Notes payable 875,000 -
Notes payable to related parties 171,666 -
Current portion of capital lease obligations 23,622 30,335
------------------- --------------------
Total current liabilities 1,477,549 320,319
Capital lease obligations, net of current portion 20,972 42,401
Stockholders' equity (deficit):
Preferred stock, $1.00 par value; 1,000,000 shares authorized; no shares
issued and outstanding - -
Common Stock, $.01 par value; 10,000,000 shares authorized, 2,047,300 and
4,718,270 shares issued and outstanding at June 30, 1996 and December
31, 1996, respectively 20,473 47,183
Capital in excess of par value 2,691,873 9,304,103
Deficit accumulated during the development stage (3,727,743) (4,863,858)
------------------- --------------------
Total stockholders' equity (deficit) (1,015,397) 4,487,428
------------------- --------------------
Total liabilities and stockholders' equity (deficit) $ 483,124 $ 4,850,148
=================== ====================
</TABLE>
See accompanying notes.
3
<PAGE> 5
CD MAX, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1993
SIX MONTHS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1995 1996 1996
---------------- ------------------ -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (728,721) $ (1,136,115) $ (4,863,858)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,108 21,121 104,522
Issuance of compensatory stock options - - 242,452
Interest expense associated with warrants issued in
connection with the Bridge Loan Agreement - 4,167 25,000
Interest expense associated with warrants issued in
connection with the Private Placement - 16,667 41,667
Changes in operating assets and liabilities:
Accounts receivable - (49,520) (55,514)
Prepaid expenses 5,012 25,263 -
Deposits (5,207) - (11,829)
Debt issuance costs - 69,954 (69,955)
Accounts payable (17,113) 52,907 101,768
Accrued expenses 48,711 (170,184) 173,119
Unearned royalties - - 17,180
---------------- ------------------ -----------------
Net cash used in operating activities (693,210) (1,165,740) (4,295,448)
INVESTING ACTIVITIES
Purchases of property and equipment - (70,546) (71,631)
Purchase of short-term investments - - (20,000)
---------------- ------------------ -----------------
Net cash used in investing activities - (70,546) (91,631)
FINANCING ACTIVITIES
Net proceeds from notes payable - - 1,655,500
Net proceeds from issuance of warrants - - 104,455
Principal payments on notes payable - (875,000) (975,000)
Principal payments on notes payable to related parties - (171,666) (171,666)
Principal payments on capital lease obligations (7,124) (24,676) (46,515)
Net cash proceeds from issuance of common stock 525,000 6,618,106 8,426,795
---------------- ------------------ -----------------
Net cash provided by financing activities 517,876 5,546,764 8,993,569
---------------- ------------------ -----------------
Net increase (decrease) in cash (175,334) 4,310,478 4,606,490
Cash at beginning of period 301,856 296,012 -
---------------- ------------------ -----------------
Cash at end of period $ 126,522 $ 4,606,490 $ 4,606,490
================ ================== =================
</TABLE>
See accompanying notes.
4
<PAGE> 6
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, we do not include all of the information and
footnotes required by generally accepted accounting principles (consisting of
normal recurring accruals) considered necessary for a fair presentation.
Operating results for the three and six month periods ended December 31, 1996
are not necessarily indicative of the results that may be expected for the year
ended June 30, 1997. For further information, refer to the financial
statements and footnotes thereto included in the Company's registration
statement on Form SB-2 for the year ended June 30, 1996, on file with the
Securities and Exchange Commission.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a
maturity of less than three months to be cash equivalents. The Company's
short-term investments may consist of certificates of deposit, banker's
acceptances and repurchase agreements of major banks and institutions,
obligations of the Treasury and U.S. Government agencies, and commercial paper,
having maturities of less than three months, or money market mutual funds
invested in the foregoing described investments. These securities are recorded
at cost, which approximates fair value.
PRODUCT DEVELOPMENT COSTS
Through December 31, 1996, the Company expensed its product
development costs as research and development costs. It will continue to
expense such costs until such time as the economic realizability of the
Company's software is established.
2. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
In August 1996, the Company sold in a public offering 1,322,500 Units, each
Unit consisting of two shares of Common Stock and one Redeemable Warrant, which
generated net proceeds of approximately $6.6 million to the Company.
5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
This Report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties and represent
management's judgement as of the date of this Form 10-QSB. The Company's
actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed under the caption "Risk Factors" in the
Company's Prospectus, dated August 16, 1996, issued in conjunction with the
Company's registration statement on Form SB-2, on file with the Securities and
Exchange Commission. The Company disclaims any intent or obligation to update
these forward-looking statements.
OVERVIEW
The Company is a development stage company engaged in the development
and marketing of the CD-MAX and NET-MAX technologies to publishers of digitally
stored information. The Company commenced operations in July 1993. Prior
thereto, the principals of the Company were involved in the development of the
company's technology, development of the business plan and arrangement for the
initial capitalization of the Company.
From July 1, 1993 (inception) through December 31, 1996, the Company
recognized revenues from operations of $43,398 and as of December 31, 1996 had
an accumulated deficit of $4,863,858. The Company has continued to operate at
a loss since inception and expects to incur significant additional operating
losses until the Company generates significant revenues from operations which
are sufficient to cover its monthly operating expenses.
The Company's strategy is to achieve market acceptance of the CD-MAX
and NET-MAX Systems with publishers of professional, general corporate, library
and educational materials who use CD-ROMs and the Internet as the method of
information distribution. The Company has entered into agreements with seven
information publishers pursuant to which it will receive product development,
transaction and licensing fees (which represent a percentage of the revenue
billed by the Company on behalf of the publisher), provided that the publishers
are successful in marketing their information. The first commercial test of
the CD-MAX System began in August 1995, and to date, a total of $43,398 in
revenues have been generated from all uses of the system.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH THREE MONTHS ENDED DECEMBER
31, 1995
REVENUES
For the three months ended December 31, 1996, the Company recognized
revenues of $15,000 as license fee income pursuant to its agreements with
publishers. For the three months ending December 31, 1995, the Company
recognized revenues of $3,500 from license fees pursuant to its agreements with
publishers. These revenues consisted primarily of software development and
licensing fees.
OPERATING EXPENSES
The Company's operating expenses were $622,169 for the three months ended
December 31, 1996, compared to $425,774 for the three months ended December 31,
1995. This increase of $196,395 or 46% was attributable primarily to the
following factors:
6
<PAGE> 8
Sales and Marketing. Selling expenses were $119,231 for the three
months ended December 31, 1996, compared to $47,971 for the three months ended
December 31, 1995. This increase of $71,260 or 149% was attributable primarily
to increased expenses for two additional marketing professionals and increased
advertising costs.
General and Administrative. General and administrative expenses were
$224,126 for the three months ended December 31, 1996, compared to $257,347 for
the three months ended December 31, 1995. This decrease of $33,221 or 13% was
primarily due to private placement and legal fees which were $39,659 in 1995
and $4,769 in 1996.
Research and Development. Research and development expenses were
$262,966 for the three months ended December 31, 1996, compared to $117,865 for
the three months ended December 31, 1995. This increase of $145,101 or 123%
was primarily attributed to the increase of eight additional personnel in
software development and operations. This increase in staff also resulted in a
proportionate increase of equipment and related expenses.
Due to the above, the Company had a net loss of $550,055 for the three
months ended December 31, 1996, compared to a net loss of $419,320 for the
three months ended December 31, 1995.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH SIX MONTHS ENDED DECEMBER 31,
1996
REVENUES
For the six months ended December 31, 1996, the Company recognized
revenues of $27,504 as license fee income pursuant to its agreements with
publishers. For the six months ending December 31, 1995, the Company
recognized revenues of $8,500 from license fees pursuant to its agreements with
publishers. These revenues consisted primarily of software development and
licensing fees.
OPERATING EXPENSES
The Company's operating expenses were $1,216,583 for the six months ended
December 31, 1996, compared to $746,327 for the six months ended December 31,
1995. This increase of $470,256 or 63% was attributable primarily to the
following factors:
Sales and Marketing. Selling expenses were $213,224 for the six months
ended December 31, 1996, compared to $92,938 for the six months ended December
31, 1995. This increase of $120,286 or 129% was attributable primarily to
increased expenses for an additional marketing professional and other expenses
associated with the design and production of new marketing literature.
General and Administrative. General and administrative expenses were $498,323
for the six months ended December 31, 1996, compared to $431,355 for the six
months ended December 31, 1995. This increase of $66,968 or 16% was primarily
due to a $69,955 increase due to debt issuance amortization associated with a
private placement financing.
7
<PAGE> 9
Research and Development. Research and development expenses were
$483,915 for the six months ended December 31, 1996, compared to $217,926 for
the six months ending December 31, 1995. This increase of $265,989 or 122% was
primarily attributed to the increase of eight additional personnel in software
development and operations. This increase in staff also resulted in a
proportionate increase of equipment and related expenses.
Due to the above, the Company had a net loss of $1,136,115 for the six months
ended December 31, 1996, compared to a net loss of $728,721 for the six months
ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced net losses from operations since its
inception and at December 31, 1996 had an accumulated deficit of $4,863,858.
Other than routine trade payables, at December 31, 1996 the Company's primary
liabilities are accrued expenses of $118,632 which represents back salary due
to management, and fringe benefit accruals of $52,404.
The Company has financed its operations primarily through funds
obtained from the sale of Common Stock. On August 16, 1996 the Company
completed a Public Offering of 1,322,500 Units, each unit consisting of two
shares of Common Stock and one Redeemable Warrant. The gross proceeds to the
Company were approximately $8.1 million; as of December 31, 1996, $1,454,726 of
the total offering proceeds were used to pay off private placement notes
payable and related party notes payable and related offering expenses. The net
proceeds from this offering will be used to support continuing operations and
research and development. As of December 31, 1996 an additional $900,000 of
the proceeds have been used to purchase short-term certificates of deposit.
The Company expects the proceeds from the offering to be sufficient to fund its
operations for at least twelve months.
The Company has no material commitments other than its facility,
equipment leases, and employment agreements with four of its senior executives
which call for annual salaries of approximately $64,000 to $89,500 per year per
individual.
CERTAIN BUSINESS RISKS
There can be no assurance that the Company's services will be accepted
by the marketplace in a successful and timely manner; that the Company will
achieve positive cashflow to fund its operations prior to exhausting its
capital resources; or that the Company will be able to raise additional
capital, should it be required.
A description of these and other risks relating to the Company's
business is set forth under the caption "Risk Factors" in the Company's
Prospectus, dated August 16, 1996, issued in conjunction with the Company's
registration statement on Form SB-2, on file with the Securities and Exchange
Commission.
8
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CD-MAX, Inc.
--------------------------------------
(Registrant)
Date: February 13, 1996 /s/ ROBERT A. WIEDEMER
-------------------------------------
Robert A. Wiedemer
President, Chief Executive Officer,
and Chairman of Board
(Principal Executive Officer)
Date: February 13, 1996 /s/ PHILIP J. GROSS
-------------------------------------
Philip J. Gross,
Secretary Treasurer, VicePresident-
Chief Financial Officer, and Director
(Principal Accounting Officer)
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q-SB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-30-1996<F1>
<CASH> 4,606,490
<SECURITIES> 20,000
<RECEIVABLES> 55,514
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,682,004
<PP&E> 190,882
<DEPRECIATION> 34,567
<TOTAL-ASSETS> 4,850,148
<CURRENT-LIABILITIES> 320,319
<BONDS> 0
0
0
<COMMON> 47,183
<OTHER-SE> 4,440,245
<TOTAL-LIABILITY-AND-EQUITY> 4,850,148
<SALES> 15,000
<TOTAL-REVENUES> 15,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,287
<INCOME-PRETAX> (550,055)
<INCOME-TAX> 0
<INCOME-CONTINUING> (550,055)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (550,055)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> 0
<FN>
<F1>QUARTERLY PERIOD ENDED DECEMBER 30, 1996
</FN>
</TABLE>
