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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
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For quarterly period ended March 31, 1997 Commission File Number 0-21147
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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 May 13, 1997)
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TABLE OF CONTENTS
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three and nine months ended
March 31, 1996 and 1997 and for the period from
July 1, 1993 (inception) to March 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Balance Sheets at June 30, 1996 and March 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows for the nine months ended
March 31, 1996 and 1997 and for the period from
July 1, 1993 (inception) to March 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
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PART I. FINANCIAL INFORMATION
CD-MAX, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
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PERIOD FROM
JULY 1, 1993
THREE MONTHS ENDED NINE MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31, MARCH 31,
1996 1997 1996 1997 1997
----------------- --------------- --------------- ------------------- ---------------
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Revenues $ - $ 9,500 $ 8,500 $ 37,004 $ 52,898
Costs and expenses:
Selling 58,164 132,022 151,102 345,246 786,743
General and administrative 37,259 255,807 468,614 754,130 2,880,427
Research and development 208,886 248,169 426,812 732,084 1,771,463
Depreciation and amortization 2,591 15,896 6,699 37,017 120,418
--------------- ------------- -------------- --------------- -------------
Total costs and expenses 306,900 651,894 1,053,227 1,868,477 5,559,051
Other income (expense):
Interest income 583 46,373 11,316 136,583 154,678
Interest expense (2,084) (6,137) (3,711) (43,383) (114,541)
--------------- ------------- -------------- --------------- -------------
Net loss $ (308,401) $ (602,158) $ (1,037,122) $ (1,738,273) $ (5,466,016)
=============== ============= ============== =============== =============
Net loss per share $ (.15) $ (.13) $ (.54) $ (.41)
=============== ============= ============== ===============
Weighted average number of
common shares outstanding 2,047,300 4,718,270 1,923,354 4,252,726
=============== ============= ============== ===============
=============== ============= ============== ===============
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See accompanying notes.
2
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CD MAX, INC.
(A Development Stage Company)
BALANCE SHEETS
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JUNE 30, MARCH 31,
1996 1997
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ASSETS
Current assets:
Cash $ 296,012 $ 3,750,162
Accounts receivable 5,994 73,874
Short-term investments 20,000 20,000
Prepaid expenses 25,263 -
---------------- -----------------
Total current assets 347,269 3,844,036
Computer equipment 67,518 320,814
Less accumulated depreciation (13,446) (50,869)
---------------- -----------------
54,072 269,945
Deposits 11,829 11,829
Debt issuance costs, net 69,954 -
---------------- -----------------
Total assets $ 483,124 $ 4,125,810
================ =================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 48,861 $ 78,220
Accrued expenses 341,220 84,283
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 25,357
---------------- -----------------
Total current liabilities 1,477,549 205,040
Capital lease obligations, net of current portion 20,972 35,500
Stockholders' (deficit) equity:
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 March
31, 1997, 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) (5,466,016)
---------------- -----------------
Total stockholders' (deficit) equity (1,015,397) 3,885,270
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Total liabilities and stockholders' (deficit) equity $ 483,124 $ 4,125,810
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See accompanying notes.
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CD MAX, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
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PERIOD FROM
JULY 1, 1993
NINE MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31,
1996 1997 1997
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OPERATING ACTIVITIES
Net loss $ (1,037,122) $ (1,738,273) $ (5,466,016)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 6,699 37,017 120,418
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 - (67,880) (73,874)
Prepaid expenses (19,988) 25,263 -
Deposits (12,006) - (11,829)
Debt issuance costs - 69,954 (69,955)
Accounts payable (20,007) 29,359 78,220
Accrued expenses 120,154 (256,937) 86,366
Unearned royalties - - 17,180
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Net cash used in operating activities (962,270) (1,880,663) (5,010,371)
INVESTING ACTIVITIES
Purchases of property and equipment - (199,337) (200,422)
Purchase of short-term investments - - (20,000)
---------------- ---------------- ----------------
Net cash used in investing activities - (199,337) (220,422)
FINANCING ACTIVITIES
Net proceeds from notes payable 175,000 - 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 (10,151) (37,290) (59,129)
Net cash proceeds from issuance of common stock 525,000 6,618,106 8,426,795
---------------- ---------------- ----------------
Net cash provided by financing activities 689,849 5,534,150 8,980,955
---------------- ---------------- ----------------
Net (decrease) increase in cash (272,421) 3,454,150 3,750,162
Cash at beginning of period 301,856 296,012 -
---------------- ---------------- ----------------
Cash at end of period $ 29,435 $ 3,750,162 $ 3,750,162
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See accompanying notes.
4
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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 nine month periods ended March 31, 1997 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, and its subsequently
files 10-QSBs 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 March 31, 1997, 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.
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.
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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 March 31, 1997, the Company
recognized revenues from operations of $52,898 and as of March 31, 1997 had an
accumulated deficit of $5,466,016. 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, technical, corporate, library
and educational materials which use CD-ROMs and/or 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996
REVENUES
For the three months ended March 31, 1997, the Company recognized revenues
of $9,500 as license fee income pursuant to its agreements with publishers.
These revenues consisted primarily of software development and licensing fees.
For the three months ending March 31, 1996, the Company recognized no revenues.
OPERATING EXPENSES
The Company's operating expenses were $651,894 for the three months ended
March 31, 1997, compared to $306,900 for the three months ended March 31, 1996.
This increase of $344,944 or 112% was attributable primarily to the following
factors:
Sales and Marketing. Selling expenses were $132,022 for the three months
ended March 31, 1997, compared to $58,164 for the three months ended March 31,
1996. This increase of $73,858 or 127% was attributable primarily to increased
expenses for an additional marketing professionals and increased advertising
and marketing costs.
5
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General and Administrative. General and administrative expenses were
$255,807 for the three months ended March 31, 1997, compared to $37,259 for the
three months ended March 31, 1996. This increase of $218,548 or 587% was
primarily due to a $36,193 increase in payroll and employee benefits with the
addition of two new administrative staff and salary increases, a $35,518
increase in financial public relations, a $16,479 increase in financial filing
fees, a $14,900 increase in travel, a $13,140 increase in accounting fees, a
$10,328 increase in business insurance, and a $9,037 increase in consulting
fees.
Research and Development. Research and development expenses were $248,169
for the three months ended March 31, 1997, compared to $208,886 for the three
months ended March 31, 1996. This increase of $39,283 or 19% was primarily
attributed to the increase of three additional personnel in software
development and operations. This increase in staff also resulted in a
proportionate increase of related expenses.
Due to the above, the Company had a net loss of $602,158 for the three
months ended March 31, 1997, compared to a net loss of $308,401 for the three
months ended March 31, 1996.
NINE MONTHS ENDED MARCH 31, 1997 COMPARED WITH NINE MONTHS ENDED MARCH 31, 1997
REVENUES
For the nine months ended March 31, 1997, the Company recognized revenues
of $37,004 as license fee income pursuant to its agreements with publishers.
For the nine months ending March 31, 1996, 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 $1,868,477 for the nine months ended
March 31, 1997, compared to $1,053,227 for the nine months ended March 31,
1996. This increase of $815,250 or 77% was attributable primarily to the
following factors:
Sales and Marketing. Selling expenses were $345,246 for the nine months
ended March 31, 1997, compared to $151,102 for the nine months ended March 31,
1996. This increase of $194,144 or 128% 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
$754,130 for the nine months ended March 31, 1997, compared to $468,614 for the
nine months ended March 31, 1996. This increase of $285,516 or 61% was
primarily due to a $129,747 increase in payroll and employee benefits with the
addition of two new administrative staff and salary increases, a $46,503
increase in financial public relations, a $44,890 increase in business
insurance, a $32,951 increase in accounting fees, and a $8,594 increase in
phone charges. These increases were offset by a $50,126 decrease in
administrative office leases which were reclassed to Research and Development.
7
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Research and Development. Research and development expenses were $732,084
for the nine months ended March 31, 1997, compared to $426,812 for the nine
months ending March 31, 1996. This increase of $305,272 or 72% was primarily
attributed to the increase of three additional personnel in software
development and operations. This increase in staff also resulted in a
proportionate increase of equipment and related expenses. Office lease expense
also increased $50,126 since it was reclassed to Research and Development from
General and Administrative Expense.
Due to the above, the Company had a net loss of $1,738,273 for the
nine months ended March 31, 1997, compared to a net loss of $1,037,122 for the
nine months ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced net losses from operations since its inception
and at March 31, 1997 had an accumulated deficit of $5,466,016. Other than
routine trade payables, at March 31, 1997 the Company's primary liabilities are
accrued expenses of $84,283, which represents accrued payables and fringe
benefit accruals of $57,867.
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 March 31, 1997, $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 are being used to support continuing operations and research
and development. As of March 31, 1997 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.
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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: May 13, 1996 /s/ ROBERT A. WIEDEMER
------------------------------------------
Robert A. Wiedemer
President, Chief Executive Officer,
and Chairman of Board
(Principal Executive Officer)
Date: May 13, 1996 /s/ PHILIP J. GROSS
------------------------------------------
Philip J. Gross,
Secretary Treasurer, VicePresident-
Chief Financial Officer, and Director
(Principal Accounting Officer)
9
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q-SB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 3,750,162
<SECURITIES> 20,000
<RECEIVABLES> 73,874
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,844,036
<PP&E> 320,814
<DEPRECIATION> (50,869)
<TOTAL-ASSETS> 4,125,810
<CURRENT-LIABILITIES> 205,040
<BONDS> 0
0
0
<COMMON> 47,183
<OTHER-SE> 3,858,087
<TOTAL-LIABILITY-AND-EQUITY> 4,125,810
<SALES> 9,500
<TOTAL-REVENUES> 9,500
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,137
<INCOME-PRETAX> (602,158)
<INCOME-TAX> 0
<INCOME-CONTINUING> (602,158)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (602,158)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> 0
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