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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
For quarterly period ended September 30, 1997 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 November 3, 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 months ended
September 30, 1996 and 1997 and for the period from
July 1, 1993 (inception) to September 30, 1997...............................................2
Balance Sheets at June 30, 1997 and September 30, 1997..........................................3
Statements of Cash Flows for the three months ended
September 30, 1996 and 1997 and for the period from
July 1, 1993 (inception) to September 30, 1997...............................................4
Notes to Financial Statements...................................................................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................6
Signatures...................................................................................9
</TABLE>
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PART I. FINANCIAL INFORMATION
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1993
THREE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997
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Revenues $ 12,504 $ 5,500 $ 68,398
Costs and expenses:
Selling and marketing 93,962 122,728 1,142,359
General and administrative 269,042 215,499 3,408,281
Research and development 226,134 303,324 2,364,280
Depreciation and amortization 5,275 26,316 182,550
----------- ----------- -----------
Total costs and expenses 594,413 667,867 7,097,470
Other income (expense):
Interest income 25,808 27,765 224,899
Interest expense (29,959) (465) (118,105)
----------- ----------- -----------
Net loss $ (586,060) $ (635,067) $(6,922,278)
=========== =========== ===========
Net loss per share $ (.18) $ (.13)
=========== ===========
Weighted average number of common
shares outstanding 3,307,785 4,718,270
=========== ===========
</TABLE>
See accompanying notes.
2
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CD MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
BALANCE SHEETS
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JUNE 30, SEPTEMBER 30,
1997 1997
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ASSETS
Current assets:
Cash $ 1,119,242 $ 871,434
Accounts receivable 20,250 35,648
Short-term investments 1,803,701 1,108,014
Prepaid expenses and other current assets 50,295 90,623
----------- -----------
Total current assets 2,993,488 2,105,719
Computer equipment 368,775 389,779
Less accumulated depreciation (84,822) (111,138)
----------- -----------
283,953 278,641
Deposits 11,829 181,220
----------- -----------
Total assets $ 3,289,270 $ 2,565,580
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 83,989 $ 13,651
Accrued expenses 66,898 59,099
Unearned royalties 17,180 17,180
Current portion of capital lease obligations 33,325 33,325
----------- -----------
Total current liabilities 201,392 123,255
Capital lease obligations, net of current portion 23,803 13,317
Stockholders' 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, 4,718,270
shares issued and outstanding at June 30, 1997 and September 30, 1997 47,183 47,183
Capital in excess of par value 9,304,103 9,304,103
Deficit accumulated during the development stage (6,287,211) (6,922,278)
----------- -----------
Total stockholders' equity 3,064,075 2,429,008
----------- -----------
Total liabilities and stockholders' equity $ 3,289,270 $ 2,565,580
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</TABLE>
See accompanying notes.
3
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CD MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1993
THREE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997
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<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (586,060) $ (635,067) $(6,922,278)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,275 26,316 112,594
Amortization of debt issuance costs - - 139,909
Issuance of compensatory stock options - - 242,452
Interest expense associated with warrants issued in
connection with the Bridge Loan Agreement 4,167 - 29,167
Interest expense associated with warrants issued in
connection with the Private Placement 16,667 - 50,000
Changes in operating assets and liabilities:
Accounts receivable 2,496 (15,398) (35,648)
Prepaid expenses and other assets 25,263 (40,328) (90,623)
Deposits - (169,391) (181,220)
Debt issuance costs 69,954 - (139,909)
Accounts payable 12,293 (70,338) 13,651
Accrued expenses (178,724) (7,799) 61,182
Unearned royalties - - 17,180
----------- ----------- -----------
Net cash (used in) provided by operating activities (628,669) (912,005) (6,703,543)
INVESTING ACTIVITIES
Purchases of property and equipment (2,452) (21,004) (231,033)
Sale (purchase) of short-term investments - 695,687 (1,108,014)
----------- ----------- -----------
Net cash provided by (used in) investing activities (2,452) 674,683 (1,339,047)
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) - (1,000,000)
Principal payments on notes payable to related parties (171,666) - (180,000)
Principal payments on capital lease obligations (16,842) (10,486) (113,560)
Net cash proceeds from issuance of common stock 6,624,753 - 8,447,629
----------- ----------- -----------
Net cash provided by (used in) financing activities 5,561,245 (10,486) 8,914,024
----------- ----------- -----------
Net increase (decrease) in cash 4,930,124 (247,808) 871,434
Cash at beginning of period 296,012 1,119,242 -
----------- ----------- -----------
Cash at end of period $ 5,226,136 $ 871,434 $ 871,434
=========== =========== ===========
</TABLE>
See accompanying notes.
4
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1. SUMMARY OF 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 month period ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 1998. For further information, refer to the financial statements and
footnotes thereto included in the Company's 10-KSB for the year ended June 30,
1997, on file with the Securities and Exchange Commission.
RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
Per Share," which is required to be adopted for the Company's June 30, 1998
financial statements. At that time, the Company will be required to change the
method currently used to compute net loss per share and to restate all prior
periods. Under the new requirements for calculating primary net loss per share,
the dilutive effect of stock options will be excluded. The impact of SFAS No.
128 on the calculation of primary and fully diluted net loss per share on the
June 30, 1997 financial statements is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income," which is required to be adopted for the Company's June
30, 1999 financial statements. The Statement establishes new rules for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income is the total of
net income and all other nonowner changes in equity. The impact of SFAS No. 130
on the June 30, 1999 financial statements is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 131 ("SFAS No. 131"),
"Disclosures about Segments of an Enterprise and Related information," which is
required to be adopted for the Company's June 30, 1999 financial statements.
SFAS No. 131 requires an enterprise to report certain additional financial and
descriptive information about its reportable operating segments. The impact of
SFAS No. 131 on the June 30, 1999 financial statements is not expected to be
material.
5
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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 judgment 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 e-commerce services including the CD-MAX and
NET-MAX systems 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 September 30, 1997, the
Company recognized revenues from operations of $68,398 and as of September 30,
1997 had an accumulated deficit of $6,922,278. 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 who 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
use of the CD-MAX System began in August 1995, and to date, a total of $68,398
in revenues have been generated from all uses of the system. The first
commercial use of the NET-MAX system was in September 1997 and to date no
revenues have been received by the Company.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996
REVENUES
For the three months ended September 30, 1997, the Company recognized
revenues of $5,500 as license fee income pursuant to its agreements with
publishers. For the three months ending September 30, 1996, the Company
recognized revenues of $12,504 from license fees pursuant to its agreements with
publishers. These revenues consisted primarily of software development and
licensing fees.
6
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OPERATING EXPENSES
The Company's operating expenses were $667,867 for the three months
ended September 30, 1997, compared to $594,413 for the three months ended
September 30, 1996. This increase of $73,454 or 12% was attributable primarily
to the following factors:
Sales and Marketing. Selling expenses were $122,728 for the three
months ended September 30, 1997, compared to $93,962 for the three months ended
September 30, 1996. This increase of $28,766 or 31% was attributable primarily
to increased expenses for two additional marketing professionals and increased
advertising costs.
General and Administrative. General and administrative expenses were
$215,499 for the three months ended September 30, 1997, compared to $269,042 for
the three months ended September 30, 1996. This decrease of $53,543 or 20% was
primarily due to a decrease of $69,954 in debt issuance costs associated with a
private placement financing, and was offset by a $10,447 increase in
administrative salaries due to the hiring of two administrative personnel.
Research and Development. Research and development expenses were
$303,324 for the three months ended September 30, 1997, compared to $226,134 for
the three months ended September 30, 1996. This increase of $77,190 or 34% was
primarily attributed to a $48,155 increase in salaries and a $30,426 increase in
consultants.
Due to the above, the Company had a net loss of $635,067 for the
three months ended September 30, 1997, compared to a net loss of $586,060 for
the three months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has no external sources of liquidity and the Company has
no knowledge of any trends, events, or uncertainties that are likely to impact
short-term or long-term liquidity.
The Company is currently spending approximately $225,000 per month
and, as of September 30, 1997, had cash, cash equivalents and short-term
investments of approximately $1.9 million.
Unless revenues increase significantly, the Company anticipates that
it will have to raise additional funds during fiscal year 1998. There is no
certainty that the Company will be able to raise such funds. Should the Company
be unable to raise the additional Capital, the Company must significantly reduce
its operating expense and/or redeem its redeemable warrants.
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 September 30, 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 September 30, 1997 an additional $1,783,701 of the net
proceeds have been used to purchase short-term certificates of deposit.
7
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The Company has experienced net losses from operations since its
inception and at September 30, 1997 had an accumulated deficit of $6,922,278.
Other than routine trade payables, at September 30, 1997 the Company's primary
liabilities are accrued expenses of $59,099 for employee fringe benefit
accruals.
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
The Company expects that its existing funds, interest income, and
committed license fees and research payments from existing collaboration
agreements will be sufficient to fund the Company's operations for the next two
quarterly periods. The Company's future capital requirements and the adequacy of
its available funds will depend on many factors, including scientific progress
in its research and development programs, the magnitude of those programs, the
ability of the Company to establish collaborative and licensing arrangements,
the cost involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and competing technological and market developments.
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
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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: November 14, 1997 /s/ ROBERT A. WIEDEMER
-----------------------------
Robert A. Wiedemer
President, Chief Executive Officer,
and Chairman of Board
(Principal Executive Officer)
Date: November 14, 1997 /s/ PHILIP J. GROSS
------------------------------
Philip J. Gross,
Secretary Treasurer, VicePresident-
Chief Financial Officer, and Director
(Principal Accounting Officer)
9
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10 KSB FILED WITH THE SECURITIES & EXCHANGE COMMISSION
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 871,434
<SECURITIES> 1,108,014
<RECEIVABLES> 35,648
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,105,719
<PP&E> 389,779
<DEPRECIATION> (111,138)
<TOTAL-ASSETS> 2,565,580
<CURRENT-LIABILITIES> 123,255
<BONDS> 0
0
0
<COMMON> 47,183
<OTHER-SE> 2,381,825
<TOTAL-LIABILITY-AND-EQUITY> 2,565,580
<SALES> 5,500
<TOTAL-REVENUES> 5,500
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 465
<INCOME-PRETAX> (635,067)
<INCOME-TAX> 0
<INCOME-CONTINUING> (635,067)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (635,067)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> 0
</TABLE>
