<PAGE> 1
Form 10QSB for REGISTRY MAGIC INC filed on Jul 13 1998
U.S. 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 October 31, 1998
--------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
------------- --------------
Commission File Number: 0-24283
REGISTRY MAGIC INCORPORATED
- -------------------------------------------------------------------------------
(Exact name of Small Business Issuer as specified in its Charter)
FLORIDA 65-0623427
- ------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One South Ocean Boulevard, Suite 206, Boca Raton, Florida 33432
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(561) 367-0408
-------------------------------
(Issuer's telephone number)
- -------------------------------------------------------------------------------
(Former Name, former address and former fiscal year, if changed since
last Report.)
Check mark whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether 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
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 5,813,000 shares of Common
Stock as of December 10, 1998.
<PAGE> 2
REGISTRY MAGIC INCORPORATED
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets - October 31, 1998 (unaudited) and
July 31, 1998
Condensed Statements of Operations (unaudited) for the Three
Months Ended October 31, 1998 and 1997
Condensed Statements of Cash Flows (unaudited) for the Three
Months Ended October 31, 1998 and 1997
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis and Plan of
Operation
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
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REGISTRY MAGIC INCORPORATED
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 8,647,067 $ 10,252,511
Accounts receivable ........................................................... 105,660 124,060
Inventories ................................................................... 283,777 238,494
Other current assets .......................................................... 58,824 43,621
------------ ------------
Total current assets ............................................... 9,095,328 10,658,686
Property and equipment, net ...................................................... 436,669 337,209
Deferred patent costs ............................................................ 36,484 36,073
Other assets ..................................................................... 10,257 21,092
------------ ------------
$ 9,578,738 $ 11,053,060
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ...................................... $ 297,497 $ 708,896
Notes payable - related party ................................................. 50,000 50,000
------------ ------------
Total current liabilities ......................................... 347,497 758,896
------------ ------------
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares
outstanding...................................................................
Common stock, $.001 par value; 30,000,000 shares authorized; 5,813,000 and
5,813,000 shares issued and outstanding respectively ......................... 5,813 5,813
Additional paid-in capital ..................................................... 14,013,881 14,013,881
Accumulated deficit ............................................................ (4,788,453) (3,725,530)
------------ ------------
Total shareholders' equity ........................................ 9,231,241 10,294,164
------------ ------------
$ 9,578,738 $ 11,053,060
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
2
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Registry Magic Incorporated
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
October 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Consulting fees ........................... $ -- $ 113,384
Product sales ............................. 282,038 --
------------ ------------
Total income ............................ 282,038 113,384
Costs and expenses:
Cost of goods sold ........................ 103,696 --
General and administrative ................ 749,458 220,012
Research and development .................. 372,121 188,794
Royalty expense ........................... 200,000 --
Depreciation and amortization ............. 40,349 20,047
Interest expense (income), net ............ (120,663) 77
------------ ------------
Total costs and expenses ................ 1,344,961 428,930
------------ ------------
Net loss ................................ $ (1,062,923) $ (315,546)
============ ============
Weighted average shares
outstanding ........................... 5,813,000 3,793,000
Net loss per common share (basic and
diluted) .............................. $ (.18) $ (.08)
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
3
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REGISTRY MAGIC INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the
Three Months Ended
October 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating Activities:
Net Loss ................................... $ (1,062,923) $ (315,546)
Adjustments to reconcile net loss to
net cash in operating activities:
Depreciation and amortization .............. 40,349 20,047
Decrease in accounts receivable ............ 18,400 5,140
Increase in inventories .................... (45,283) --
Increase in other current assets ........... (15,203) (3,836)
Decrease in other assets ................... 10,835 --
Decrease in accounts
payable and accrued expenses ............. (411,399) (16,526)
Decrease in deferred revenue ............... -- (12,500)
------------ ------------
Net cash used in operating
activities ..................... (1,465,224) (323,221)
------------ ------------
Investing Activities:
Purchase of equipment ...................... (139,809) (50,811)
Proceeds from sale of equipment ............ -- 6,812
Deferred patent costs ...................... (411) (612)
------------ ------------
Net cash used in investing
activities ...................... (140,220) (44,611)
------------ ------------
Financing Activities:
Payment of deferred offering costs ......... -- (27,002)
------------ ------------
Net cash from financing activities -- (27,002)
------------ ------------
Net decrease in cash ............. (1,605,444) (394,834)
Cash beginning of period ....................... 10,252,511 928,680
------------ ------------
Cash end of period ......................... $ 8,647,067 $ 533,846
============ ============
Supplemental disclosures:
Cash paid for interest: .................... $ 76 $ 17,945
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
4
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Registry Magic Incorporated
Notes to Condensed Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared in
accordance with generally accepted accounting principals for interim financial
information and with instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principals for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The results of
operations for the three-month period ended October 31, 1998 are not
necessarily indicative of the results to be expected for the year ended July
31, 1999. The condensed interim financial statements should be read in
conjunction with the audited financial statements and notes, contained in the
Company's Annual Report on Form 10-KSB for the year end July 31, 1998.
2. INVENTORIES
Inventories are stated as the lower of cost or market. Cost is
determined using the first-in first-out method.
3. NET LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share," which simplifies the standards for computing
earnings per share ("EPS") previously found in APB No. 15, "Earnings Per
Share," It replaces the presentation of primary EPS with a presentation of
basis EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the diluted
EPS computation. The Company adopted SFAS No. 128 in January 1998 and its
implementation did not have a material effect on the financial statements. EPS
has been restated for all prior periods presented.
Net loss per common share (basic and diluted) is based on the net loss
divided by the weighted average number of common shares outstanding during each
year.
The Company's potentially issuable shares of common stock pursuant to
outstanding stock purchase options and warrants (totaling 668,026 with prices,
ranging from $0.50 to $7.00) are excluded from the Company's diluted
computation as their effect would be antidilutive to the Company's net loss.
4. COMMITMENTS AND CONTINGENCIES
The Company has entered into a Licensing Agreement and Distribution
Agreement with Veritel Corporation. Such Agreements grant the Company rights to
use certain software object code and source code in the development of its
products in exchange of non-refundable payments totaling $500,000 for
non-recurring engineering fees, derivative rights and distribution rights. As
of October 31, 1998, the Company paid Veritel Corporation a total $200,000. The
remaining $300,000 was paid in November, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
THIS ANNUAL REPORT FORM 10-QSB CONTAINS "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS,
INCLUDED IN OR INCORPORATED BY REFERENCE INTO THIS FORM 10-QSB, ARE
FORWARD-LOOKING STATEMENTS. IN ADDITION, WHEN USED IN THIS DOCUMENT,
THE WORDS "ANTICIPATE," "ESTIMATE," "PROJECT" AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES
ANDASSUMPTIONS INCLUDING THOSE RISKS DESCRIBED IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-KSB AS WELL AS IN THIS REPORT ON FORM 10-QSB SHOULD
ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED. ALTHOUGH THE
COMPANY BELIEVES THAT THE EXPECTATIONS WE INCLUDE IN SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT ASSURE YOU THAT
THESE EXPECTATIONS WILL PROVE TO BE CORRECT.
The following discussion and analysis should be read in conjunction
with the financial statements of the Company and the notes thereto appearing
elsewhere.
OVERVIEW
Registry Magic Incorporated, was organized to design,
develop, commercialize and market proprietary products and professional services
that exploit recent advances in speech recognition technologies. The
products currently available or under development by the Company have the
objective to enable a user to speak into a telephone or to a computer in a
natural conversational manner and, in turn, have the product listen, understand
and respond by performing tasks or retrieving information.
The Company's products and services, among other attributes, will
(i) substantially eliminate the need for touch-tone menus, (ii) allow for
the automation of telephone systems internationally where touch-tone may not
be prevalent, (iii) reduce operational costs by performing repetitive tasks of
live employees and (iv) allow for the access of information from anywhere and
at any time through speech. The Company's business strategy is to focus on
products and pricing models that produce revenue on a transaction or recurring
basis.
While the Company is beginning to generate limited recurring
revenues and licensing revenues, and anticipates increased revenues during its
1999 fiscal year, the Company's expenses continue to significantly exceed
revenues currently and for the remainder of the current fiscal year. There can
be no assurance that product installations, royalties or licensing will
generate sufficient revenues to enable the Company to operate profitably during
its 1999 fiscal year or thereafter.
The Company is subject to all of the risks inherent in
the establishment of a new business enterprise. To address these risks, the
Company must, among other things, increase the number of key customer
installations, enter into successful distribution arrangements, expand into the
international market, respond to competitive developments, and attract, retain
and motivate qualified personnel. Failure to achieve one or more of these goals
could have a material adverse effect upon the Company's business, operating
results and financial condition.
RESULTS OF OPERATIONS
Since its inception in October 1995, the Company's efforts have been
principally devoted to research, development and design of products, marketing
activities and raising capital.
For the three months ended October 31, 1998, the Company sold $282,038
of computer software and hardware, of which $150,000 was received from a
Development Agreement with Veritel Corporation as described hereafter. For the
three months ended October 31, 1997, the Company had revenues of $113,384 as a
result of the receipt of certain consulting fees during the period.
The Company has entered into a Joint Development Agreement with
Veritel Corporation to develop an interface to allow certain future Company
Products to be bundled with Veritel products. Veritel Corporation has agreed to
pay the Company a total of $500,000 for the development of such technologies.
As of October 31, 1998, the Company has been paid a total of $150,000 of
development fees, and such amounts have been recorded as revenue as of October
31, 1998.
During this 12-month period, the Company intends to focus its efforts
on enhancing its Virtual Operator product and refining two of its
telephone-based speech recognition prototypes, Virtual Dialer, and Virtual
Assistant, which it intends to introduce during calendar 1999. It will also
implement its sales and marketing program for further developing a marketing
and sales network initially in North America and thereafter in Europe.
During the initial three months of the current fiscal year, unit
product sales have consisted solely of the Company's Virtual Operator product,
and sales of its Virtual Operator product are expected to represent a
substantial portion of it's the Company's unit product sales for the remainder
of the 1999 fiscal year. Sales will be achieved initially through the Company's
direct sales group in South Florida and its national account staff for
companies and entities operating on a national basis. Thereafter sales are
expected to be obtained through the Company's developing telecommunications
6
<PAGE> 8
dealer/interconnect network, telecom distributors employing their own
distribution organizations, computer/CTI distributors and their networks of
value added resellers and system integrators, and through NT Server based OEM
partnerships.
The Company has entered into distribution agreements with Several
distributors and dealers for the Virtual Operator and is actively engaged in
discussions for additional ones. Certain of these distributors and dealers have
placed orders for their "in-house" units and are working with the Company's
sales and marketing personnel to develop plans to promote the product to their
customers.
The Company initiated a pilot in South Florida for a Virtual Operator
rental program and has begun to enter into agreements with end-users. Within
the rental program, customers are provided a turnkey system including support
and installation from the Company in exchange for a monthly rental fee. The
Company is currently evaluating the expansion of this program to other
geographic locations.
For the three months ended October 31, 1998, cost of goods sold amounted
to $103,696 on sales of $132,038, representing hardware costs associated with
the Company's Virtual Operator. During the latter part of the quarter ending
October 31, 1998, the Company reduced the product manufacturing cost of the
Virtual Operator by approximately 60%. As a result, the Company has been able
to lower significantly published dealer pricing. As a result of new technology
and decreased manufacturing costs, the Company has reduced its published dealer
pricing by approximately 50%. The Company believes that opportunities for
product sales will increase as a result of such reduced pricing.
General and administrative expense increased by $529,446 from $220,012
for the three months ended October 31, 1997 to $749,458 for the three months
ended October 31, 1998. These increases were due to additional employees hired
to begin marketing and selling the Virtual Operator, additional office support
staff and increased legal and accountants fees incurred in connection with the
Company's expanding activities and patent applications. The Company does not
anticipate the level of general and administrative expense will increase
substantially above the current level on a quarterly basis for the remainder of
the current fiscal year.
Research and development expenses for the three months ended October
31, 1998 were $ 372,121 compared to $ 188,794 for the three months ended
October 31, 1997, an increase of $ 183,327. These increases were due to
continued enhancement of the Company's Virtual Operator product, the
development of other product and service prototypes, and expenses related to
the Company's performance of development contracts. Research and development
expenses incurred in the course of establishing technological feasibility of
the Company's software applications have been charged to operations pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Royalty expenses for the three months ended October 31, 1998 were
$200,000. These amounts represent a non-refundable payment to Veritel
Corporation for non-recurring engineering fees for certain software object code
and software source code for the development and distribution of personal
computer software products that utilize speaker verification and file
encryption technologies. The Company expensed such non-recurring engineering
fees in the absence of any contracts for the sale of its products at the time
of payment.
Interest income for the three months ended October 31, 1998 amounted
to $120,663 compared to interest expense of $77 for the three months ended
October 31, 1997.The increase in interest income was due to the completion of
the Company's Initial Public Offering and receipt of approximately $11,300,000
in net proceeds. Such funds are invested in money market accounts and high
grade short-term corporate paper.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1998 the Company had $8,647,067 in cash and cash
equivalents. The Company does not have any available lines of credit. Since
inception, and until completition of the Company's public offering in June
1998, the Company financed its operations through loans from the Company's
Chairman and his wife and from private placements of both debt and equity. On
June 2, 1998, the Company closed an initial public offering of Common Stock.
The Company offered and sold 1,600,000 shares of Common Stock at an initial
public offering price of $7.25 per share, raising proceeds, net of offering
costs, of approximately $9,900,000. On June 26, 1998 the Company closed on the
underwriting over-allotment. The Company sold an additional 220,000 shares of
Common Stock at an initial public offering price of $7.25 per share, raising
proceeds, net of offering costs of approximately $1,400,000
Net cash used in operating activities increased by $1,142,003 from
$323,221 for the three months ended October 31, 1997 to $1,465,224 for the three
months ended October 31, 1998. Net cash used in operating activities primarily
related to the Company's continued expansion of its research and development and
sales and marketing efforts.
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Net cash used in investing activities during the three months ended
October 31, 1998 and 1997 was $140,220 and $44,611 respectively. The
expenditures primarily related to purchases of computer equipment and patent
costs.
IMPACT OF THE YEAR 2000 ON COMPANY PRODUCTS
Computers, software and other equipment utilizing microprocessors
that use only two digits to identify a year in a date field may be unable to
process accurately certain date-based information at or after the year 2000. The
Company recognizes the need to insure that its operations will not be adversely
affected by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the year 2000 date are a
recognized risk, and the Company is addressing this issue on several different
fronts. The Company is in contact with its suppliers to assess their compliance.
There can be no assurance that there will not be a material adverse effect on
the Company if third parties do not convert their systems in a timely manner
and in a way that is compatible with the Company's systems. The Company
believes that its actions with suppliers will minimize these risks.
Finally, the Company has established an internal workforce to
coordinate solutions for the Year 2000 issue with a goal of having all its
products Year 2000 compliant by the end of 1998. After evaluation of the
responses from suppliers, which the Company anticipates to complete in the third
quarter of fiscal 1999, the Company will prepare a contingency plan to mitigate
such Year 2000 issues, if necessary.
Through October 31, 1998, the Company has not incurred material
expenses relating to Year 2000 compliance efforts and believes that the expenses
associated with completing its Year 2000 compliance plans will not have a
material adverse impact on the Company's operations. Internal and external
expenses specifically associated with modifying internal-use software for the
Year 2000 will be expensed as incurred. The Company's current estimates of the
amount of time and expenses necessary to implement and test its computer systems
are based on the facts and circumstances existing at this time. Nevertheless,
achieving Year 2000 compliance is dependent on many factors, some of which are
not completely within the Company's control. Should either the Company's
internal system or the internal systems of one or more significant vendors or
suppliers fail to achieve Year 2000 compliance, the Company's business and its
results of operations could be adversely affected.
YEAR 2000 IMPACT ON INTERNAL BUSINESS OPERATIONS
The Company uses a significant number of computer software programs
and operating systems in its internal operations, including applications used
in financial business systems and various administration functions. To the
extent that these software applications contain source code that is unable
to appropriately interpret the upcoming calendar year "2000," some level
of modification or even replacement of such source code or applications will
be necessary. The Company is in the process of identifying the
software applications that are not "Year 2000" compliant. Given the information
known at this time about the Company's systems, coupled with the Company's
ongoing efforts to upgrade or replace business critical systems as necessary, it
is currently not anticipated that these "Year 2000" costs will have a
material adverse impact on the Company's business, financial condition and
results of operations. However, the Company is still analyzing its software
applications and, to the extent they are not fully "Year 2000" compliant, there
can be no assurance that the costs necessary to update software or potential
systems interruptions would not have a material adverse effect on the
Company's business, financial condition and results of operations.
8
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
On June 2, 1998, the Company closed an initial public offering of
Common Stock. The Company offered and sold 1,600,000 shares of Common Stock at
an initial public offering price of $7.25 per share, raising proceeds, net of
offering costs, of approximately $9,900,000. On June 26, 1998 the Company closed
on the underwriting over-allotment. The Company sold an additional 220,000
shares of Common Stock at an initial public offering price of $7.25 per share,
raising proceeds, net of offering costs of approximately $1,400,000.
Supplementing the Company's previous disclosures, through the quarter ended
October 31, 1998, the Company had used a portion of the proceeds received from
its public offering completed in the final quarter of its 1998 fiscal year for
the following purposes: approximately $575,000 for research and development,
technical personnel and royalties on certain technologies (ii) approximately
$454,000 for the expansion of the Company's marketing program and the addition
of executive and other sales personnel (iii) approximately $295,000 for working
capital purposes including payment of salaries to officers and employees and
(iv) approximately $140,000 for the purchase of property and equipment.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by item 601 of Regulation S-B
The following exhibits are filed as part of this report:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
9
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGISTRY MAGIC INCORPORATED
By: /s/ Walt Nawrocki
---------------------------------
Walt Nawrocki, President
and Chief Executive Officer
By: /s/ Martin Scott
---------------------------------
Martin Scott, Secretary,
Treasurer and Principal Financial
and Accounting Officer
DATED: December 15, 1998
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 8,647,067
<SECURITIES> 0
<RECEIVABLES> 105,660
<ALLOWANCES> 0
<INVENTORY> 283,777
<CURRENT-ASSETS> 9,095,328
<PP&E> 575,402
<DEPRECIATION> 138,733
<TOTAL-ASSETS> 9,578,738
<CURRENT-LIABILITIES> 347,497
<BONDS> 0
0
0
<COMMON> 5,813
<OTHER-SE> 9,225,428
<TOTAL-LIABILITY-AND-EQUITY> 9,578,738
<SALES> 282,038
<TOTAL-REVENUES> 282,038
<CGS> 103,696
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,361,928
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (120,663)
<INCOME-PRETAX> (1,062,923)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,062,923)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,062,923)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
