<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
or
[ ] TRANSITION REPORT UNDER SECTIONC 13 OR 15(d) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER: 0-11933
AXCESS INC.
(Exact name of small business issuer as specified in its charter)
Delaware 85-0294536
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3208 Commander Drive
Carrollton, Texas 75006
(972) 407-6080
(Address, including telephone number and
area code, of principal executive offices)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 [ ]
Number of shares of common stock outstanding on November 1, 2000: 3,408,273.
Number of shares of non-voting common stock outstanding on November 1, 2000:
112,492.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
AXCESS INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets at September 30, 2000 and December 31, 1999............................. 1
Statements of Operations for the Three Months ended September 30,
2000 and 1999 and for the Nine Months ended September 30, 2000 and 1999................ 2
Statements of Cash Flows for the Nine Months
ended September 30, 2000 and 1999...................................................... 3
Notes to Financial Statements.......................................................... 4
Item 2. Management's Discussion and Analysis or Plan of Operation................................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 11
Item 2. Changes in Securities.................................................................... 11
Item 3. Defaults Upon Senior Securities.......................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders...................................... 11
Item 5. Other Information........................................................................ 11
Item 6. Exhibits and Reports on Form 8-K......................................................... 11
SIGNATURES............................................................................................ 12
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
AXCESS INC.
BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 2000 1999
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 457,694 $ 69,450
Accounts receivable - trade 621,448 459,654
Inventory 769,143 845,400
Prepaid expenses and other 528,211 695,334
------------- -------------
Total current assets 2,376,496 2,069,838
Property, plant and equipment, net 513,869 544,441
Long-term note receivable - stockholder 3,902,375 3,902,375
Purchased technologies and intellectual property, net 5,186,678 6,043,142
------------- -------------
Total assets $ 11,979,418 $ 12,559,796
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable:
Stockholders $ 1,902,850 $ 980,000
Other - 22,309
Dividends payable 212,188 8,448
Accounts payable 643,973 447,889
Other accrued liabilities 1,086,355 1,233,650
------------- -------------
Total current liabilities 3,845,366 2,692,296
Non-current notes payable to stockholders 5,989,741 5,921,999
------------- -------------
Total liabilities 9,835,107 8,614,295
------------- -------------
Stockholders' equity:
Convertible preferred stock, 7,000,000 shares authorized; 153,348 shares
outstanding in 2000 and 148,889 in 1999; $40,867,666 aggregate
liquidation preference in 2000 and $33,598,919 in 1999 40,867,666 33,598,919
Common stock, $.01 par value, 50,000,000 shares authorized
in 2000 and 12,000,000 in 1999; 3,408,273 shares
issued and outstanding in 2000 and 3,298,368 in 1999 34,083 32,984
Non-voting convertible common stock, $.01 par value, 2,250,000 shares
authorized; 112,492 shares issued and outstanding in 2000 and 1999,
convertible into common stock on a one for one share basis 1,125 1,125
Additional paid-in capital 68,148,435 61,387,968
Accumulated deficit (106,906,998) (91,075,495)
------------- -------------
Total stockholders' equity 2,144,311 3,945,501
------------- -------------
Total liabilities and stockholders' equity $ 11,979,418 $ 12,559,796
============= =============
</TABLE>
See accompanying notes to unaudited financial statements.
1
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<TABLE>
<CAPTION>
AXCESS INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 585,279 $ 422,749 $ 2,044,150 $ 545,953
Cost of sales 727,344 213,751 1,515,680 279,501
------------ ------------ ------------ ------------
Gross profit (loss) (142,065) 208,998 528,470 266,452
------------ ------------ ------------ ------------
Operating expenses:
Research and development 656,715 526,895 1,867,100 1,167,488
General and administrative 675,525 725,486 1,864,676 2,151,637
Selling and marketing 801,219 723,994 2,194,728 1,937,149
Depreciation and amortization 400,220 219,443 1,188,035 489,626
------------ ------------ ------------ ------------
Operating expenses 2,533,679 2,195,818 7,114,539 5,745,900
------------ ------------ ------------ ------------
Loss from operations (2,675,744) (1,986,820) (6,586,069) (5,479,448)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 90,371 81,621 288,058 149,571
Interest expense (223,108) (235,119) (786,560) (394,480)
Other (3,673) (1,167) 7,197 2,039,688
------------ ------------ ------------ ------------
Other income (expense), net (136,410) (154,665) (491,305) 1,794,779
------------ ------------ ------------ ------------
Loss from continuing operations (2,812,154) (2,141,485) (7,077,374) (3,684,669)
------------ ------------ ------------ ------------
Discontinued operations:
Gain on disposal of discontinued operations - - - 1,856,625
------------ ------------ ------------ ------------
Net loss (2,812,154) (2,141,485) (7,077,374) (1,828,044)
Preferred stock dividend requirements (2,247,309) (595,578) (8,754,129) (1,736,072)
------------ ------------ ------------ ------------
Net loss applicable to common stock $ (5,059,463) $ (2,737,063) $(15,831,503) $ (3,564,116)
============ ============ ============ ============
Basic and diluted net income (loss) per common share:
Continuing operations $ (1.49) $ (0.86) $ (4.73) $ (1.74)
Discontinued operations $ - $ - $ - $ 0.60
Net loss $ (1.49) $ (0.86) $ (4.73) $ (1.14)
Weighted average shares of common stock outstanding 3,389,885 3,179,368 3,346,163 3,115,632
============ ============ ============ ============
</TABLE>
See accompanyig notes to unaudited financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
AXCESS INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September, 30
---------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $(7,077,374) $(3,684,669)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 1,188,035 489,625
Amortization of financing discount and issuance costs 252,735 43,868
Loss on sale of assets (6,143) (2,033,024)
Changes in operating assets and liabilities:
Accounts receivable (161,794) (15,956)
Inventory 257,824 (298,151)
Prepaid expenses and other 167,123 (161,612)
Other assets (8,000) 10,061
Accounts payable 196,084 206
Accrued liabilities and other (328,862) (1,116,096)
----------- -----------
Net cash used by operating activities (5,520,372) (6,765,748)
----------- -----------
Cash flow from investing activities:
Capital expenditures (286,857) (93,743)
Proceeds from sale of assets - 470,116
----------- -----------
Net cash provided by (used by) investing activities (286,857) 376,373
----------- -----------
Cash flow from financing activities:
Borrowings under financing agreements 2,922,850 3,627,282
Principal payments on financing agreements (2,057,302) (418,546)
Principal payments on notes receivable - 623,249
Net proceeds from issuance of common and preferred stock 5,329,925 -
----------- -----------
Net cash provided by financing activities 6,195,473 3,831,985
----------- -----------
Net cash provided by discontinued operations - 1,063,085
----------- -----------
Net increase (decrease) in cash and cash equivalents 388,244 (1,494,305)
Cash and cash equivalents, beginning of period 69,450 1,575,429
----------- -----------
Cash and cash equivalents, end of period $ 457,694 $ 81,124
=========== ===========
Supplemental information:
Cash paid during the period for interest $ 191,274 $ 27,459
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
3
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AXCESS INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(1) Summary of Significant Accounting Policies
(a) Description of Business
AXCESS Inc. and its subsidiary (the "Company") provide computer network-
based solutions for improving the utilization of corporate assets to improve
operations productivity, physical security, asset management, manufacturing
logistics and enterprise resource planning (commonly referred to as ERP), and
financial reporting. The Company's products include hands-free, long range radio
frequency identification (RFID) technology used to track and monitor people,
assets, inventory and vehicles, as well as patented digital video compression
technology for enterprise multi-media transmission and digital recording. The
Company's products incorporate patented technologies in wireless, automatic
identification and multi-media.
The future results of operations and financial condition of the Company will
be impacted by the following factors, among others: access to capital,
technological change, dependence on identifying, developing and marketing
product enhancements and new products, dependence on third party manufacturers,
vendors, suppliers and contractors, dependence on key personnel, intellectual
property rights, and product liability.
(b) Company Organization and Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the audited financial
statements and notes thereto included in the Company's annual report or Form 10-
KSB for the year ended December 31, 1999. In the opinion of management, all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the financial position at September 30, 2000, results of
operations for the three and nine month periods ended September 30, 2000 and
1999, and cash flows for the nine months ended September 30, 2000 and 1999, have
been made. The results of operations for any given period are not necessarily
indicative of the results of the entire year.
The Company has received working capital in various forms from Amphion
Ventures, L. P. and affiliates of Amphion Ventures, L. P., including Amphion
Partners, Amphion Investments, Anitope Partners and incuVest LLC (collectively,
the "Amphion Investors"). As a result, the Amphion Investors own approximately
22% of the Company's voting common stock currently outstanding and approximately
74% of the Company's voting common stock on a diluted basis, assuming the
exercise of warrants and options and the conversion of preferred stock and
convertible debt.
Subsequent to March 31, 1999, the Company determined that the weighted
average shares of its common stock outstanding and net loss per common share was
erroneously calculated for the third quarter of 1999. Consequently, the interim
financial information for the third quarter of 1999 has been revised from the
information contained in the Company's Form 10-QSB for the three and nine months
ended September 30, 1999, as previously filed with the Securities and Exchange
Commission, to correctly state the weighted average shares of common stock
outstanding and basic and diluted net income (loss) per common share.
(c) Inventory
Inventory is valued at the lower of cost or market using the first-in,
first-out method. Inventory was comprised of the following at September 30, 2000
and December 31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- --------------------
<S> <C> <C>
Raw materials......... $ 547,286 $ 585,608
Work-in-process....... 88,396 113,447
Finished goods........ 133,461 146,345
----------------- --------------------
$ 769,143 $ 845,400
================= ====================
</TABLE>
4
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AXCESS INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(d) Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Financial Accounting
Standard (FAS) No. 133 on accounting for derivatives and hedges, which as
amended, will be effective for the Company's fiscal year beginning January 1,
2001. FAS No. 133 requires that all derivatives be recognized at fair value on
the balance sheet and that related gains and losses be included in net income.
Currently, the Company has not entered into contracts that will be classified as
derivative financial instruments under FAS No. 133. Management believes that
FAS No. 133 will not have an impact on the results of operations or financial
position of the Company.
(2) Contingencies
The Company is involved in various claims and legal actions arising in the
ordinary course of business. Estimated legal and litigation costs are reflected
in the accompanying financial statements. In the opinion of management of the
Company, the ultimate disposition of these matters will not have a material
effect on the accompanying financial statements.
(3) Preferred Stock
The Company has authorized 7,000,000 shares of convertible preferred stock,
of which shares designated in eight series have been issued. Information with
respect to the series of preferred stock outstanding at each balance sheet date
is summarized below.
<TABLE>
<CAPTION>
Series A Series B Series C
------------ ------------ ------------
<S> <C> <C> <C>
Number of shares authorized........................ 1,500,000 1,500,000 1,500,000
Stated value....................................... $ 26.00 $ 28.40 $ 30.20
Number of shares issued and
outstanding:
December 31, 1999......................... 57,692 52,817 35,427
September 30, 2000........................ 59,171 54,171 36,336
Conversion ratio (or conversion price) of
preferred shares into
common......................................... 1 to 1 into 1 to 1 into 1 to 1 into
voting voting voting
common common common
stock stock stock
Liquidation preference............................. Stated value Stated value Stated value
plus accrued plus accrued plus accrued
dividends dividends dividends
Dividend rights.................................... 10% per 10% per 10% per
annum, annum, annum,
cumulative cumulative cumulative
</TABLE>
5
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AXCESS INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(3) Preferred Stock (Continued)
<TABLE>
<CAPTION>
Series Series
Series I Series J 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Number of shares authorized..... 2,500 2,500 2,500 2,500
Stated value.................... $10,000 $10,000 $10,000 $10,000
Number of shares issued and
outstanding:
December 31, 1999...... 635 1,857 129 332
September 30, 2000..... 674 1,971 137 888
Conversion ratio (or
conversion price) of
preferred shares into
common...................... $4.00 into $4.00 into $2.50 into $3.50 into
voting non-voting voting non-voting
common common common common
stock stock stock stock
Liquidation preference.......... Stated value Stated value Stated value Stated value
plus accrued plus accrued plus accrued plus accrued
dividends dividends dividends dividends
Dividend rights................. 8% per 8% per 8% per 8% per
annum, annum, annum, annum,
cumulative cumulative cumulative cumulative
</TABLE>
On March 29, 2000, the Company completed a private equity placement with
incuVest LLC, an affiliate of the Amphion Investors. In connection with that
transaction, the Company received $5,000,000 and issued 500 shares of its Series
2000 Preferred Stock.
On April 1, 2000, Amphion Ventures, L.P. elected to convert an additional
$150,000 of a 10% convertible note, dated September 30, 1999, issued by the
Company to Amphion Ventures, L.P. These borrowings were converted into 15
shares of the Company's Series 2000 Non-Voting Preferred Stock.
Shares of Series I and Series J Preferred Stock are convertible into shares
of common stock at a conversion price of $4.00 per share. Shares of Series 1999
and Series 2000 Preferred Stock are convertible into shares of common stock at a
conversion price of $2.50 per share and $3.50 per share respectively. On
September 29, 2000 the Company paid the holders of Series I, Series J, Series
1999 and Series 2000 Preferred Stock, 39, 114, 8 and 41 shares, respectively, of
Series I, Series J, Series 1999 and Series 2000 Preferred Stock, respectively,
as payment of accrued but unpaid dividends. The closing price of the Company's
common stock on September 29, 2000 as quoted by NASDAQ was $6.50 causing Series
I, Series J, Series 1999 and Series 2000 Preferred Stock issued on September 29,
2000 to have a beneficial conversion feature. A beneficial conversion feature
applies to Convertible Preferred Stock with a conversion price that is less then
the fair market value of the Company's Common Stock on the date of issuance.
Accordingly, the Company recorded additional preferred stock dividends of
$1,431,612 for this beneficial conversion feature during the three months ended
September 30, 2000.
6
<PAGE>
AXCESS INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(4) Warranty Reserve
In September 2000, the Company identified a flaw in the manufacturing
process of its version 5.0 RFID tags. Due to the flaw, the effective life of
the tags may be shortened. The Company immediately corrected the manufacturing
process and implemented a plan to replace all version 5.0 RFID tags that had
been sold. The replacement plan will be completed in November 2000. The cost
of replacing these tags is estimated to total $268,823 which was accrued during
the three months ended September 30, 2000 as a component of cost of goods sold.
The components of cost of sales for the three and nine months ending September
30, 2000 and September 30, 1999, are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2000 1999 2000 1999
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
Product cost $414,379 $179,652 $1,178,183 $216,486
Warranty expense 312,965 34,099 337,497 63,015
-------- -------- ---------- --------
Cost of sales $727,344 $213,751 $1,515,680 $279,501
======== ======== ========== ========
</TABLE>
(5) Demand Note Payable
The Company issued a 9.5% note, dated as of September 14, 2000, in the
principal amount of $400,000 (plus additional amounts shown on the schedule of
advances to the note), to incuVest LLC. At September 30, 2000, borrowings under
this note totaled $922,850, and are due and payable on demand by incuVest LLC.
(6) Subsequent Events
To date, the Company has borrowed a total of $1,683,050 pursuant to the
incuVest demand note discussed in footnote (5) (Demand Note Payable) above.
7
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Forward-Looking Statements
This quarterly report on Form 10-QSB includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended, which can be identified by the use of forward-looking terminology such
as, "may," "believe," "expect," "could," "anticipate," "estimate," or "continue"
or the negative thereof or other variations thereon or comparable terminology.
These forward-looking statements are subject to various risks and
uncertainties that could cause actual results to differ materially from those
referred to in the forward-looking statements and are made pursuant to the
"safe-harbor" provisions of the Private Securites Litigation Reform Act of 1995.
These statements are made based on management's current expectations or beliefs
as well as assumptions made by, and information currently available to,
management.
A variety of factors could cause acutal results to differ materially from
those anticipated in the Company's forward-looking statements, including the
following factors: general economic and business conditions, conditions
affecting the industries served by the Company and its subsidiaries, conditions
affecting the Company's customers and suppliers, competitor responses to the
Company's products and services, the overall market acceptance of such products
and services, and access to capital. For a detailed discussion of these and
other cautionary statements and factors that could cause actual results to
differ from the Company's forward-looking statements, please refer to the
Company's filings with the Securities and Exchange Commission, especially "Item
1. Description of Business" and "Item 6. Management's Discussion and Analysis or
Plan of Operation" of the Company's 1999 Annual Report on Form 10-KSB, and all
of the Company's subsequent quarterly reports on Form 10-QSB, especially in the
"risk factors" sections of the Company's annual and quarterly reports.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company does not undertake any obligation to publicly revise these forward-
looking statements to reflect events or circumstances that arise after the date
hereof. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission.
Results of Operations
---------------------
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Sales and Gross Profit. Sales for the three months ended September 30, 2000
were $585,279 and $422,749 for the three months ended September 30, 1999, on
which a gross (loss) profit of $(142,065) and $208,998 was realized,
respectively. The loss in 2000 was a direct result of the RFID version 5.0 tag
replacement. As a result of this replacement warranty costs of $268,823 were
accrued as a component of cost of sales in the three months ending September 30,
2000.
Radio frequency identification (RFID) product sales were $322,752 for the
three months ended September 30, 2000 and $96,019 for the three months ended
September 30, 1999. Cost of sales were $509,396, which includes the warranty
expense of $268,823, for the three months ended September 30, 2000, and $84,185
for the three months ended September 30, 1999. As a result, gross profits (loss)
from RFID products were $(186,644) for the three months ended September 30, 2000
and $11,834 for the three months ended September 30, 1999. Management believes
that the corrections made to the tag manufacturing process will reduce future
warranty costs to historical levels.
Digital video product sales were $262,527 for the three months ended
September 30, 2000 and $326,730 for the three months ended September 30, 1999.
Cost of sales were $217,948 for the three months ended September 30, 2000 and
$129,567 for the three months ended September 30, 1999. As a result, gross
profits from digital video products were $44,579 for the three months ended
September 30, 2000 and $197,163 for the three months ended September 30, 1999.
Operating Expenses. Operating expenses were $2,533,679 for the three months
ended September 30, 2000 and $2,195,818 for the three months ended September 30,
1999. This increase was due to an increase in research and development in
connection with the development of new products and an increase in selling and
marketing expenses.
Research and development expenses for the three months ended September 30,
2000 of $656,715 were incurred in connection with the development of new digital
video and RFID products. For the three months ended September 30, 1999, research
and development expenses were $526,895 and were incurred in connection with new
product development associated with the RFID technology.
Corporate general and administrative expenses were $675,525 for the three
months ended September 30, 2000 and $725,486 for the three months ended
September 30, 1999. The decrease is attributable to a reduction in September
1999 of
8
<PAGE>
employee headcount by approximately twenty percent to eliminate overlapping
duties resulting from the July 1999 acquisition of Prism Video.
Selling and marketing expenses were $801,219 for the three months ended
September 30, 2000 and $723,994 for the three months ended September 30, 1999.
The increase was due to expanding advertising coverage to more periodicals.
Other income (expenses), net. Other expenses, net, were $136,410 for the
three months ended September 30, 2000, compared to $(154,665) for the three
months ended September 30, 1999. Interest income was $8,750 higher during the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999, as a result of the increased balance in notes receivable
from a stockholder of the Company. The increase in notes receivable from the
stockholder occurred as a result of the sale in 1999 of the Company's LMC
subsidiary and certain technology assets under development. Interest expense was
$12,011 lower in the three months ended September 30, 2000 compared to the three
months ended September 30, 1999.
Income (Loss) from Continuing Operations. Loss from continuing operations
was $(2,812,154) for the three months ended September 30, 2000, compared to a
loss of $(2,141,485) for the same period in 1999. The increase in the loss is
primarily attributable to the RFID warranty reserve, coupled with increased
operating expenses.
Results of Operations
---------------------
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Sales and Gross Profit. Sales for the nine months ended September 30, 2000
were $2,044,150 and $545,953 for the nine months ended September 30, 1999, on
which a gross profit of $528,470 and $266,452 was realized, respectively. The
decrease in gross profit relative to the increase in sales was a direct result
of the RFID version 5.0 tag replacement.
Radio frequency identification (RFID) product sales were $720,750 for the
nine months ended September 30, 2000 and $219,223 for the nine months ended
September 30, 1999. Cost of sales were $756,760, which includes the warranty
expense of $268,823, for the nine months ended September 30, 2000, and $149,934
for the nine months ended September 30, 1999. As a result, gross profits (loss)
from RFID products were $(36,010) for the nine months ended September 30, 2000
and $69,289 for the nine months ended September 30, 1999. Management believes
that the corrections made to the tag manufacturing process will reduce future
warranty costs to historical levels.
Digital video product sales were $1,323,400 for the nine months ended
September 30, 2000 and $326,730 for the nine months ended September 30, 1999.
Cost of Sales were $758,920 for the nine months ended September 30, 2000 and
$129,567 for the nine months ended September 30, 1999. As a result, gross
profits from digital products were $564,480 for the nine months ended September
30, 2000 and $197,163 for the nine months ended September 30, 1999.
Operating Expenses. Operating expenses were $7,114,539 for the nine months
ended September 30, 2000 and $5,745,900 for the nine months ended September 30,
1999. This increase was due to an increase in research and development in
connection with the development of new products and an increase in selling and
marketing expenses.
Research and development expenses for the nine months ended September 30,
2000 of $1,867,100 were incurred in connection with the development of new
digital video and RFID products. For the nine months ended September 30, 1999,
research and development expenses were $1,167,488 and were incurred in
connection with new product development associated with the RFID technology.
Corporate general and administrative expenses were $1,864,676 for the nine
months ended September 30, 2000 and $2,151,637 for the nine months ended
September 30, 1999. The decrease is attributable to a reduction in September
1999 of employee headcount by approximately twenty percent to eliminate
overlapping duties resulting from the July 1999 acquisition of Prism Video.
Selling and marketing expenses were $2,194,728 for the nine months ended
September 30, 2000 and $1,937,149 for the nine months ended September 30, 1999.
The increase was due to expanding advertising coverage to more periodicals.
Other income (expenses), net. Other income (expenses), net, was $(491,305)
for the nine months ended September 30, 2000, compared to $1,794,779 for the
nine months ended September 30, 1999. This decrease is a result of the
nonrecurring gain on the April 30, 1999 sale of the Company's LMC subsidiary and
certain technology assets under development. Interest income was $138,487
higher during the nine months ended September 30, 2000 compared to the nine
months ended September 30, 1999, as a result of the increased balance in notes
receivable from a stockholder of the Company. The increase in notes receivable
from the stockholder occurred as a result of the sale in 1999 of the Company's
LMC subsidiary and certain technology assets under development. Interest
expense was $392,080 higher in the nine months ended September 30, 2000 compared
to the nine months ended September 30, 1999, reflecting an increase in the
outstanding balance of notes payable in 2000.
9
<PAGE>
Loss from Continuing Operations. Loss from continuing operations was
$(7,077,374) for the nine months ended September 30, 2000, compared to
$(3,684,669) for the same period in 1999. Losses increased by approximately 3.4
million in the nine months ended September 30, 2000 compared to the nine months
ended September 30, 1999. On April 30, 1999 the Company recorded a nonrecurring
gain on sale, in the amount of $2,044,109, for the sale of the Company's LMC
subsidiary and certain technology assets under development. This nonrecurring
gain reduced the loss reported in the nine months ended September 30, 1999. The
increase in loss can also be attributed to the RFID warranty reserve recorded in
the three months ended September 30, 2000 and increased operating expenses.
Gain from Discontinued Operations. The gain from discontinued operations
was $1,856,625 for the nine months ended September 30, 1999 resulting from the
disposal of LMC.
Liquidity and Capital Resources
Since inception, the Company has utilized the proceeds from a number of
public and private sales of its equity securities, the exercise of options and
warrants and, more recently, convertible debt and short-term bridge loans from
stockholders to meet its working capital needs.
At September 30, 2000, the Company was in default on a $400,000 note payable
to J.P. Morgan Investment Corporation (JPMIC). The Company is currently in
negotiations with JPMIC to pay this note in cash or securities of the Company.
The default on this note does not impact the terms, including acceleration of
maturities, of the Company's other debt.
On March 29, 2000 the Company completed a private equity placement with
incuVest LLC, an affiliate of the Amphion Investors. In connection with that
transaction, the Company received $5,000,000 and issued 500 shares of Series
2000 Preferred Stock with a $10,000 per share stated value. The Series 2000
Preferred Stock is convertible to non-voting common stock based at a conversion
price of $3.50 per non-voting common share.
The Company issued a 9.5% note, dated as of September 14, 2000, in the
principal amount of $400,000 (plus additional amounts shown on the schedule of
advances to the note), to incuVest LLC. At September 30, 2000, borrowings under
this note totaled $922,850, and are due and payable on demand by incuVest LLC.
The Company anticipates that it will repay this demand note with the proceeds
from private equity placements. incuVest LLC has committed to purchase an
additional $5,000,000 of preferred stock.
The Company's future working capital requirements will depend upon many
factors, including the extent and timing of the Company's product sales, the
Company's operating results and the status of competitive products. The
Company's actual funding needs will depend on numerous factors, including actual
cash expenditures and revenues generated from its operations compared to its
business plan. If the Company's losses continue, the Company may have to obtain
sufficient funds to meet its cash requirements through strategic or other
financial transactions with compatible entities having the resources to support
its programs, the sale of securities or other financing agreements, or it will
be required to curtail its programs or seek a merger partner. Any additional
funding may be on terms that are unfavorable to the Company or disadvantageous
to existing stockholders. In addition, no assurance may be given that the
Company will be successful in raising additional funds or entering into business
alliances. IncuVest LLC has committed to purchase an additional $5,000,000 of
preferred stock. The Company anticipates that cash on hand and cash provided by
this private placement when consumated will be sufficient to fund the operations
of the Company's current business for the next 9 months.
Other
Inflation. Inflation has not had and is not expected to have a material
impact on the operations and financial condition of the Company.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
During the first nine months of 2000, the Company issued unregistered
securities in connection with the transactions described below. The issuance of
preferred stock was exempt from the registration requirements of the Securities
Act, as amended by virtue of Section 4(2) thereof as a transaction not involving
a public offering and an appropriate restrictive legend was affixed to the
certificates.
In connection with the terms of a private equity placement to provide
additional financing to the Company, on March 29, 2000, the Company issued 500
shares of the Company's Series 2000 Non-Voting Preferred Stock, par value $0.01
per share ("Series 2000 Non-Voting Preferred Stock"), to incuVest LLC, an
affiliate of the Amphion Investors.
On April 1, 2000, Amphion Ventures, L.P. elected to convert an additional
$150,000 of a 10% convertible note, dated September 30, 1999, issued by the
Company to Amphion Ventures, L.P. These borrowings were converted into 15
shares of the Company's Series 2000 Non-Voting Preferred Stock.
Each share of Series 2000 Non-Voting Preferred Stock is convertible in whole
or in part at any time at the option of the holder into shares of non-voting
common stock of the Company equal to the quotient of (a) the aggregate original
issue price of $10,000 per share divided by (b) the conversion price of $3.50.
The holders of the Company's Series A, B, and C Preferred Stock are entitled
to receive quarterly dividends on each such share held at the annual rate of 10%
of the original issue price of each share payable in arrears, when, as and if
declared by the Company's board of directors, in cash or additional shares of
preferred stock.
The holders of Series I, J, Series 1999 Voting, and Series 2000 Non-Voting
Preferred Stock are entitled to receive semi-annual dividends on each such share
held by the annual rate of 8% of the original issue price of each share payable
in arrears, when, as and if declared by the Company's board of directors, in
cash or additional shares of preferred stock. On September 29, 2000, the
Company issued (a) 39 shares of Series I Preferred Stock to holders thereof as
payment in full for the $388,423 of accrued, but unpaid dividends of the Series
I Preferred Stock as of such date, (b) 114 shares of Series J Preferred Stock to
holders thereof as payment in full for the $1,135,239 of accrued, but unpaid
dividends of the Series J Preferred Stock as of such date, (c) 8 shares of
Series 1999 Voting Preferred Stock to the holders thereof as payment in full for
the $78,993 of accrued, but unpaid dividends of the Series 1999 Voting Preferred
Stock as of such date and (d) 41 shares for Series 2000 Non Voting Preferred
Stock to the holders thereof as payment in full for the $411,792 of accrued, but
unpaid dividends of the Series 2000 Non Voting Preferred Stock as of such date.
Item 3. Defaults Upon Senior Securities.
At September 30, 2000, the Company was in default on a $400,000 note
payable to J.P. Morgan Investment Corporation (JPMIC). The Company is currently
in negotiations with JPMIC to pay this note in cash or securities of the
Company. The default on this note does not impact the terms, including
acceleration of maturities, of the Company's other debt.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Reports on Form 8-K:
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None.
(b) Exhibits:
Exhibit No. Description
----------- ------------
10.1 Demand Note dated as of September 14, 2000, executed by the
Company payable to incuVest, LLC in the principal amount of
$400,000 (plus additional amounts shown on the schedule of
advances to the note).
10.2 Commitment letter dated August 16, 2000, from incuVest LLC
regarding the purchase of 500 shares of Series 2000A
Preferred Stock.
27.1 Financial Data Schedule
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.
AXCESS INC.,
Registrant
/S/ ALLAN GRIEBENOW
-------------------------------------------------
Allan Griebenow Director, President and
Chief Executive Officer (Principal Executive
Officer)
/S/ JAMES R. CRAIG
-------------------------------------------------
James R. Craig
Chief Financial Officer and Secretary
(Principal Accounting and Financial Officer)
November 14, 2000
12
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- ------------
10.1 Demand Note dated as of September 14, 2000, executed by the
Company payable to incuVest, LLC in the principal amount of
$400,000 (plus additional amounts shown on the schedule of
advances to the note).
10.2 Commitment letter dated August 16, 2000, from incuVest LLC
regarding the purchase of 500 shares of Series 2000A Preferred
Stock.
27.1 Financial Data Schedule
13
