UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 FOR THE QUARTER ENDED
SEPTEMBER 30, 1998
Commission file number 0-28610
XOX CORPORATION
(Name of small business issuer as specified in its charter)
Delaware 93-0898539
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7640 West 78th Street, Bloomington, Minnesota 55439
(612) 946-1191
(Address and telephone number of principal executive offices
and principal place of business)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods 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___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $.025 Par Value - 3,072,401 shares outstanding as of October 15,
1998.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
page 1
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
XOX Corporation September 30, December 31,
Balance Sheets 1998 1997
U.S. Dollars Unaudited
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,011,427 $ 687,039
Accounts receivable 108,936 279,888
Prepaid expenses 32,750 22,719
------------ ------------
Total current assets 1,153,113 989,646
Property and equipment
Furniture and fixtures 81,691 81,691
Computer equipment 393,002 393,002
------------ ------------
474,693 474,693
Less accumulated depreciation 409,237 363,889
------------ ------------
Net property and equipment 65,456 110,804
License agreements, net of amortization of $62,292
and $100,625 at September 30, 1998 and December 31, 14,375 52,708
1997, respectively
Investment in joint venture 127,799 80,532
------------ ------------
Total assets 1,360,743 1,233,690
============ ============
Current liabilities
Accounts payable 151,523 184,005
Accrued expenses 8,710 118,442
------------ ------------
Total current liabilities 160,233 302,447
Deferred revenue 219,976 118,465
Long-term liabilities
Long-term debt related parties 496,249 632,005
Accrued payroll taxes 17,701 25,783
Other accrued liabilities 63,771 78,771
------------ ------------
Total long-term liabilities 577,722 736,559
Stockholders' equity:
Common stock 76,821 76,298
Additional paid-in capital 12,696,744 12,677,471
Accumulated deficit (12,370,752) (12,677,550)
------------ ------------
Total stockholders' equity 402,813 76,219
------------ ------------
Total liabilities and stockholders' equity $ 1,360,743 $ 1,233,690
============ ============
</TABLE>
See note to Financial Statements
page 2
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
XOX CORPORATION September 30, September 30,
Statement of Operations 1998 1997 1998 1997
U.S. Dollars Unaudited Unaudited Unaudited Unaudited
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues
Customer support and consulting $ 166,742 $ 163,735 $ 392,221 $ 349,219
Maintenance 87,761 $ 417,290 --
Royalties, Licenses, Products 308,611 35,404 809,811 325,312
----------- ----------- ----------- -----------
563,114 199,139 1,619,322 674,531
Operating expenses
Research and development 189,666 254,491 641,484 944,513
Selling, general and administrative 216,664 328,741 720,172 1,152,204
----------- ----------- ----------- -----------
406,330 583,232 1,361,656 2,096,717
Income (loss) from operations 156,784 (384,093) 257,666 (1,422,186)
Interest income 8,475 16,756 20,773 68,277
Interest expense (8,723) (10,781) (28,291) (35,011)
Miscellaneous 184 -- 11,426
Gain on Debt Repayment 12,974
Share of joint venture net Income (loss) -- 19,650 32,249 39,512
----------- ----------- ----------- -----------
Net Income (loss) $ 156,720 ($ 358,468) $ 306,797 ($1,349,408)
=========== =========== =========== ===========
Basic income (loss) per share 0.05 (0.12) 0.10 (0.46)
=========== =========== =========== ===========
Diluted net income (loss) per share 0.04 -- 0.09 --
=========== =========== =========== ===========
Weighted average number of shares
outstanding 3,072,401 2,952,931 3,066,576 2,941,666
=========== =========== =========== ===========
Weighted average number of shares
assuming dilution 3,597,350 2,952,931 3,397,421 2,941,666
=========== =========== =========== ===========
</TABLE>
See note to Financial Statements
page 3
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
For the Nine Months Ended
XOX CORPORATION September 30,
Statement of Cash Flows 1998 1997
U.S. Dollars Unaudited Unaudited
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (loss) 306,797 (2,470,841)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 45,348 18,699
Amortization 38,333 57,500
Loss on disposal of property and equipment -- 74,466
Share of joint venture net (gain)/loss (32,249) (39,512)
Fair value of options granted for service -- 241,742
Write-off note receivable due to impairment -- 161,000
Gain on extinguishment of debt (12,974)
Changes in other operating assets and liabilities
Accounts receivable 170,952 (85,912)
Prepaid expenses (10,031) 68,238
Accounts payable (73,155) (25,390)
Accrued interest 8,710 --
Accrued liabilities (77,765) 32,854
Deferred revenue 101,511 52,798
----------- -----------
Net cash used in operating activities 465,477 (1,914,358)
INVESTING ACTIVITIES
Purchase of property and equipment -- (70,333)
Working capital advances to XOX-Asia (15,018) --
Advance under note receivable -- (149,000)
----------- -----------
Net cash used in investing activities (15,018) (219,333)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock -- 151,800
Payments on notes payable (126,071) (51,621)
----------- -----------
Net cash provided (used) by financing activities (126,071) 100,179
----------- -----------
Net increase (decrease) in cash and cash equivalents 324,388 (2,033,512)
Cash and cash equivalents at beginning of period 687,039 2,720,551
----------- -----------
Cash and cash equivalents at end of period 1,011,427 687,039
=========== ===========
</TABLE>
See note to Financial Statements
page 4
<PAGE>
Part 1
FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
XOX Corporation
Note to Financial Statements
September 30, 1998
Note 1 - Basis of Presentation
The financial statements have been prepared by XOX Corporation, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The information furnished in the financial statements includes normal recurring
adjustments and reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of such financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and accompanying
notes included in the Company's annual report to the Securities and Exchange
Commission on Form 10-KSB for the fiscal year ended December 31, 1997.
Note 2 - Earnings (Loss) per share
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September
1998 1997 1998 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 156,720 $ (358,468) $ 306,797 $(1,349,408)
Denominator for earnings
(loss) per share:
Weighted average shares 3,072,401 2,952,931 3,066,576 2,941,666
Effect of dilutive securities
options and warrants 524,949 - 330,845 -
---------------------------------------------------------
3,597,350 2,952,931 3,397,421 2,941,666
=========================================================
Basic earnings (loss) per share $ .05 $(.12) $.10 $(.46)
Diluted earnings (loss) per share $ .04 $(.12) $.09 $(.46)
- --------------------------------------------------------------------------------------------
</TABLE>
page 5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This report, other than historical financial information, contains
forward-looking statements that involve risks and uncertainties. These
forward-looking statements will likely be impacted by factors outside the
Company's control and may differ materially from actual future events or
results. There are a number of important factors that could cause actual results
to differ materially from those anticipated by any forward-looking information.
A description of risks and uncertainties relating to XOX Corporation and its
industry and other factors which could affect the Company's financial results
are included in the Company's Securities and Exchange Commission filings.
RESULTS OF OPERATIONS
FISCAL YEAR 1998 QUARTER ENDING SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDING
SEPTEMBER 30, 1997
Net revenues for the quarter ended September 30, 1998 increased approximately
292% to $563,114, from $199,139 reported for the same quarter in 1997. Net
revenues for the nine -month period ending September 30, 1998 increased
approximately 140% to $1,619,322 from $674,531 reported in nine-month period
ending September 30, 1997. The primary reason for the increase in both periods
is attributable to revenues earned from certain agreements the Company entered
into with Geoquest, a division of Schlumberger Technology Corporation (The
"Schlumberger Agreements"). As disclosed in the Company's Form 10-QSB-A filed
for the quarter ended June 30, 1998, under the Schlumberger Agreements, XOX
assigned a co-ownership interest in SHAPES, subject to certain limitations in
how XOX agreed to provide services to GeoQuest to maintain, support and enhance
SHAPES. The Schlumberger Agreements provide for payments of approximately $5.75
million to XOX Corporation over three years, with additional sums possible based
upon potential software dispositions. There is no restriction on the number of
years in which XOX will receive royalties based on the number of such software
dispositions made by Schlumberger. The Schlumberger Agreements were the subject
of a press release dated July 23, 1998. The Company anticipates that geosciences
will continue in fiscal year 1998 to represent the strongest niche market for
providing revenues to XOX.
To increase the Company's revenues in 1998, the current Board and management
previously disclosed its intention to broaden the scope of business
opportunities available to the Company. XOX intended on broadening its business
opportunities in several ways; through the sale of nonexclusive licenses, which
may include the ownership of source code through partnerships and strategic
alliances for the purpose of joint development and marketing of end user
products; through the continued sale of OEM licenses at increased prices, which
price may include negotiated royalties and development support and through
continuing its custom development and consulting business. The Schlumberger
Agreements directly relate to these previously stated intentions. Further, XOX
announced
page 6
<PAGE>
in the first week of November, the entering into of a contract with Interpretive
Imaging, LLC, and an enhancement to a current Development-OEM Software License
Agreement between XOX Corporation and Seismic Micro-Technology.
In an attempt to achieve profitability in 1998, the Company's Board of Directors
and its management budgeted for reduced expenses and monthly cash expenditures
for 1998, thereby hoping to improve the ratio of operating expenses to sales.
These reductions were implemented and effective on January 1, 1998. The results
of these efforts, as well as others, continued to be reflected throughout the
third quarter of 1998, with operating expenses averaging $58,967 per month less
than the Company's operating expenses for the same quarter in 1997. Operating
expenses averaged $81,673 per month less than the nine month period ending
September 30,1997.
The Company's research and development expenses for the quarter ended September
30, 1998 decreased approximately 25% to $189,666 from $254,491 reported for the
same quarter in 1997. The Company's research and development expenses for the
quarter ended September 30, 1998 represented approximately 47% of the Company's
total operating expenses as compared to 44% of the Company's total operating
expense in the third quarter of 1997. For the nine-month period ending September
30, 1998, the Company's total research and development expenses decreased 32% to
$641,484 from the Company's total research and development expenses of $944,513
reported in the same period in 1997. The Company's total research and
development expenses for the nine-month period ending September 30, 1998,
represented 47% of the Company's total operating expenses as compared to 45% of
the Company's total operating expenses for the same period in 1997.
Selling, general, and administrative expenses for the quarter ended September
30, 1998 decreased approximately 34% to $216,664 from $328,741 reported for the
same quarter in 1997. Selling, general and administrative expenses represented
approximately 53 % of the Company's total operating expenses as compared to 56%
of the Company's operating expenses in the third quarter of 1997. For the
nine-month period ending September 30, 1998, selling, general, and
administrative expenses decreased 37 % to $720,172 from $1,152,204 reported the
same period in 1997. The Company's selling, general and administrative expenses
represented 53% of operating expenses as compared to 55% of the Company's total
operating expenses for the same period in 1997.
The increase in revenues and the reductions in the operating expenses improved
the Company's ratio of operating expenses to revenues and resulted in net income
of $156,720 for the quarter ending September 30, 1998 and $306,797 for the nine
month period ending September 30,1998. This compares to a net loss of $358,468
and $1,349,408 for the same time periods in 1997. Thus, the Company net income
per share for the quarter ending September 30,1998 was $.05 and net income per
share for the nine months ending September 30,1998 was $.10 compared to a net
loss per share of $.12 for the quarter ending September 30, 1997 and $.46 for
the nine month period ending September 30,1997. The third quarter net income per
share of $.05 was below the second
page 7
<PAGE>
quarter net income per share of $.08 due to requirements to recognize a portion
of the income derived from the Schlumberger agreement in the second quarter.
Despite recognizing a portion of this income in the second quarter year to date,
net income for the quarter ended June 30, 1998 increased from $.05 to $.10 per
share for the quarter ended September 30, 1998.
Interest income in the quarter ended September 30, 1998 of approximately $8,475
resulted primarily from the investment of the surplus cash realized from the
Company's 1998 earnings in money market accounts and short-term commercial
paper.
During the fourth quarter of 1998, the Company believes that operating results
could continue to vary substantially from the first three-quarters of 1998. At
its current stage of operations, the Company's quarterly revenues and results of
operations may be materially affected by the timing of the development,
introduction and market acceptance of the Company's and its licensees' products.
LIQUIDITY AND CAPITAL RESOURCES
The completion of the Company's initial public offering of its Units in
September 1996, and a partial exercise of the underwriter's over-allotment
option in November 1996, provided the Company with net proceeds of approximately
$4,997,000. This financing transaction gave the Company the necessary cash
infusion to pay down some debt and to continue to pursue its business strategy.
Cash and cash equivalents were $1,011,427 at September 30, 1998, compared to
$687,039 at December 31, 1997 and $1,024,474 at September 30, 1997. The
Company's working capital was $992,880 at September 30,1998, compared to working
capital of $687,199 at December 31, 1997 and working capital of $1,348,254 at
September 30, 1997. The Company's accounts receivables were $108,936 on
September 30,1998, compared to accounts receivables of $249,024 at September 30,
1997, and $279,888 at December 31, 1997.
In December 1996, the Company made an equity investment of $41,020 in IIS-XOX,
in exchange for a 47.5% interest in the joint venture. The Company's 47.5% share
of equity in earnings of the joint venture for the period ended March 31, 1998
amounted to $32,249 resulting in an investment shown on the balance sheet of
$112,781 at September 30, 1998, in accordance with the equity method of
accounting. At present, the Company has reached an agreement to exit the joint
venture. The final dissolution, which should occur during the fourth quarter of
1998, is not anticipated to have material impact on the earnings of the Company.
During the quarter ended September 30,1998, the Company advanced $15,108 in
working capital to XOX-India a wholly owned subsidiary that the Company is in
the process of establishing in India.
page 8
<PAGE>
During the quarter ended September 30, 1998, the Company re-paid $126,071 of
notes payable. The Company anticipates making additional payments in 1999 on
long term notes that have a variable re-payment plan dependent on the Company
attaining after tax profits equal to or greater than the Company's after tax
profits in 1998.
The Company currently estimates that it will make capital expenditures in 1998
of approximately $20,000 for computer equipment.
The Company estimates that its current cash balance and the cash to be generated
from customer revenues will be sufficient to fund its operations and capital
needs through at least July 31, 2001. At its current stage of business
development, the Company's quarterly revenues and results of operations may be
materially affected by, among other factors, development and introduction of
products, time to market, market acceptance, demand for the Company's products,
reviews in the press concerning the products of the Company or its competitors
and general economic conditions. Many of these factors are not within the
control of the Company. As a result, there can be no assurance that the Company
will be sufficiently funded through the fourth quarter of 1998.
YEAR 2000
The Company is aware of the Year 2000 issue. During the past several months, the
Company has performed an internal analysis on its primary software product,
(SHAPES) and has begun to assess the readiness of the Company's other products,
its internal computer systems and third party equipment and software for
handling such Year 2000 issues. The Company believes that the SHAPES product is
currently Year 2000 compliant. During the next several months, the Company, its
software engineers and its technical support staff expect to perform an extended
analysis on vendor supplied modules. While the Company cannot give any
assurances that these vendor modules will be Year 2000 compliant, the Company
expects to be able to successfully address and implement any necessary changes
to ensure Year 2000 compliance.
The Company is also in the process of addressing its administrative dependence
on software packages. Management intends on corresponding with its outside
vendors and third party suppliers to inquire about the Year 2000 readiness of
their respective products or services. To the extent that such vendors and
suppliers can ensure Year 2000 compliance, the Company anticipates continued use
and dependence on such third parties. However, there can be no assurance that
these outside vendors and third party suppliers will be able to become Year 2000
compliant, which could have an adverse effect on the Company.
XOX is committed to being Year 2000 compliant and realizes the impact to our
customers if the Company is unable to continue developing, maintaining and
supplying
page 9
<PAGE>
SHAPES software. The Company is in the early stages of developing contingency
plans in areas that may be impacted by Year 2000 related computer failure and
expects to have these plans in place by the year end 1999.
To date, the Company has not incurred any significant expenditures associated
with becoming Year 2000 compliant. As management continues the assessment, the
Company may find it necessary to incur additional costs to become Year 2000
compliant. However, the Company cannot give any assurance that it will in fact
be able to be Year 2000 compliant, or that other problems or costs associated
with the Year 2000 issue will not arise.
page 10
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
USE OF PROCEEDS FROM REGISTERED SECURITIES
1. The effective date of the registration statement for which this information
is reported was September 11, 1996.
2. The following is a reasonable estimate of, the amount of net offering
proceeds to the issuer used for each of the purposes listed below. An "x"
has been placed to the left of any amount that is an estimate.
DIRECT OR INDIRECT PAYMENTS TO DIRECTORS, OFFICERS,
GENERAL PARTNERS OF THE ISSUER OR THEIR ASSOCIATES; TO
PERSONS OWNING TEN PERCENT OR MORE OF ANY CLASS OF
EQUITY SECURITIES OF THE ISSUER; AND TO AFFILIATES OF
THE DIRECT OR INDIRECT ISSUER PAYMENTS TO OTHERS
(A) (B)
(01) Construction of plant, building
and facilities
(02) Purchase and installation of
machinery and equipment $115,139
(03) Purchase of real estate
(04) Acquisition of other business(s)
(05) Repayment of indebtedness $652,982 $434,751
(06) Working capital x $661,784
Temporary investment (specify)
(07) Money Market x $1,011,427
page 11
<PAGE>
Other purposes (specify)
(11) Purchase of software $85,000
(12) Sales and marketing $1,010,902
(13) Research and development $2,187,769
(14) IMETRIX Loan $161,000
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
page 12
<PAGE>
Item 5. Other Information
Effective September 18, 1998, John Sherbin II resigned as a member of
the XOX Corporation Board of Directors due to his resignation as Chief
Financial Officer of ANSYS, Inc. Mr. Sherbin had been the
representative of ANSYS, Inc. on the Company's Board of Directors.
Concurrent with Mr. Sherbin's departure, the Company's Board of
Directors voted to appoint Paul Johnson, who is Senior Vice President
of Production Creation for ANSYS, Inc., as a new member of the
Company's Board of Directors.
In addition, Mr. Peter Dahl and Mr. Craig Gagnon have been appointed to
the Company's Board of Directors, effective November 11, 1998. Mr. Dahl
is currently the Vice President and Chief Operating Officer of
BankWindsor and Mr. Gagnon is currently a partner at Oppenheimer, Wolff
& Donnelly.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(i) Those exhibits required to be furnished in response to this
item other than Exhibit 27, were furnished in connection
with the Company's Registration Statement on Form SB2, File
No. 333-05112-C, as filed with the Securities and Exchange
Commission and as amended, and other reports filed under the
Securities Exchange Act of 1934, all of which are
incorporated here in by reference.
(ii) Exhibit 27.6 - Financial Data Schedule
(b) Reports on Form 8-K
None
In accordance with the requirements of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
XOX Corporation
October 30,1998
By /s/ Steven B. Mercil
Steven B. Mercil
Chief Financial Officer
page 13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,011,427
<SECURITIES> 0
<RECEIVABLES> 108,936
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,153,113
<PP&E> 474,693
<DEPRECIATION> 409,237
<TOTAL-ASSETS> 1,360,743
<CURRENT-LIABILITIES> 160,233
<BONDS> 0
0
0
<COMMON> 76,821
<OTHER-SE> 12,696,744
<TOTAL-LIABILITY-AND-EQUITY> 1,360,743
<SALES> 0
<TOTAL-REVENUES> 563,114
<CGS> 0
<TOTAL-COSTS> 406,330
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,723
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $156,720
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.04
</TABLE>
