<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------------------------------------
For the quarterly period ended June 30, 1996
Commission File Number: 0-20376
XXSYS TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
California 33-0161808
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4619 Viewridge Avenue
San Diego, California 92123
(Address of principal executive offices)
(619) 974-8200
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the 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
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: Common Stock, no par value
- -- 6,297,977 shares outstanding on August 6, 1996.
Transitional Small Business Disclosure Format (check one): Yes X No
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XXSYS TECHNOLOGIES, INC.
INDEX
PART I -- FINANCIAL INFORMATION
PAGE
----
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-8
Other Information 9
2
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XXSYS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
PROFORMA
JUNE 30, JUNE 30, SEPTEMBER 30,
1996 1996 1995
-------- ---- --------
ASSETS (NOTE 7)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 86,748 $ 524,488 $ 148,562
Cash in escrow (Note 2) 175,000 175,000 --
Accounts receivable 122,935 122,935 46,623
Stock subscription receivable (Note 3) -- -- 380,000
Inventory 20,438 20,438 --
Prepaid expenses and other 92,926 92,926 53,600
------------ ------------ ------------
Total current assets 498,047 935,787 628,785
Machinery, equipment and furniture, net of accumulated
depreciation of $439,852 and $340,220 891,663 891,663 439,047
Long-term note receivable -- -- 446,928
Deferred costs (Note 4) 192,500 -- 1,102,181
Patents, net of amortization of $102,154 and $86,298 61,710 61,710 59,796
------------ ------------ ------------
$ 1,643,920 $ 1,889,160 $ 2,676,737
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 590,253 $ 87,702 $ 695,552
Accounts payable 516,738 516,738 521,699
Accrued liabilities 125,726 79,078 98,622
Related party accrued expenses 9,107 9,107 192,426
------------ ------------ ------------
Total current liabilities 1,241,824 692,625 1,508,299
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $100
Shares authorized -- 2,000,000;
Issued and outstanding -- 4,500
(liquidation preference -- $450,000) 450,000 450,000 450,000
Common stock, no par value
Shares authorized -- 20,000,000;
Issued and outstanding -- 6,286,805/6,067,082 12,606,087 13,400,526 12,068,535
Warrants for services to be performed (11,237) (11,237) --
Accumulated deficit (12,157,925) (12,157,925) (10,910,399)
Note receivable for preferred stock (295,665) (295,665) (263,698)
Note receivable for common stock (189,164) (189,164) (176,000)
Deferred compensation -- -- --
------------ ------------ ------------
Total stockholders' equity 402,096 1,196,535 1,168,438
------------ ------------ ------------
$ 1,643,920 $ 1,889,160 $ 2,676,737
============ ============ ============
</TABLE>
See accompanying notes.
3
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XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Sales $ -- $ -- $ -- $ --
Contract revenues 152,543 38,441 489,228 320,492
---------- ---------- ----------- -----------
Total revenues 152,543 38,441 489,228 320,492
Operating expenses:
Cost of equipment -- -- -- --
Cost of services 97,063 25,973 384,354 71,581
Selling, general and administrative 703,229 445,523 1,693,461 1,288,292
Research and development 18,988 25,309 47,640 115,812
---------- ---------- ----------- -----------
Total operating expenses 819,280 496,805 2,125,455 1,475,685
---------- ---------- ----------- -----------
Operating loss (666,737) (458,364) (1,636,227) (1,155,193)
Interest income 23,988 11,235 68,982 36,690
Other income -- -- 372,819 --
Interest expense (15,529) (24,964) (53,100) (59,676)
---------- ---------- ----------- -----------
Net loss $ (658,278) $ (472,093) $(1,247,526) $(1,178,179)
========== ========== =========== ===========
Net loss per share $ (.11) $ (0.08) $ (0.20) $ (0.23)
========== ========== =========== ===========
Weighted average number of shares
outstanding 6,212,181 5,774,000 6,145,995 5,128,000
========== ========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,247,526) $(1,178,179)
Adjustments to reconcile net loss to cash 284,563
used in operating activities:
Depreciation and amortization 124,848
Non-cash employee compensation 143
Non-cash compensation for outside services 132,167
Accrued interest income (44,621)
Changes in assets and liabilities:
Cash in escrow (175,000)
Investments --
Accounts receivable (76,312)
Inventories (20,438)
Prepaid expenses and other (39,326)
Accounts payable (4,961)
Accrued liabilities 9,325
Related party accrued expenses 109,129
----------- -----------
Net cash used in operating activities (1,232,572) (893,616)
Cash flows from investing activities:
Purchase of machinery and equipment (552,248) (105,403)
Deferred acquisition costs 1,102,181 (1,990)
Other assets (27,130) 3,128
----------- -----------
Net cash used in investing activities 522,803 (104,265)
Cash flows from financing activities:
Sale of common stock 380,000 45,000
Assignment of stock powers 239,002 --
Warrant redemption costs (174,721) --
Exercise of warrants 154,493 --
Issuance of convertible notes -- 800,000
Issuance of other notes payable 91,340 410,000
Repayment of notes payable (196,639) (190,700)
Payments of related party debt __154,480 --
----------- -----------
Net cash from financing activities 647,955 1,064,300
Net increase (decrease) in cash (61,814) 66,419
Cash and cash equivalents -- beginning of period 148,562 8,722
----------- -----------
Cash and cash equivalents at end of period $ 86,748 $ 75,141
=========== ===========
</TABLE>
See accompanying notes.
5
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XXSYS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the information contained therein. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes for the fiscal year ended September 30, 1995,
contained in the Company's Form 10-KSB/A. The results of operations for the
three-month and nine-month periods ended June 30, 1996, are not necessarily
indicative of results for the entire year.
2. CASH IN ESCROW
Cash in escrow represents the Company's contractual share of payment of
a consulting fee made part of a settlement of a lawsuit in 1995, net of legal
fees. The funds are held in escrow pending settlement of a dispute between the
Company and its former president. All of the conditions of the payment of the
funds from escrow to the Company have been satisfied, however, the escrow agent
has declined to take further action without the withdrawal of a claim made by
the former president, or a court order instructing the escrow agent to make
payment to the Company. At the Company's request the escrow agent has filed an
interpleader action with the appropriate court for resolution.
3. STOCK SUBSCRIPTION RECEIVABLE
The stock subscription receivable of $380,000 represents cash received
by the Company in October 1995 as partial payment for stock purchased under a
stock purchase agreement that the company signed on September 1, 1995. The stock
subscription receivable is shown as a current asset for September 30, 1995,
because the amount was received prior to the issuance of the financial
statements. Amounts still owed the Company as part of the September 1, 1995,
agreement totaling $176,000 are reported as a contra-equity account titled ,
"Note receivable for common stock."
4. DEFERRED COSTS
Costs incurred in the first nine months ended June 30, 1996, are in
connection with a planned redemption of publicly traded warrants (see Liquidity
and Capital Resources). The warrant redemption was completed in August 1996.
5. NOTES PAYABLE
Notes payable at June 30, 1996, totaling $590,253 include $502,552 in
loans from two parties prior to October 1, 1995, a $50,000 loan from an officer
of the Company, and $37,701 from an installment financing arrangement for
prepaid insurance. The installment financing arrangement for the insurance is
paid in equal payments spread over an eleven month period, and has at an annual
interest rate of 7.72%. The interest rate on all other loans outstanding at June
30, 1996, are at 10% per year. Notes payable totaling $502,552 are due on
October 11, 1996, or upon the Company receiving no less than $2 million from any
equity offering, whichever occurs sooner. The note payable to an officer of the
Company is due on demand.
6. STOCKHOLDERS' EQUITY
Common Stock:
On October 3, 1995, the Company received cash in the amount of $380,000
as part of a subscription receivable related to a private placement of
$1,056,000, in exchange for 211,200 shares of common stock sold to an uncle of
the Company's chairman at a price of $5.00 per share under a purchase agreement
dated September 1, 1995. Cash in the amount of $500,000 had already been
received by September 30, 1995. Of the total purchase commitment,
6
<PAGE> 7
$176,000 remains as a two-year note payable to the Company at an interest rate
of 10% per year, due September 29, 1997.
On December 27, 1995, the Company received $147,693 upon the exercise
of a warrant to purchase 75,740 restricted shares of common stock at $1.95 a
share.
On January 12, 1996, the Company granted the issuance of 50 shares of
common stock, valued at $ 143, to a part-time employee. On January 19, 1996, the
Company authorized the issuance of 6,185 shares of common stock as payment for
services to four consultants, valued at $23,914, for an average $3.87 a share.
On April 3, 1996, the Company received $1,800 upon the exercise of a
warrant that had been issued prior to the Company's initial public offering in
1992, to purchase 2,620 restricted shares of common stock at $0.687 a share. On
May 21, 1996, the Company assigned its rights to redeem certain restricted
shares of common stock to a third party for $239,002. On May 22, 1996, the
Company received $5,000 for the exercise of a warrant issued in connection with
a bridge loan prior to the Company's initial public offering in 1992 to purchase
6,250 restricted shares of common stock at $0.80 a share.
On May 22, 1996, a group of investors exercised their rights under a
warrant agreement to receive 135,128 shares of restricted common stock in a
"cash-less" exercise, by tendering 34,872 of a total of 170,000 shares that
could be purchased by these investors under that same warrant agreement that
were "in-the-money" by $3.875 per share ($4.875 market price at the time of
exercise less the $1.00 exercise price).
Warrants
On January 17, 1996, the Company issued warrants to a consultant to
purchase 100,000 shares of common stock, including 50,000 shares at $4.00 a
share and 50,000 shares at $3.50 a share in connection with services to be
performed over a six-month period. The warrants were valued at $120,000. The
consulting agreement has been terminated.
7. PROFORMA BALANCE SHEET
The proforma balance sheet as of June 30, 1996, reflects the effect of
several transactions which have occurred between July 1, 1996 and August 19,
1996, which have increased shareholders' equity to a level above $1 million, an
equity requirement for the NASDAQ small cap exchange. Between July 11, 1996, and
August 14, 1996, the Company received $501,472 from the exercise of publicly
traded warrants (Warrants) and $10,000 from the exercise of other warrants, for
a total of 137,868 common shares. On August 12, 1996, at 5:00 p.m. Eastern
Daylight Time the Company redeemed all unexercised Warrants for $0.05 a share.
The total shareholders' equity in the proforma balance sheet contains an
allowance of $73,732 for the redemption of unexercised Warrants. Additionally,
on August 16, 1996, the Company signed an agreement for the conversion of
$502,551.50 in notes payable plus $46,648 in accrued interest for 196,152 shares
of restricted common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Third Quarter of 1996 Compared to Third Quarter of 1995
Revenues of $152,543 were recorded in the quarter ended June 30, 1996,
which is the Third Quarter of the Company's 1996 fiscal year, representing an
increase of $114,102, or 297%, compared with the Third Quarter of fiscal 1995.
The increase in revenues was due principally to an increase in work under
government contracts which have funded much of the technologies to improve the
commercial competitiveness of the Robo-Wrapper(TM).
Total operating expenses of $819,280 in the Third Quarter 1996
increased by $322,475 or 65%, over the Third Quarter of fiscal 1995. The cost of
services of $97,063 represented 64% of contract revenues in the Third Quarter
1996. Most of the research and development efforts for the Third Quarter 1996
continued to be related to billable government contracts and therefore were
reported as cost of services. Selling, general and administrative expenses
7
<PAGE> 8
increased by $257,706 or 58%, to $703,229, due to higher marketing and sales
activity as the Company commercializes its technology. Interest income during
the Third Quarter increased to $23,988, compared to $11,235 in the prior year's
Third Quarter.
The net loss for the Third Quarter of fiscal 1996 of $658,278
represents an increase of $186,185, or 39%, compared with the net loss of
$472,093 in the Third Quarter of 1995. The higher net loss was primarily the
result of higher sales and marketing expense as the Company enters commercial
operations. On a per share basis, the net loss was $0.11 in the Third Quarter
1996, which represents an increase in loss per share of $0.03 when compared to a
loss of $0.08 in the Third Quarter of 1995.
Nine Months of 1996 Compared to Nine Months of 1995
Revenues of $489,228 were recorded in the first nine months ended June
30, 1996, representing an increase of $168,736, or 53%, over the comparable
period in fiscal 1995. Government contract revenues for the nine month period
were higher than the comparable period in fiscal 1995.
Total operating expense of $1,636,227 in the first nine months of
fiscal 1996 increased by $481,034, or 42%, over the comparable period of fiscal
1995. The cost of services of $384,354 represented 79% of contract revenues in
the first nine months of fiscal 1996. Research and development efforts for the
first nine months of fiscal 1996 were funded primarily through billable
government contracts and therefore were reported as cost of services. Selling,
general and administrative expenses increased by $405,169, or 31%, to
$1,693,461, as the result of higher staffing levels and travel activity in
continuing support of marketing and commercialization of the Robo-Wrapper(TM)
Technology.
Interest income during the first nine months increased to $68,985,
compared to $36,690 in the prior year's first nine months, as a result of higher
level of cash available for investment in early fiscal 1996 and accrued interest
on notes receivable. Other income was primarily the result of settlement of the
lawsuit reported in the prior fiscal quarter.
The net loss for the first nine months of fiscal 1996 of $1,247,526,
represents an increase of $69,347, or 6%, compared with the net loss of
$1,178,179 in the first nine months of 1995. On a per share basis, the net loss
was $0.20 in the first nine months of 1996, compared to a loss of $0.23 in the
first nine months of 1995. The reduction in loss per share of $0.03 is primarily
the result of additional average number of shares outstanding compared with the
comparable period in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
On May 3, 1996, the Company borrowed $50,000 from the Chief Financial
Officer of the Company. The note had an interest rate of 10% per annum and
matured on May 31, 1996. The note's maturity date was subsequently extended to
August 19, 1996.
The Company's net working capital as of June 30, 1996, was negative
(current assets of $498,047 less current liabilities of $1,254,988), which has
required Company management to take actions to raise additional capital,
including the call of its publicly traded warrants and the negotiation of the
conversion of certain of its notes payable to equity. The effect of these
actions is shown in the proforma balance sheet for June 30, 1996, which reflects
the effect of the changes in capital structure described here and in Note 7.
On July 3, 1996, the Company announced that it had called for
redemption of its publicly-traded common stock purchase warrants ("Warrants").
Warrant holders were notified that they had until August 2, 1996, to exercise
their right to purchase common stock underlying the Warrants or to sell the
Warrants. The Warrant call date was subsequently extended to August 12, 1996,
the date that the Company redeemed the Warrants at $0.05 per Warrant. As of
August 13, 1996, 83,579 Warrants had been exercised for the purchase of 125,368
shares of common stock at $4.00 per common share, representing a total
investment in the Company of $501,472. Additionally, 11% the 112,500 in Bridge
Warrants from the Company's IPO in 1992 have been exercised, for 12,500 shares
at $0.80 a share.
Prior to the Warrant redemption date of August 12, 1996, there were
1,600,000 Warrants issued and outstanding. After giving effect to certain
adjustments pursuant to the anti-dilution provisions of the Warrants, each
Warrant entitled the holder to purchase one and one-half (1.5) shares of common
stock of the Company at an exercise
8
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price of $4.00 per common share. The common shares purchasable under the
Warrants were registered in a statement filed with the Securities and Exchange
Commission ("SEC") on Form SB-2, and made effective by the SEC on June 28, 1996.
The Warrants were called by the Company and subsequently delisted from NASDAQ at
5:00 p.m. Eastern Daylight Time on August 12, 1996. The redemption of the
Warrants, and the sale of any shares of common stock issued upon the exercise of
the Warrants, were made only by means of a prospectus made part of the
registration statement filed with the Securities and Exchange Commission.
IMPACT OF INFLATION
Inflation has not had any significant effect on the Company's operating
costs.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is currently subject to certain claims and legal actions
arising in the ordinary course of its business. In the opinion of management,
all such matters are adequately covered by insurance or will not have a material
adverse effect on the Company's financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None
(b) Reports on Form 8-K:
On October 10, 1995, the Company filed a Form 8-K relating to the
settlement of a lawsuit that it filed against third parties in which the Company
claimed breach of contract and fiduciary duty with regard to its efforts to
acquire a carbon composites manufacturer.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
XXSYS TECHNOLOGIES, INC.
August 19, 1996
By: /s/ Gregory P. Hanson
---------------------------------
Gregory P. Hanson
Chief Financial Officer (Principal
Financial and Accounting Officer)
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE PERIOD ENDED JUNE 30, 1996.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 261,748<F1>
<SECURITIES> 0
<RECEIVABLES> 122,935
<ALLOWANCES> 0
<INVENTORY> 20,438
<CURRENT-ASSETS> 498,047
<PP&E> 1,331,515
<DEPRECIATION> 439,852
<TOTAL-ASSETS> 1,643,920
<CURRENT-LIABILITIES> 1,241,824
<BONDS> 0
0
450,000
<COMMON> 12,606,087
<OTHER-SE> (496,066)<F2>
<TOTAL-LIABILITY-AND-EQUITY> 1,643,920
<SALES> 489,228
<TOTAL-REVENUES> 489,228
<CGS> 384,354
<TOTAL-COSTS> 384,354
<OTHER-EXPENSES> 1,741,101
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,100
<INCOME-PRETAX> (1,247,526)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,247,526)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,247,526)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES $175,000 CASH IN ESCROW, REPRESENTING COMPANY'S SHARE OF PAYMENT MADE
PART OF SETTLEMENT OF A LAWSUIT IN 1995.
<F2>INCLUDES NOTE RECEIVABLE FOR COMMON STOCK $189,164, NOTE RECEIVABLE FOR
PREFERRED STOCK OF $295,665 AND WARRANTS FOR SERVICES TO BE PERFORMED OF
$11,237, WHICH ARE CONTRA - EQUITY ACCOUNTS
</FN>
</TABLE>
