<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, 1997
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
- - 8,642,717 shares outstanding on August 13, 1997.
Transitional Small Business Disclosure Format (check one): Yes [X] No
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XXSYS TECHNOLOGIES, INC.
INDEX
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-9
</TABLE>
2
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<TABLE>
<CAPTION>
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, SEPTEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,391 $ 184,489
Restricted certificates of deposit (Note 2) 451,133 -
Trade accounts receivable 238,491 75,602
Stock subscription receivable (Note 3) 607,000 1,149,933
Inventory and work in process 186,959 19,480
Prepaid expenses and other 71,028 89,967
------------ ------------
Total current assets 1,556,002 1,519,471
Machinery, equipment and furniture, net of
accumulated depreciation of $659,088 and $ 478,640 1,604,548 962,705
Cash in escrow - 175,000
Patents, net of amortization of $113,546 and $105,532 68,499 44,532
Other non-current assets 94,715 -
------------ ------------
Total assets $ 3,323,764 $ 2,701,708
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 609,259 $ 324,823
Accrued compensation 173,160 37,119
Accrued liabilities 206,727 112,019
Related party accrued expenses 35,920 20,564
Current portion, long-term debt 26,542 75,803
------------ ------------
Total current liabilities 1,051,608 570,328
Long-term debt, less current portion 87,736 67,848
Commitments and contingencies (Note 4)
Shareholders' equity:
Preferred stock, par value $100
Shares authorized -- 2,000,000;
Issued and outstanding -- 4,500
(liquidation preference -- $450,000) 450,000 450,000
Common stock, no par value
Shares authorized -- 20,000,000;
Issued and outstanding -- 8,642,717/7,270,101 18,356,052 15,099,537
Accumulated deficit (16,086,477) (12,986,117)
Note receivable for preferred stock (328,392) (306,288)
Note receivable for common stock (206,763) (193,600)
Deferred compensation
- -
------------ ------------
- -
Total shareholders' equity 2,184,420 2,063,532
------------ ------------
Total liabilities and shareholders' equity $ 3,323,764 $ 2,701,708
============ ============
</TABLE>
See accompanying notes.
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XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Commercial sales and services $ 56,999 $ - $ 132,621 $ -
Government research contracts 72,993 152,543 260,683 489,228
----------- ---------- ----------- -----------
Total revenues 129,992 152,543 393,304 489,228
Operating expenses:
Cost of services 214,798 97,063 525,287 384,354
Selling, general and administrative 1,178,344 703,229 3,009,948 1,693,461
Research and development 104,279 18,988 214,310 47,640
----------- ---------- ----------- -----------
Total operating expenses 1,497,421 819,280 3,749,545 2,125,455
----------- ---------- ----------- -----------
Operating loss (1,367,429) (666,737) (3,356,241) (1,636,227)
Interest income 13,231 23,988 38,844 68,982
Other income (6) 0 - 231,575 372,819
Interest expense (1,964) (15,529) (8,383) (53,100)
----------- ---------- ----------- -----------
Net loss $(1,356,162) $ (658,278) $(3,094,205) $(1,247,526)
=========== =========== =========== ===========
Net loss per share $ (.17) $ (.11) $ (.41) $ (.20)
=========== =========== =========== ===========
Weighted average number of shares
outstanding 7,887,369 6,212,181 7,520,568 6,145,995
=========== =========== =========== ===========
</TABLE>
See accompanying notes
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<TABLE>
<CAPTION>
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED JUNE 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,094,206) $(1,247,526)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 226,818 124,848
Non-cash compensation - 143
Non-cash compensation for outside services - 132,167
Stock issued for services 9,725 -
Accrued interest income (36,400) (44,621)
Changes in assets and liabilities:
Restricted certificates of deposit (450,000) -
Accounts receivable (162,889) (76,312)
Cash in escrow 175,000 (175,000)
Inventories (167,479) (20,438)
Prepaid expenses and other 18,939 (39,326)
Accounts payable 284,436 (4,961)
Accrued liabilities 224,595 9,325
Related party accrued expenses 15,356 109,129
----------- -----------
Net cash used in operating activities (2,956,105) (1,232,572)
Cash flows from investing activities:
Purchase of machinery and equipment (822,291) (552,248)
Deferred costs (133,071) 1,102,181
Other assets (31,981) (27,130)
----------- -----------
Net cash used in investing activities (987,343) 522,803
Cash flows from financing activities:
Sale of common stock 3,752,933 380,000
Stock issued for pledge of collateral 11,790 -
Assignment of stock powers - 239,002
Warrant redemption costs - (174,721)
Exercise of warrants 25,000 154,493
Issuance of other notes payable 32,400 91,340
Repayment of notes payable (61,773) (196,639)
Payments of related party debt - 154,480
----------- -----------
Net cash from financing activities 3,760,350 647,955
Net increase (decrease) in cash (183,098) (61,814)
Cash and cash equivalents -- beginning of period 184,489 148,562
----------- -----------
Cash and cash equivalents at end of period $ 1,391 $ 86,748
=========== ===========
</TABLE>
See accompanying notes.
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XXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED 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 year ended September 30, 1996, contained
in the Company's Form 10-K. The results of operations for the nine-month period
ended June 30, 1997, are not necessarily indicative of results for the entire
year.
2. RESTRICTED CERTIFICATES OF DEPOSIT
The restricted certificates of deposit at June 30, 1997, of $451,133
represent cash deposited by the Company during the third quarter 1997 into
certificates of deposit, to be used as security for a letter of credit issued by
Bank of America to a surety company that is underwriting a material payment and
performance bond for the Company's construction projects. Of the amount held as
security for the Company, $450,000 represents certificates of deposit with
short-term maturities and $1,133 represents accrued interest on the CDs at June
30, 1997.
3. STOCK SUBSCRIPTIONS RECEIVABLE
The stock subscriptions receivable at June 30, 1997, of $607,000
represent cash received by the Company in July and August 1997 as partial
payment for stock purchased under stock purchase agreements that the Company
signed on March 18, 1997, and June 16, 1997. The stock subscriptions receivable
at September 30, 1996, of $1,149,933 represent cash received by the Company from
October 1, 1996, to December 31, 1996, as part of the stock purchase agreements
signed on September 12, 1996. The stock subscriptions receivable are shown as
current assets because the amounts were received prior to the issuance of the
financial statements for each of the periods ended September 30, 1996, and June
30, 1997.
4. COMMITMENTS
At June 30, 1997, the Company had commitments totaling $206,138 to
complete construction of a column wrapping machine. In April 1997, the Company
took delivery of Robo Jr.(TM), which wraps columns up to three feet in diameter,
thus, completing one of the Company's commitments at March 31, 1997. In a
separate transaction, the Company made a commitment to a bank to increase its
deposits in a restricted use account by $100,000, which will increase the
Company's ability to provide larger letters of credit in support of various
material payment and performance bonds for construction projects. The Company
fulfilled its commitment in July 1997.
5. SHAREHOLDERS' EQUITY
Common Stock:
During October and November 1996, the Company received $25,000 from
four individuals who exercised warrants to purchase 31,250 restricted shares of
Common Stock at $0.80 per share.
During the period from October 11, 1996, to April 10, 1997, the Company
received cash in the amount of $1,675,000 from two individuals in exchange for
595,649 shares of restricted Common Stock under Regulation S under two private
placement agreements for $2 million, signed on September 12, 1996. The average
share price of Common Stock issued to these two individuals during this period
was $2.81. The balance of funds totaling $325,000 was received in the prior
fiscal year.
On March 18, 1997, the two individuals exercised their rights to
purchase an additional $2 million, of which the Company had received cash of
$1,787,933 before June 30, 1997, in exchange for 691,566 shares of restricted
Common
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Stock at an average price of $2.59 a share. In July and August 1997 the
Company received the remaining $212,067 of the private placement agreements
signed on March 18, 1997, in exchange for 108,218 shares of restricted Common
Stock, for an average price of $1.96 a share.
On April 21, 1997, the Company issued 3,000 shares of restricted Common
Stock to a third party as part of an agreement whereby the third party would
provide a pledge of collateral in support of a letter of credit issued by a bank
in favor of the Company, valued at $11,790, for a price per share of $3.93.
Also, on April 21, 1997, the Company issued 3,261 shares of restricted Common
Stock to a consultant in exchange for services rendered earlier in the year
valued at $9,725, for an average price per share of $2.98.
On June 16, 1997 the Company signed agreements for two outside
investors to purchase restricted Common Stock under Regulation S for $2 million,
of which the Company had received $290,000 in exchange for 138,337 shares of
restricted Common Stock before June 30, 1997, for an average price of $2.10 a
share. In July and August 1997 the Company received an additional $394,933 of
these private placements in exchange for 208,333 shares of restricted Common
Stock, for an average price of $1.90 a share. The amounts received after June
30, 1997, but before publication of this financial statement are included in
total Subscriptions Receivable at June 30, 1997. The remaining funds to be
received under private placements as of August 12, 1997, are $1,315,067.
6. OTHER INCOME
Other income of $231,575 for the nine months ended June 30, 1997,
represents final settlement of a dispute with the former president over rights
to a consulting fee from a composite materials company and other matters.
Other income of $372,819 for the first nine months of fiscal 1996
represents the net effect of the Company's settlement of a lawsuit in which it
claimed breach of contract and breach of fiduciary relationship against third
parties who interfered with Company's efforts to acquire a composite materials
company.
RESULTS OF OPERATIONS
Third Quarter of Fiscal 1997 Compared to Third Quarter of 1996
Revenues of $129,992 were recorded in the fiscal quarter ended June 30,
1997, the third quarter of the Company's 1997 fiscal year, representing a
decrease of $22,551, or 15%, compared with the third quarter of fiscal 1996. The
decrease reflects a winding down of government-funded research and development
contracts as the Company transitions into commercial operation. This is
evidenced by the fact that commercial contract revenues increased to 44% of all
revenues for the quarter, compared to 0% in the third quarter of 1996.
During the third quarter 1997, the Company was awarded $981,000 in
retrofit contracts in three different states - California, Utah and Washington.
In May the Company announced that it had been awarded a $551,000 contract to
retrofit 176 spandrel columns of the Arroyo Seco Bridge in Pasadena, California.
In June the Company announced contracts to retrofit a parking structure in Salt
Lake City, Utah, at the LDS Hospital, and to retrofit bridge columns in Seattle,
Washington, as a demonstration project at the interchange of I-5 and I-90. The
company began work on the Utah project in June. The Company expects to begin the
Washington demonstration project and the Arroyo Seco Bridge project in the next
couple months.
Total operating expenses of $1,497,421 in the third quarter 1997
increased by $678,141, or 83%, over the third quarter of fiscal 1996. The cost
of services of $214,798 represented 165% of contract revenues. A substantial
portion of the R&D work continues to be performed under government research
contracts and has been reported as a cost of services. Research and development
costs in excess of reimbursements by government agencies are reported as
research and development expense. Selling, general and administrative expenses
increased by $475,115, or 68%, to $1,178,344, in 1997 as a result of continued
higher marketing and sales activity as the Company continues to expand its sales
and marketing efforts to other states in the United States and other countries.
Interest income during the third quarter decreased to $13,231, compared
to $23,988 in the third quarter of the prior year.
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The net loss for the third quarter of fiscal 1997 of $1,356,162
represents an increase of $697,884 over the net loss of $658,278 in the third
quarter of 1996. On a per share basis, the net loss was $0.17 in the second
quarter 1997, compared to $0.11 in the third quarter of 1996. The expansion of
the Company's sales and marketing efforts nationwide to both public and private
sectors was the primary reason for the higher losses.
NINE MONTHS OF 1997 COMPARED TO NINE MONTHS OF 1996
Revenues of $393,304 were recorded for the nine months ended June 30,
1997, representing a decrease of $95,924, or 20%, compared with the first nine
months of fiscal 1996. Commercial contracts represented 34% of total revenues,
compared to 0% in 1996. As the Company's technology gained commercial
acceptance, revenues have decreased from research and development grants from
the National Institute of Standards and Technology (NIST) and the Advanced
Research Projects Agency (ARPA) which were used to validate the commercial
application of the Company's carbon composite jacketing technology for seismic
retrofit. The matching funds grant from the State of California ended in
February 1997. The reduction in revenues from government grants through the
first nine months was partially offset by an increase in commercial revenues
from commercial sales contracts.
Total operating expenses of $3,749,545 in the first nine months of 1997
increased by $1,624,090, or 76%, over the comparable period of fiscal 1996. The
cost of services of $525,287 represented 134% of contract revenues. Research and
development efforts for the first nine months were for the development of new
products over the next two to three year horizon. Selling, general and
administrative expenses increased by $1,316,487, or 77%, to $3,009,948, as a
result of higher marketing and sales activity as the Company expands its sales
and marketing efforts in other states.
Interest income during the first nine months decreased to $38,844,
compared to $68,982 in the first nine months of the prior year. Other income in
the prior year is primarily the result of consulting fees received from a
composite materials company (see Note 5, Other Income).
The net loss for the first nine months of fiscal 1997 of $3,094,205
represents an increase of $1,846,679 over the net loss of $1,247,526 in the
first nine months of 1996. On a per share basis, the net loss was $0.41 in the
first nine months of 1997, compared to $0.20 in the first nine months of 1996.
The expansion of the Company's sales and marketing efforts nationwide to both
public and private sectors was the primary reason for the higher losses.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 1997, the Company incurred
losses in pursuing the commercialization of its composite retrofit business
primarily because of increased expense of marketing and business development
expense and in conducting small demonstration projects and seminars in Southern
California and neighboring states. The Company believes that the
commercialization of the retrofit business throughout the United States will
come from such demonstration projects and seminars, which are expected to
continue to grow throughout 1997. The Company has completed projects and
generated revenue now in both the public and private sectors in two states, Utah
and California. The Company also increased the number of Robo-Wrapper(TM)
machines to three and a fourth is under construction.
The sale of Common Stock continues to be the Company's supplemental
source of funds while the Company continues to commercialize its retrofit
business. The Company reported at the beginning of its fiscal year that
approximately $5.5 million in capital will be necessary to sustain operations
and capital equipment purchases throughout the 1997 fiscal year. During the
first nine months ended June 30, 1997, the Company received $3,752,933 from the
sale of 1,425,552 shares of restricted Common Stock through six private
placements and $25,000 from the exercise of warrants to purchase 31,250 shares
of restricted Common Stock. An additional $607,000 was received in July and
August 1997 as part of the sale of 316,551 shares of restricted Common Stock
under the private placements. The Company's sale of stock, cash outflows to
develop the business, and net working capital balance as of June 30, 1997, are
consistent with management's 1997 fiscal year operating plan.
IMPACT OF INFLATION
Inflation has not had any significant effect on the Company's operating
costs.
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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:
Form 8-K was filed on May 15, 1997.
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 13, 1997
By: /s/ Gregory P. Hanson
----------------------------------
Gregory P. Hanson
Chief Financial Officer (Principal
Financial and Accounting Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE FISCAL QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 452,524<F1>
<SECURITIES> 0
<RECEIVABLES> 845,491<F2>
<ALLOWANCES> 0
<INVENTORY> 186,959
<CURRENT-ASSETS> 1,556,002
<PP&E> 2,263,636
<DEPRECIATION> 659,088
<TOTAL-ASSETS> 3,323,764
<CURRENT-LIABILITIES> 1,051,608
<BONDS> 0
0
450,000
<COMMON> 18,356,052
<OTHER-SE> (535,155)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 3,323,764
<SALES> 393,304
<TOTAL-REVENUES> 393,304
<CGS> 525,287
<TOTAL-COSTS> 525,287
<OTHER-EXPENSES> 3,224,258
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,383
<INCOME-PRETAX> (3,094,205)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,094,205)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,094,205)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> 0
<FN>
<F1>Includes the Restricted Certificates of Deposit $451,133.
<F2>Includes Stock Subscription Receivable $607,000.
<F3>Note Receivable for Common Stock of $206,763 and Note Receivable for Preferred
Stock of $328,392 are shown as Contra-Equity Accounts.
</FN>
</TABLE>
