<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 March 31, 1997
Commission File Number: 0-20376
XXSYS TECHNOLOGIES, INC.
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(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
- -- 7,905,092 shares outstanding on May 15, 1997.
Transitional Small Business Disclosure Format (check one): Yes [X] No [ ]
<PAGE> 2
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
<PAGE> 3
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 75,936 $ 184,489
Trade accounts receivable 175,900 75,602
Stock subscription receivable (Note 2) 1, 149,933
903,000
Inventory and work in process 19,480
96,759
Prepaid expenses and other 61,094 89,967
----------- -----------
Total current assets 1,312,689 1,519,471
Machinery, equipment and furniture, net of
accumulated depreciation of $593,180 and $ 478,640 1,257,528 962,705
Cash in escrow - 175,000
Deferred costs 49,172 --
Patents, net of amortization of $130,675 and $121,058 40,192 44,532
----------- -----------
Total assets $ 2,659,581 $ 2,701,708
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 286,990 $ 324,823
Accrued compensation 88,243 37,119
Accrued liabilities 140,313 112,019
Related party accrued expenses 27,736 20,564
Current portion, long-term debt 40,913 75,803
----------- -----------
Total current liabilities 584,195 570,328
Long-term debt, less current portion 56,408 67,848
Commitments and contingencies (Note 3)
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 -- 7,905,092 / 7,270,101 16,816,537 15,099,537
Accumulated deficit (14,724,159) (12,986,117)
Note receivable for preferred stock (321,024) (306,288)
Note receivable for common stock (202,376) (193,600)
Deferred compensation
- -
----------- -----------
Total shareholders' equity 2,018,978 2,063,532
----------- -----------
Total liabilities and shareholders' equity $ 2,659,581 $ 2,701,708
=========== ===========
</TABLE>
See accompanying notes.
3
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XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996 1997 1996
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues:
Commercial sales and services $ 31,041 $ -- $ 75,622 $ --
Government research contracts 128,353 148,685 187,690 336,685
--------- --------- ------------ ---------
Total revenues 159,394 148,685 263,312 336,685
Operating expenses:
Cost of services 159,132 98,812 310,489 223,114
Selling, general and administrative 903,861 541,310 1,831,604 1,054,410
Research and development 84,828 28,651 110,031 28,651
--------- --------- ------------ ---------
Total operating expenses 1,147,821 668,773 2,252,124 1,306,175
--------- --------- ------------ ---------
Operating loss (988,427) (520,088) (1,988,812) (969,490)
Interest income 12,042 17,731 25,613 44,984
Other income(5) 62,077 249,999 231,575 372,819
Interest expense (3,370) (17,013) (6,419) (37,571)
--------- --------- ------------ ---------
Net loss $ (917,678) $(269,371) $(1,738,043) $ (589,258)
========= ========= ============ =========
Net loss per share $ (.12) $ (.04) $ (.24) $ (.10)
========= ========= ============ =========
Weighted average number of shares
outstanding 7,376,516 6,148,020 7,337,168 6,112,902
========= ========= ============ =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,738,043) $ (589,258)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 124,157 77,024
Non-cash compensation -- 143
Accrued interest income (23,511) (22,561)
Changes in assets and liabilities:
Investments -- --
Accounts receivable (100,298) (53,438)
Cash in escrow 175,000 (175,000)
Inventories (77,279) --
Prepaid expenses and other 28,873 (10,494)
Accounts payable (37,833) (78,756)
Accrued liabilities 79,418 8,039
Related party accrued expenses 7,172 (106,021)
----------- -----------
Net cash used in operating activities (1,562,344) (950,322)
Cash flows from investing activities:
Purchase of machinery and equipment (409,363) (379,110)
Deferred costs (49,172) 1,102,181
Other assets (5,277) (19,496)
----------- -----------
Net cash used in investing activities (463,812) 703,575
Cash flows from financing activities:
Sale of common stock 1,938,933 380,000
Warrant redemption costs -- (87,051)
Exercise of warrants 25,000 147,693
Issuance of warrants -- 49,060
Issuance of convertible notes -- --
Issuance of other notes payable -- --
Repayment of notes payable (46,330) (193,000)
Payments of related party debt -- --
----------- -----------
Net cash from financing activities 1,917,603 296,702
Net increase (decrease) in cash (108,553) 49,955
Cash and cash equivalents -- beginning of period 184,489 148,562
----------- -----------
Cash and cash equivalents at end of period $ 75,936 $ 198,517
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
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 six-month period
ended March 31, 1997, are not necessarily indicative of results for the entire
year.
2. STOCK SUBSCRIPTIONS RECEIVABLE
The stock subscriptions receivable at March 31, 1997, of $903,000
represent cash received by the Company in April and May 1997 as partial payment
for stock purchased under stock purchase agreements that the Company signed on
September 12, 1996, and March 18, 1997. The stock subscription receivable at
September 30, 1996, of $1,149,933 represents 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 March
31, 1997.
3. COMMITMENTS
At March 31, 1997, the Company had commitments totaling $538,750 to
complete construction of two column wrapping machines. In April 1997, the
Company took delivery of Robo Jr.(TM), which wraps columns up to three feet in
diameter.
4. 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 March 31, 1997, the Company
received cash in the amount of $1,608,933 from two individuals in exchange for
573,908 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 $2.80. On March 18, 1997, the two individuals exercised their rights to
purchase an additional $2 million, of which the Company had received cash of
$330,000 from one individual before March 31, 1997, in exchange for 127,407
shares of restricted Common Stock at an average price of $2.59 a share.
In April 1997 the Company received the remaining $66,067 of the
$1,000,000 private placement agreement signed on September 12, 1996, in exchange
for 21,742 shares of restricted Common Stock, for an average price of $3.04 a
share. In April and May 1997 the Company received $836,933 in exchange for
287,682 shares of restricted Common Stock as part of the $2,000,000 private
placement agreements signed on March 18, 1997, for an average price of $2.91 a
share. The amounts received after March 31, 1997, but before publication of this
financial statement are included in total Subscriptions Receivable at March 31,
1997. The remaining funds to be received under private placements as of May 15,
1997, are $833,067.
6
<PAGE> 7
5. OTHER INCOME
Other income of $62,077 for the three months ended March 31, 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. The
Company previously reported other income of $169,498 for the three months ended
December 31, 1996, for the consulting fee.
Other income of $249,999 for the second quarter of fiscal 1996 and
$372,819 for the first half 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
Second Quarter of Fiscal 1997 Compared to Second Quarter of 1996
Revenues of $159,394 were recorded in the fiscal quarter ended March
31, 1997, the second quarter of the Company's 1997 fiscal year, representing an
increase of $10,709, or 7%, compared with the second quarter of fiscal 1996.
Government contracts represented 81% of revenues as compared to 100% government
contract work in 1996. Commercial contracts represented 19% of revenues in the
second quarter 1997. In January the Company completed its first seismic retrofit
contract on Interstate 5 in San Diego for the California Department of
Transportation (Caltrans).
Total operating expenses of $1,147,821 in the second quarter 1997
increased by $479,048, or 72%, over the second quarter of fiscal 1996. The cost
of services of $159,132 represented 100% 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 $362,551, or 67%, to $903,861, 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.
Sales and marketing efforts are beginning to take effect, as the
Company has reported results on both a domestic and international basis. On
March 21, 1997, the Company announced that it had signed a letter of intent to
form a joint venture in Saudi Arabia with NAFA Enterprises, Ltd. NAFA is one of
the largest and fastest-growing companies in Saudi Arabia, with over 3,000
employees. The company provides bridge maintenance and construction services in
both Saudi Arabia and surrounding countries. On May 5, 1997, the Company
announced that it was awarded a $551,000 subcontract to retrofit 176 spandrel
columns of the Arroyo Seco Bridge in Pasadena, California. This is the first
contract awarded by Caltrans to retrofit a historic arch bridge, which specified
the exclusive use of composite jackets.
Interest income during the first quarter decreased to $12,042, compared
to $17,731 in the second quarter of the prior year. Other income is primarily
the result of consulting fees received from a composite materials company (see
Note 5, Other Income).
The net loss for the second quarter of fiscal 1997 of $917,678
represents an increase of $648,307 over the net loss of $269,371 in the second
quarter of 1996. On a per share basis, the net loss was $0.12 in the second
quarter 1997, compared to $0.04 in the second 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.
Six Months of 1997 Compared to Six Months of 1996
Revenues of $263,312 were recorded for the six months ended March 31,
1997, representing a decrease of $73,373, or 22%, compared with the first six
months of fiscal 1996. Government contracts represented 71% of total revenues,
compared to 100% 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 reduction in revenues from government grants through the first six
months was partially offset by an increase in commercial revenues from
commercial sales contracts.
7
<PAGE> 8
Total operating expenses of $2,252,124 in the first six months of 1997
increased by $945,949, or 72%, over the comparable period of fiscal 1996. The
cost of services of $310,489 represented 118% of contract revenues. Research and
development efforts for the first half were for the development of new products
over the next two to three year horizon. Selling, general and administrative
expenses increased by $777,194, or 74%, to $1,831,604, 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 six months decreased to $25,613,
compared to $44,984 in the first half of the prior year. Other income is
primarily the result of consulting fees received from a composite materials
company (see Note 5, Other Income).
The net loss for the first half of fiscal 1997 of $1,738,043 represents
an increase of $1,148,785 over the net loss of $589,258 in the first half of
1996. On a per share basis, the net loss was $0.24 in the first half of 1997,
compared to $0.10 in the first half 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 half 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 half ended March 31, 1997, the Company received $1,938,933 from the sale
of 701,315 shares of restricted Common Stock through four private placements and
$25,000 from the exercise of warrants to purchase 31,250 shares of restricted
Common Stock. An additional $903,000 was received in April and May 1997 as part
of the sale of 309,424 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 March 31, 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.
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:
8
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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.
May 15, 1997
By: /s/ Gregory P. Hanson
--------------------------------------
Gregory P. Hanson
Chief Financial Officer (Principal
Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE
FISCAL QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 75,936
<SECURITIES> 0
<RECEIVABLES> 1,078,900<F1>
<ALLOWANCES> 0
<INVENTORY> 96,759
<CURRENT-ASSETS> 1,312,689
<PP&E> 1,850,708
<DEPRECIATION> 593,180
<TOTAL-ASSETS> 2,659,581
<CURRENT-LIABILITIES> 584,195
<BONDS> 0
0
450,000
<COMMON> 16,816,537
<OTHER-SE> (523,400)<F2>
<TOTAL-LIABILITY-AND-EQUITY> 2,659,581
<SALES> 263,312
<TOTAL-REVENUES> 263,312
<CGS> 310,489
<TOTAL-COSTS> 310,489
<OTHER-EXPENSES> 1,941,635
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,419
<INCOME-PRETAX> (1,738,043)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,738,043)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,738,043)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES STOCK SUBSCRIPTION RECEIVABLE OF $903,000
<F2>NOTE RECEIVABLE FOR COMMON STOCK OF $202,376 AND NOTE RECEIVABLE FOR
PREFERRED STOCK OF $321,024 ARE SHOWN AS CONTRA-EQUITY ACCOUNTS
</FN>
</TABLE>
