<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 December 31, 1998
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
- - 14,074,019 shares outstanding on February 12, 1999.
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 6,7
Management's Discussion and Analysis 8-10
Exhibits 10
</TABLE>
2
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XXSYS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1998
------------
<S> <C>
Current Assets:
Cash and cash equivalents $ 38,783
Restricted certificates of deposit (Note 8) 329,343
Trade accounts receivable 824,202
Other accounts receivable --
Stock subscription receivable --
Inventory and work in process 79,871
Prepaid expenses and other 133,547
------------
Total current assets 1,405,746
Machinery, equipment and furniture, net of
accumulated depreciation of $1,132,500 1,389,198
Deferred costs 4,219
Licenses and Patents, net of amortization of $180,990 309,166
------------
Total assets $ 3,108,329
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,471,700
Accrued compensation 43,304
Accrued liabilities 304,141
Related party accrued expenses 211,269
Current portion, long-term debt 82,649
------------
Total current liabilities 2,113,063
Long-term debt, less current portion 44,076
Commitments and contingencies (Note 2)
Shareholders' equity (Note 3):
Preferred stock, par value $100
Shares authorized -- 2,000,000;
Issued and outstanding - 500
(liquidation preference -- $50,000 50,000
Common stock, no par value
Shares authorized -- 20,000,000;
Issued and outstanding -- 14,074,019 21,635,780
Accumulated deficit (20,303,875)
Note receivable for stock (Note 5) (279,476)
Deferred compensation (151,239)
------------
Total shareholders' equity 951,190
------------
Total liabilities and shareholders' equity $ 3,108,329
============
</TABLE>
See accompanying notes
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XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Commercial sales and services $ 9,167 $ --
Government research contracts 17,785 308,370
------------ ------------
26,952 308,370
Operating expenses:
Cost of services 155,078 261,316
Selling, general and administrative 514,517 685,286
Research and development 13,216 58,131
------------ ------------
Total operating expenses 682,811 1,004,733
------------ ------------
Operating loss (655,859) (696,363)
Interest income 7,954 16,598
Other income ( Note 5 ) 118 374,995
Interest expense (2,174) (2,755)
------------ ------------
Net loss $ (649,961) $ (307,525)
============ ============
Net loss per share $ (.05) $ (.03)
============ ============
Weighted average number of shares
outstanding 13,871,435 9,222,587
============ ============
</TABLE>
See accompanying notes.
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XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(649,961) $(307,525)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 66,163 88,500
Non-cash compensation --
Stock issued for services
430,027
Accrued interest income (6,460) (7,449)
Changes in assets and liabilities:
Restricted certificates of deposit 221,657 --
Accounts receivable 656,855 220,674
Cash in escrow -- --
Inventories 31,864 (22,167)
Prepaid expenses and other (10,059) 29,197
Accounts payable (389,676) (163,924)
Accrued liabilities (273,515) (93,379)
Related party accrued expenses 29,077 20,620
--------- ---------
Net cash provided (used) in operating activities 105,972 (235,453)
Cash flows from investing activities:
Purchase of machinery and equipment (14,823) (12,398)
Deferred costs -- --
Other assets (40,602) (45,896)
--------- ---------
Net cash used in investing activities (55,425) (58,294)
Cash flows from financing activities:
Sale of common stock -- 396,000
Stock issued for pledge of collateral -- --
Exercise of warrants -- --
Issuance of other notes payable -- --
Repayment of notes payable (12,174) (33,192)
Payments of related party debt -- --
--------- ---------
(12,174) 362,808
Net increase (decrease) in cash 38,373 69,061
Cash and cash equivalents -- beginning of period -- 33,846
--------- ---------
Cash and cash equivalents at end of period $ 38,373 $ 102,907
========= =========
</TABLE>
See accompanying notes.
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XXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. However, the Company has had
substantial losses since inception and management expects that they will
continue for the foreseeable future. Additionally, the Company has a working
capital deficiency of approximately $707,317 at December 31, 1998. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. The Company is actively
seeking additional equity financing and other financing arrangements with
potential partners and other sources.
2. COMMITMENTS AND CONTINGENCIES
Arroyo Seco Project
During fiscal 1997, the Company executed a subcontract with McCarthy
Brothers, who was under contract with the California Department of
Transportation (Caltrans), to install carbon composite casings on 174 columns on
the Arroyo Seco bridge in Pasadena, California for $551,000. In compliance with
contract requirements, the Company posted material payment and performance bonds
of $551,000 each underwritten by Great American Insurance Company (Great
American) and secured by a letter of credit and $551,000 of restricted
certificates of deposit. Caltrans issued a number of stop notices and work on
the project was delayed until December 15, 1997. Part of the delay was to allow
for structural tests to be performed at UCSD to confirm the performance of the
retrofit design. Work continued into the second quarter of fiscal 1998.
In May, a dispute arose between the Company, McCarthy Brothers and
Caltrans regarding the quality and acceptability of the work performed to date
and the unilateral change order by Caltrans to eliminate the remaining
two-thirds of the columns to be wrapped. The Company had several meetings with
Caltrans officials to resolve these disputes over defects on workmanship versus
specification deficiency issues on the project, which included testimony from
independent professionals knowledgeable of composites used in retrofitting this
project and other bridge structures. Caltrans determined after such review
meetings that some of the work performed to date is acceptable, and some are
subject to repair with additional composite materials. The Company has submitted
a repair plan for Caltrans' approval. As of the date of this filing, there are a
number of technical issues regarding repair submittals that needed to be
addressed before the repair plan is approved by Caltrans. As a result of the
stop notices and change orders issued by Caltrans, the Company incurred time and
material charges well in excess of the original contract amount. The Company has
filed with Caltrans a number of notices of potential claims for the additional
work and damages caused by Caltrans' delays. It is not possible to predict the
outcome of these claims, and there can be no assurance that the Company will
collect all of its receivables, or recover its claims for damages. Meanwhile,
Great American has paid vendor claims against the material payment bond totaling
$242,476 and has drawn on the letter of credit to recover these costs.
3. SHAREHOLDERS' EQUITY
Common Stock:
On October 13, 1998 the Company filed a registration statement under
Form S-8 for purposes of registering 1,433,422 shares of common stock issuable
upon exercise of outstanding options or in consideration of services rendered.
In October 1998, the Company issued 1,433,422 shares of common stock in
consideration of services rendered at the market value at the date the stock was
sold, which ranged between $0.22 to $0.34 per share.
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4. NOTES RECEIVABLE FOR COMMON AND PREFERRED STOCK
On May 12, 1998, Dr. Ma reduced the balance of a promissory note and
accrued interest due the Company by $90,681, by relinquishing her rights to
certain deferred salaries and accrued vacation. The effect of this transaction
is to reclassify $90,681 previously reported as "Notes Receivable - Preferred
and Common Stock" to "Other Receivables." The remaining balance due under the
promissory note of $279,476 at December 31, 1998, continues to be reported as a
contra-equity account, "Notes Receivable - Preferred and Common Stock." Of the
amount being paid on the note by Dr. Ma, $55,056 was first applied to reduction
of accrued interest and the remaining amount of $35,625 was applied to reduction
in principal on the promissory note.
5. OTHER INCOME
Other income of $374,995 in the first three months of fiscal 1998
represents the net effect of the Company's receipt of payment of a final
consulting fee from a composite materials company.
6. CONSULTING AGREEMENT
On April 15, 1998, the Company entered into a two-year consulting
agreement with Continental Capital & Equity Corporation (CCEC), a public
relations and direct marketing advertising firm located in Longwood, Florida,
specializing in the dissemination of information about publicly traded
companies. As part of the agreement, CCEC will publicize the Company to brokers,
prospective investors and shareholders, including preparation and mailing of
corporate information about the Company and field calls from firms, investors
and brokers inquiring about the Company. In consideration of the services to be
performed by CCEC, 300,000 shares of freely trading Common Stock were placed
into escrow, subject to certain performance milestones to be achieved by CCEC.
Additionally, the Company issued CCEC an option to purchase an additional 50,000
shares at $2.00 per share and 50,000 shares at $3.00 per share as part of the
agreement. All Common Stock issued is to be held in escrow for a specific period
of time and is subject to repurchase by the Company at designated prices for a
limited period after issuance.
7. RESTRICTED CERTIFICATES OF DEPOSIT
In April 1997, the Company arranged for a $551,000 letter of credit with
its bank for the purpose of providing collateral in support of a material
payment bond and a performance bond issued by a surety company in connection
with work to be performed on the Arroyo Seco retrofit project. The $551,000
letter of credit is fully supported by the pledge of Company's funds, which are
held by the Company's bank as collateral for the letter of credit. Such funds
remain in a restricted use account until the bond and letter of credit are no
longer required. The remaining balance of this fund is $329,243. The funds are
regularly reinvested in short-term certificates of deposit with the bank.
Certain contractors and customers require the Company to have bonding capacity
in order to wok on their projects.
8. RELATED PARTY TRANSACTIONS
In January of 1999, a relative of the Chairman purchased a non-exclusive
license to the Company's technology for cash and forgiveness of a note payable
to the related party in the amount of $175,000.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
First Quarter of Fiscal 1999 Compared to First Quarter of 1998
Revenues of $26,952 were recorded in the fiscal quarter ended December
31, 1998, the first quarter of the Company's 1999 fiscal year, representing a
decrease of $281,418, or 87%, compared with the first quarter of fiscal 1998.
The decrease in revenues was primarily due to project delays and a reduction in
government grants.
Total operating expenses of $682,811 in the first quarter 1999 decreased
by $321,922, or 32%, compared with the first quarter of fiscal 1998. Gross
profit in the first quarter 1999 was a negative 83% compared to a positive
margin of 15% in the comparable period in 1998. Gross profit declined due to the
absence of construction activity and lack of revenue. Research and development
costs in excess of reimbursements by government agencies are reported as
research and development expense. Selling, general and administrative expenses
decreased by $170,769, or 25%, to $514,517 in the first quarter of fiscal 1999
as a result of a smaller staff size in the administrative area.
Interest income during the first quarter 1999 decreased to $7,954,
compared to $16,598 in the first quarter of the prior year.
Other income of $374,995 in the first quarter of fiscal 1998 represents
the net effect of the Company's receipt of payment of a final consulting fee
from a composite materials company.
The net loss for the first quarter of fiscal 1999 of $649,961 represents
an increase of $342,436 compared with the net loss of $307,525 in the third
quarter of 1998. On a per share basis, the net loss was $0.05 in the first
quarter of fiscal 1999 compared to $0.03 in the first quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of fiscal 1999, the Company continued to
incur losses in pursuing the commercialization of its composite retrofit
business primarily because of continued high business development expense and
cost of conducting small demonstration projects in new states and countries. The
Company has incurred costs of conducting small demonstration projects now in
primarily three states - California, Washington and Utah - and two countries
outside the United States, Canada and England. The Company believes that the
commercialization of the retrofit business throughout the United States will
come from such demonstration projects, which are expected to continue throughout
1999.
Working capital at December 31, 1998, was a negative $707,317 compared
with a negative $495,288 at September 30, 1998, for a decline of $212,029 during
the first three months. Working capital for both periods includes $329,343 and
$551,000,respectively, in restricted certificates of deposit, which are
necessary for material payment and performance bonds totaling $551,000 put in
place for the Company's surety to provide a bond for work being conducted on the
Arroyo Seco bridge retrofit project. The Company will not have access to these
funds until work has been determined to be satisfactorily installed and accepted
by both the prime contractor and the California Department of Transportation
(Caltrans). The restrictions of the bond combined with continued cost being
incurred on the project without receiving any reimbursement for work completed
to date have contributed to the decline of working capital. The Company can give
no assurances as to when a review will be held between Caltrans and the Company
on resolution of work issues on the project, whether the work performed to date
will be accepted, or when or how much it will be paid by the prime contractor
for the work performed on the project to date or when the bond will be released,
which could continue to have a negative impact on the Company's working capital.
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The sale of Common Stock continues to be the Company's supplemental
source of funds while the Company continues to commercialize its retrofit
business. During the first quarter ended December 31, 1998, the company issued
1,433,422 shares of common stock for services provided by vendors and employees.
This Form 10-QSB contains forms of forward-looking statements that are
based on the Company's beliefs as well as assumptions made by and information
currently available to the Company. Such statements are subject to certain
risks, uncertainties and assumptions, which are identified and described in the
Company's registration statements and periodic reports on file with the SEC,
including the Company's 1997 Annual Report on Form 10-KSB and subsequent
Quarterly Reports on Form 10-QSB. In particular, there is a risk that the
parties to the stock purchase agreements signed in December 1997 may not be able
to fulfill their remaining funding obligations. If the remaining funding
obligations should not be timely received or not received at all, then it will
be necessary for the Company to obtain substantial additional capital from other
sources which may be at unfavorable prices or not obtained at all, in which case
the Company may have to reduce, curtail or sell operating activities and assets.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results will vary materially from
those anticipated, estimated, or projected and the variation may be material.
YEAR 2000 STATEMENT
The Year 2000 Issue results from computer hardware and software systems
that were not designed to distinguish between centuries and may not accommodate
some or all dates beyond the year 1999. Therefore, computer hardware and
software systems will need to be modified prior to the year 2000 in order to
remain functional.
State of Readiness and Costs to Address Year 2000 Issues:
The Company has substantially completed a comprehensive inventory of its
systems, equipment and facilities. The Company's business information technology
(IT) systems include business applications, computing hardware and software and
related networking equipment and software. Non-IT systems are primarily embedded
technology such as microcontrollers, used in its facilities and the manufacture
or distribution of the Company's products. As a result of the Company's
strategic migration to new application systems that began in 1995, substantially
all of the Company's IT systems use hardware and software platforms that the
vendors have represented to be Year 2000 compliant. In addition, the majority of
the Company's non-IT systems are Year 2000 compliant. In general, the Company
expects to resolve any remaining Year 2000 Issues through planned upgrades or
replacements of its IT and non-IT systems, equipment and facilities that have
been deemed to be critical to the business operations. The Company is primarily
using internal resources to remediate or upgrade and test these systems for Year
2000 compliance. Based on the information currently available, the Company
estimates that the costs of planned upgrades or replacements of facility and
equipment systems will not exceed $500 thousand. This estimate assumes that the
Company will not incur significant Year 2000 related costs on behalf of its
suppliers, customers or third parties. In addition, the Company is monitoring
Year 2000 compliance efforts of suppliers, service providers and other entities
with which it has a business relationship. Until the assessments of these third
parties are complete, the Company cannot state with certainty whether it has, or
will have, significant Year 2000 Issues. Furthermore, as the Company is relying,
in large measure, on statements made by such third parties in order to prepare
those assessments, the lack of responsiveness or accuracy in such statements
could materially affect those assessments. As a result, the Company cannot
predict the potential consequences if these or other third parties or their
products are not Year 2000 compliant.
Risks of Year 2000 Issues and Contingency Plans:
While the Company believes its efforts to address the Year 2000 Issues
will be successful in avoiding any material adverse effect on the Company's
operations or financial condition, it recognizes that a most reasonable likely
worst case Year 2000 scenario would be the failure of a third party or a
component of the infrastructure, including national banking systems, electrical
power, transportation facilities, communication systems and governmental
activities to conduct their respective operations after 1999 such that the
Company's ability to obtain, manufacture and distribute its products and
services would be limited for a period of time. If this were to occur, it would
likely cause temporary financial losses and inability to provide products and
services to customers. The Company continues to assess the Year 2000 Issues
relating to its physical plant and equipment, products, suppliers and customers.
The Company is starting its contingency planning for critical operational areas
that might be affected
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by the Year 2000 Issues if compliance by the Company is delayed and/or if third
parties with which the Company has a business relationship fail to achieve Year
2000 compliance. In certain cases, especially third party infrastructure
failures, there may be no practical alternative course of action available to
the Company.
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) Reports on Form 8-K:
None
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.
February 11, 1999
By: /s/Randall Smith
------------------------------------
Randall Smith
Chief Financial Officer (Principal
Financial and Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form
10-QSB for the fiscal quarter ended March 31, 1998. And is qualified in its
entirety by reference to such
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 38,783
<SECURITIES> 0
<RECEIVABLES> 824,202<F1>
<ALLOWANCES> 0
<INVENTORY> 79,871
<CURRENT-ASSETS> 1,405,746
<PP&E> 2,521,698
<DEPRECIATION> 1,132,500
<TOTAL-ASSETS> 3,108,329
<CURRENT-LIABILITIES> 1,969,721
<BONDS> 0
0
50,000
<COMMON> 21,779,122
<OTHER-SE> (430,715)
<TOTAL-LIABILITY-AND-EQUITY> 3,108,329
<SALES> 26,952
<TOTAL-REVENUES> 26,952
<CGS> 155,078
<TOTAL-COSTS> 155,078
<OTHER-EXPENSES> 527,733
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,174
<INCOME-PRETAX> (649,961)
<INCOME-TAX> 0
<INCOME-CONTINUING> (649,961)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (649,961)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0
<FN>
<F1>Note receivable for preferred stock of $279,476 and deferred compensation of
$151,239 are shown as contra-equity accounts.
</FN>
</TABLE>
