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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______ TO _______
Commission File Number 0-23152
\
MOBINETIX SYSTEMS, INC.
----------------------------------------------
Exact Name of small business issuer as specified in its charter
<TABLE>
<S> <C>
DELAWARE 33-0253408
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 OAKMEAD PARKWAY, SUNNYVALE, CALIFORNIA 94086
------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's telephone number, including area code: (408) 524-4200
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of issuer's common stock outstanding as of
December 31, 1998: 1,924,442
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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MOBINETIX SYSTEMS, INC.
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheet at December 31, 1998 3
Consolidated Condensed Statements of Operations for the
Three Months Ended December 31, 1998 and 1997 4
Consolidated Condensed Statements of Operations for the
Six Months Ended December 31, 1998 and 1997 5
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended December 31, 1998 and 1997 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signature 13
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MOBINETIX SYSTEMS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET (unaudited)
as of December 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and equivalents $ 3,617,613
Accounts receivable, net 2,396,773
Inventories 1,427,955
Prepaid expenses and other current assets 229,035
-----------
Total current assets 7,671,376
-----------
Property and equipment 783,695
Less: Accumulated depreciation (426,806)
-----------
Property and equipment, net 356,889
-----------
Total assets $ 8,028,265
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 936,902
Accrued liabilities and other 552,442
-----------
Total current liabilities 1,489,344
-----------
Stockholders' equity:
Series B convertible Preferred Stock 710
Series C convertible Preferred Stock 28
Series D convertible Preferred Stock 1,273
Common stock 1,924
Additional paid-in capital 15,088,836
Accumulated deficit (8,553,850)
-----------
Total stockholders' equity 6,538,921
-----------
Total liabilities and stockholders' equity $ 8,028,265
===========
</TABLE>
The accompanying notes are an integral part
of this financial statement.
3
<PAGE> 4
MOBINETIX SYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (unaudited)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Revenues $4,061,130 $2,281,001
Cost of revenues 2,091,805 1,339,367
---------- ----------
Gross margin 1,969,325 941,634
---------- ----------
Operating expenses:
Selling, general and administrative 1,164,558 819,885
Research and development 803,293 762,521
---------- ----------
Total operating expenses 1,967,851 1,582,406
---------- ----------
Operating income/(loss) 1,474 (640,772)
Interest expenses and other (41,450) (22,433)
Interest income 66,771 12,975
---------- ----------
Income/(loss) before income taxes 26,795 (650,230)
Income taxes 1,263 -
---------- ----------
Net income/(loss) $ 25,532 $(650,230)
========== =========
Net income/(loss) per share (note 2)
Basic $ 0.01 $ (0.42)
Diluted $ 0.00 $ (0.42)
Weighted average shares outstanding
Basic 1,923,965 1,537,120
Diluted 6,160,629 1,537,120
</TABLE>
The accompanying notes are an integral part
of this financial statement.
4
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MOBINETIX SYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (unaudited)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenues $10,107,909 $ 3,899,283
Cost of revenues 5,633,215 2,300,651
----------- -----------
Gross margin 4,474,694 1,598,632
----------- -----------
Operating expenses:
Selling, general and administrative 2,307,333 1,492,104
Research and development 1,764,298 1,433,575
----------- -----------
Total operating expenses 4,071,631 (2,925,679)
----------- -----------
Operating income/(loss) 403,063 (1,327,047)
Interest expenses and other (61,962) (22,698)
Interest income 125,094 43,670
----------- -----------
Income/(loss) before income taxes 466,195 (1,306,075)
Income taxes 1,263 -
----------- -----------
Net income/(loss) $ 464,932 $(1,306,075)
=========== ===========
Net income/(loss) per share (note 2)
Basic $ 0.24 $ (0.91)
Diluted $ 0.07 $ (0.91)
Weighted average shares outstanding
Basic 1,908,940 1,439,086
Diluted 6,222,397 1,439,086
</TABLE>
The accompanying notes are an integral part
of this financial statement.
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MOBINETIX SYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net cash used in operating activities $(2,439,875) $(3,676,896)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (118,215) (82,473)
----------- -----------
Net cash used in investing activities (118,215) (82,473)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 565,573
Borrowings -- notes payable -- 2,320,195
Repayment of debt under a line of credit (290,195) --
----------- -----------
Net cash (used in)/provided by in
financing activities (290,195) 2,885,768
----------- -----------
Net decrease in cash and cash equivalents (2,848,285) (873,601)
Cash and cash equivalents at beginning
of period 6,465,898 3,421,489
----------- -----------
Cash and cash equivalents at end
of period $ 3,617,613 $ 2,547,888
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes 1,263 --
Cash paid for interest 3,423 22,698
</TABLE>
The accompanying notes are an integral part
of this financial statement.
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MOBINETIX SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The financial information included herein for the three and six month periods
ended December 31, 1998 and 1997 is unaudited; however, such information
reflects all adjustments consisting only of normal recurring adjustments which
are, in the opinion of management, necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim
periods.
The interim consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. These interim
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Form 10-KSB of
MobiNetix Systems, Inc. (the "Company") for the year ended June 30, 1998.
The results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
2. NET INCOME/(LOSS) PER SHARE
Basic net income/(loss) per share is computed by dividing net income/(loss)
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period and excludes the
dilutive effect of stock options and convertible securities. Diluted net
income/(loss) per share gives effect to all dilutive common shares and other
dilutive securities outstanding during the period, including the assumed
conversion of the Preferred Stock into Common Stock using the if converted
method. In computing diluted net income per share, the average stock price for
the period is used in determining the number of shares assumed to be purchased
from exercise of stock options.
The following table sets forth the computation of basic and diluted earnings per
share for the three and six month periods ended December 31, 1998 and 1997 as
follows:
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<TABLE>
<CAPTION>
Three Months end Six Months end
December 31 December 31
1998 1997 1998 1997
------------------------- ------------------------
<S> <C> <C> <C> <C>
Numerator for basic and
diluted earnings per
share -- net income/(loss) $ 25,532 $ (650,230) $ 464,932 $(1,306,075)
---------- ----------- ---------- -----------
Denominator for basic
earnings per share --
weighted average Common
shares 1,923,965 1,537,120 1,908,940 1,439,086
Effect of dilutive securities
Series B Preferred Stock 1,441,339 -- 1,456,365 --
Series C Preferred Stock 1,150,307 -- 1,150,307 --
Series D Preferred Stock 1,273,149 -- 1,273,149 --
Employee stock options and
warrants 371,869 -- 433,637 --
---------- ----------- ---------- -----------
Denominator for diluted
earnings per share
adjusted weighted average
shares 6,160,629 1,537,120 6,222,397 1,439,086
---------- ----------- ---------- -----------
Income/(loss) per share
Basic $ 0.01 $ (0.42) $ 0.24 $(0.91)
Diluted $ 0.00 $ (0.42) $ 0.07 $(0.91)
Potentially dilutive
securities excluded from
computations as the effect
would be antidilutive -- 2,891,906 -- 2,909,810
</TABLE>
3. INVENTORIES
Classification of inventories is as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Finished goods $ 207,428
Work in process 572,098
Raw materials 648,429
-----------
Total $ 1,427,955
===========
</TABLE>
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
unaudited consolidated financial statements of MobiNetix Systems, Inc. and its
wholly owned subsidiary PenWare, Inc., including the notes thereto (see Part I,
Item 1).
This quarterly report on Form 10-QSB ("Form 10-QSB") for MobiNetix Systems, Inc.
(the "Company") contains forward-looking statements made within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act of 1934, as amended. Words such as "anticipates," "expects,"
"intends," "plans," "seeks," "estimates," and similar expressions identify such
forward looking statement. These statements are not quarantees of future
performance and are subject to certain risks and uncertainties that could cause
actual results to differ materially from those expressed or forecasted. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Business," "Operating Results," "Liquidity
and Capital Resources," and "Outlook" on pages 3-5 and 7-9 in the annual report
on Form 10-KSB ("Annual Report") filed with the Securities and Exchange
Commission("Commission") on September 29, 1998. Readers should not rely unduly
on forward-looking statements, which reflect only the opinion of the Company's
management as of the date hereof. Unless required by law, the Company undertakes
no obligation to revise forward-looking statements. Readers should also
carefully review the risk factors set forth in other reports or documents the
Company files from time to time with the Commission, particularly the quarterly
reports on Form 10-QSB, and any current reports on Form 8-K.
RESULTS OF OPERATIONS (THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE
MONTHS ENDED DECEMBER 31 1997)
The 78% increase in revenues from the second quarter of fiscal 1998 (three
months ended December 31, 1997) to the second quarter of fiscal 1999 (three
months ended December 31, 1998) is largely due to increased sales of the
Company's advanced PenWare 3100 inter-active electronic transaction terminals,
including significant shipments to Federated Department Stores,
Inc.("Federated"), IBM under a subcontract with U.S. Postal Services, and
America Retail Group. In addition to Federated, the Company received and shipped
significant orders from other national retailers in the quarter ended December
31, 1998. The Company also recognized certain software revenue as it has
released its Hide and Seek and other software products in the quarter ended
December 31, 1998.
Cost of sales increased by 56% in the second quarter of fiscal 1999 compared
with the second quarter of fiscal 1998, mainly due to higher unit volumes
shipped in the period. Gross margin increased from 41.3% in second quarter of
fiscal 1998 to 48.5% in the second quarter of 1999 due to release of certain
software products which have higher gross margin.
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Selling, general and administrative expenses increased by 42% from second
quarter of fiscal 1998 to the second quarter of fiscal 1999. The increase is
largely the result of higher personnel expenses to support business growth,
including targeted new hiring of employees in such areas as sales and marketing
purchasing and production control.
The 5% increase in research and development expenses in the second quarter of
fiscal 1999 is also largely attributable to the increase in number of Company
personnel. The Company continued to expand its engineering staff during the
second quarter of fiscal 1999 to enable the design, development and production
ramp of interactive transaction terminal products and software solutions. Due to
the very tight labor market and high costs in the Silicon Valley, in January
1999, the Company opened a software research and development center in Sri
Lanka, an Asian Pacific country, to take advantage of the rich human resources
in software development in these Asian Pacific countries. The Company also hired
technical consultants in area of designing and testing in India during the
second quarter of fiscal 1999 in an effort to reduce its increasing research
and development expenses.
RESULTS OF OPERATION (SIX MONTHS ENDED DECEMBER 1998 COMPARED TO SIX MONTHS
ENDED DECEMBER 1997)
Changes in revenues, costs and expenses from the first half of fiscal 1998 to
first half of fiscal 1999 are the result of the same factors and trends as those
outlined above for the three-month comparison period factoring in the seasonal
fluctuation of the Company's business.
CASH AND SOURCES OF LIQUIDITY
The Company's operating activities consumed $2,439,875 in cash during the six
months ended December 31 1998, compared to $3,676,896 during the six months
ended December 31 1997. The decreased cash usage in the first half of fiscal
1999 is due largely to improved profitability.
The Company's financing activities consumed $290,195 in the six months ended
December 31, 1998 compared to cash inflow of $2,885,768 in the six months ended
December 31, 1997. The usage of cash in current year is due to the payment of
$290,195 indebtedness under a line of credit with a commercial bank in July 1998
and the inflow of cash in the first half of fiscal 1998 was due to borrowing of
$2,320,195 under the line of credit and proceeds of $565,573 from exercise of
stock options. As of December 31, 1998, the Company's principal sources of
liquidity included cash of $3.6 million and funds available under its $3.0
million line of credit, which is subject to borrowing base formulas and other
conditions. The line of credit expires July 15, 1999.
OUTLOOK
With the cash on hand and the existing credit facilities, the Company believes
that it will not require additional financing for fiscal 1999. However, the
Company may pursue other debt or equity transactions
10
<PAGE> 11
which upon completion, would provide additional financing for future expansion.
There is no assurance that additional funding will be available.
The Company has yet to sustain consistent profitability and sales trends are
inherently difficult to predict at this stage of development. Sales forecast
shortfalls, delayed product introductions, and manufacturing and financing
constraints, together with other risk factors, could lead to adverse
fluctuations in revenues and profits in any particular quarter.
IMPACT OF CURRENCY AND INFLATION.
The Company purchases the majority of its materials and services in U.S.
dollars, and most of its foreign sales are transacted in U.S. dollars. The
Company did not hold or purchase any foreign exchange contracts for the purchase
or sale of foreign currencies. The Company may choose to enter into such
contracts from time to time should conditions appear favorable. Effects of
inflation on Company's financial results have not been significant.
FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
In addition to other information in this Form 10-QSB and the risk factors
discussed in the Company's latest Annual Report filed with the Commission,
investors evaluating the Company and its business should carefully consider the
following risk factors, which may have a significant impact on the Company's
business, operating results and financial condition. The risk factors set forth
below and elsewhere in this Form 10-QSB and in the Company's Annual Report could
cause actual results to differ materially from those projected in any
forward-looking statements. These risk factors include but are not limited to
the unpredictable and fluctuating operating results; highly competitive markets
for the Company's products; rapidly developing and changing technologies and
market condition; dependence on intellectual property, large customers, single
component manufacturer/suppliers and key personnel; and reliance on the
company's limited product line.
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that most computer software programs
have been written using two digits rather than four to represent a specific
year. Any computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculation causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. During the first half of fiscal
1999, the Company began a Year 2000 assessment of its management information
system, other information technology systems, non-information technology
systems, products and key suppliers. Items identified and under review include
manufacturing and test equipment,
11
<PAGE> 12
telecommunications systems and equipment and computer systems and equipment. In
addition, the Company is assessing the Year 2000 compliance of its products. The
Company intends to have its Year 2000 assessment, testing, remediation efforts
and development of necessary contingency plans complete by the year 2000, the
total cost of which has not yet been determined. To date, however, costs
incurred to address Year 2000 compliance issues have not been material. Costs
related to Year 2000 compliance issues continue to be funded through operating
cash flows. The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issue. There can be no assurance that the Company will be able to
complete its Year 2000 compliance assessment, testing, remediation efforts and
development of necessary contingency plans by the Year 2000. Any failure to
complete the Year 2000 assessment, testing, remediation efforts and development
of necessary contingency plans prior to January 2000 could have a material
adverse effect on the Company's business, financial condition and results of
operations.
NEW ACCOUNTING REQUIREMENTS
As of July 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income"("SFAS 130"). SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
SFAS 130 had no impact on the Company's net income or stockholders' equity.
In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information" which becomes effective for fiscal years
beginning after December 15, 1997. Adoption of SFAS 131 had no material impact
on the Company's consolidated financial position, results of operations or cash
flow.
FUTURE ACCOUNTING REQUIREMENTS
Also in June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which the Company will be required to adopt for fiscal year 2000.
This statement establishes a new model for accounting for derivatives and
hedging activities. Under FAS 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. The Company has not determined the
impact of the adoption of this new accounting standard on its consolidated
financial position or results of operations.
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PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MOBINETIX SYSTEMS, INC.
Date: February 12, 1999 By: /s/ DAVID M. LICURSE, SR.
------------------------------------
David M. Licurse, Sr.
Chief Financial Officer and
Vice President of Operations
(principal accounting officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,617,613
<SECURITIES> 0
<RECEIVABLES> 2,569,578
<ALLOWANCES> 172,805
<INVENTORY> 1,427,955
<CURRENT-ASSETS> 7,671,376
<PP&E> 783,695
<DEPRECIATION> 426,806
<TOTAL-ASSETS> 8,028,265
<CURRENT-LIABILITIES> 1,489,344
<BONDS> 0
0
2,011
<COMMON> 1,924
<OTHER-SE> 6,534,986
<TOTAL-LIABILITY-AND-EQUITY> 8,028,265
<SALES> 10,107,909
<TOTAL-REVENUES> 10,107,909
<CGS> 5,633,215
<TOTAL-COSTS> 5,633,215
<OTHER-EXPENSES> 4,071,631
<LOSS-PROVISION> 110,442
<INTEREST-EXPENSE> 3,432
<INCOME-PRETAX> 466,195
<INCOME-TAX> 1,263
<INCOME-CONTINUING> 466,195
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 466,195
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.07
</TABLE>
