FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO .
NOVEX SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 0-26112 41-1759882
(State of Jurisdiction) (Commission (IRS Employer
File Number) Identification No.)
16 CHERRY STREET CLIFTON, NEW JERSEY 07014
(Address of Principal Executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 973-777-2307
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to filing requirements for the
PAST 90 DAYS. YES X NO .
The Company had 21,987,738 shares of its $.001 par value common stock issued and
outstanding on November 30, 1999. On a fully diluted basis, assuming all
outstanding stock options and warrants to purchase common are exercised, the
Company would have 24,099,537 shares of common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
LOCATION IN FORM 10-Q INCORPORATED DOCUMENT
None.
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NOVEX SYSTEMS INTERNATIONAL, INC.
INDEX
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheet - dated
November 30, 1999 and May 31, 1999.............................................................F-1
Consolidated Statement of Operations - for the three months ended November
30, 1999 and November 30, 1998 and for the six months ended
November 30, 1999 and November 30, 1998........................................................F-2
Consolidated Statement of Changes in Shareholders'
Deficit, November 30, 1999....................................................................F-3
Consolidated Statement of Cash Flows - for the six
months ended November 30, 1999 and
November 30, 1998..............................................................................F-4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................................................1
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................................3
Item 2. Changes in Securities............................................................................4
Item 3. Defaults Upon Senior Securities..................................................................4
Item 4. Submission of Matters to a Vote of Security Holders..............................................4
Item 5. Other Information................................................................................4
Item 6. Exhibits and Reports on Form 8-K.................................................................4
ii
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PART I
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ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheet - dated
November 30, 1999 and May 31, 1999.............................................................F-1
Consolidated Statement of Operations - for the three months ended November
30, 1999 and November 30, 1998 and for the six months ended
November 30, 1999 and November 30, 1998........................................................F-2
Consolidated Statement of Changes in Shareholders'
Deficit, November 30, 1999.....................................................................F-3
Consolidated Statement of Cash Flows - for the six
months ended November 30, 1999 and
November 30, 1998..............................................................................F-4
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NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
November 30, May 31,
1999 1999
----------- -----------
CURRENT ASSETS:
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Cash and cash equivalents .................................................. $ 27,979 $ 1,788
Account receivable, net of allowances ...................................... 516,406 20,690
Inventory .................................................................. 495,015 221,707
Prepaid expenses and other current assets .................................. 42,734 8,600
----------- -----------
Total Current Assets ..................................................... 1,082,134 252,785
PROPERTY, PLANT, AND EQUIPMENT, net of ....................................... 1,477,138 80,914
accumulated depreciation and amortization
GOODWILL, net of accumulated amortization .................................... 875,949 316,300
OTHER ASSETS ................................................................. -- 6,059
----------- -----------
$ 3,435,221 $ 656,058
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank line of credit ........................................................ $ 434,741 $ --
Current Portion of Long-Term Debt .......................................... -- 393,548
Note payable-Sherwin Williams .............................................. 1,504,730 --
Accounts payable ........................................................... 546,384 322,502
Accrued expenses ........................................................... 203,691 34,112
Officer's loan ............................................................. 30,378
----------- -----------
Total Current Liabilities ................................................ 2,719,924 750,162
COMMITMENTS AND CONTINGENCIES
LONG TERM DEBT, net of current portion ....................................... 872,552 829,282
SHAREHOLDERS' DEFICIT:
Common stock - $0.001 par value
50,000,000 shares authorized
21,987,738 and 15,250,771 shares
issued and outstanding, respectively ..................................... 21,987 15,251
Additional paid-in capital ................................................. 5,688,150 4,386,387
Accumulated deficit ........................................................ (5,867,392) (5,325,024)
----------- -----------
Shareholders' Deficit .................................................... (157,255) (923,386)
----------- -----------
$ 3,435,221 $ 656,058
=========== ===========
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See notes to financial statements.
F-1
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NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
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Three Months Ended Six Months Ended
November 30, November 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
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Net Sales ............................ $ 570,187 $ 118,599 $ 851,474 $ 128,276
Cost of goods sold ................. 444,490 26,418 556,127 30,573
------------ ------------ ------------ ------------
Gross Profit ..................... 125,697 92,181 295,347 97,703
Operating Expenses
Selling expenses ................... 141,938 141,938
General and administrative expenses 141,575 302,844 497,333 561,588
Research and development expenses .. 26,016 26,016
Stock compensation ................. 7,500 7,500 7,500 26,250
------------ ------------ ------------ ------------
Total operating expenses ......... 317,029 310,344 672,787 587,838
------------ ------------ ------------ ------------
Loss from operations ................. (191,332) (218,163) (377,440) (490,135)
------------ ------------ ------------ ------------
Other expenses
Interest expense ................... (63,871) (73,368) (141,942) (114,706)
Other expenses ..................... (16,625) (22,493) (22,986) (35,175)
------------ ------------ ------------ ------------
(80,496) (95,861) (164,928) (149,881)
Net Loss ............................. $ (271,828) $ (314,024) $ (542,368) $ (640,016)
============ ============ ============ ============
Net loss per weighted-average share of
common stock outstanding $ (0.01) $ (0.03) $ (0.03) $ (0.05)
============ ============ ============ ============
Weighted-average share of common .....
stock outstanding 21,987,738 12,471,506 20,233,440 12,310,302
============ ============ ============ ============
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See notes to financial statements.
F-2
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NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
(Unaudited)
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Additional
Common Stock Paid-in Accumulated
-------------------------
Shares Amount Capital Deficit Total
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BALANCE, MAY 31, 1999 ......... 15,250,771 $ 15,251 $ 4,386,387 $(5,325,024) $ (923,386)
Issuance of common stock
in connection with acquisition
of Allied/Por Rok Division . 1,000,000 1,000 259,000 -- 260,000
Issuance of common stock
for compensation............ 30,000 30 7,470 -- 7,500
Conversion of debt and interest
to equity .................. 5,041,569 5,041 852,023 -- 857,064
Conversion of debt and interest
to equity ................... 575,924 576 165,859 -- 166,435
Net loss ...................... -- -- -- (270,540) (270,540)
----------- ----------- ----------- ----------- -----------
BALANCE, August 31, 1999 ...... 21,898,264 $ 21,898 $ 5,670,739 $(5,595,564) $ 97,073
Issuance of common stock
for compensation ............ 39,474 39 7,461 -- 7,500
Conversion of debt to equity .. 50,000 50 9,950 -- 10,000
Net loss ...................... -- -- -- (271,828) (271,828)
=========== =========== =========== =========== ===========
BALANCE, November 30, 1999 .... 21,987,738 $ 21,987 $ 5,688,150 $(5,867,392) $ (157,255)
=========== =========== =========== =========== ===========
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See notes to financial statements.
F-3
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NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
November 30,
--------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................ $ (542,368) $ (640,016)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............... 51,902 15,713
Common stock issued as payment for interest . -- 15,175
Common stock issued as compensation ......... 7,500 44,400
Amortization of debt discount ............... 28,870 69,529
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Change in accounts receivable ................. (495,716) (68,259)
Change in other receivables ................... -- 15,122
Change in inventory ........................... (273,308) (113,154)
Change in prepaid expenses and other current assets (34,134) (13,530)
Change in other assets ......................... 6,059 (1,840)
Change in accounts payable and accrued expenses 393,461 38,538
----------- -----------
CASH USED IN OPERATING ACTIVITIES ................. (857,734) (638,322)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ........... (1,424,868) 5,678
Acquisition of business, net of cash acquired ... (582,907) (296,318)
----------- -----------
CASH USED IN INVESTING ACTIVITIES ................. (2,007,775) (290,640)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit ............... 434,741 --
Proceeds from bridge financing .................. -- 800,000
Change in officer's loan ........................ 30,378 (37,000)
Change in debt .................................. 2,166,581 --
Proceeds from issuance of notes payable ......... -- 85,000
Common stock issued in connection with acquisition 260,000
Proceeds from sale of common stock .............. -- 98,000
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES ............. 2,891,700 946,000
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS ............. 26,191 17,038
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .. 1,788 49,108
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........ $ 27,979 $ 66,146
=========== ===========
See notes to financial statements.
F-4
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING FINANCIAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND FOOTNOTES, WHICH ARE ANNEXED HERETO. FORWARD
LOOKING STATEMENTS MADE IN THIS SECTION ARE MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying consolidated financial
statements.
The Consolidated Financial Statements for the period ended November 30, 1999,
included in this Form 10-Q are unaudited; however, such information reflects all
adjustments (consists solely of normal recurring adjustments), which are, in the
opinion of management, necessary to present a fair statement of the results for
the interim period.
RESULTS OF OPERATIONS
SIX MONTHS ENDING NOVEMBER 30, 1999 VS. NOVEMBER 30, 1998.
Net sales for the six month periods ending November 30, 1999 and November 30,
1998, were $851,474 and $128,276, respectively. The increase in sales was
attributable principally to the Company's acquisition of the Allied
Composition/Por-Rok business unit from The Sherwin-Williams Company ("Por-Rok
Unit") on August 13, 1999.
In the three month periods ending November 30, 1999 and November 30, 1998, net
sales were $570,187 and $118,559, respectively. The increase in revenues in the
second quarter ending November 30, 1999, versus the first quarter ending August
31, 1999 resulted from the second quarter reflecting a full quarter of revenues
derived from the Por-Rok Unit versus, there only being two weeks of revenue from
the Por-Rok Unit in the previous quarter. The Company experienced a decrease in
its gross margin in the three months ending November 30, 1999 to 22% versus 34%,
which was the result of a change in the Company's inventory valuation
methodology which caused an artifically higher cost of goods sold, and that
sales of its Por-Rok products in November were low which is consistent with the
historical sales patterns. In the third quarter ending February 28, 2000, the
Company anticipates that its gross margin will return to a level that is closer
to the gross margin in the first quarter. Management's targeted goal of
generating a 50% gross margin could be achieved if net sales were to increase to
an annualized level of approximately $4 million dollars. This higher level of
sales volume would reduce factory overhead expenses as a percentage of net
sales, thus resulting in a higher gross margin.
In the three month period ending November 30, 1999, the Company generated a loss
from operation of $191,332. In this period, however, the Company estimates that
the change in its inventory
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valuation methodology caused the Company to generate approximately $50,000 in
additional costs. The Company also incurred approximately $100,000 in freight
expenses which the Company will pass on to its customers through a new shipping
policy to become effective March 1, 2000. Also, in this period, the Company had
incurred non-cash charges for depreciation and amortization of approximately
$42,000. The net effect of these non-cash accounting charges and the cash
expenses relating to shipping costs, would have resulted in the Company posting
a nominal operating profit for the three month period ending November 30, 1999,
before expenses for interest which in the quarter totaled $80,496. The Company's
overall operating results for the six month period ending November 30, 1999 is
less reflective of the Company's current operations since the first quarter only
includes two weeks of the revenues and expenses generated by the Por- Rok Unit.
On November 30, 1999, the Company had $1,082,134 in current assets, which
consisted principally of accounts receivable of $516,406 and INVENTORY OF
495,015. The Company's property, plant and equipment totaled $1,477,138 and
goodwill was $875,949. All of the Company's asset categories increased
substantially when compared to its year ending balance sheet dated May 31, 1999
on account of the integration of the assets it acquired as part of the Por-Rok
transaction.
LIQUIDITY AND FINANCIAL RESOURCES AT NOVEMBER 30, 1999
In the three month period ending November 30, 1999, the Company had $2,719,924
in current liabilities, which includes a seller's note for $1,300,000 that was
issued to The Sherwin-Williams Company upon the acquisition of the Por-Rok Unit
("Sherwin-Williams Note"). The Company also has $434,741 outstanding on its
secured revolving line of credit with Dime Commercial Corp. which is used to
fund the Company's operations and it has accounts payable of $546,384, and
accrued expense of $203,691. The officer's loan of $30,378 was made to the
Company by its current President, Daniel W. Dowe, in June and July, 1999 to
assist the Company with its operating cash flow needs prior to the Company's
acquisition of the Por-Rok Unit and the opening of the line of credit with Dime
Commercial Corp. Mr. Dowe has entered into an agreement with the Company's board
of directors to have the loan repaid without interest as the Company's cash flow
increases.
Long-term debt of $872,552 consists of the long-term portion of a three year
$890,000 term loan that was made by Dime Commercial Corp. to enable the Company
to acquire the Por-Rok Unit. The remaining portion of the purchase price for the
Por-Rok Unit was paid with the Sherwin-Williams Note.
If the Company were to convert its accounts receivable and its finished goods
inventory into cash it will be able to pay all its current obligation in full,
except for the Sherwin-Williams Note. The Company has already begun the early
stage process of refinancing the Sherwin-Williams Note which matures on August
12, 2000, with an
2
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equity or a partial equity and debt security offering which may be completed as
part of another acquisition. The net effect of this refinancing, assuming a
portion, if not all, of the refinancing is completed through an equity offering
would enable the Company to increase its shareholders equity which was a
negative $157,255 on November 30, 1999. Although management's plans to refinance
the Sherwin-Williams Note are being undertaken, no assurance can be made that
the refinancing will be completed, or that it will be on terms that are
favorable to the Company.
INFLATION AND CHANGING PRICES
The Company does not foresee any risks associated with inflation or substantial
price increase in the near future. In addition, the raw materials that are used
by the Company in the manufacturing of its materials are available locally
through many sources and are, for the most part, commodity products. The one raw
material that the Company uses in all its products that cannot be classified as
a pure commodity is currently in sufficient supply, although the Company
presently owns approximately 600,000 lbs. of this product. As such, while the
Company will always have exposure to inflationary risks, it does not believe
that inflation will have any materially significant impact on its operations in
the near future.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 12, 1997, a shareholder, who was a former director and officer of the
Company commenced an action against the Company and its former President to
enjoin the Company from taking any action that would restrict the sale of common
stock that the plaintiff allegedly owns. The plaintiff has since named the
Company's current president in the lawsuit. The court acting on a motion for
summary judgment submitted by the plaintiff denied the relief requested in the
motion. The Company has raised several defenses to this action and believes the
claims against the Company are without merit. The Company has also asserted
multiple counterclaims against the plaintiff and, in December, 1999, asserted
multiple claims against two other third-party defendants that the Company
alleges were associated with the plaintiff and were direct participants in the
underlying actions and omissions that gave rise to the counterclaims against the
plantiff. Mel Greenspoon vs. Stratford Acquisition Corporation, et. al., Ontario
Court (General Division), Index No. 97- CV-126814.
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ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
None.
REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Stratford Acquisition Corporation has duly caused this
report to be signed on its behalf by the undersigned person who is duly
authorized to sign on behalf of the Registrant and as chief accounting officer.
NOVEX SYSTEMS INTERNATIONAL, INC.
BY:/S/Daniel W. Dowe
Daniel W. Dowe
President
Date: January 14, 2000
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<CIK> 0000945634
<NAME> NOVEX SYSTEMS INTERNATIONAL, INC.
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> NOV-30-1999
<EXCHANGE-RATE> 1
<CASH> 27,979
<SECURITIES> 0
<RECEIVABLES> 548,906
<ALLOWANCES> 32,500
<INVENTORY> 495,015
<CURRENT-ASSETS> 1,082,134
<PP&E> 1,678,393
<DEPRECIATION> 201,255
<TOTAL-ASSETS> 3,435,221
<CURRENT-LIABILITIES> 2,719,924
<BONDS> 0
0
0
<COMMON> 21,987
<OTHER-SE> (179,242)
<TOTAL-LIABILITY-AND-EQUITY> 3,435,221
<SALES> 851,474
<TOTAL-REVENUES> 851,474
<CGS> 556,127
<TOTAL-COSTS> 556,127
<OTHER-EXPENSES> 695,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141,942
<INCOME-PRETAX> (542,368)
<INCOME-TAX> 0
<INCOME-CONTINUING> (542,368)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (542,368)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
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