FORM 10-QSB
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
AUGUST 31, 2001
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 26,160,775 shares of its $.001 par value common stock and
1,529,426 shares of its $.001 par value preferred stock issued and outstanding
on August 31, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-Q Incorporated Document
--------------------- ---------------------
Part II, Item 6 None
NOVEX SYSTEMS INTERNATIONAL, INC.
Index
Page No.
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Part I Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheet as of
August 31, 2001.................................................. F-1
Statements of Operations for the
three months ended August 31, 2001 and
August 31, 2000.................................................. F-2
Statements of Cash Flows for the
three months ended August 31, 2001 and
August 31, 2000.................................................. F-3
Notes to Financial Statements ................................... 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
PART I
Page No.
--------
Item 1. Financial Information (Unaudited)
Balance Sheet as of
August 31, 2001.....................................................F-1
Statements of Operations for the
three months ended August 31, 2001 and
August 31, 2000.....................................................F-2
Statements of Cash Flows for the
three months ended August 31, 2001 and
August 31, 2000.....................................................F-3
Notes to Financial Statements ......................................F-4
NOVEX SYSTEMS INTERNATIONAL, INC.
BALANCE SHEET
AUGUST 31, 2001
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
accounts of $53,347 $ 410,953
Inventories 192,430
Prepaid expenses and other current assets 87,889
-----------
Total Current Assets 691,272
PROPERTY, PLANT AND EQUIPMENT - at cost, net 1,296,171
GOODWILL - at cost, net 665,873
-----------
$ 2,653,316
===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Cash overdraft $ 58,080
Current portion of long term debt 1,765,066
Bank line of credit 431,214
Accounts payable 578,425
Loans payable - shareholder 18,000
Accrued expenses and other current liabilities 145,909
-----------
Total Current Liabilities 2,996,694
-----------
COMMITMENTS AND CONTINGENCY
SHAREHOLDERS' DEFICIENCY:
Preferred stock - $0.001 par value, 10,000,000 shares authorized,
1,529,426 shares issued and outstanding 1,529,426
Common stock - $0.001 par value, 50,000,000 shares authorized,
26,160,775 shares issued and outstanding 26,161
Additional paid-in capital 6,328,319
Accumulated deficit (8,227,284)
-----------
Total shareholders' deficiency (343,378)
-----------
$ 2,653,316
===========
See notes to financial statements.
F-1
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
Three Months Ended
Ended August 31,
----------------------------
2001 2000
------------ ------------
(Unaudited) (Unaudited)
NET SALES $ 595,699 $ 497,833
COST OF GOOD SOLD 364,512 312,373
------------ ------------
GROSS PROFIT 231,187 185,460
SELLING, GENERAL AND ADMINISTRATIVE 284,036 234,478
------------ ------------
LOSS FROM OPERATIONS (52,849) (49,018)
------------ ------------
OTHER INCOME (EXPENSES):
Interest expense (65,006) (81,921)
Amortization of debt discount (27,671) (2,638)
Gain on change in valuation of put warrant 3,279 --
------------ ------------
OTHER EXPENSES, net (89,398) (84,559)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (142,247) (133,577)
------------ ------------
DISCONTINUED OPERATIONS:
Loss from operations of Novex Canada -- (48,124)
------------ ------------
LOSS FROM DISCONTINUED OPERATIONS -- (48,124)
------------ ------------
NET LOSS (142,247) (181,701)
LESS: PREFERRED STOCK DIVIDEND 23,172 --
------------ ------------
NET LOSS TO COMMON SHAREHOLDERS $ (165,419) $ (181,701)
============ ============
LOSS PER COMMON SHARE, basic and diluted:
From continuing operations (0.01) (0.01)
From discontinued operations -- (0.00)
------------ ------------
TOTAL LOSS PER COMMON SHARE, basic and diluted $ (0.01) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, basic and diluted 24,914,226 22,528,227
============ ============
See notes to financial statements.
F-2
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended
August 31,
--------------------------
2001 2000
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (142,247) $ (181,701)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Provision for bad debts 11,261 6,269
Depreciation and amortization 33,954 43,619
Loss (gain) on change in valuation of put warrant (5,231) --
Common stock issued for services -- 3,900
Amortization of debt discount 27,671 2,636
Changes in assets and liabilities, net of the effect from acquisition and
disposition:
Accounts receivable (119,565) 44,922
Inventories 11,824 (48,164)
Prepaid and other current assets (38,766) (39,622)
Net liabilities of discontinued operations -- (9,742)
Other assets -- (2,467)
Accounts payable 66,860 174,330
Accrued interest -- 29,406
Accrued expenses and other current liabilities 36,785 18,601
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (117,454) 41,987
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITY:
Acquisition of business, net of cash acquired -- (93,621)
----------- -----------
CASH USED IN INVESTING ACTIVITY -- (93,621)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 29,737 (7,201)
(Repayment of ) proceeds from loans payable - shareholders (18,000) 72,000
(Repayment of) proceeds from bank line of credit (25,194) 22,734
Repayment of debt obligations (22,089) (30,889)
Proceeds from the sale of common stock 153,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 117,454 56,644
----------- -----------
NET INCREASE IN CASH -- 5,010
CASH AT BEGINNING OF YEAR -- 285
----------- -----------
CASH AT END OF PERIOD $ -- $ 5,295
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 5,075 $ 46,375
=========== ===========
Income taxes $ -- $ --
=========== ===========
Non-cash flow and investing and financing activities:
Conversion of debt to equity $ 178,868 $ 1,390,388
=========== ===========
Common stock issued for assets acquired $ -- $ 130,000
=========== ===========
Common stock issued for future services $ 18,903 $ --
=========== ===========
Common stock issued for financing considerations $ 19,040 $ --
=========== ===========
Preferred stock dividend $ 139,038 $ --
=========== ===========
See notes to financial statements.
F-3
NOVEX SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED August 31, 2001
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operation results for the three months ended August 31,
2001 are not necessarily indicative of the result that may be expected for
the year ended May 31, 2002. The unaudited condensed financial statements
should be read in conjunction with the financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year
ended May 31, 2001.
2. LOSS PER SHARE
Basic net loss per common share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding. For the
three months ended August 31, 2001 and 2000 diluted loss per share is the
same as basic loss per share since the inclusion of stock options and
warrants would be antidilutive.
3. DISCONTINUED OPERATION
In October and December 2000, the Company entered into agreements to sell
the assets, except for accounts receivable and the Fiberforce trade name,
of its subsidiary, Novex Systems International, Ltd. ("Novex Canada"), for
approximately $245,300.
The results of operations and cash flows for Novex Canada has been
reclassified as discontinued operations for all periods presented.
Summarized results of the discontinued operation is as follows:
Three Months Ended August 31,
-----------------------------
2001 2000
----------- -----------
Net Sales $ -- $ 68,305
=========== ===========
Loss from operations $ -- $ (48,124)
----------- -----------
Total loss on discontinued operations $ -- $ (48,124)
=========== ===========
F-4
NOVEX SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED August 31, 2001
(unaudited)
4. INVENTORIES
Inventories were determined based on the perpetual inventory system and
consisted of the following:
August 31, 2001
---------------
Raw Material $ 146,547
Finished Goods 45,883
-------------
$ 192,430
=============
5. SHAREHOLDERS' DEFICIENCY
As of August 31, 2001, the Company raised $153,000 from the sale of
1,020,000 shares of restricted common stock. Included in the sale of common
stock were warrants, which provide the right to purchase one share of
common stock for every three shares of common stock purchased. The warrants
have an exercise price of $0.20 per share and they expire three years from
the date of issuance.
During the three months ended August 31, 2001, the Company has issued
136,000 shares of common stock in consideration for the financing of
$136,000 and recorded a debt discount of $19,040. In addition, the Company
converted $42,868 of loan and interest from a shareholder into 285,786
shares of restricted common stock.
During August 2001, the Company issued 70,000 shares of restricted common
stock and 75,000 warrants for future consulting services. The common stock
and warrants were valued at $8,400 and $10,503, respectively and recorded
as prepaid expense.
As of August 31, 2001, the Company issued 139,038 shares of preferred stock
as payment of accrued preferred stock dividend.
On June 1, 2001, the Company granted 100,000 options to a director of the
Company with an exercise price of $.20 and will expire on June 1, 2004. In
addition, the Company granted 61,805 options to its employees with an
exercise price of $.25 and will expire on October 1, 2003.
6. CONTINGENCY
During fiscal 1997, a shareholder commenced an action against the Company
and its former President to enjoin the Company and the former President
from taking any action that would restrict the sale of common stock that he
allegedly owns. In the opinion of management, this action is without merit
and will not have a material adverse effect on the Company's financial
position or results of operations.
F-5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
the information contained in the Financial Statements and the Notes to the
financial statements appearing elsewhere in this Form 10-QSB. The Financial
Statements for the three month period ended August 31, 2001, included in this
Form 10-QSB are unaudited; however, this information reflects all adjustments
(consisting 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
Three months ending August 31, 2000 vs. August 31, 2001
In the three month period ended August 31, 2001, Novex had net sales of
$595,699 versus $497,833 in the corresponding three month period in 2000. Cost
of goods sold in this period was $364,512 which was approximately 62% of gross
revenues, versus 63% in 2000. Novex incurred general and administrative costs of
$284,036 which resulted in a loss from operations of $52,849 in this period. In
this period, Novex incurred $65,006 in interest expense including $27,671 of
amortization of debt discount. The company's operating loss before interest,
taxes, depreciation and amortization was $18,895. The increase in sales, cost of
goods sold and general operating expenses during this period was attributable
primarily to the company's improvement of its sales and marketing efforts.
On August 31, 2001, Novex had $691,272 in current assets which consisted
primarily of inventory of $192,430 and accounts receivable of $410,953. The
company's property, plant and equipment was $1,296,171 net of accumulated
depreciation of $164,569 and goodwill of $665,873 net of accumulated
amortization of $91,833.
Liquidity and Financial Resources at August 31, 2001
As of August 31, 2001, Novex had $2,996,694 in current liabilities. Of this
amount, $431,214 was the balance on Novex's secured revolving line of credit
with Dime Commercial Corp. which is used to fund the Company's operations. It
had accounts payable of $578,425 accrued expenses of $145,909 and a cash
overdraft of $58,080.
In late May through August 2001 the company began to offer for sale
restricted shares of its common stock at $.15 per share and a warrant to
purchase one (1) share of common stock for every three shares of common stock
purchased in the offering. The warrants have an exercise price of $.20 per share
and a three year expiration period. As of the filing of this Form 10-KSB the
company raised $153,000. In addition, Novex's CEO and President, Daniel W. Dowe,
entered into an agreement with the company to convert all loans he made to the
company into equity under the same terms and conditions offered to investors in
the aforementioned private offering. The total amount converted was $42,868.
On December 21, 2000, Novex obtained from a private investor a six-month
secured bridge loan in the amount of $600,000 ("Bridge Note") which has been
extended by the investor to provide the company additional time to improve its
sales and secure take-out financing on terms that are mutually beneficial to the
company and the new investor(s). The Bridge Note holder owns approximately 4% of
the company's common stock and is equally concerned with excessive dilution. The
bridge loan bears interest at a rate of 10% per annum. In exchange for the
bridge financing, Novex issued 600,000 shares of its common stock to the
investor. The Bridge Note is secured by the same assets as, and is subordinated
to, the Dime Note (discussed below). During the period February 21, 2001,
through May 22, 2001, the same private investor made three additional bridge
loans of $286,000 for which he received 286,000 shares of common stock as of
August 31, 2001. The terms of the additional bridge loans are identical to those
of the original Bridge Note. He also made an equity investment of $50,000 on
January 21, 2001 for which he received 625,000 shares of Novex' common stock.
The current portion of the long-term debt consists of a three year term
loan and put warrant totalling $770,086 (originally $890,000) that was made by
Dime Commercial Corp. to enable the Company to acquire the Por-Rok Unit (the
"Dime Note"). The remaining portion of the purchase price for the Por-Rok Unit
was paid with the Sherwin-Williams Note which has been converted into 1,390,388
preferred shares. Included in the current portion of long-term debt is a
debenture payable for $125,000 that is past due as it matured on May 31, 1999.
This $125,000 note is the remaining balance on a bridge loan of $250,000 that
was purchased by Novex' largest shareholder, which is a private equity fund
managed by Quilcap Corporation.
The Dime Note is secured by all the assets that are located at the Por-Rok
operation at 16 Cherry Street, Clifton, New Jersey. These assets include the
land (1.58 acres), the main manufacturing building and the two warehouses,
including all the equipment in these buildings and all trademarks owned by
Novex. In addition, the revolving line of credit that Novex has with Dime is
secured by the accounts receivable generated at the Por-Rok unit and all
inventory.
For the quarter ended August 31, 2001, Novex has been able to increase
sales volume while selling, general and administrative expenses have remained
relatively constant when compared to quarter ended August 31, 2000. The increase
in sales has resulted in higher levels of accounts receivable and inventory as
well as accounts payable and accrued expenses. For the period ended August 31,
2001, gross margin has increased and selling, general and administrative
expenses have decreased when compared to the same period ended August 31, 2000.
The increase in the gross margin has resulted in lower levels of inventory,
interest and accounts payable and accrued expenses.
The company has generated a negative cash flow from operations of $117,454
for the quarter ended August 31, 2001 compared to a positive cash flow of
$41,987 for the quarter ended August 31, 2000. Thus, while future operating cash
inflows should continue to increase, unless Novex's sales volume increases, the
company will not have sufficient cash flow to cover its operating, investing and
debt payment requirements. Therefore, Novex has developed plans to improve
profitability and cash flows and to raising capital, if necessary.
2
To improve Novex's profitability, management is undertaking a number of
initiatives to increase sales and reduce expenses. In addition, management is
aggressively pursuing sales of the Por-Rok, Dash Patch, Sta-Dri and Fiberforce
products to large home center stores and major cooperative retailers of building
materials.
To improve cash flow, Novex has endeavored to procure more favorable
payment terms from vendors by extending the payment due date for raw materials
and supplies used in manufacturing. These vendors have been willing to extend
only limited credit to Novex since its acquisition of the Por-Rok product line
from The Sherwin-Williams, due to the company's small size. The limited credit
terms increased our need to use cash for operations.
If these efforts do not generate additional sales to enable Novex to meet
all of its operating and financing expense requirements, it would then seek
additional financing from third-party sources. Although the Novex's assets are
fully secured by loans outstanding to Dime Commercial Corp. and Montcap
Financial Corp., Novex would seek to raise additional capital through the sales
of unsecured debt securities, unsecured debt combined with equity securities or
preferred and common stock. It is likely, however, that any unsecured debt
financing would carry a higher interest rate than secured financing or that any
equity financing might be on terms which are not favorable to Novex and which
are dilutive to existing shareholders.
Inflation and Changing Prices
Novex 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 Novex 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 Novex uses in all its products that cannot be classified as a pure
commodity is currently in sufficient supply. For these reasons, while Novex 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 once a director and officer of
Novex ("the Plaintiff") commenced an action against Novex and its former
president, Mr. A. Roy Macmillan, to enjoin Novex from taking any action that
would restrict the sale of up to 300,000 shares of common stock that he
allegedly owns and for the costs he will incur to conduct the lawsuit. He has
not asked for, nor does Novex expect him to ask for, damages. The Plaintiff has
since named Novex's current president, Mr. Dowe, in the lawsuit. The Plaintiff
has no other affiliation with Novex other than for being a shareholder. The
plaintiff submitted a motion for summary judgment
3
which the court denied. Novex has raised several defenses to this action and
believes that plaintiff's claims are without merit. Novex has also asserted
multiple counterclaims against the plaintiff alleging that he caused the company
to issue to himself and others stock for work that was never done and at a time
when current management believes that fraudulent activities were being
undertaken which caused he company's stock price to be overinflated. Plaintiff
claims that he received stock as compensation for services rendered. When Novex
investigated the matter it found virtually no records of any tangible service.
These actions and omissions caused the U.S. Securities and Exchange Commission
in or about 1997 to commence an investigation of the company, then known as
Stratford Acquisition Corp. It is Novex's understanding that the investigation
is still pending and the Company has no information as to what action, if any,
the SEC may take pursuant to the investigation. Mel Greenspoon vs. Stratford
Acquisition Corporation, et. al., Ontario Court (General Division), Index No.
97-CV-126814.
Item 2. Changes in Securities.
During this quarter, the Registrant issued 136,000 shares of its common
stock to a private investor who made an additional bridge loan to the company in
the previous quarter totaling $136,000. The Registrant also issued in exchange
for investor relations services to be provided 70,000 shares of common stock and
a warrant to purchase 75,000 shares of common stock at a price of $.20 per share
for a three year exercise period. In June 2001, Mr. Dowe converted his $42,868
loan to 285,786 shares of common stock and a warrant to purchase 94,858 shares
of common stock at a price of $.20 per share for a three year exercise period.
The Registrant also issued 1,020,001shares of common stock and warrants to
purchase 434,855 shares of common stock in connection with equity investments
totalling $153,000 pursuant to a private offering conducted by the Registrant
during the quarter. The Registrant also issued 100,000 stock options to its
newest director as compensation for serving on the board of directors and issued
an additional 61,805 stock options to two former employees of the Registrant's
Canadian subsidiary as part of their severance packages.
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. None.
4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Novex Systems International Incorporated 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: /ss/ Daniel W. Dowe
--------------------------------------------
Daniel W. Dowe
President and Chief Executive Officer
Date: October 19, 2001
5