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, 2002
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 26,870,187 shares of its $.001 par value common stock and
1,644,133 shares of its $.001 par value preferred stock issued and outstanding
on August 31, 2002.
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, 2002 .............................F-1
Statements of Operations for the
three months ended August 31, 2002 and
August 31, 2001..................................................F-2
Statements of Cash Flows for the
three months ended August 31, 2002 and
August 31, 2001..................................................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..............................................3
Item 3. Defaults Upon Senior Securities....................................3
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
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PART I
Page No.
--------
Item 1. Financial Information (Unaudited)
Balance Sheet as of August 31, 2002 .............................F-1
Statements of Operations for the
three months ended August 31, 2002 and
August 31, 2001..................................................F-2
Statements of Cash Flows for the
three months ended August 31, 2002 and
August 31, 2001..................................................F-3
Notes to Financial Statements ...................................F-4
NOVEX SYSTEMS INTERNATIONAL, INC.
BALANCE SHEET
August 31, 2002
ASSETS
CURRENT ASSETS:
Cash $ 14,700
Accounts receivable, net of allowance for doubtful
accounts of $77,338 481,838
Inventories 159,852
Prepaid expenses and other current assets 180,248
Total Current Assets 836,638
PROPERTY, PLANT AND EQUIPMENT -at cost, net 1,209,808
GOODWILL - at cost, net 616,421
-----------
$ 2,662,867
===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long term debt $ 2,133,232
Bank line of credit 567,553
Accounts payable 424,422
Loans payable - shareholder 122,991
Accrued preferred stock dividend payable 38,235
Accrued expenses and other current liabilities 384,017
Accrued payroll taxes 275,731
-----------
Total Current Liabilities 3,946,181
-----------
COMMITMENTS AND CONTINGENCY
SHAREHOLDERS' DEFICIENCY:
Preferred stock - $0.001 par value, 10,000,000 shares authorized,
1,644,133 shares issued and outstanding (liquidation value $1,644,133) 1,644,133
Common stock - $0.001 par value, 50,000,000 shares authorized
26,870,187 shares issued and outstanding 26,870
Additional paid-in capital 6,399,653
Accumulated deficit (9,353,970)
-----------
Total shareholders' deficiency (1,283,314)
-----------
$ 2,662,867
===========
See notes to financial statements.
F-1
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
Three Months Ended August 31,
2002 2001
---- ----
NET SALES 557,526 595,699
COST OF GOODS SOLD 361,098 364,512
------------ ------------
GROSS PROFIT 196,428 231,187
SELLING, GENERAL AND ADMINISTRATIVE 260,722 284,036
------------ ------------
LOSS FROM OPERATIONS (64,294) (52,849)
------------ ------------
OTHER INCOME( EXPENSES):
Interest expense (86,178) (65,006)
Amortization or debt discount -- (27,671)
(Loss) gain on change in valuation of put warrant -- 3,279
------------ ------------
OTHER EXPENSES, net (86,178) (89,398)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (150,472) (142,247)
------------ ------------
NET LOSS (150,472) (142,247)
Less: Preferred stock dividend 38,235 23,172
------------ ------------
NET LOSS TO COMMON SHAREHOLDERS $ (188,707) $ (165,419)
============ ============
LOSS PER COMMON SHARE, basic and diluted:
FROM CONTINUING OPERATIONS (0.01) (0.01)
TOTAL LOSS PER COMMON SHARE, basic and diluted $ (0.01) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, basic and diluted 26,870,187 24,914,226
============ ============
See notes to financial statements.
F-2
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended August 31,
-----------------------------
2002 2001
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(150,472) $(142,247)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for bad debts 0 11,261
Depreciation and amortization 33,854 33,954
Loss (gain) on change in valuation of put warrant 0 (5,231)
Amortization of debt discount 14,400 27,671
Changes in assets and liabilities, net of the
effect from acquisition:
Accounts receivable (95,620) (119,565)
Inventories (3,568) 11,824
Prepaid and other current assets (36,772) (38,766)
Accounts payable 43,062 66,860
Accrued expenses and other current liabilities 77,811 36,785
Accrued payroll taxes 41,750 0
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (75,555) (117,454)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 0 29,737
(Repayment of ) proceeds from loans payable - shareholders (29,680) (18,000)
(Repayment of) proceeds from bank line of credit (4,757) (25,194)
Proceeds from debt financing 100,000 0
Repayment of debt obligations 0 (22,089)
Proceeds from the sale of common stock 0 153,000
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 65,563 117,454
--------- ---------
NET INCREASE(DECREASE) IN CASH (9,992) --
CASH AT BEGINNING OF YEAR 24,692 --
--------- ---------
CASH AT END OF PERIOD $ 14,700 $ --
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 26,622 $ 5,075
========= =========
Income taxes $ 0 $ 0
========= =========
Non-cash flow and investing and financing activities:
Conversion of debt to equity $ 0 $ 178,868
========= =========
Common stock issued for assets acquired $ 0 $ 0
========= =========
Common stock issued for future services 18,903
=========
Common stock issued for financing consideration 19,040
=========
Accrued preferred stock dividend payable $ 38,235 139,038
========= =========
See notes to financial statements.
F-3
NOVEX SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 2002
(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, 2002 are not necessarily indicative of the result
that may be expected for the year ended May 31, 2003. 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-KSB for
the year ended May 31, 2002.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered from
recurring losses from operations, including a net loss of $150,472 for the
quarter ended August 31, 2002, and has a negative working capital and
shareholder deficiency as of August 31, 2002. The Company is also in default of
its bank lines of credit and in arrears with paying payroll taxes. These factors
raise substantial doubt as to the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern.
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, 2002 and 2001 diluted loss per share is the same as basic loss per
share since the inclusion of stock options and warrants would be antidilutive.
3. INVENTORIES
Inventories were determined based on the perpetual inventory system and
consisted of the following:
August 31, 2002
---------------
Raw Material & Packaging $ 121,477
Finished Goods 38,375
---------
$ 159,852
=========
4. SUBSEQUENT EVENT
During fiscal 2002, the Company recorded $160,000 of Deferred Expense related to
a proposed sale-leaseback of its property. Effective October 23, 2002 the deal
was terminated and these prepaid expenses will be written off in the second
quarter.
F-4
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 ending August 31, 2002 and 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, 2002 vs. August 31, 2001
In the three month period ended August 31, 2002, Novex had net sales of
$557,526 versus $595,699 in the corresponding three month period in 2001. Cost
of goods sold in this period was $361,098 which generated a gross margin of 35%,
versus 38% in 2001. The decrease in the gross margin was attributable to sales
of large volumes of the company's products at wholesale prices to one new
distributor that purchased seven truckloads of product. Novex incurred selling,
general and administrative costs of $260,722, which resulted in a loss from
operations of $64,294 in this period. In this period, Novex incurred $86,178 in
interest expense. The company also issued a contractually obligated in-kind
preferred stock dividend to the holder of record of the company's preferred
stock in the amount of $38,235. For the three month period ending August 31,
2002 the company's operating loss before interest, taxes, depreciation and
amortization (EBITDA) was $30,440 versus a loss of $18,895 in the same three
month period in 2001. The decrease in selling, general and administrative
expenses in the three month period ended August 31, 2002 was attributable to
lower utility charges and lower selling expenses due to the company's
termination of manufacturer's representatives that earned commissions on sales.
On August 31, 2002, Novex had $836,638 in current assets which consisted
primarily of inventory of $159,852, accounts receivable of $481,838 and prepaid
expenses of $180,248. The company's property, plant and equipment was
$1,209,808, net of accumulated depreciation of $250,933 and goodwill of $616,421
net of accumulated amortization of $141,285.
Liquidity and Financial Resources at August 31, 2002
As of August 31, 2002 Novex had $3,946,181 in current liabilities. Of this
amount, $567,553 was the balance on Novex's secured revolving line of credit
with Dime Commercial Corp. which was used to fund the Company's operations and a
term loan of $704,667 outstanding with Dime and $1,011,000 in bridge loans
outstanding to a shareholder and director. Novex has also received advances of
$275,000 on a sale and leaseback transaction with its real property that was
terminated in October, 2002. Novex had accounts payable of $424,422, accrued
expenses of $384,017, unpaid tax obligations of $275,731 and a loan from a
shareholder of $122,991. The
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accrual for preferred stock dividend payable is $38,235 and is payable in shares
of preferred stock not cash.
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 from February 21, 2001,
through October 4, 2001, the same private investor made three additional bridge
loans of $411,000 for which he received 286,000 shares of common stock as of
November 30, 2001 and another 25,000 shares of common stock as of December 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 totaling $704,667 (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.
Effective March 1, 2002, Dime had terminated its funding on the two notes
and has commenced collections actions to secure repayment of the two loans. At
the time the loans were called the principal and interest payments were current,
however Dime had cited covenant defaults in its demand letter to Novex. Novex
reached an agreement in principle to sell and leaseback its real property for
$1,200,000 however the transaction did not close, although the investors
advanced Novex $275,000 up to August 31, 2002 as partial payments on the
purchase of the property.
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Due in part from the collapse of the sale and leaseback transaction, the
overdue maturity of its bank notes which matured on August 13, 2002 and Novex's
inability to secure the capital needed to achieve the growth objectives in its
business plan the company's board of directors have announced through a recent
filing with the Securities and Exchange Commission that it has determined to
sell Novex's business operation. Novex would then use cash proceeds to pay-off
its debt obligations and retain any excess proceeds in the company. Novex will
then seek to merge its public entity with a privately-held operating business
that could utilize Novex's $8 million net operating loss carryforward and its
public status. Novex will soon file proxy materials with the Commission to
schedule a shareholders meeting to approve of the asset sale. (See Item 6
below.)
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
In March, 2002, Dime Commercial Corp. commenced a legal action against
Novex to secure payment on the two outstanding notes and a separate action to
seek foreclosure on the real property in an attempt to force the company to
pay-off the notes in a reasonable time period. Since the filing of the actions,
the court in the legal proceeding for payment on the notes provided Novex with
injunctive relief whereby Novex could retain payments from customers on account
and use a new bank account to funds its operations until the litigation is
resolved. Novex has yet to file a response to the foreclosure action and with
its filing will seek further injunctive relief. Novex believes that its efforts
to secure refinancing of the Dime notes will materialize although as of the date
of this filing there are no firm commitments outstanding from prospective
investors.
Some small vendor accounts have commenced actions against Novex to secure
payments on aged accounts payable and the company does not believe these actions
would have materially adverse consequences to the company, since generally
enters into payment plans with creditors that believe that the only recourse for
payment is through legal action. In addition, as part of the refinancing of the
Dime notes, the company anticipates earmarking some of the proceeds for paydown
of outstanding trade debt.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. See Item 1. above.
3
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. The Company filed a Form 8-K on
November 5, 2002 the company filed a Form 8-KSB with the Securities and Exchange
Commission that the company has elected to divest of its operating business
through a corporate auction. The company has pre-selected strategic buyers in
the building products industry to assess the business and provide offers. The
company would like to close the sale by December 31, 2002 and then seek a merger
with a larger privately-held company that would be able to utilize the company's
$8 million net operating loss and public-status to achieve its business
objectives.
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.
Certification Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
In connection with the Quarterly Report of Novex Systems International, Inc. on
Form 10-QSB for the three month period ended August 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel
W. Dowe, the President and Acting Treasurer of the Company, pursuant to 18 U.S.
C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) and 15(d)
of the Securities and Exchange of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
NOVEX SYSTEMS INTERNATIONAL, INC.
By: /ss/ Daniel W. Dowe
--------------------------------
Daniel W. Dowe
President and Acting Treasurer
Date: November 18, 2002
4