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, 2003
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 26,245,187 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, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-Q Incorporated Document
--------------------- ---------------------
Part II, Item 6 None
NOVEX SYSTEMS INTERNATIONAL, INC.
Index
Page No.
--------
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheet as of August 31, 2003 .................................F-1
Statements of Operations for the
three months ended August 31, 2003 and
August 31, 2002......................................................F-2
Statements of Cash Flows for the
three months ended August 31, 2003 and
August 31, 2002......................................................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......................................................4
Item 2. Changes in Securities..................................................4
Item 3. Defaults Upon Senior Securities........................................5
Item 4. Submission of Matters to a Vote of Security Holders....................5
Item 5. Other Information......................................................5
Item 6. Exhibits and Reports on Form 8-K.......................................5
ii
PART I
Page No.
--------
Item 1. Financial Information (Unaudited)
Item 1. Financial Statements (Unaudited)
Balance Sheet as of August 31, 2003 .................................F-1
Statements of Operations for the
three months ended August 31, 2003 and
August 31, 2002......................................................F-2
Statements of Cash Flows for the
three months ended August 31, 2003 and
August 31, 2002......................................................F-3
Notes to Financial Statements .......................................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, 2003 and August 31,
2002, 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, 2003 vs. August 31, 2002
In the three month period ended August 31, 2003, Novex had net sales of
$75,804 versus $557,526 in the corresponding three month period in 2002. Cost of
goods sold in this period was $0 which generated a gross margin of 100%, versus
35% in 2002. The material change in sales and gross margin was attributable to
Novex' conversion of its business from a manufacturing company into a licensing
company. On February 1, 2003, Novex entered into an exclusive licensing
agreement with CGM, Inc., whereby CGM fulfills all orders for products sold
under the trade names that Novex continues to own and thereafter pays Novex a
cash royalty on sales ("Licensing Agreement"). All royalty payments are based on
actual sales in the previous month and are paid on a monthly basis.
This three month period marks the first quarter whereby Novex did not
produce any of sales. In the three month period ending May 31, 2003, Novex was
bound by the Licensing Agreement, but still needed to produce a nominal amount
of sales at its former Clifton, New Jersey facility. Going forward, and assuming
there are no material changes in Novex's business, the operating results will
appear similar to the quarter ending August 31, 2003 than in previous quarterly
periods whereby Novex recorded much higher net sales and costs of sales that are
more in line with a manufacturing entity.
In this three month period, Novex recorded income from operations of
$13,655 and a net income to common shareholders of $320,955. The net profit was
attributable primarily to a one time gain on the disposition of assets of
$393,500. On July 1, 2003, Novex's former bank, Washington Mutual (formerly Dime
Commercial Corp.) ("Dime") took title to the company's former manufacturing
facility in Clifton, New Jersey as satisfaction of a judgment that the bank
secured earlier this year in the amount of $1,336,000. Novex has not received a
final satisfaction of judgment from Dime. Dime and Novex are undertaking
settlement discussions. If the settlement discussions do not result in a
mutually satisfactory means for securing a satisfaction of judgment, Novex will
have to consider filing a bankruptcy petition to stop Dime from executed its
judgment against Novex' remaining assets, namely the intangible property that is
needed by Novex to perform its obligations under the Licensing Agreement.
In the three month period, Novex incurred financing charges of $40,986.
Until Novex can either refinance its outstanding debt, or merge with another
company which will include a refinancing of the debt
it will continue to accrue inordinate debt charges on a monthly basis.
Novex incurred selling, general and administrative costs of $62,149.
On August 31, 2003, Novex had $45,428 in current assets, which consisted
primarily of inventory of royalty receivables of $21,844 and cash of $23,584.
Novex also has goodwill of $579,067, which represents the book value of its
trademarks, trade names and customer list which are the assets that generate the
royalty income that the company earns.
Liquidity and Financial Resources at August 31, 2003
As of August 31, 2003 Novex had $2,906,592 in current liabilities. Of this
amount, $1,990,998 is due to four shareholders that loaned funds to the company
since 1998. The remaining liabilities are account payable and accrued expenses
of $483,609 and various taxes payable of $431,985.
On December 21, 2000, Novex obtained from a private investor, who is
referenced above as one of four shareholders, 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 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 Novex assets. 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. As part of a forbearance agreement that Novex and the
holder entered into the 625,000 shares of common stock were tendered back to the
company for cancellation.
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
in the manufacturing of Novex's products are available locally through many
sources and are for the most part commodity products.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure on contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions and conditions.
2
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described below. For a
detailed discussion on the application of these and other accounting policies
see our note 2 to our financial statements.
Long-Lived Assets (including Tangible and Intangible Assets)
We acquired businesses in recent years, which resulted in tangible assets being
recorded. The determination of the value of such intangible assets requires
management to make estimates and assumptions that affect our consolidated
financial statements. We assess potential impairment to the intangible and
tangible assets on a quarterly basis or when evidence that events or changes in
circumstances indicate that the carrying amount of an assets may not be
recovered. Our judgments regarding the existence of impairment indicators, if
any, and future cash flows related to these assets are based on operational
performance of our business, market conditions and other factors.
Accounting for Income Taxes
As part of the process of preparing our financial statements we are required to
estimate our income taxes. Management judgment is required in determining our
provision of our deferred tax asset. We recorded a valuation for the full
deferred tax asset from our net operating losses carried forward due to the
Company not demonstrating any consistent profitable operations. In the event
that the actual results differ from these estimates or we adjust these estimates
in future periods we may need to adjust such valuation recorded.
Going Concern
The financial statements of the Company have been prepared assuming that the
Company will continue as a going concern. The Company has had negative working
capital for each of the last two years ended May 31, 2003 and 2002. The Company
has recently relinquished title to its property and equipment due to default of
its bank line of credit and mortgage on its property. The Company is in arrears
with paying payroll taxes for several months. Those conditions raise substantial
doubt about the abilities to continue as a going concern. The financial
statements of the Company do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
Item 3. Controls and Procedures
(A) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried
out an evaluation under the supervision and with the participation of the
Company's management, including the Company's President and Acting Treasurer of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to the Exchange Act Rule 13a-14. Based upon
that evaluation, the President and Acting Treasurer concluded that the Company's
disclosure controls and procedures are effective in timely alerting the Company
to material information required to be included in
3
the Company's periodic SEC filings relating to the Company.
(B) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in
the other factors that could significantly affect these internal controls
subsequent to the date of our most recent evaluation.
Part II Other Information
Item 1. Legal Proceedings
In March, 2001, 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. In April, 2003 Dime received a
judgment for $1,336,000 and a judgment in foreclosure on Novex's real property,
which was conveyed to Dime, along with Novex's personal tangible property
located at the real property on July 1, 2003 in what Novex believes to be full
satisfaction of the judgment.
One vendor, which is also a shareholder, commenced an action against Novex
and received a judgment for $95,000 for unpaid cash payments that were required
to be made on a monthly basis, plus purchased inventory when Novex acquired the
Sta-Dri assets from the former Sta-Dri Company.
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 more senior
creditors have priority rights to Novex's collateral and no other creditors can
threaten the company or its assets without the approval of these senior
creditors.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. See Item 1. above.
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.
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
4
officer.
NOVEX SYSTEMS INTERNATIONAL, INC.
By: /ss/ Daniel W. Dowe
--------------------------------------
Daniel W. Dowe
President and Acting Treasurer
Date: November 10, 2003
NOVEX SYSTEMS INTERNATIONAL, INC.
BALANCE SHEET
August 31, 2003
ASSETS
CURRENT ASSETS:
Cash $ 23,584
Royalty/Licensee receivable 21,844
------------
Total Current Assets 45,428
GOODWILL - at cost, net 579,067
------------
$ 624,495
============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long term debt 1,511,000
Accounts payable 513,402
Loans payable - shareholder 152,827
Accrued expenses and other current liabilities 332,755
Accrued Taxes 396,609
------------
Total Current Liabilities 2,906,592
------------
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
26,245,187 shares issued and outstanding 26,245
Additional paid-in capital 6,413,267
Accumulated deficit (10,365,743)
------------
Total shareholders' deficiency (2,282,098)
------------
$ 624,495
============
See notes to financial statements.
F-1
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
Three Months Ended August 31,
2003 2002
---- ----
(Unaudited) (Unaudited)
NET SALES 75,804 557,526
COST OF GOODS SOLD 0 361,098
----------- -----------
GROSS PROFIT 75,804 196,428
SELLING, GENERAL AND ADMINISTRATIVE 62,149 260,722
----------- -----------
INCOME (LOSS) FROM OPERATIONS 13,655 (64,294)
----------- -----------
OTHER INCOME (EXPENSES):
Interest expense (40,986) (86,178)
Gain on Exchange of Assets 393,500 0
----------- -----------
OTHER EXPENSES, net 352,514 (86,178)
----------- -----------
NET INCOME (LOSS) 366,169 (150,472)
Less: Preferred stock dividend 45,214 38,235
----------- -----------
NET INCOME (LOSS) TO COMMON SHAREHOLDERS 320,955 (188,707)
=========== ===========
INCOME (LOSS) PER COMMON SHARE, basic and diluted $ 0.01 $ (0.01)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, basic and diluted 26,245,187 26,870,187
=========== ===========
See notes to financial statements.
F-2
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended August 31,
-----------------------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net income (loss) $ 366,169 $(150,472)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 12,628 33,854
Gain on Exchange of Assets. (393,500)
Reversal of excess accruals (25,203)
Amortization of debt discount -- 14,400
Changes in assets and liabilities, net of the
effect from acquisition:
Accounts receivable 68,169 (95,620)
Royalty/Licensee receivable (21,844) --
Inventories -- (3,568)
Prepaid and other current assets -- (36,772)
Accounts payable (6,709) 43,062
Accrued expenses and other current liabilities (25,373) 77,811
Accrued payroll taxes 19,774 41,750
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES (5,890) (75,555)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES: 0 0
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment of) proceeds from loans payable - shareholders 26,308 (29,680)
(Repayment of) proceeds from bank line of credit (4,757)
Proceeds from debt financing 100,000
(Repayment) of debt obligations --
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 26,308 65,563
----------- ---------
NET INCREASE (DECREASE) IN CASH 20,419 (9,992)
CASH AT BEGINNING OF YEAR 3,165 24,692
----------- ---------
CASH AT END OF PERIOD $ 23,584 $ 14,700
=========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 40,986 $ 26,622
=========== =========
Income taxes 0 0
=========== =========
Non-cash flow and investing and financing activities:
Accrued preferred stock dividend 0 38,235
=========== =========
Foreclosure of property and equipment 767,298
=========== =========
Reversal of accrued liabilities related to foreclosure 72,113
=========== =========
Satisfication of bank debt via foreclosure $ 1,118,686 $
=========== =========
See notes to financial statements.
F-3