FORM 10-QSB
UNITED STATE
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 FISCAL YEAR ENDED AUGUST 31, 2004.
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 File Number) (IRS Employer ID No.)
42 Forest Lane Bronxville, New York 10708
(Address of Principal Executive offices) (Zip Code)
Registrant's telephone number, including area code 914-441-3591
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock $.001 par value OTC Electronic Bulletin Board
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 |_|
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. |_|.
The company had 25,245,187 shares of its $.001 par value common stock and no
shares of its $.001 par value preferred stock issued and outstanding on August
31, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K Incorporated Document
--------------------- ---------------------
None
NOVEX SYSTEMS INTERNATIONAL, INC.
Index
Page
----
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheet as of August 31, 2004 ...............................F-1
Statements of Operations for the
three months ended August 31, 2004 and
August 31, 2003....................................................F-2
Statements of Cash Flows for the
three months ended August 31, 2004 and
August 31, 2003....................................................F-3
Notes to Financial Statements .....................................F-4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................1
Item 3. Controls and Procedures..............................................3
Part II Other Information
Item 1. Legal Proceedings....................................................4
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
----
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheet as of August 31, 2004 ................................F-1
Statements of Operations for the
three months ended August 31, 2004 and
August 31, 2003.....................................................F-2
Statements of Cash Flows for the
three months ended August 31, 2004 and
August 31, 2003.....................................................F-3
Notes to Financial Statements ......................................F-4
iii
NOVEX SYSTEMS INTERNATIONAL, INC.
BALANCE SHEET
August 31, 2004
ASSETS
CURRENT ASSETS:
Cash $ 21,100
Royalty/Licensee receivable 17,912
------------
Total Current Assets 39,012
INTANGIBLES - at cost, net 528,555
------------
$ 567,567
============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long term debt $ 1,570,958
Accounts payable 445,299
Loans payable - shareholder 156,183
Accrued expenses and other current liabilities 514,864
Accrued payroll taxes 403,677
------------
Total Current Liabilities 3,090,981
------------
COMMITMENTS AND CONTINGENCY --
SHAREHOLDERS' DEFICIENCY:
Preferred stock - $0.001 par value, 10,000,000 shares authorized,
0 shares issued and outstanding --
Common stock - $0.001 par value, 40,000,000 shares authorized
25,245,187 shares issued and outstanding 25,245
Additional paid-in capital 8,058,400
Accumulated deficit (10,607,059)
------------
Total shareholders' deficiency (2,523,414)
------------
$ 567,567
============
See notes to financial statements.
F-1
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
Three Months Ended August 31,
-----------------------------
2004 2003
---- ----
Unaudited Unaudited
ROYALTY REVENUE 55,276 75,804
COST OF GOODS SOLD 0 0
----------- -----------
GROSS PROFIT 55,276 75,804
SELLING, GENERAL AND ADMINISTRATIVE 115,139 62,149
----------- -----------
INCOME (LOSS) FROM OPERATIONS (59,863) 13,655
----------- -----------
OTHER INCOME( EXPENSES):
Interest expense (41,380) (40,986)
Gain on property conveyance 0 393,500
----------- -----------
OTHER EXPENSES, net (41,380) 352,514
----------- -----------
NET INCOME (LOSS) (101,243) 366,169
Less: Preferred stock dividend 0 (45,214)
----------- -----------
NET INCOME (LOSS) TO COMMON SHAREHOLDERS (101,243) 320,955
INCOME (LOSS) PER COMMON SHARE, basic and diluted $ (0.00) $ .01
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, basic and diluted 25,245,187 26,245,187
=========== ===========
See notes to financial statements.
F-2
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Three Months ended August 31,
-----------------------------
2004 2003
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (101,243) $ 366,169
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of goodwill 12,628 12,628
Gain on property conveyance -- (393,500)
Reversal of excess accruals -- (25,203)
Changes in assets and liabilities, net of the effect from
acquisition:
Accounts receivable -- 68,169
Royalty/Licensee receivable 18,501 (21,844)
Accounts payable 22,173 (6,709)
Accrued expenses and other current liabilities 63,001 (25,373)
Accrued payroll taxes -- 19,774
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 15,060 (5,889)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES: -- --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable - shareholders 5,861 26,308
----------- -----------
NET INCREASE IN CASH 20,920 20,419
CASH AT BEGINNING OF YEAR 180 3,165
----------- -----------
CASH AT END OF PERIOD $ 21,100 $ 23,584
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ 40,986
=========== ===========
Income taxes -- --
=========== ===========
Non-cash flow and investing and financing activities:
Foreclosure of property and equipment -- 767,298
=========== ===========
Reversal of accrued liabilities related to foreclosure -- 72,113
=========== ===========
Satisfaction of bank debt via foreclosure -- 1,118,686
=========== ===========
See notes to financial statements.
F-3
NOVEX SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 2004
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Novex Systems
International, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Regulation S-B. 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 considered
necessary for a fair presentation (consisting of normal recurring
accruals) have been included. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Operating results expected for
the three months ended August 31, 2004 are not necessarily indicative of
the results that may be expected for the year ending May 31, 2005. For
further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-KSB for the
year ended May 31, 2004. Per share data for the periods are based upon the
weighted average number of shares of common stock outstanding during such
periods, plus net additional shares issued upon exercise of options and
warrants.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. GOING CONCERN
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, and has a negative working capital and
shareholder deficiency as of August 31, 2004. The Company is also in
arrears with paying payroll taxes by several months. These factors raise
substantial doubt as to the Company's ability to continue as a going
concern. Management expects to incur additional losses in the foreseeable
future and recognizes the need to raise capital to achieve their business
plans. The financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern.
b. STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion 25, (APB25) Accounting for Stock
Issued to Employees and the related interpretation, for which no
compensation cost is recorded in the statement of operations for the
estimated fair value of stock options issued with an exercise price equal
to the fair value of the common stock on the date of
F-4
grant. Statement of Financial Accounting Standards No. 123 (SFAS 123)
Accounting for Stock-Based Compensation, as amended by Statement of
Financial Accounting Standards No. 148 (SFAS 148) Accounting for
Stock-Based Compensation - Transition and Disclosure, requires the
companies, which do not elect to account for stock-based compensation as
prescribed by this statement, to disclose the pro-forma effects on
earnings and earnings per share as if SFAS 123 has been adopted. No
options or warrants have been granted to employees, officers and directors
during fiscal year ended 2004 and through August 31, 2004.
c. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." This Statement establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003,
except for mandatory redeemable financial instruments of nonpublic
entities, if applicable. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. The Company
does not expect the adoption of SFAS No. 150 to have a material impact on
our financial statements.
Throughout 2003, the FASB released numerous proposed and final FASB Staff
Positions (FSPs) regarding FIN 46, which both clarified and modified FIN
46's provisions. In December 2003, the FASB issued Interpretation No. 46
(FIN 46-R), which will replace FIN 46 upon its effective date. FIN 46-R
retains many of the basic concepts introduced in FIN 46; however, it also
introduces a new scope exception for certain types of entities that
qualify as a "business" as defined in FIN 46-R, revises the method of
calculating expected losses and residual returns for determination of the
primary beneficiary, includes new guidance for assessing variable
interests, and codifies certain FSPs on FIN 46. FIN 46-R does not have a
material impact on the Company's Financial Statements.
3. GAIN ON PROPERTY CONVEYANCE
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. In April 2003
Dime received a judgment for $1,336,000 and a judgment in foreclosure on
Novex's real property. The real property was conveyed to Dime, along with
Novex's personal tangible property located at the real property, all with
a recorded value of $767,298, on July 1, 2003 in what Novex believed to be
full satisfaction of the judgment. On January 16, 2004, Novex, certain
directors, officers and key shareholders of Novex common stock signed a
definitive settlement agreement.
F-5
4. ROYALTY AGREEMENT
On January 31, 2003, Novex entered into a licensing agreement, until
December 2004, with C.G.M., Inc. of Ben Salem, Pennsylvania ("Licensee"),
to manufacture, market and distribute Novex's Por-Rok, Dash Patch and
Sta-Dri products in exchange for monthly royalty payments ranging from 15%
to 25% of the net invoice value to the customer. The Licensee purchased at
cost the inventory on hand from the Company, payable in three installments
through March 31, 2003. Although the Licensee had the right to terminate
the agreement within 180 days from the commencement date of the agreement,
the Licensee did not exercise that right. Had the Licensee elected to
terminate this licensing agreement, the Company would have been obligated
to purchase all inventory that cannot be used by the Licensee due to the
termination of the licensing agreement. Licensor reserves the right to
terminate the licensing agreement for the following reasons; failure to
ship a minimum of $375,000 of merchandise in two consecutive quarters,
Licensee having become subject to a 50% change in control, Licensee
becoming subject to involuntary or voluntary bankruptcy.
5. DEBT AND EQUITY TRANSACTION
On September 3, 2003, The Sherwin-Williams Company ("Sherwin") surrendered
for cancellation all of its 1,000,000 shares of common stock and all of
its 1,644,133 shares of preferred stock, including accrued dividends after
February 28, 2003. The decision was based solely on Sherwin's review of
its mandatory right to convert its preferred shares into common stock
pursuant to an agreement reached on August 7, 2000, which upon exercise
would have resulted in Sherwin owning over 90% of the company's common
stock. Under the circumstances Sherwin preference was to terminate its
entire ownership interest in the Company, versus having to assume a
substantial controlling interest in the Company pursuant to the terms and
conditions of the August 7, 2000 agreement.
Effective September 3, 2003, the Company has terminated all of its
preferred shares having had a liquidation preference of $1.00 per share,
or a face value of $1,644,133, and has reduced its issued and outstanding
common stock by 1,000,000 shares to 25,245,187.
6. INTANGIBLES
Intangibles arose in connection with the acquisitions of Arm Pro in
September 1998, and with the acquisition of Allied / Por-Rok lines in
August 1999 and Sta-Dri in August 2000. The intangible assets have been
re-characterized pursuant to SFAS 142 from "Goodwill" to be "Intangibles",
since such intangibles are actually comprised of trademarks, acquired
proprietary technology and customer lists. These intangibles are being
amortized over a fifteen-year life on a straight-line basis. The Company
continues to periodically review these long-lived assets for impairment
whenever circumstances and situations change such that there is an
indication that the carrying amounts may not be recovered.
F-6
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, 2004, 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, 2004 vs. August 31, 2003
In the three month period ended August 31, 2004, Novex had net sales of
$55,276 versus $75,804 in the corresponding three month period in 2003. Cost of
goods sold in this period for each of 2004 and 2003 was $0 which generated a
gross margin of 100%. 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.
In this three month period, Novex recorded a loss from operations of
$59,863 and a net loss to common shareholders of $101,243. For the same period
in 2003, the company recorded a net profit which was attributable primarily to a
one time gain on the disposition of assets of $393,500. 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 17, 2003 in what Novex believed to
be full satisfaction of the judgment. On January 16, 2004, Novex, certain
directors, officers and key shareholders of Novex common stock signed a
definitive settlement agreement. Upon the transfer of the property and equipment
in July 2003, the related costs and accumulated depreciation were eliminated
from the accounts and the gain was reflected in operations.
In the three month period, Novex incurred financing charges of $41,380.
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. In lieu of converting its redeemable convertible
preferred shares into common stock, on September 3, 2003, The Sherwin- Williams
Company forfeited its ownership of all preferred shares of Novex, including all
accrued and unpaid dividends that were payable in-kind in additional shares of
preferred stock. This forfeiture terminated all future dividends and has since
lowered the financing charges.
Selling, general and administrative charges in this three month period
were $115,139 versus $62,149 in the corresponding three month period in 2003.
On August 31, 2004, Novex had $39,012 in current assets which consisted
primarily of inventory of royalty receivables of $17,912 and cash of $21,100.
Novex also has intangible assets of $528,555, which represents the book value of
its trademarks, trade names and customer list, which collectively are the assets
that generate the royalty income that the company earns.
Liquidity and Financial Resources at February 28, 2004
As of August 31, 2004 Novex had $3,090,980 in current liabilities, which
includes loans (including interest) that are now due totaling $2,183,982 which
were used to fund the Company's operations. It had accounts payable of $445,299
and accrued taxes of $403,677.
Of the principal loans outstanding, $1,061,000 is held by one person that
has properly perfected security interest against Novex's remaining assets, being
all its intangible property.
Novex is planning to increase its royalty revenue and use excess cash
proceeds to pay down its debt while it continues to pursue a new business that
could be merged with Novex. With any merger Novex will seek to refinance its
debt by either paying off all debt in cash or an offer of cash and stock.
Although Novex is required to carry its intangible property at a net value of
$528,555, it believes that the fair market value for these assets are
$1,500,000. Assuming another business could be merged into Novex with all of
Novex's current expenses being applied to the new business, the royalty
payments, even if not improved, would produce $30,000 on average of monthly cash
flow, which under current valuation methods to for measuring the worth of a
business would merit a value of $1,500,000. As such, Novex believes that a
refinancing that would enable creditors to receive cash and some additional
equity in the company will eliminate all debts.
Until such time as Novex shall merge with another entity, its current cash
flow is sufficient to meet its fixed monthly expenses.
Inflation and Changing Prices
Novex no longer manufacturers its products and is no longer subject to
risks associated with inflation or substantial price increase in the near
future.
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.
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.
2
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, 2004 and 2003. 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
(1) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried
out an evluation, 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 the company's periodic SEC filings relating to
the Company.
3
(2) 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
On June 18, 2004 the settlement agreement with Dime was released from
escrow. Dime Commercial Corp. v. Novex Systems International, Inc., Superior
Court of New Jersey, Docket No. PAS-L-1577-2.
The former shareholders of the Sta-Dri company filed a lawsuit for unpaid
royalty payments and received a judgment in the amount of $95,000.
The Company is involved in several lawsuits arising from the non-payment
of recorded payables. These claims are unsecured and subordinate to a properly
perfected security interest of a financial creditor that is willing to work with
the company.
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 and the
matter has been dormant for three years. Mel Greenspoon vs. Stratford
Acquisition Corporation, et. al., Ontario Court (General Division), Index No.
97-CV-126814.
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. 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: November 12, 2004
5