UNITIED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
x Quarterly Report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
¨ Transition report pursuant section 13 or 15(d) of the Securities Exchange Act of 1934
0-9040
Commission file number
AUCXIS CORP.
(Exact name of small business issuer as specified in its charter)
Nevada
(State or other jurisdiction)
Pending
(IRS Employer of incorporation or organization Identification No.)
Suite 500 - 666 Burrard Street, Vancouver, BC V6C 3P6 Canada.
(Address of principal executive offices)
604-639-3109
(Issuer's telephone number)
_______________________________________________________________________
(Former Name, Address and Former Fiscal Year, if Changed Since Last Report)
Check whether the issuer:
| (1) | filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and | |
| (2) | has been subject to such filing requirements for the past 90 days. Yes x No¨ |
Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by court. Yes ¨ No x
As of June 16, 2003 there were 66,409,415shares of the Registrant's common stock, par value $0.001 per share outstanding.
Transitional Small Business Disclosure Format (check one); Yes ¨ No x
AUCXIS CORP. (FORMERLY E-AUCTION GLOBAL TRADING INC.)
FORM 10-QSB
INDEX
| PART I. FINANCIAL INFORMATION | Page |
| Item 1. Financial Statements | 3 |
| Consolidated Balance Sheet at March 31, 2003 (Unaudited) and December 31, 2002 | 4 |
| (Audited) | |
| Consolidated Statements of Operations, Deficit and Comprehensive Loss (Unaudited) for | 5 |
| the three months ended March 31, 2003 and 2002 | |
| Consolidated Statements of Cash Flows (Unaudited) for the three months ended March | 6 |
| 31, 2003 and 2002 | |
| Notes to Consolidated Financial Statements | 7 |
| Item 2. Managements’ Discussion and Analysis of Financial Condition and Results of | 18 |
| Operations | |
| PART II. OTHER INFORMATION | 20 |
| Item 1. Legal Proceedings | 20 |
| Item 5: Other Information | 20 |
| Item 6. Exhibits and Reports on Form 8-K | 21 |
| Signatures | 21 |
1
ITEM 1. Financial Statements
Aucxis Corp.
(formerly e-Auction Global Trading Inc.)
(a Nevada Corporation)
Consolidated Financial Statements
(Unaudited)
March 31, 2003
(expressed in U.S. dollars)
2
AUCXIS CORP.
(a Nevada Corporation)
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2003
(in U.S. dollars)
3
| AUCXIS CORP. |
| CONSOLIDATED BALANCE SHEET |
| (in U.S. dollars) |
| March 31, | December 31, | |||||
| 2003 | 2002 | |||||
| (Unaudited) | (Audited) | |||||
| ASSETS | ||||||
| CURRENT ASSETS | ||||||
| Cash and equivalents | $ | 639,006 | $ | 617,811 | ||
| Accounts receivable (Note 4) | 1,012,811 | 1,135,903 | ||||
| Inventory (Note 5) | 1,364,040 | 1,394,028 | ||||
| Prepaid expenses | 10,378 | 51,218 | ||||
| Total Current Assets | 3,026,235 | 3,198,960 | ||||
| Investments (Note 6) | 192,240 | 160,070 | ||||
| Property and equipment (Note 7) | 302,196 | 297,624 | ||||
| Acquired core technology (Note 8) | 262,134 | 299,584 | ||||
| Total Assets | $ | 3,782,805 | $ | 3,956,238 | ||
 | | | | |||
| LIABILITIES | ||||||
| CURRENT LIABILITIES | ||||||
| Accounts payable and accrued liabilities (Note 10) | $ | 1,678,209 | $ | 1,592,618 | ||
| Due to former Kwatrobox shareholders (Note 11) | 494,402 | 356,274 | ||||
| Deferred revenue | 1,617,840 | 2,000,082 | ||||
| Current portion of long-term debt (Note 13) | 474,946 | 488,666 | ||||
| Deferred taxes | 5,400 | 5,241 | ||||
| Total Current Liabilities | 4,270,797 | 4,442,881 | ||||
| Long-term debt (Note 13) | 34,560 | 105,859 | ||||
| Non-controlling interest (Note 14) | 62,372 | 2,400 | ||||
| Total Liabilities | 4,367,729 | 4,551,140 | ||||
| Mandatory Redeemable Shares of Common Stock (Note 14) | 4,215,914 | 4,818,181 | ||||
| 8,583,643 | 9,369,321 | |||||
| STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||
| Common stock, $0.001 par value; 250,000,000 shares | ||||||
| authorized, 62,773,051 issued and outstanding (Note 16) | 62,773 | 62,773 | ||||
| Additional paid-in capital | 18,736,200 | 18,736,200 | ||||
| Accumulated other comprehensive income | 418,333 | 243,710 | ||||
| Deficit | (24,018,144 | ) | (24,455,766 | ) | ||
| Total Stockholders’ Equity (Deficit) | (4,800,838 | ) | (5,413,083 | ) | ||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | 3,782,805 | $ | 3,956,238 | ||
| | | | |||
| Commitments and Contingency (Note 20) |
(The accompanying notes are an integral part of these consolidated financial statements)
4
| AUCXIS CORP. |
| CONSOLIDATED STATEMENTS OF OPERATIONS, DEFICIT AND COMPREHENSIVE LOSS |
| (in U.S. dollars) |
| 2003 | 2002 | |||||
| THREE MONTHS ENDED MARCH 31 | (Unaudited) | (Unaudited) | ||||
| Revenue | $ | 1,226,880 | $ | 1,308,512 | ||
| Cost of goods sold | (307,800 | ) | (590,071 | ) | ||
| 919,080 | 718,441 | |||||
| Selling, general and administrative expense | 993,555 | 788,605 | ||||
| Depreciation and amortization expense | 62,368 | 82,925 | ||||
| 1,055,923 | 871,530 | |||||
| Loss from operations before the under-noted | (136,843 | ) | (153,089 | ) | ||
| Share of income (loss) of equity investment (Note 7) | 32,170 | (1,740 | ) | |||
| Gain on cancellation of mandatory redeemable shares (Note 14) | 542,295 | - | ||||
| Loss on sales and write down of assets | - | (114,886 | ) | |||
| Income (loss) before income taxes | 437,622 | (269,715 | ) | |||
| Income tax expense | - | (22,796 | ) | |||
| Income (loss) for the period | $ | 437,622 | $ | (292,511 | ) | |
| | | | |||
| Basic income (loss) per share | .01 | (.01 | ) | |||
| | | | |||
| Income (loss) for the period | $ | 437,622 | $ | (292,511 | ) | |
| Foreign currency translation adjustments | 174,623 | (6,210 | ) | |||
| Comprehensive income (loss) | $ | 612,245 | $ | (298,721 | ) | |
| | | | |||
| Shares used in computing basic earnings per share | 62,773,051 | 62,738,926 | ||||
| | | | |||
| Shares used in computing fully diluted earnings per share | 65,827,551 | 65,793,426 | ||||
| | | |
(The accompanying notes are an integral part of these consolidated financial statements)
5
| AUCXIS CORP. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (in U.S. dollars) |
| 2003 | 2002 | |||||
| THREE MONTHS ENDED MARCH 31 | (Unaudited) | (Unaudited) | ||||
| OPERATING ACTIVITIES | ||||||
| Net income (loss) for the year | $ | 437,622 | $ | (292,511 | ) | |
| Adjustments to reconcile net loss to cash | ||||||
| Depreciation and amortization | 62,368 | 82,925 | ||||
| Foreign exchange | 126,623 | (8,385 | ) | |||
| Share of income (loss) of equity investment | (32,170 | ) | 1,740 | |||
| Provision for impairment | - | 82,003 | ||||
| Loss on sale of assets | - | 32,883 | ||||
| Gain on cancellation of mandatory redeemable shares | (542,295 | ) | - | |||
| Net change in non-cash working capital items (Note 17) | 66,837 | 99,369 | ||||
| CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 118,895 | (1,976 | ) | |||
| FINANCING ACTIVITIES | ||||||
| Related party repayments | - | (343 | ) | |||
| Long-term debt net of repayment | (116,300 | ) | 16,748 | |||
| CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | (116,300 | ) | 16,405 | |||
| INVESTING ACTIVITIES | ||||||
| Purchase of property, plant and equipment (net of disposal proceeds) | - | (1,440 | ) | |||
| CASH USED IN INVESTING ACTIVITIES | - | (1,440 | ) | |||
| INCREASE IN CASH AND CASH EQUIVALENTS | ||||||
| DURING THE PERIOD | 2,685 | 12,989 | ||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | 18,510 | 6,285 | ||||
| CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD | 617,811 | 310,050 | ||||
| CASH AND CASH EQUIVALENTS END OF PERIOD | $ | 639,006 | $ | 329,324 | ||
| | | | |||
| Supplemental cash flow information: | ||||||
| Interest paid | $ | 15,120 | $ | 8,952 | ||
| Taxes paid | - | 22,796 |
(The accompanying notes are an integral part of these consolidated financial statements)
6
| AUCXIS CORP. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (Unaudited) |
| (in U.S. dollars) |
| THREE MONTHS ENDED MARCH 31, 2003 AND YEAR ENDED DECEMBER 31, 2002 |
| 1. | NATURE OF OPERATIONS AND CONTINUANCE OF BUSINESS The Company is currently developing e-business services for the perishable commodity marketplace primarily in Europe. In addition, through its subsidiary, Aucxis Trading Solutions N.V. (ATS) (formerly Schelfhout Computer Systemen N.V.), the Company is engaged in the installation and maintenance of auction clock and cooling systems for traditional auction halls and the development of software for auctions. In September 2001, the Company decided to discontinue its financial support for its subsidiaries in the Netherlands, including V-Wholesale N.V., Kwatrobox B.V., Palm Verlingsystemen B.V., Scoop Software B.V., Automatiseringsbureau Palm N.V., and Nieaf Systems B.V. (together “Kwatrobox”) as the businesses operated by these companies no longer form part of the company’s refocused business strategy. As a result, Kwatrobox and its operating subsidiaries, Automatiseringsbureau Palm N.V. and Nieaf Systems B.V., filed for bankruptcy and under the bankruptcy laws of the Netherlands, a trustee took control of Kwatrobox and its subsidiaries in October 2001. The Company has a serious working capital deficiency as at March 31, 2003 of $1,244,562 and has an accumulated deficit as at March 31, 2003 of $24,018,144. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The Company is also involved in several legal actions related to its key operating division, Aucxis Trading Solutions N.V., which raise substantial doubt about the company’s ability to control this subsidiary and its operations in the future (see Notes 14, 21 and 22). The ability of the Company to continue as a going concern is dependent upon effective implementation of revenue and cost management alternatives and the success of potential future external financing initiatives. Management is considering various revenue and cost management alternatives and is examining a variety of options to re-organize the Company. It is not possible at this time to predict with any assurance the success of these initiatives. |
| 2. | BASIS OF PRESENTATION These financial statements consolidate the accounts of the Company, Aucxis Corp. (Nevada) and its subsidiaries as follows: |
| 100% | Aucxis Corp. N.V. (Belgium) | |
| 92.5% | Aucxis Trading Solutions N.V. (formerly Schelfhout Computer Systemen N.V. (Belgium) (see Note 14) | |
| 100% | I-Three Inc. (Canada) | |
| 100% | e-Auction Global Trading Inc. (Barbados) | |
| 100% | Aucxis Corp. (Canada) |
| These financial statements also include the operations and cash flows of the Company’s 33% interest in Auction Trading Services Netherlands B.V. and 40% investment in SDL Invest N.V. (Belgium) which are accounted for by the equity method. During 2002, the Company disposed of its investment in Aucxis Limited (Australia). All intercompany transactions and balances have been eliminated. |
7
| AUCXIS CORP. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (Unaudited) |
| (in U.S. dollars) |
| THREE MONTHS ENDED MARCH 31, 2003 AND YEAR ENDED DECEMBER 31, 2002 |
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
| (a) | Foreign currency translation The Company’s functional currency is U.S. dollars, except that its main operating subsidiaries function in Euros. Foreign currency denominated assets and liabilities are measured in U.S. dollars using the exchange rate prevailing at year end. The Company applies the average exchange rate for the year to translate revenues, expenses and gains and losses, into U.S. dollars. The resulting translation adjustments are included as a separate component of other comprehensive income (loss) within shareholders’ equity. Foreign currency transaction gains and losses are included in operations. | |
| (b) | Financial instruments The Company’s financial instruments include cash and cash equivalents and bank indebtedness, accounts receivable, accounts payable and accrued liabilities amounts, due to related parties, deferred revenue, long-term debt, mandatory redeemable shares of common stock, and contingencies. The fair values of these financial instruments approximate their carrying values due to their short-term nature and normal trade terms. The majority of the Company’s revenue and accounts receivable are denominated in Euros and are related to contracts to install auction clock and cooling systems for the perishable commodity marketplace. | |
| (c) | Property, plant and equipment Property, plant and equipment are recorded at cost less accumulated depreciation. Property, plant and equipment are depreciated from the date of acquisition using the following rates and methods: | |
| Furniture and fixtures | 10 years straight-line | |
| Leaseholds | 4 years straight-line | |
| Tools and equipment | 5 years straight-line | |
| Vehicles | 5 years straight-line |
| (d) | Acquired core technology Acquired core technology is recorded at cost and amortized on a straight-line basis over its expected life of approximately five years. | |
| (e) | Impairment of long-lived assets In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment on Disposal of Long-Lived Assets”, the Company evaluates potential impairment of its long-lived assets whenever events or changes in circumstances indicate doubts about the recoverability of such assets. Recoverability of assets held and used is measured by comparing the carrying amount of the asset to estimated future net undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment is recognized based on the amount by which the carrying amount of the asset exceeds its estimated fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value. Fair value is based on the amount of consideration which would be paid by an arms length party under no compulsion to transact. |
8
| AUCXIS CORP. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (Unaudited) |
| (in U.S. dollars) |
| THREE MONTHS ENDED MARCH 31, 2003 AND YEAR ENDED DECEMBER 31, 2002 |
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) | |
| (f) | Income taxes The company provides for income taxes under the asset and liability method in accordance with SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of assets and tax liabilities and are measured using enacted tax rates and laws. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts which are more likely than not to be realized. To date, the company’s deferred tax assets, relating primarily to losses carried forward, have not been considered more likely than not to be realized and, accordingly, a valuation allowance equal to the deferred tax assets has been recorded. | |
| (g) | Revenue recognition The Company derives revenue from the development and installation of clock systems, cooling installations and maintenance services related to these systems. Clock and cooling installations take three to four months to complete and are accounted for using the percentage of completion method in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position No. 81-1 “Accounting for Performance of Construction Type and Certain Production Type Contracts”. Revenue from contracts with customers that include customer acceptance provisions that are not confirmed until delivery and installation of the systems is recognized when the installation is complete and customer acceptance has occurred under the completed contract method of accounting. Revenue from the sale of customized hardware and software applications is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed and collectibility is reasonably assured. Maintenance contracts to service installed clock and cooling systems are sold separately from these systems. Revenue from maintenance contracts is recognized rateably over the contract period during which services are performed, as vendor specific objective evidence of fair value for maintenance service is obtained. | |
| (h) | Inventory Inventory is stated at the lower of cost or net realizable value with cost being determined using the weighted average cost method. Obsolete or defective inventories are reduced to net realizable value. The work-in-progress inventory represents direct costs, including raw materials, labour and an allocation of overhead. | |
| (i) | Stock options SFAS No. 123, “Accounting for Stock-Based Compensation,” requires that stock awards granted be recognized as compensation expense based on their fair values at the date of grant. Alternatively, a company may account for granted stock awards under Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and disclose pro forma income amounts which would have resulted from recognizing such awards at their fair value. The Company has elected to account for stock-based compensation for employees under APB No. 25 and make the required pro forma disclosures for compensation expense. Stock based compensation for non-employees is accounted for using SFAS No. 123. | |
9
| AUCXIS CORP. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (Unaudited) |
| (in U.S. dollars) |
| THREE MONTHS ENDED MARCH 31, 2003 AND YEAR ENDED DECEMBER 31, 2002 |
| 3 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) | ||
| (i) | Stock options (continued) The Company has modified the terms of its option plan for certain employees and, in accordance with Financial Accounting Standards Board Interpretation No. 44 (FIN 44), “Accounting for Certain Transactions Involving Stock Compensation”, the Company has adopted variable plan accounting for these options. Under variable plan accounting, compensation expense is calculated and recorded each period from the date of modification to the date of measurement. | ||
| (j) | Cash and cash equivalents Cash and cash equivalents consist of cash on deposit and highly liquid short-term, interest bearing securities, having original terms to maturity of three months or less. | ||
| (k) | Warranty provision One of the Company’s subsidiaries provides a warranty for some of the products sold. A provision for estimated warranty costs is charged to operations on the basis of management’s estimate of costs to be incurred servicing warranty claims. | ||
| (l) | Use of estimates The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Financial results as determined by actual events could differ from those estimates. | ||
| (m) | Comparative figures Certain of the comparative figures have been reclassified to conform to the current year’s presentation. | ||
| (n) | Interim financial statements These interim unaudited financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the period shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. | ||
| (o) | Recent Accounting Pronouncements In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”, which amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair market value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 expands the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition provisions of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The disclosure provisions of SFAS No. 148 are effective for financial statements for interim periods beginning after December 15, 2002. The Company has adopted the disclosure provisions effective January 1, 2003. | ||
10
| AUCXIS CORP. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (Unaudited) |
| (in U.S. dollars) |
| THREE MONTHS ENDED MARCH 31, 2003 AND YEAR ENDED DECEMBER 31, 2002 |
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) | |
| (o) | Recent Accounting Pronouncements (continued) In June 2002, FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The Company adopted SFAS No. 146 on January 1, 2003. The effect of adoption of this standard on the Company’s results of operations and financial position is being evaluated. FASB has also issued SFAS No. 145 and 147 but they will not have any relationship to the operations of the Company, therefore, a description of each and their respective impact on the Company’s operations have not been disclosed. In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. The Company is currently evaluating its impact on the financial statements and expects to adopt SFAS 150 in the quarter ended September 30, 2003. | |
| 4. | ACCOUNTS RECEIVABLE Accounts receivable consists of the following amounts: | |
| March 31, | December 31, | ||||||
| 2003 | 2002 | ||||||
| Accounts receivable | $ | 1,01,811 | $ | 1,148,743 | |||
| Allowance for doubtful accounts | - | (12,840 | ) | ||||
| $ | 1,012,811 | $ | 1,135,903 | ||||
| | | |
| 5. | INVENTORY Inventory consists of the following: |
| March 31, | December 31, | ||||||
| 2003 | 2002 | ||||||
| Raw materials | $ | 324,000 | $ | 272,550 | |||
| Work-in-progress | 1,040,040 | 981,072 | |||||
| Finished goods | - | 140,406 | |||||
| $ | 1,364,040 | $ | 1,394,028 | ||||
| | | |
11
| AUCXIS CORP. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (Unaudited) |
| (in U.S. dollars) |
| THREE MONTHS ENDED MARCH 31, 2003 AND YEAR ENDED DECEMBER 31, 2002 |
| 6. | INVESTMENTS The investments balance consists of the Company’s interest in SDL Invest N.V. (Belgium) and the Company’s interest in Auction Trading Services Netherland B.V. as follows: |
| March 31, | December 31, | ||||||
| 2003 | 2002 | ||||||
| Auction Trading Services Netherlands B.V., at cost | $ | 6,480 | $ | 5,657 | |||
| SDL Invest N.V. (Belgium), at cost | 116,931 | 116,931 | |||||
| Equity income | 69,652 | 37,482 | |||||
| $ | 192,240 | $ | 160,070 | ||||
| | | |
| 7. | PROPERTY AND EQUIPMENT Property and equipment comprises: |
| March 31, | December 31, | ||||||||||||
| 2003 | 2002 | ||||||||||||
| Accumulated | Net Carrying | Net Carrying | |||||||||||
| Cost | Depreciation | Value | Value | ||||||||||
| Furniture and fixtures | $ | 105,119 | $ | 22,004 | $ | 83,115 | $ | 77,420 | |||||
| Tools and equipment | 60,773 | 28,888 | 31,885 | 23,702 | |||||||||
| Vehicles | 509,645 | 322,449 | 187,196 | 196,502 | |||||||||
| $ | 675,537 | $ | 373,341 | $ | 302,196 | $ | 297,624 | ||||||
| | | | | | | |
| 8. | ACQUIRED CORE TECHNOLOGY |
| March 31, | December 31, | ||||||
| 2003 | 2002 | ||||||
| Cost | $ | 748,969 | $ | 748,969 | |||
| Accumulated amortization | (486,835 | ) | (449,385 | ) | |||
| $ | 262,134 | $ | 299,584 | ||||
| | | |
| 9. | BANK INDEBTEDNESS The Company’s subsidiary, ATS, has available a bank credit facility of approximately $266,000 (247,000 EUR) which can be used for operating purposes. This credit facility bears interest at the bank’s base rate plus 1.25% and is secured by certain assets of ATS. The Company has executed a postponement agreement in favour of the bank. Under the agreement, the Company may not cause the ATS subsidiary to pay dividends to the Company or otherwise make payments to other companies in the group without the consent of the bank. |
12
| AUCXIS CORP. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (Unaudited) |
| (in U.S. dollars) |
| THREE MONTHS ENDED MARCH 31, 2003 AND YEAR ENDED DECEMBER 31, 2002 |
| 10. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following: |
| March 31, | December 31, | ||||||
| 2003 | 2002 | ||||||
| Trade payables | $ | 867,244 | $ | 896,398 | |||
| Accrued liabilities | 308,765 | 566,255 | |||||
| Payroll | 502,200 | 129,965 | |||||
| $ | 1,678,209 | $ | 1,592,618 | ||||
| | | |
| 11. | DUE TO FORMER KWATROBOX SHAREHOLDERS The amount due to former Kwatrobox shareholders relates to the acquisition of Kwatrobox from its former shareholders and the balance is non-interest bearing. |
| 12. | RELATED PARTY TRANSACTIONS The Company incurred the following amounts to related parties during the periods ended March 31, 2003 and March 31, 2002, respectively: |
| March 31, | March 31, | ||||||
| 2003 | 2002 | ||||||
| Consulting fees to a company controlled by a officer | $ | 20,925 | $ | 20,697 |
| Due to directors and officers: | ||
| ||
Included in the accounts payable is $2,400 (2002 - $24,874) due to a firm in which a director is a partner. Included in accounts payable is $Nil (2002 - $44,825) due to a company controlled by directors of subsidiary. Included in accounts payable is $39,728 due to a company controlled by an officer. | ||
13
| AUCXIS CORP. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (Unaudited) |
| (in U.S. dollars) |
| THREE MONTHS ENDED MARCH 31, 2003 AND YEAR ENDED DECEMBER 31, 2002 |
| 13. | LONG-TERM DEBT |
| March 31, | December 31, | ||||||
| 2003 | 2002 | ||||||
| Convertible Bridge loan (including accrued interest) | $ | 437,146 | $ | 405,865 | |||
| Vehicle loans | 72,360 | 188,660 | |||||
| Less: Current portion | (474,946 | ) | (488,666 | ) | |||
| Long-term debt | $ | 34,560 | $ | 105,859 | |||
| | | |
The vehicle loans have interest rates ranging from 3.67% to 8.82% and maturity dates ranging from March 2003 through August 2004, and are secured by the related vehicles. The debt repayments over the next two years are as follows: |
| 2003 | $ | 39,000 | ||||||
| 2004 | 33,360 | |||||||
| $ | 72,360 | |||||||
| |
| 14. | MANDATORY REDEEMABLE SHARES OF COMMON STOCK During the quarter, the Company finalized the disposition of a 7.5% interest in ATS pursuant to a court order allowing the former owners of ATS to reacquire a 7.5% interest in exchange for the transfer for cancellation of the first tranche of 454,545 shares. Accordingly, the Company reduced the mandatory redeemable shares of common stock by $602,267 (454,545 shares), increased its non-controlling interest by $59,972, representing the carrying amount of the portion of ATS disposed of and recognized a gain on cancellation of mandatory redeemable preferred shares for the balance of $542,295 (see also Note 21). |
| 15. | INCOME TAXES The components of the net deferred tax asset, the statutory tax rate, the effective tax rate and the elected amount of the valuation allowance are outlined below: |
| March 31, | December 31, | ||||||
| 2003 | 2002 | ||||||
| Net combined U.S. and European operating losses | $ | 19,500,000 | $ | 19,000,000 | |||
| Statutory combined U.S. and European tax rate | 35% | 35% | |||||
| Effective tax rate | - | ||||||
| Deferred tax asset | 6,825,000 | 6,650,000 | |||||
| Valuation allowance | (6,825,000 | ) | (6,650,000 | ) | |||
| Net deferred tax asset | $ | - | $ | - | |||
| | | |
14
| AUCXIS CORP. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (Unaudited) |
| (in U.S. dollars) |
| THREE MONTHS ENDED MARCH 31, 2003 AND YEAR ENDED DECEMBER 31, 2002 |
| 16. | STOCK-BASED COMPENSATION The exercise price of all options granted under existing stock option plans was equal to or greater than the market price of the underlying common stock on the grant date and no stock-based employee compensation cost was recognized at the time of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to employee stock benefits, including shares issued under the stock option plan. |
| March 31, | March 31, | ||||||
| 2003 | 2002 | ||||||
| Net income (loss) as reported | $ | 437,622 | $ | (292,511 | ) | ||
| Deduct: total stock-based employee compensation | |||||||
| expense determined under fair value based method, | |||||||
| net of tax | (26,910 | ) | (26,910 | ) | |||
| Pro forma net income (loss) | 410,712 | (319,421 | ) | ||||
| Basic net income (loss) per share: | |||||||
| As reported | .01 | (.01 | ) | ||||
| Pro forma | .01 | (.01 | ) | ||||
| Diluted net income (loss) per share: | |||||||
| As reported | .01 | (.01 | ) | ||||
| Pro forma | .01 | (.01 | ) |
| 17. | CHANGE IN NON-CASH WORKING CAPITAL |
| March 31, | March 31, | ||||||
| 2003 | 2002 | ||||||
| Accounts receivable | $ | 123,092 | $ | (123,653 | ) | ||
| Inventory | 29,988 | (73,331 | ) | ||||
| Prepaid expenses | 40,840 | 11,309 | |||||
| Accounts payable, accrued liabilities and related party | 255,001 | 239,076 | |||||
| Deferred items | (382,084 | ) | 45,968 | ||||
| $ | 66,837 | $ | 99,369 | ||||
| | | |
| 18. | SEGMENTED INFORMATION The Company operates in one operating segment, this being the installation of auction clocks and cooling systems. Resources are allocated based on revenue and overall profitability. Geographic information |
| March 31, | March 31, | ||||||
| 2003 | 2002 | ||||||
| Revenue | |||||||
| Belgium | $ | 1,226,880 | $ | 1,308,512 | |||
| March 31, | December 31, | ||||||
| 2003 | 2002 | ||||||
| Identifiable long lived assets | |||||||
| Canada | $ | 23,556 | $ | 24,558 | |||
| Belgium | 540,774 | 572,650 | |||||
| $ | 564,330 | $ | 597,208 | ||||
| | | |
15
| AUCXIS CORP. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (Unaudited) |
| (in U.S. dollars) |
| THREE MONTHS ENDED MARCH 31, 2003 AND YEAR ENDED DECEMBER 31, 2002 |
| 19. | INCOME AND LOSS PER SHARE The following table represents the calculation of basic and diluted net income (loss) per common share (in thousands, except per share amounts): |
| Three months ended | |||||||
| March 31, | March 31, | ||||||
| 2003 | 2002 | ||||||
| Net income (loss) | $ | 437,622 | $ | (292,511 | ) | ||
| | | | ||||
| Weighted-average shares used in computing basic net | |||||||
| income (loss) per share | $ | 62,773,051 | $ | 62,738,826 | |||
| Dilutive effect of common share equivalents | 3,054,500 | - | |||||
| Weighted-average shares used in computing diluted net | |||||||
| income (loss) per share | $ | 65,827,551 | $ | 62,738,826 | |||
| | | | ||||
| Basic net income (loss) per share | $ | .01 | $ | (.01 | ) | ||
| | | | ||||
| Diluted net income (loss) per share | $ | .01 | $ | (.01 | ) | ||
| | | | ||||
| For the three months ended March 31, 2002, potential common shares in the form of stock options to purchase 3,054,500 shares of common stock, were antidilutive and therefore not included in the computation of diluted earnings per share. | |
20. | COMMITMENTS AND CONTINGENCY The Company has future minimum lease payments under operating leases relating to premises at March 31, 2003 as follows: |
| 2003 | $ | 89,000 | |||||
| 2004 | 89,000 | ||||||
| 2005 | 89,000 | ||||||
| 2006 | 89,000 | ||||||
| 2007 | 89,000 | ||||||
| $ | 445,000 | ||||||
| |
| In addition, the Company has an outstanding commitment to sell its remaining 40% investment in SDL Invest N.V. to a former director of ATS under the terms of an option held by the former ATS director. | ||
| 21. | LITIGATION | |
| (a) | A former director of ATS obtained a judgement against the Company in the amount of $244,000 for breach of a management contract. The Company has accrued $244,000 to date for this judgement, but is appealing the decision. | |
| (b) | The former owners of the Company’s subsidiary, ATS (formerly Schelfhout Computer Systemen N.V.) sought to enforce the mandatory redemption feature related to the second and third tranches of shares totalling 909,090 to be released under the terms of the purchase agreement described in Note 14 on the basis that these shares were not free trading at the time of release as contemplated in the agreement. This action to recover $1,500,000 from the Company is currently pending. | |
16
| AUCXIS CORP. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| (Unaudited) |
| (in U.S. dollars) |
| THREE MONTHS ENDED MARCH 31, 2003 AND YEAR ENDED DECEMBER 31, 2002 |
| 21. | LITIGATION (continued) | |
| (c) | On March 17, 2003, the former owners of the Company’s subsidiary, ATS, obtained a restraining order against the Company, effectively securing the remaining 92.5% of the ATS shares to satisfy any ultimate judgement which might be awarded to the former owners of ATS as a result of their claims alleging misrepresentations by the Company prior to and subsequent to the closing of the ATS share purchase by the Company in January 2000. If the plaintiffs are successful in proving these claims, the Company may lose control of ATS, its main operating subsidiary. | |
| 22. | SUBSEQUENT EVENT On April 11, 2003, Aucxis N.V., the subsidiary which directly owns the shares of ATS, filed for voluntary bankruptcy in Belgium. Although the operations of ATS have not been directly affected by these proceedings, it is possible that the Company will ultimately lose control of ATS, its main operating subsidiary, and this would require that the net assets of ATS be presented on the liquidation basis. | |
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
When used herein, the words “may”, “will”, “expect”, “anticipate”, “continue”, “estimate”, “project”, “intend”, “plan” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, operating results and financial position. All statements, other than statements of historical facts, included or incorporated by reference in this Form 10-QSB which address activities, events or developments which the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof), business strategy, expansion and growth of the Company’s business and operations, and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. Such statements are not guarantees of future performance and are subject to risks and significant uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. The occurrence of any unanticipated events may cause actual results to differ from those expressed or implied by the forward-looking statements contained herein. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this report.
Overview
Aucxis Corp. (“Aucxis” or the “Company”) was originally incorporated in Nevada on January 8, 1998 under the name Kazari International, Inc. (Kazari). On February 26, 1999, Kazari and e-Auction Global Trading Inc. (Barbados) entered into a share exchange agreement pursuant to which agreement Kazari purchased e-Auction (Barbados) shares on a one for one basis. Kazari had no viable business activities at the time of the share exchange agreement. On June 10, 1999, Kazari amended its name to e-Auction Global Trading Inc. During fiscal year 2000, Aucxis acquired Schelfhout Computer Systemen N.V., Kwatrobox B.V., and I-Three, Inc. On June 12, 2001 the Company amended its charter to change its name to Aucxis Corp.
Aucxis currently has a wholly owned subsidiary, e-Auction (Barbados), which in turn has one wholly owned subsidiary, Aucxis Corp. (Canada). The Company also owns Aucxis Corp. (Belgium) (“Aucxis NV”), directly, which in turn has a 92.5% ownership in Aucxis Trading Solutions, N.V. (“ATS”) (formerly Schelfhout Computer Systemen N.V.), a Belgium company. Aucxis Trading Solutions N.V. in turn has a 33.3.% interest in Auction Trading Services Nederland BV (“ATS Holland”) formed in partnership with two of the largest flower auctions. On April 11, 2003, Aucxis NV voluntarily filed for bankruptcy and as such a trustee in bankruptcy has been entrusted with Aucxis NV’s management and the realization of its assets for the benefit of its creditors. Management of the Company will be working with the Trustee to maximize the proceeds received for ATS and to ensure there is little or no disruption to employees and the business in general.
ATS (formerly Schelfhout) is a solutions provider for perishable commodity (fish, flower, fruits and vegetables) auction houses. Over the past 17 years ATS has developed trading systems for numerous selling organizations all over the world. Through ATS, the Company has the potential to access electronic trading hubs representing billions of dollars in annual turnover, including European trade of more than USD$7 billion. ATS delivers the tools to bring together supply and demand under optimum conditions and thus create a better market situation. ATS has focused on two market sectors: (i) the computerization of auctions and (ii) automation for the preservation of perishable products. As an ancillary to the auction system, a modular graphic display panel was developed by ATS in 1992 and added to the product range.
Through its subsidiary ATS, Aucxis is engaged in the installation and maintenance of auction clock and cooling systems for traditional auction halls and the development of software for auctions, including Internet-based auction systems. The company has temporarily suspended development of e-business services for the perishable commodity marketplace pending further review of the business opportunities in this area. Aucxis continues to maintain a “staging environment” in Toronto, Canada for testing and further research and development. It is managements’ intention to review this area of the business in order to evaluate alternatives to maximize shareholder value.
18
Highlights of the Quarter
Revenue for the three months ended March 31, 2003 was $1,226,680 compared to $1,308,512 in the same period in 2002. Although overall revenue was lower, gross profit was higher by $200,639 due to lower cost of sales compared to last year
Revenue for the quarter was driven entirely by ATS with continued growth in the installation of auction clock systems and cooling systems. ATS continues to derive its revenues from the development and installation of clock systems, cooling installations and associated maintenance contracts for auctions.
Selling, general and administrative expense for the three months ended March 31, 2003 was $993,555 as compared to $788,605 for the corresponding three month period in 2002. The increase was primarily due to an increase in salaries and related remuneration expenses at ATS. Depreciation and amortization expense for the three months ended March 31, 2003 was down $20,557 from the same three month period last year, due primarily to software write-downs at the end of the last fiscal year.
Net income for the three months ended March 31, 2003 was $437,622 compared to a loss of $269,715 for the same period in 2001. Included in income is a gain of $542,295 from the cancellation of 454,545 mandatory Redeemable shares. During the quarter, the Company finalized the disposition of a 7.5% interest in ATS pursuant to a court order allowing the former owners of ATS to reacquire a 7.5% interest in exchange for the transfer for cancellation of the first tranche of 454,545 shares. Accordingly, the Company reduced the mandatory redeemable shares of common stock by $602,267 (454,545 shares), increased its non-controlling interest by $59,972, representing the carrying amount of the portion of ATS disposed of and recognized a gain on cancellation of mandatory redeemable preferred shares for the balance of $542,295.
Net income was also higher than last year due to an increase in its share of income of the equity investment in ATS Holland. These gains were offset by operational losses of $136,843, an improvement over the prior year, which was $153,089. This significant improvement in costs compared to prior years is attributed to the Company’s ongoing cost management initiatives.
Management is continuing its revenue enhancing and cost management initiatives while simultaneously exploring various strategic options for the Company including disposition of business units and/or assets, and business combinations and/or joint ventures with other companies in the perishable goods marketplace. Management will be reviewing the Collateral Management Utility (CMU) and related hardware to determine if the CMU justifies additional research and development. It is expected that this review will lead to discussions with interested parties for the development or sale of the CMU, depending on the outcome of any financings or business unit sale initiatives.
Liquidity and Capital Resources
As at March 31, 2003, the Company had a cash balance of $639,006, an increase from the cash balance at December 31, 2002. Future cash flows for the Company will be derived from increased growth within ATS, the success of future external financing initiatives and the disposal of business units and other assets. Management continues to examine a variety of options to raise additional financing. At the ATS level management has been successful securing the necessary credit lines and bank guarantees needed to fulfill the requirements under the various contracts that have been secured. Aucxis is continuing its revenue enhancement and cost management initiatives, including decreasing operating costs and working with creditors regarding outstanding payables. It is not possible at this time to predict with any assurance the success of any other initiatives, however management is working diligently towards the goal of self-sustainability.
19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 29, 2002 Mr. Schelfhout and Mrs. De Laet brought an ex parte application before Court of Dendermonde (Belgium), which granted them authorization to apply a restraint order to a portion of the ATS shares held by Aucxis NV (Belgium). The restraint order was effectively applied on that same date with a view to securing the alleged damages that may be due in respect of the arbitration proceedings.
On March 17, 2003, the former owners of the Company’s subsidiary, ATS, obtained a restraining order against the Company, effectively securing the remaining 92.5% of the ATS shares to satisfy any ultimate judgement which might be awarded to the former owners of ATS as a result of their claims alleging misrepresentations by the Company prior to and subsequent to the closing of the ATS share purchase by the Company in January 2000.
On March 26, 2002, Mr. Schelfhout resigned as the managing director of ATS, as a consequence of which ATS brought a civil law action before the Commercial Court of Dendermonde (Belgium) on May 17, 2002, aiming at establishing that such resignation has caused the management contract under which Mr Schelfhout performed his management duties to be terminated, entitling ATS to cease all payments of management fees and to demand damages. In February of 2003, Mr. Schelfhout obtained a judgement against the Company in the amount of $244,000 for breach of a management contract. The Company has accrued $244,000 to date for this judgement, but is appealing the decision.
Except as described above, management does not have knowledge of any material litigation pending, threatened or contemplated, or unsatisfied judgments against the Company or its affiliates, or any proceedings in which the Company or its affiliates is a party. Similarly, management is without knowledge as to any legal actions pending or threatened or judgments entered against the Company's executive officers and directors in their capacity as such, other than to the extent such individuals are named in the above actions.
Item 5. Other Information
On April 11, 2003, Aucxis NV, the wholly owned Belgium subsidiary of Aucxis Corp. (the “Company”) has voluntarily filed for bankruptcy and as such has been declared bankrupt by the Commercial Court of Dendermonde on that date. A trustee in bankruptcy has been entrusted with Aucxis NV’s management and the realization of its assets for the benefit of its creditors. The Company is the primary creditor with a claim of USD $9,250,000, this being the outstanding balance of the original inter-company loan with respect to the acquisition of Aucxis Trading Solutions NV (“ATS”) in January 2000. ATS is the only significant asset of Aucxis NV and the most significant asset in the Aucxis Corp. group. Court proceedings for the final verification of claims took place on June 5, 2003. Management of the Company will be working with the Trustee to maximize the proceeds received for ATS and to ensure there is little or no disruption to employees and the business in general. The Aucxis NV bankruptcy will have certain temporary and/or permanent effects on certain ongoing judicial proceedings the details of which are not known at this time.
20
Item 6. Exhibits And Reports On Form 8-K
| (a) | Exhibits | ||
| 99.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| (b) | Reports on Form 8-K | ||
On May 15, 2003, we filed a Form 8-K, which contained disclosure under Item 5 (Other Events). On June 18, 2003, we filed a Form 8-K/A, amending the Form 8-K filed on May 15, 2003. | |||
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the Company has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: June 18, 2003 | Aucxis Corp. | |
| (Registrant) | ||
| By: | /s/ Dennis E. Petke | |
| Dennis E. Petke, | ||
| Chief Financial Officer (duly authorized officer) | ||
21
Exhibit 99.1
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 Aucxis Corp. (the “Company”) on Form 10-QSB for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Neil Murphy, Chief Operating Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The financial information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Dennis Petke
Dennis Petke
Chief Financial Officer
June 18, 2003