United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Period Ended April 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Transition Period From
_______________ to_______________
Commission file number 0-22636
CANMAX INC.
(Exact name of registrant as specified in its charter)
Wyoming 75-2461665
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 W. Carpenter Freeway
Irving, Texas 75039
(Address of principal executive offices) (Zip Code)
(214) 541-1600
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since
last report)
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
Exchange Act of 1934 during the preceding 12 months (or for such
shorter periods 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______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock, No Par Value----5,012,869 shares as of June 10, 1996.
CANMAX INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
April 30 October 31
1996 1995
ASSETS
Current Assets:
Cash $ 207,142 $ 477,364
Accounts receivable, net 1,356,094 1,221,458
Inventory (Note B) 331,606 474,481
Prepaid expenses and other 186,614 76,259
Total current assets 2,081,456 2,249,562
Property and equipment at
cost less accumulated
depreciation and amortization
of $1,844,702 in 1996 and
$1,568,324 in 1995 1,463,459 1,634,325
Capitalized software costs,
net of accumulated
amortization of $481,410
in 1996 and $381,811 in 1995 643,446 614,171
Intellectual property rights,
net of accumulated amortization
of $580,978 in 1996 and $497,005
in 1995 89,195 173,168
Other assets 10,859 30,676
$ 4,288,415 $ 4,701,902
See accompanying notes.
CANMAX INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, continued
(Unaudited)
April 30 October 31
1996 1995
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 1,028,374 $ 1,290,263
Accrued liabilities 551,414 511,641
Deferred revenue 806,151 586,836
Current portion of leasehold
obligation 119,602 109,475
Advance from shareholder
(Note D) 203,846 220,000
Total current liabilities 2,709,387 2,718,215
Leasehold obligation 208,013 200,015
Development obligation (Note C) - 65,000
Shareholders' equity;
Common stock, no par
value, 44,169,100 shares
authorized; 5,012,869
and 4,935,269 shares issued
and outstanding in 1996
and 1995, respectively. 18,372,574 18,163,634
Option to purchase common
stock (Note C) 4,861,659 4,861,659
Deficit (21,863,218) (21,306,621)
Total shareholders' equity 1,371,015 1,718,672
$ 4,288,415 $ 4,701,902
See accompanying notes.
CANMAX INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
For the three months For the six months
ended April 30 ended April 30
1996 1995 1996 1995
Revenues:
Software, hardware and
product licenses $ 283,363 $ 313,952 $1,415,598 $ 674,877
Development 1,036,611 630,228 2,305,422 1,551,906
Service agreements 770,912 692,494 1,437,868 1,036,022
2,090,886 1,636,674 5,158,888 3,262,805
Costs and expenses:
Cost of software,
hardware & product
license revenues 378,929 151,113 1,106,411 369,300
Cost of development
revenues 508,515 462,996 933,064 982,312
Customer service 558,280 631,953 1,029,740 1,137,153
Product development 356,106 785,029 672,781 1,600,886
Selling and administration 1,010,895 1,316,270 1,971,040 2,268,412
2,812,725 3,347,361 5,713,036 6,358,063
Net loss $ (721,839) $(1,710,687) $(554,148) $(3,095,258)
Net loss per common
share $ (0.15) (0.37) (0.11) (0.69)
Weighted average
common shares
outstanding 4,970,674 4,615,177 4,952,824 4,476,619
See accompanying notes.
CANMAX INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the six months
ended April 30
1996 1995
Net loss $ (554,148) $ (3,095,258)
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and
amortization 441,077 443,652
Writedown of inventory 217,623 -
Writedown of investment 18,675 -
Changes in assets and liabilities:
Accounts receivable (134,636) 1,200,221
Inventory (74,748) (121,542)
Prepaid expenses and other (110,355) (78,633)
Accounts payable (261,889) (209,871)
Accrued liabilities 39,733 (220,600)
Deferred revenue 219,315 168,404
Net cash used in operations (199,353) (1,913,627)
Investing activities:
Purchase of property and
equipment (31,226) (230,300)
Capitalized software costs (128,874) -
Decrease in other assets 19,817 -
Net cash used in investing
activities (140,283) (230,300)
Financing activities:
Net proceeds from issuance
of common stock 208,940 3,039,095
Payments on leasehold
obligation (55,963) (50,397)
Decrease in development
obligation (65,000) (815,065)
Repayment of shareholder
advance (16,154) (7,200)
Net cash provided by financing
activities 71,823 2,166,433
Effect of exchange rate changes
on cash (2,409) (5,103)
Net increase (decrease) in cash (270,222) 17,403
Cash at beginning of period 477,364 10,581
Cash at end of period $ 207,142 $ 27,984
See accompanying notes.
CANMAX INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
April 30, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month period and
six month period ended April 30, 1996 are not necessarily indicative
of the results that may be expected for the year ended October 31,
1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual
report on Form 10K for the year ended October 31, 1995. Certain
amounts in the 1995 consolidated statement of operations and
consolidated statement of cash flows have been reclassified to conform
with the 1996 presentation.
NOTE B - INVENTORY
Inventory consists of raw materials and finished products, primarily
computer hardware, software, and components for sale to software
licensees.
April 30, 1996 October 31, 1995
Raw Materials $ - $ 75,040
Finished Products 331,606 399,441
$ 331,606 $ 474,481
NOTE C - EDS AGREEMENT
The company signed agreements with Electronic Data Systems Corporation
("EDS") in April 1993 which were amended in October 1994. Under the
terms of the amended agreements, EDS markets the Company's software
services and hardware technology to the retail petroleum marketplace
exclusively, and the Company offers EDS the right to participate with
its customers and prospective customers. EDS provided $2,600,000 in
cash of which $2,000,000 was used for product development, $500,000
was used to support the Company's marketing efforts, and $100,000 as
consideration for a software license to EDS. EDS also provided
$2,000,000 in services to the Company.
In connection with the above agreements, EDS received an option to
purchase up to 25% of the common stock of the Company at an exercise
price of not less than 75% of the market value of the common stock at
the time of exercise, minus $4,000,000, which will be reduced by
royalties or similar payments received by EDS from any licensing of
the Company's product other than through EDS. The stock option is
exercisable at EDS' option any time between April 22, 1994 and
April 22, 1998.
The Company accounted for the transaction as follows:
$4,000,000 as an option to purchase common stock
$ 500,000 as a deferred marketing credit with respect to the
cash intended for marketing support and
$ 100,000 as revenue with respect to the software license.
During 1994, the Company purchased services from EDS valued at
$1,972,329. By agreement, $861,659 of this amount was not paid by the
Company and has been added to the original $4,000,000 option amount.
The balance, $1,110,670, was offset against EDS' liability to the
Company for site licenses sold to EDS.
In connection with prospective business opportunities with major oil
companies, the Company and EDS jointly incurred $2,130,130 in product
development costs. EDS funded that total cost, which included
reimbursing the Company for $1,679,977 in expenses paid by the
Company. By agreement, the Company owed EDS for one-half of the total
cost. That development obligation for $1,065,065, and other amounts
due to EDS of $34,935 were converted into 229,167 common shares of the
Company on November 15, 1994. The price per share of $4.80 was
determined pursuant to agreement with EDS and represents 75% of market
value. In fiscal 1995, EDS and the Company jointly incurred $346,190
in product development costs. By agreement the Company owed EDS for
one half of the total cost. On April 20, 1995, the $173,095
development obligation due to EDS was converted into 36,061 common
shares of the Company at a conversion rate of $4.80 per share. The
balance of the outstanding amounts owed to EDS at October 31, 1995
have been repaid in full.
During 1994, the Company sold EDS 788 site licenses for $1,810,670
Pursuant to the contract, the amount receivable for this transaction
was used to offset amounts payable to EDS of $1,110,670 and to settle
a disputed $400,000 liability with respect of deferred marketing
funding that arose from an amendment to the original agreements with
EDS. The balance of $300,000 was received in cash after October 31,
1994.
NOTE D - ADVANCES FROM SHAREHOLDERS
During the first quarter of 1995, a director, W. Thomas Rinehart,
advanced the company $250,000. The advance was unsecured and had an
interest rate of 1% above the current prime rate. The company repaid
principal of $30,000 during the first quarter of 1995. The remaining
principal balance of $203,846 is being repaid in weekly installments.
Principal payments totaling $16,154 were repaid during the quarter
ended April 30, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Revenue
During the second quarter of 1996, the Company had revenues of
$2,090,886, an increase of $454,212 or 27.8% over the second quarter
of 1995. For the six months ended April 30, 1996 the Company had
revenues of $5,158,888, an increase of $1,896,083 or 58.1% over the
comparable period in 1995. The improvement in revenue is a result of
moderate growth in software revenues from the Company's proprietary
software product C-Serve, significant growth in hardware sales and
development revenue as the company completed its current contract for
the sale of hardware components to The Southland Corporation and as a
result of the provision of additional development services to The
Southland Corporation.
Software, hardware, and product license revenue for the second quarter
of 1996 was $283,363, a decrease of $30,589 or 9.7% over the second
quarter of 1995. The decline is due to a reduction in revenue from the
Company's proprietary software product C-Serve over the same period in
1995 arising from a reduction in the number of new systems sold,
offset by an increase in revenue from the sale of hardware components
produced by the company. Software, hardware, and product license
revenue declined 75.0% from the first quarter of 1996 primarily due to
the completion during the first quarter of 1996 of The Company's
current contract for the sale of hardware components to The Southland
Corporation.
For the six months ended April 30, 1996 the Company had software,
hardware, and product license revenue of $1,415,598, an increase of
109.8% over the comparable period in 1995. This increase was primarily
due to the sale of hardware components to The Southland Corporation
and other customers during 1996 which did not occur during the
comparable period in 1995.
Development revenue for the second quarter of 1996 was $1,036,611, an
increase of $406,383 or 64.5% over the second quarter of 1995. While
development revenue from the base contract with The Southland
Corporation declined in accordance with the terms of the contract
compared with the same period in 1995, the company recognized
additional development revenue of $ 570,748 for work associated with a
contract between the company and NCR to develop a point of sale system
for The Southland Corporation. No such revenue was recorded in 1995.
The additional project for The Southland Corporation is due to
conclude during the third quarter of 1996. The Company is currently
negotiating another new contract with NCR (formerly AT&T Global
Information Solutions Company) and The Southland Corporation to
provide development services. Development revenue declined 18.3% from
the first quarter of 1996 due to the decline in revenue from the work
associated with a contract between the Company and NCR to develop a
point of sale system for The Southland Corporation in accordance with
the terms of the agreement as the contract nears completion.
For the six months ended April 30, 1996, the Company had development
revenue of $2,305,422, an increase of $753,516 or 48.6% over the
comparable period in 1995. The increase is due to the factors noted
above.
Service agreements revenue for the second quarter of 1996 was
$770,912, an increase of $78,418 or 11.3% over the second quarter of
1995. This improvement resulted from an increase in revenue from 24
hour/ 7 day a week help desk services reflecting an increase in the
number of sites supported from 2660 at April 30, 1995 to 5834 as of
April 30, 1996. While the number of sites supported more than doubled,
revenue increased at a lower rate due to the structure of the support
contract with The Southland Corporation which provided for a minimum
payment until a certain volume of support calls was achieved. In
addition, the Company recorded service revenue of $168,545 for work
associated with an agreement between the Company and NCR in relation
to the development of a point of sale system for The Southland
Corporation. No such revenue was recorded in 1995.
For the six months ended April 30, 1996, the Company recorded service
agreement revenue of $1,437,868, an increase of $401,846 or 38.8% over
the comparable period in 1995. This improvement results from an
increase in revenue from the 24 hour/ 7 day a week help desk which
increased to $897,200 for the six months ended April 30. This change
resulted from an increase in the number of sites supported from 2660
as at April 30, 1995 to 5834 as at April 30, 1996. Further, the
Company recorded $400,003 in services revenue for the six months ended
April 30, 1996 for work associated with an agreement between the
Company and NCR in relation to the development of a point of sale
system for The Southland Corporation. No such revenue was recorded in
1995.
Gross Margin
Gross margin, as a percentage of software, hardware, product licenses
and development revenue was 32.8% for the second quarter of 1996
compared with 35.0% for the same period in 1995. This decrease in
gross margin is due to the following.
Gross margin on software sales was 60.7% for the second quarter of
1996 compared with 63.3% for the same period in 1995. The slight
decline is due to reduced levels of sales of the companies high margin
proprietary software C-Serve as a result of reduced demand for the
product during the reporting period. Gross margin on hardware sales
was 41.3% for the second quarter of 1996 compared with 57.0% for the
second quarter of 1995. The decline in margin resulted from a change
in the mix of hardware components sold. Compared to the second
quarter of 1995, sales of higher margin third party components
declined while sales of a lower margin product manufactured by the
Company increased in line with customer orders. Included in cost of
revenues for software, hardware, and product licenses for the second
quarter of 1996 is a one time writedown of $105,763 for software
inventory that the Company determined was necessary due to the limited
likelihood of future sales of that item. Further, also included in
cost of revenues for software, hardware and product licenses for the
second quarter of 1996 is a one time writedown of inventory to net
realizable value of $111,860 that the Company determined was required.
These charges totaling $217,623 resulted in the negative margin on
software, hardware and product license revenue in the second quarter
of 1996.
For the six months ended April 30, 1996 the gross margin on software
sales was 77.0% compared with 76.0% for the same period in 1995. For
the six months ended April 30, 1996 the gross margin on hardware sales
was 31.9% compared with 58.4% for the same period in 1995. As noted
above, mix changes in products sold, driven by customer orders,
accounted for the decline, and as previously discussed, gross margins
on software, hardware and product license revenue were negatively
impacted by the $217,623 writedown recorded in the second quarter of
1996.
Gross margin for development for the second quarter of 1996 was 50.9%
compared with 26.5% for the same period in 1995. For the six months
ended April 30, 1996 the gross margin on development was 59.5%
compared with 36.7% for the same period in 1995. The overall
improvement for the three month period and six month period ended
April 30, 1996 compared with the same period in 1995 is a result of
improved profit margins on development projects mentioned above. The
gross margin declined from the first quarter of 1996 from 66.5% to
50.9% as a result of a the need to employ highly skilled contractors
to complete certain projects on time during the second quarter.
Customer service costs for the second quarter of 1996 decreased 11.7%
compared with the same period in 1995, despite an increase in 24
hour/ 7 day a week help desk revenue. For the six months ended April
30, 1996, customer service costs declined 9.4% compared with the same
period in 1995. In both cases, the decline in costs is due to lower
operating costs for the service arising from increased efficiencies
and lower overall expenditure levels.
Expenses
Product development costs declined from $785,029 for the second
quarter of 1995 to $356,106 for the second quarter of 1996, a decrease
of 54.6%. The reduction is due to the following:
A reduction in investment in product development funded by the
Company and
A significant increase in funded development projects which
resulted in development expenditure being included in cost
of revenues.
For the six months ended April 30, 1996 product development costs
declined from $1,600,886 for the same period in 1995 to $672,781, a
reduction of 58.0%. The reduction is due to the reasons noted above
and due to the capitalization of software development costs amounting
to $128,874 relating to a new credit card processing network interface
the company developed during the first quarter of 1996.
Selling and administrative expenses declined 23.2% for the second
quarter of 1996 compared with the second quarter of 1995 and declined
13.1% for the six months ended April 30, 1996 compared with the same
period in 1995. These cost reductions are a result of lower
expenditure levels and cost savings arising from the reduction in
staffing levels and improved supply contracts for certain services.
As a result of the foregoing, the Company incurred a net loss of
$721,839, or a net loss of $0.15 per share for the second quarter of
1996, as compared to a net loss of $1,710,687 or a net loss of $0.37
per share for the second quarter of 1995.
For the six months ended April 30, 1996, the Company incurred a net
loss of $554,148 or a net loss of $0.11 per share, as compared to a
net loss of $3,095,258, or a net loss of $0.69 per share for the
comparable period in 1995.
Liquidity and Sources of Capital
At April 30, 1996, the Company has a net working capital deficiency of
$627,931. During the quarter ended April 30, 1996, the Company used
cash in operating activities of $199,353. The Company was able to
maintain liquidity during the first and second quarter of 1996
primarily from net proceeds arising from the exercise of stock options
which provided cash of $208,940 during the second quarter of 1996.
There is an emerging preference by customers for systems, solutions
and software that run under Microsoft Windows family of operating
systems. To date, the Company has experienced only isolated instances
of sales resistance for its current UNIX based systems; however, it
is seen as critical to the future growth of the corporation that it
develop a Windows based product. Work on a next generation Windows
based product commenced in May of 1996 and is currently expected to be
completed in the second calendar quarter of 1997. Completion of this
project is dependent on the successful and timely completion of a key
phase of work currently under negotiation with The Southland
Corporation. Once the development is completed, the company will be
uniquely positioned in the market place and will offer both a Windows
NT based and UNIX solution to its customers.
The development of the Windows based product in conjunction with The
Southland Corporation should ensure that the new product offering
encompasses state of the art technology and industry best practices
for the management of retail gas stations and convenience stores.
The majority of the Company's new product will be developed in
conjunction with work currently under negotiation with The Southland
Corporation. However, the Company will need to perform additional
development effort that is not funded by work done for The Southland
Corporation and to be able to market and fund all other costs
necessary to bring the new product to market and provide for
infrastructure improvements, which is estimated to be in the range of
$3.0 - $5.0 million. The Company believes that by raising additional
capital, the timely completion of its next generation product is
assured within the necessary window of opportunity and sufficient
funds are available to provide vital marketing and other support
services.
No financing arrangements have been entered into by the Company at
this time, however the Company is currently discussing financing
arrangements with a number of institutions and is anticipating that it
will be able to raise the necessary funds. It is probable that any
future equity capital funding would be dilutive.
During the third quarter of 1996, the Company has received a progress
payment for this project amounting to $286,000 to enable development
to commence; however, no contract is in place as yet. Should the
Company not be successful in concluding these negotiations on a timely
basis and no further progress payments are received, the Company will
require additional financing to continue as a going concern without
restructuring operations. Based on the Company's capital raising plan
mentioned above and the anticipated successful negotiation of a new
contract for The Southland Corporation project described above,
Management believes that it will have adequate capital resources to
continue operations into the foreseeable future; however there can be
no assurances that this will occur.
The above statements discussed in this Form 10-Q include forward-
looking statements that involve risks and uncertainties, including the
timely development and acceptance of new products, the impact of
competitive products and pricing, the successful negotiation of new
business, and the timely funding of customers' projects, and other
risks detailed from time to time in the Company's SEC reports.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 - K
(a) Exhibits
3.01 Articles of Incorporation and Bylaws of International Retail
Systems Inc. (1)
10.01 Escrow Agreement (1)
10.02 Stock Option Plan (1)
10.03 Joint Marketing Agreement with EDS (1)
10.04 Stock Option Agreement (1)
10.05 Contract with The Southland Corporation (2)
10.06 Contract with AT&T - Business Requirements Definition (3)
10.07 1996 Management Incentive Plan
(1) Incorporated by reference to the Exhibit identified in
parentheses, filed as an exhibit to the Registrant's Registration
Statement on Form 10, filed October 15, 1993.
(2) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended October 31, 1994 and incorporated herein
by reference.
(3) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended October 31, 1995 and incorporated herein
by reference.
(b) Reports on Form 8 - K
The company did not file a report on Form 8 - K during the three
months ended April 30, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Canmax Inc.
(Registrant)
DATE: June 14, 1996 /s/ Roger D. Bryant
Roger D. Bryant
President & CEO
DATE: June 14, 1996 /s/ Philip M. Parsons
Philip M. Parsons
Chief Financial Officer
and Authorized Signatory