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 January 31, 1998
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)
(972) 541-1600
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(Registrant's telephone number, including area code)
Not applicable
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(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----8,111,005 shares as of March 16, 1998.
CANMAX INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JANUARY 31, OCTOBER 31,
1998 1997
----------- -----------
ASSETS
Current Assets:
Cash $ 440,875 $ 128,871
Accounts receivable, net 1,179,217 2,751,264
Inventory (Note B) 78,640 46,615
Prepaid expenses and other 215,029 175,494
---------- ----------
Total current assets 1,913,761 3,102,244
Property and equipment at cost less
accumulated depreciation and amortization
of $2,904,175 in 1998 and $2,732,749 in 1997 1,351,809 962,175
Capitalized software costs, net of
accumulated amortization of $897,125
in 1998 and $839,721 in 1997 587,376 494,786
Intellectual property rights, net of accumulated
amortization of $643,784 in 1998 and $639,617
in 1997 26,389 30,556
Goodwill 2,928,707 -
Other assets 110,452 117,717
---------- ----------
$6,918,494 $4,707,478
---------- ----------
---------- ----------
See accompanying notes.
2
CANMAX INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
JANUARY 31, OCTOBER 31,
1998 1997
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable (Note C) $ 216,412 $ -
Convertible debentures - shareholder (Note C) 350,000 -
Accounts payable 595,525 878,241
Accrued liabilities 739,365 867,233
Deferred revenue 307,892 269,404
Current portion of lease obligation 134,255 159,364
Current portion of long-term debt 35,195 35,195
Advances from shareholder (Note C) 17,354 100,000
------------ ------------
Total current liabilities 2,395,998 2,309,437
Lease obligations 171,259 127,051
Long-term debt 42,421 51,056
Shareholders' equity;
Common stock, no par value,
44,169,100 shares authorized; 8,111,005
and 6,611,005 shares issued and
outstanding in 1998 and 1997 25,938,131 23,290,733
Accumulated deficit (21,629,315) (21,070,799)
------------ ------------
Total shareholders' equity 4,308,816 2,219,934
------------ ------------
$ 6,918,494 $ 4,707,478
------------ ------------
------------ ------------
See accompanying notes.
3
CANMAX INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED JANUARY 31,
-------------------------
1998 1997
---------- ----------
Revenues:
Software licenses and product revenue $ 215,225 $ 229,920
Development 840,745 3,251,359
Service agreements 547,980 488,930
---------- ----------
1,603,950 3,970,209
---------- ----------
Costs and expenses:
Cost of software licenses and product revenue 169,909 221,702
Cost of development revenues 401,082 1,475,438
Customer service 476,613 567,292
Product development 170,944 276,900
General and administration 783,357 956,889
Sales and marketing 151,338 109,919
Interest and financing costs, net 9,240 3,710
---------- ----------
2,162,483 3,611,850
---------- ----------
Net income (loss) $ (558,533) $ 358,359
---------- ----------
---------- ----------
Basic earnings (loss) per share (Note F) $ (0.08) $ 0.07
---------- ----------
---------- ----------
Diluted earnings (loss) per share (Note F) $ (0.08) $ 0.05
---------- ----------
---------- ----------
See accompanying notes.
4
CANMAX INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED JANUARY 31,
-------------------------
1998 1997
---------- ----------
Operating Activities
Net income (loss) $ (558,533) $ 358,359
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 233,447 235,832
Loss on disposal of assets - 8,958
Changes in operating assets and liabilities
Accounts receivable 1,951,920 (118,404)
Inventory (8,563) 209,488
Prepaid expenses and other (18,748) 1,833
Accounts payable (647,407) 219,508
Accrued liabilities (407,989) (267,119)
Deferred revenue (14,894) (289,328)
---------- ----------
Net cash provided by operating activities 529,233 359,127
---------- ----------
Investing activities:
Purchase of property and equipment (24,660) (12,953)
Capitalized software costs (150,443) -
Purchase of business, net of cash acquired (244,949) -
(Increase) decrease in other assets 7,265 (1,665)
---------- ----------
Net cash used in investing activities (412,787) (14,618)
---------- ----------
Financing activities:
Proceeds from convertible debentures - shareholder 350,000 -
Payments made on lease obligations (45,824) (30,725)
Repayment of shareholder advance (100,000) (60,472)
Repayment on borrowing (8,635) (8,372)
---------- ----------
Net cash provided by (used in) financing activities 195,541 (99,569)
---------- ----------
Effect of exchange rate changes on cash 17 9
---------- ----------
Net increase in cash 312,004 244,949
Cash at beginning of period 128,871 908,772
---------- ----------
Cash at end of period $ 440,875 $1,153,721
---------- ----------
---------- ----------
See accompanying notes.
5
CANMAX INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 ended January 31, 1998 are not necessarily indicative
of the results that may be expected for the year ending October 31, 1998.
For further information, refer to the consolidated financial statements and
footnotes thereto included in Canmax's annual report on Form 10-K for the
year ended October 31, 1997. Certain amounts in the 1997 condensed
consolidated statement of operations have been reclassified to conform with
the 1998 presentation.
On January 30, 1998, Canmax acquired USCommunication Services, Inc. ("USC"),
a San Diego, California based provider of telecommunication products and
internet services to the transportation industry. USC's products and
services include prepaid calling cards, one plus long distance services,
public internet access kiosks, pay telephones and pallet exchange services.
Pursuant to the terms of an Agreement and Plan of Merger dated as of January
30, 1998 (the "Merger Agreement") by an among Canmax, USC and a wholly owned
subsidiary of Canmax (the "Subsidiary"), USC was merged with and into the
Subsidiary, with the Subsidiary being the surviving corporation in the merger
(the "Surviving Corporation") and electing to continue its operations under
the name "USCommunication Services, Inc." Pursuant to the Merger Agreement,
the former stockholders of USC received an aggregate of 1.5 million shares of
Canmax Common Stock, a warrant that is exercisable during the five (5) year
period commencing January 30, 1998 to acquire 1.5 million shares of Canmax
Common Stock at an exercise price of $1.25 per share, and a warrant that is
exercisable during the five (5) year period commencing January 30, 2000 to
acquire 1.0 million shares of Canmax Common Stock at an exercise price of
$2.00 per share. The acquisition was accounted for under the purchase
method. The results of USC's operations have been combined with those of
Canmax since the date of acquisition.
NOTE B - INVENTORY
Inventory consists primarily of computer hardware and purchased software.
NOTE C - NOTES PAYABLE AND ADVANCES FROM SHAREHOLDERS
NOTES PAYABLE
USC maintains a $500,000 revolving line of credit with PayNet Communications,
Inc., which is secured by the interests in Location Agreements and equipment
obtained by USC when installing its Internet Kiosk product, TravelNet. The
note bears interest at the Prime Rate plus one percent, and has a term of
three years.
Prior to consummation of the acquisition of USC, certain beneficial owners of
shares of USC loaned USC $20,000. Funds obtained from these holders bear
interest at 16%. All principal and interest are due on April 1, 1998.
6
ADVANCES FROM SHAREHOLDERS
On October 30, 1997, a shareholder, Founders Equity Group, Inc. ("Founders"),
advanced Canmax $100,000. The advance was unsecured and had an interest rate
of 12%. On November 6, 1997, Canmax repaid principal and interest of
$100,230, which fully satisfied Canmax's obligation.
Prior to consummation of the acquisition of USC on January 30, 1998, the
President and beneficial shareholder of USC made advances to USC. These
advances are unsecured and do not bear interest.
CONVERTIBLE DEBENTURES TO SHAREHOLDERS
On December 15, 1997, Canmax executed a convertible loan agreement with a
shareholder, Founders Equity Group, Inc., ("Founders") which provides
financing of up to $500,000. Funds obtained under the loan agreement are
collateralized by all assets of Canmax and bear interest at 10%. Required
payments are for interest only and are due monthly beginning February 1,
1998. Borrowings under the loan agreement mature January 1, 1999, unless
otherwise redeemed or converted.
Under the terms of the loan agreement, Founders may exercise its right at any
time to convert all, or in multiples of $25,000, any part of the borrowed
funds into Canmax Common Stock at a conversion price of $1.25 per share. The
conversion price is subject to adjustment for certain events and transactions
as specified in the loan agreement. Additionally, the outstanding principal
amount is redeemable at the option of Canmax at 110% of par.
As of January 31, 1998, Founders had advanced to Canmax $350,000 under the
loan agreement. Canmax used these funds to pay fees and expenses related to
the USC acquisition, to advance USC $250,000 for equipment purchases and for
USC's general working capital requirements, and for Canmax's general working
capital requirements, all of which are permitted uses of proceeds under the
loan agreement. On February 24, 1998, Founders advanced Canmax the remaining
$150,000 available under the loan agreement.
On February 11, 1998, Canmax and Founders executed a loan commitment letter
which provides for multiple advance loans of up to $2 million over the
ensuing 12 month period. Funds obtained under the loan commitment agreement
are collateralized by all assets of Canmax and bear interest 10%. Interest
is payable monthly and borrowings under the agreement mature one year from
the date of the advance. Amounts borrowed under the agreement are
convertible into Canmax Common Stock at a conversion price equal to the five
(5) day trading average of the Canmax Common Stock immediately preceding the
date of advance. The maximum amount of Canmax Common Stock issuable under the
loan commitment is 1.6 million shares. As consideration for the loan
commitment, Canmax paid a commitment fee of $10,000. As of March 16, 1998,
no amounts had been advanced to Canmax under the loan commitment agreement.
NOTE D - ACQUISITIONS
On January 30, 1998, Canmax acquired USC in a transaction recorded under the
purchase method. The total purchase price of the acquisition was $2,952,204
comprised of the following consideration:
7
Number of shares Value Assigned
---------------- --------------
Canmax Common Stock 1,500,000 $1,458,973
Warrants 1,500,000 653,055
Warrants 1,000,000 535,370
--------- ----------
Subtotal 4,000,000 2,647,398
---------
---------
Cash advances made to USC 250,000
Acquisition costs 54,806
----------
----------
Total Purchase Price $2,952,204
----------
----------
The fair value of the warrants issued in connection with the acquisition was
estimated using the Black-Scholes option pricing model with the following
assumptions:
Risk-free interest rates 5.5% - 6.0%
Dividend yields 0%
Volatility factor 0.921
Expected life of warrants 2 - 4 yrs
In accordance with the purchase method of accounting, a portion of the
purchase price was allocated to the net assets acquired based on their
estimated fair values. The fair value of tangible assets acquired and
liabilities assumed was approximately $955,500 and $932,000 respectively.
The balance of the purchase price, approximately $2,929,000, was recorded as
excess cost over net assets acquired (goodwill) and is being amortized over 5
years on a straight-line basis.
The January 31, 1998 financial statements reflect the preliminary allocation
of the purchase price as the purchase price allocation has not been finalized.
The following unaudited pro forma consolidated results of operations have
been prepared as if the acquisition of USC had occurred at November 1, 1997
and 1996:
PRO FORMA THREE MONTHS ENDED
JANUARY 31, 1998 JANUARY 31, 1997
---------------- ----------------
Net revenues $2,414,007 4,015,075
Net income (loss) (935,288) 158,364
Earnings (loss) per share:
Basic $ (0.12) $ 0.02
Diluted $ (0.12) $ 0.02
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisition been in effect for the periods
presented, nor do they purport to be indicative of the results that will be
obtained in the future.
Upon consummation of the Merger Agreement, James C. Bernet, the former
President of USC, executed an Employment Contract with the Surviving
Corporation and Canmax pursuant to which he will continue to serve as
President of the Surviving Corporation. Mr. Bernet's Employment Contract
expires January 29, 2001. Upon the execution of his Employment Contract, Mr.
Bernet was also granted (a)
8
warrants to acquire 1.0 million shares of Canmax Common Stock at an exercise
price of $2.00 per share, the vesting of which is dependent upon the annual
business operations of the Surviving Corporation generating after tax
earnings of at least $5.0 million (subject to certain adjustments), and (b)
warrants to acquire 1.0 million shares of Canmax Common Stock at an exercise
price of $3.00 per share, the vesting of which is dependent upon the annual
business operations of the Surviving Corporation generating after tax
earnings of at least $8.625 million (subject to certain adjustments). Each
of the warrants granted in connection with Mr. Bernet's Employment Contract
must vest, if at all, on or before January 30, 2001. In accordance with APB
No. 25, and its related interpretations, Canmax has recorded no compensation
expense to date. Compensation expense will be recognized when it becomes
probable that an event which will trigger vesting will occur.
NOTE E - SHAREHOLDERS' EQUITY
VESTING OF PERFORMANCE WARRANTS
In September 1997, Canmax executed employment agreements with certain
executives which provided for the issuance of warrants ("Performance
Warrants") to each executive as additional compensation. These agreements
were effective July 1, 1997. The aggregate number of shares to be issued
upon exercise of such Performance Warrants is 475,000. Each Performance
Warrant expires 10 years from the date of issuance and is exercisable at a
price of $2.25 per share, the closing price of the Canmax Common Stock on
July 17, 1997, the date that the compensation committee approved the issuance
of such warrants. The employment agreements provided that the Performance
Warrants were to vest 50% upon the "Trigger Date" and 50% on the one-year
anniversary of the Trigger Date. As used in each employment agreement, the
Trigger Date means the date of the earlier of the following events: (i) the
earnings per share of Canmax (after tax) equals or exceeds $0.30 per share
during any fiscal year, or (ii) the closing price of the Canmax Common Stock
equals or exceeds $8.00 per share for sixty-five consecutive trading days.
The Performance Warrants were also to vest on a Change of Control (as defined
in each executive's employment agreement).
Upon the consummation of the Merger Agreement a Change of Control occurred
that caused the vesting of the Performance Warrants. In accordance with APB
No. 25, and its related interpretations, Canmax recorded no compensation
expense upon the vesting of the Performance Warrants as the stock price on
the vesting date was less than the exercise price of the Performance Warrants.
STOCK OPTION PLAN
On February 26, 1998, the Board of Directors increased the number of shares
issuable under Canmax's stock option plan (the "Stock Option Plan") from 1.2
million shares to 2.3 million shares so that stock options previously granted
by the Board in excess of those permitted by the Stock Option Plan could be
covered by the Plan. As of February 27, 1998, 1,121,990 shares of Canmax
Common Stock have been issued under the Stock Option Plan, 1,093,700 shares
remain subject to outstanding options under the Stock Option Plan, and 84,310
shares were available for future grants under the Stock Option Plan.
NOTE F - EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FASB 128),
effective for both interim and annual periods ending after December 15, 1997.
Statement 128 requires companies to report basic and diluted earnings per
share. Basic earnings per share is computed using the weighted average
number of shares of common stock outstanding during each period. Diluted
earnings per share is computed using the weighted average number of shares of
common stock outstanding during each period and common equivalent shares
consisting of stock options and warrants (using the treasury stock method).
All earnings per share amounts reported have been restated to conform to the
new standard.
The following table sets forth the computation of basic and diluted earnings
per share as calculated in accordance with FASB 128.
9
FOR THE THREE MONTHS ENDED
JANUARY 31,
--------------------------
1998 1997
---------- ----------
Numerator:
Numerator for basic and
diluted earnings per share -
Net income (loss) $ (558,533) $ 358,359
Denominator:
Denominator for basic earnings
per share - weighted average shares 6,627,309 5,012,869
Effect of dilutive securities:
Stock Options - 1,598,936
Warrants - -
10% convertible debentures - -
---------- ----------
Dilutive potential common shares - 1,598,936
---------- ----------
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions 6,627,309 6,611,805
---------- ----------
---------- ----------
Basic earnings (loss) per share $ (0.08) $ 0.07
---------- ----------
---------- ----------
Diluted earnings (loss) per share $ (0.08) $ 0.05
---------- ----------
---------- ----------
NOTE G - NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FASB 131), which supercedes existing
accounting standards related to disclosures of operating segment information.
The provisions of FASB 131 are effective for Canmax beginning the year ended
October 31, 1999. Historically, Canmax has operated in one industry segment.
However, with the acquisition of USC, Canmax is evaluating the impact of FASB
131 on its reporting requirements.
In October 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No.
97-2, "Software Revenue Recognition" (SOP 97-2), which supercedes Statement
of Position No. 91-1. SOP 97-2 will be effective for all transactions
entered into by Canmax subsequent to October 31, 1998. Canmax is currently
evaluating the impact that SOP 97-2 will have on software license revenue
transactions entered into subsequent to October 31, 1998.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
REVENUE
For the first quarter of 1998, Canmax had revenues of $1,603,950, a decrease of
$2,366,259 or 59.6% over the same period in 1997. During the first quarter of
1998, The Southland Corporation ("Southland") and NCR Corporation ("NCR")
accounted for approximately 84% of Canmax's total revenue as compared with
approximately 94% for the comparable period of 1997.
Software licenses and product revenue for the three month periods ended January
31, 1997 and 1998 decreased by 6.4% from $229,920 to $215,225, respectively.
This decrease is primarily due to purchased software sales to Southland in the
first quarter of 1997 that did not occur during the comparable period in 1998.
This decrease was partially offset by an increase in sales of hardware
components to Southland during the first quarter of 1998 over the comparable
period of 1997.
Software licenses and product revenue decreased $840,905 or 79.6% from
$1,056,130 in the fourth quarter of 1997 to $215,225 in the first quarter of
1998 primarily due to the sale to Southland in October, 1997 of the right to
use, possess and modify the source code of the software developed by Canmax for
Southland, for a one-time license fee of $1.0 million.
Development revenue for the three month periods ended January 31, 1997 and 1998
decreased $2,410,614 or 74.1% from $3,251,359 to $840,745, respectively.
During the first quarter of 1997, Canmax recognized approximately $3,058,000 of
development revenue for work performed under an agreement which commenced in
May, 1996 with NCR and Southland to develop a scanning point of sale
application for Southland and other associated inventory, merchandising, and
back office functions, running in a Windows NT environment (the "Southland
Windows NT development project"). The Southland Windows NT development project
was completed in October, 1997. This decrease was partially offset by an
increase in development revenue from the base contract with Southland which
increased from approximately $185,000 in 1997 to approximately $212,000 during
the same period in 1998 and an increase in revenues from development and other
resources provided to Southland on as as-needed basis under an agreement which
commenced in January, 1998 and extends through December, 1998. During the
first quarter of 1998, Canmax recognized approximately $637,000 of development
revenue related to these efforts.
Development revenue decreased $1,178,014 or 58.4% from $2,018,759 in the fourth
quarter of 1997 to $840,745 in the first quarter of 1998. This decrease is
primarily due to a decrease in development revenues of approximately $1,592,000
resulting from the completion of the Southland Windows NT development project
in October, 1997. This decrease is partially offset by an increase in
development revenues of approximately $383,000 from services provided to
Southland on an as-needed basis under current agreements with Southland.
Service agreements revenue for the three months ended January 31, 1997 and 1998
increased $59,050 or 12.1% from $488,930 to $547,980, respectively. This
increase resulted from support rate increases negotiated with certain customers
which was partially offset by a decline in the installation, training and site
survey revenues reflecting a lower number of new installations of Canmax's
proprietary software accompanied by a decrease in calls received from Southland
locations by the 24 hour/7 day a week help desk, which caused a decline in
revenue due to the structure of the support contract with Southland.
See discussion in "Liquidity and Sources of Capital" for future trends and
status of contracts.
11
GROSS MARGIN
Gross margin, as a percentage of software licenses and product revenue, was
21.1% for the three months ended January 31, 1998 as compared with 3.6% for the
same period in 1997. Gross margin on hardware sales for the first quarter of
1998 was 47.8% compared to 30.1% for the same period in 1997. The percentage
increase in margin resulted from a change in the mix of hardware components
sold. This percentage increase in hardware margins accompanied by margin
increases from increased sales of hardware components to Southland during the
first quarter of 1998 over the comparable period of 1997 more than offset a
decrease in margins on software sales. The decrease in margins on software
sales was due to purchased software sales to Southland in the first quarter of
1997 that did not occur during the comparable period of 1998.
Gross margin, as a percentage of software licenses and product revenue, was
93.1% for the fourth quarter of 1997 as compared with 21.1% for the first
quarter of 1998. This decrease is due to the effects of the higher margin
source code sale to Southland in October, 1997.
Gross margin on development revenues for the three months ended January 31,
1998 was 52.3% as compared with 54.6% for the same period in 1997. This
decrease is due to lower profit margins under the current agreements with
Southland to provide development and other resources on as as-needed basis as
compared to margins on the Southland Windows NT development project in process
during the same period of 1997.
EXPENSES
Customer service costs for the three months ended January 31, 1998 decreased by
$90,679 or 16.0% compared with the same period in 1997. The decline in costs
is due to lower operating costs for the service arising from increased
efficiencies and lower overall expenditure levels.
Product development costs decreased $105,956 or 38.3% from $276,900 for the
three months ended January 31, 1997 to $170,944 for the comparable period in
1998. This decrease is primarily due to headcount reductions from attrition
and an increase in capitalized software development costs. During the first
quarter of 1998, Canmax capitalized $150,433 of software development costs
relating to Canmax's next generation Windows based project which is scheduled
for release in the first calendar quarter of 1998. No such costs were
capitalized during the first quarter of 1997.
General and administrative expenses decreased $173,532 or 18.1% from $956,889
for the first quarter of 1997 to $783,357 for the first quarter of 1998. This
decrease is primarily due to lower overall expenditure levels and a reduction
in development project premiums to ensure timely completion of projects and
performance bonuses.
General and administrative expenses decreased $404,324 or 34.0% from $1,187,681
for the fourth quarter of 1997 to $783,357 for the first quarter of 1998. This
decrease is primarily due to Canmax expensing approximately $360,000 of merger
related costs during October, 1997 upon termination of the proposed merger with
Auto Gas Systems, Inc.
Sales and marketing expenses increased by $41,419 or 37.7% from $109,919 for
the first quarter of 1997 to $151,338 for the first quarter of 1998. These
increases are due to increased headcount and advertising and marketing
expenditures aimed at generating interest in existing products as well as
Canmax's new Windows based product scheduled for release in the first calendar
quarter of 1998.
For the three months ended January 31, 1997 Canmax recorded no tax provision as
net operating loss carryforwards of approximately $19.1 million would offset
any tax liability. No tax provision was recorded for the three months ended
January 31, 1998 as Canmax generated both a book and taxable loss during that
period.
12
As a result of the foregoing, Canmax incurred a net loss of ($558,533) or
($0.08) per share, for the three months ended January 31, 1998 as compared with
net income of $358,359 or $0.07 per share (basic), for the three months ended
January 31, 1997.
LIQUIDITY AND SOURCES OF CAPITAL
At January 31, 1998, Canmax had a working capital deficiency of ($482,237),
compared to working capital surplus of $792,809 at October 31, 1997. The
decrease in working capital is primarily attributable to decreased revenues
during the quarter ended January 31, 1998. For the three months ended
January 31, 1998, Canmax generated cash from operating activities of $529,233.
To maintain liquidity during fiscal 1998, Canmax must (i) increase revenue
through the successful completion of on-going development contracts with
customers, the introduction of new products to the marketplace, increasing the
market share for existing products and services, and negotiating new
development contracts with customers and/or (ii) utilize existing loan
agreements or obtain additional lines of credit. See "Convertible Loan
Agreements." Canmax believes that it will meet its liquidity needs in 1998
through cash generated from the operations of its existing software business,
its newly acquired telecommunications business, and, if necessary, through
utilization of its existing loan and loan commitment agreements.
CONVERTIBLE LOAN AGREEMENTS
On December 15, 1997, Canmax executed a convertible loan agreement with a
shareholder, Founders Equity Group, Inc., ("Founders") which provides financing
of up to $500,000. Funds obtained under the loan agreement are collateralized
by all of the assets of Canmax and bear interest at 10%. Required payments are
for interest only and are due monthly beginning February 1, 1998. Borrowings
under the loan agreement mature January 1, 1999, unless otherwise redeemed or
converted.
Under the terms of the loan agreement, Founders may exercise its right at any
time to convert all, or in multiples of $25,000, any part of the borrowed funds
into Canmax Common Stock at a conversion price of $1.25 per share. The
conversion price is subject to adjustment for certain events and transactions
as specified in the loan agreement. Additionally, the outstanding principal
amount is redeemable at the option of Canmax at 110% of par.
As of January 31, 1998, Founders had advanced to Canmax $350,000 under the loan
agreement. Canmax used these funds to pay fees and expenses related to the USC
acquisition, to advance to USC $250,000, and for general working capital
requirements, all of which are permitted uses of proceeds under the loan
agreement. On February 24, 1998, Founders advanced to Canmax the remaining
$150,000 under this agreement.
On February 11, 1998, Canmax and Founders executed a loan commitment letter
which provides for multiple advance loans of up to $2 million over the ensuing
12 month period. Funds obtained under the loan commitment agreement are
collateralized by all assets of Canmax and bear interest at 10%. Interest is
payable monthly and borrowings under the agreement mature one year from the
date of the advance. Amounts borrowed under the agreement are convertible into
Canmax Common Stock at a conversion price equal to the five (5) day trading
average of the Canmax Common Stock immediately preceding the date of the
advance. The maximum amount of Canmax Common Stock issuable under the loan
commitment is 1.6 million shares. As consideration for the loan commitment,
Canmax paid a commitment fee of $10,000. As of March 16, 1998, no amounts had
been advanced to Canmax under the loan commitment agreement.
PRODUCT DEVELOPMENT
To complete development of the next generation Windows based product, Canmax is
performing additional development effort that is not funded by work currently
being performed for Southland. Costs necessary to perform the additional
development and to bring the new product to market are estimated to
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range from $250,000 to $500,000. Canmax increased its sales and marketing
efforts in 1997 in order to generate market interest in existing systems as
well as new products under development.
Canmax believes that it may be necessary to raise additional capital to
complete development of its next generation product within the critical window
of opportunity and to provide vital marketing and other support services. If
cash generated by operations is insufficient to satisfy Canmax's liquidity
requirements, Canmax may be required to sell additional debt or equity
securities or utilize existing lines of credit, delay new product development
or restructure operations to reduce costs. Such financing could have a
dilutive effect on the stockholders of Canmax.
USC LIQUIDITY NEEDS
Canmax anticipates that approximately $3.5 to $5.0 million will be required to
realize anticipated revenue growth in its telecommunications businesses. These
funds will be used to purchase and install additional prepaid phone card
vending machines and internet access kiosks. Canmax is seeking to secure
equipment financing for these purchases.
ACQUISITIONS
Canmax continues to review an acquisition strategy within its current industry
and other related markets. From time to time Canmax will review acquisition
candidates with products, technologies or other services that could enhance
Canmax's product offerings or services. Any material acquisitions could result
in Canmax issuing or selling additional debt or equity securities, obtaining
additional debt or other lines of credit and may result in a decrease to
Canmax's working capital depending on the amount, timing and nature of the
consideration to be paid.
SOUTHLAND AGREEMENTS
In December, 1993, Canmax signed a five year agreement with Southland to
provide software licenses, development services, and provide hardware and help
desk services (the "Master Agreement"). Southland chose Canmax's proprietary
convenience store automation software, C-Serve, as the basis for its automation
of store functions and operations at its corporate and franchise operated
7-Eleven convenience stores in the United States. Software licensing, product
and service revenue under this agreement during the three months ended January
31, 1998 and 1997 totaled approximately $512,500 and $470,121, respectively,
while development revenues recorded under the Master Agreement during these
same periods totaled approximately $212,000 and $185,000 respectively.
On October 31, 1997, Canmax and Southland entered into Amendment No. 3 to the
Master Agreement (the "Southland Amendment"). Pursuant to the terms of the
Southland Amendment, Canmax allowed Southland to exercise its right as
specified in the Master Agreement to use, possess and modify the source code
for the software developed by Canmax for Southland for a one-time license fee
of $1.0 million. Payment of the license fee was due in two installments of
$500,000. The first installment was received in November, 1997 and the second
installment was received in January, 1998. The Southland Amendment also
contains Southland's agreement to purchase from Canmax on or before
December 7, 1998, no less than $4.0 million of hardware, software maintenance,
help desk, development and other services. Although Southland has committed to
purchase certain products and services totaling a minimum of $4.0 million
through December 7, 1998 in accordance with the terms of the Southland
Amendment, Southland's use and possession of the source code could result in a
material reduction in Southland's reliance upon, and payment of fees for
development services to, Canmax. The use by Southland of its own staff or a
third-party other than Canmax to perform such services could have a material
adverse effect on Canmax.
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From time to time, Canmax may also provide development and other resources to
Southland on an as-needed basis under various agreements at terms specified in
the Master Agreement. Approximately $637,000 of development revenue under such
agreements was recognized by Canmax in the first quarter of 1998. Such
agreements extend through December, 1998.
During fiscal 1996, Canmax reached an agreement with NCR to develop for
Southland a next generation Windows NT based version of the Canmax C-Serve
convenience store software for $9.5 million. NCR was chosen by Southland to
provide project management and other professional services for the project.
Modifications to project requirements increased total project revenues from
$9.5 million to $11.5 million. This project was completed in October, 1997.
Approximately $3,058,000 of development revenues under such agreement was
recognized by Canmax in the first quarter of 1997.
Canmax is in discussions with Southland regarding the renegotiation of its
contract, but no definitive agreement has been reached to date. While Canmax
anticipates that it will successfully negotiate future agreements with
Southland, there can be no assurances either that Canmax will continue to
provide services to or receive revenue from Southland after the expiration of
the existing contracts in December, 1998 or, if Canmax enters into new
agreements with Southland extending beyond December, 1998, the amount of
revenues Canmax will receive thereunder. Any termination or significant
disruption of Canmax's relationships with Southland could have a material
adverse effect on Canmax's business, financial condition and results of
operations.
Due to periodic fluctuations in billing and collection cycles in the Southland
relationship, Canmax's accounts receivable as a percentage of its total assets
will fluctuate; however, Canmax does not anticipate any material problems in
collecting its accounts receivable with Southland. Any material adverse change
in the ability of Southland to pay the amounts owed to Canmax would result in a
write down in such receivables (beyond any reasons currently established
therefor) and, if significant, could have a material adverse effect on Canmax.
IMPACT OF YEAR 2000
Canmax has completed an assessment of the impact of Year 2000 issues on its
internal systems and developed software products and determined that it will be
required to modify or replace portions of its internal systems and developed
software products so that they will function properly with respect to dates in
the year 2000 and thereafter. Canmax has initiated communications with all of
its significant suppliers and customers to determine the extent to which
Canmax's internal systems and developed software products are vulnerable to
those third parties failure to remediate their own Year 2000 issues. Canmax has
commenced its Year 2000 compliance project. The project is estimated to be
completed not later than December 31, 1998. Canmax believes that with
modifications to existing internal systems and developed software products and
conversions to new internal systems and developed software products, the Year
2000 issue will not pose significant problems for its internal systems and
developed software products. However, if such modifications and conversions are
not made, or are not completed timely, the Year 2000 issue could have a
material impact on the operations of Canmax. Canmax has concluded that the cost
of its Year 2000 project will not materially impact future financial results.
Canmax is in the process of evaluating Year 2000 issues related to the recently
acquired business operations of USC.
NASDAQ LISTING REQUIREMENTS
On August 25, 1997, the U.S. Securities and Exchange Commission, the National
Association of Securities Dealers, Inc. and The Nasdaq Stock Market approved
increases in the listing and maintenance standards governing the Nasdaq
SmallCap Market. These new standards require, as a condition to continued
listing on the Nasdaq SmallCap Market, an issuer to maintain either "net
tangible assets" (defined as total assets, excluding goodwill, minus total
liabilities) of $2.0 million, market capitalization of $35.0 million or net
income in two of the last three fiscal years of at least $0.5 million.
Companies failing to
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satisfy the new listing requirements were allowed a six month "compliance"
period (ending February 23, 1998) during which they may take appropriate steps
to comply with the new listing requirements. As of January 31, 1998, Canmax
had net tangible assets of approximately $1.4 million, a market capitalization
of approximately $9.1 million, and had not had net income of $0.5 million in
any of its last three fiscal years; therefore, Canmax failed to meet the
requirements for continued listing on the Nasdaq SmallCap Market. Canmax is in
the process of submitting a plan to satisfy such continued listing
requirements, but no assurances can be given that such plan will be accepted by
Nasdaq or, if accepted, that such plan will be successful. Canmax's failure to
satisfy the requirements for continued listing on the Nasdaq SmallCap Market
(or receive a waiver of such requirement for a sufficient period to achieve
compliance) will subject Canmax to being delisted from the Nasdaq SmallCap
Market. The delisting of Canmax would materially adversely affect the ability
of Canmax to raise capital in the future, the liquidity of the Canmax Common
Stock and the operations of Canmax.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FASB 131), which supercedes existing
accounting standards related to disclosures of operating segment information.
The provisions of FASB 131 are effective for Canmax beginning the year ended
October 31, 1999. Historically, Canmax has operated in one industry segment.
However, with the acquisition of USC, Canmax is evaluating the impact of FASB
131 on its reporting requirements.
In October 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No.
97-2, "Software Revenue Recognition" (SOP 97-2), which supercedes Statement
of Position No. 91-1. SOP 97-2 will be effective for all transactions
entered into by Canmax subsequent to October 31, 1998. Canmax is currently
evaluating the impact that SOP 97-2 will have on software license revenue
transactions entered into subsequent to October 31, 1998.
The foregoing "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Canmax" section contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act which represent Canmax's expectations or beliefs
concerning, among other things, future operating results and various components
thereof and the adequacy of future operations to provide sufficient liquidity.
Canmax cautions that such matters necessarily involve significant risks and
uncertainties that could cause actual operating results and liquidity needs to
differ materially from such statements, including, without limitation: (i)
user acceptance of Windows NT as an operating system, (ii) concentration of
revenues in one customer and Canmax's relationship with such customer, (iii)
the ability of Canmax to manage its growth, (iv) Canmax's need for additional
financing to fund product development, marketing and related support services,
and acquisitions, (v) future technological developments and product acceptance,
(vi) intense price and product competition within the industry, (vii) future
operating results and continued growth of USC's business and (viii) other risks
indicated herein and in filings with the commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended January 31, 1998.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On December 23, 1997, the Registrant filed a report on Form 8-K regarding the
signing of a letter of intent to acquire USCommunication Services, Inc.
("USC"). Additionally, on February 9, 1998, the Registrant filed a report on
Form 8-K regarding the consummation of the USC acquisition and on February 13,
1998 the Registrant filed a report on Form 8-K regarding the possible change of
control of the Registrant at a subsequent date.
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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: March 17, 1998 /s/ ROGER BRYANT
--------------- ----------------------------
Roger Bryant
President & CEO
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