**U.S. SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

** **
| **ý** | **Quarterly report under  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                               |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                      |
|       | **For the quarterly period ended September 30, 2003**                                                                                                                                |
|       |                                                                                                                                                                                      |
| **o**      | **Transition report under Section 13 or 15(d) of  the Securities Exchange Act of 1934**                                                                                         |
|       |                                                                                                                                                                                      |
|       | **For the transition period from               to              ** |
|       |                                                                                                                                                                                      |
|       | **Commission File number 33-58694**                                                                                                                                                       |

 

| **Vitrix,  Inc.**                                                                   |
|-------------------------------------------------------------------------------------|
| (Exact name of small business  issuer as specified in its charter)                  |
|                                                                                |   |   |
| **Nevada**                                                                          |   | **13-3465289** |
| (State or other jurisdiction of  incorporation of organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |   |
| **51 West Third Street, Suite 310, Tempe,  Arizona 85281**                          |
| (Address of principal executive offices)                                            |
|                                                                                |
| **(480) 967-5800**                                                                  |
| (Issuer’s telephone number)                                                    |
|                                                                                |
|                                                                                |
| (Former name, former 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 theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90days.    Yes  ý   No  o

 

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date: At November 7, 2003, the issuer had outstanding12,106,557 shares of Common Stock, par value $.005 per share.

 

Transitional Small BusinessDisclosure Format:    Yes  o   No  ý

 

 

 

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** **

**PARTI – FINANCIAL INFORMATION**

** **

**Item 1. Financial Statements.**

** **

**VITRIX,INC. AND SUBSIDIARY**

CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                  |   | **September 30,  2003** |      | **June 30,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|-------------------------|--------|
|                                                                                                                  |   | **(Unaudited)**              |      |                    |   |
| **ASSETS**                                                                                                            |   |                         |      |                    |   |
| **Current Assets:**                                                                                                   |   |                         |      |                    |   |
| Cash and cash equivalents                                                                                             |   | $                            | 370,675   |                    | $      | 245,795 |   |
| Accounts receivable – trade, net                                                                                 |   | 809,711                      |      | 551,576                 |   |
| Inventory                                                                                                             |   | 242,504                      |      | 232,815                 |   |
| Prepaid expenses and other current assets                                                                             |   | 41,865                       |      | 34,451                  |   |
|                                                                                                                  |   |                         |      |                    |   |
| **Total Current Assets**                                                                                              |   | 1,464,755                    |      | 1,064,637               |   |
|                                                                                                                  |   |                         |      |                    |   |
| **Property and equipment, net**                                                                                       |   | 150,475                      |      | 115,633                 |   |
|                                                                                                                  |   |                         |      |                    |   |
| **Total Assets**                                                                                                      |   | $                            | 1,615,230 |                    | $      | 1,180,270 |   |
|                                                                                                                  |   |                         |      |                    |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIT)**                                                              |   |                         |      |                    |   |
|                                                                                                                  |   |                         |      |                    |   |
| **Current Liabilities:**                                                                                              |   |                         |      |                    |   |
| Current portion of long-term debt                                                                                     |   | $                            | 282,565   |                    | $      | 283,148 |   |
| Accounts payable                                                                                                      |   | 282,127                      |      | 272,129                 |   |
| Accrued liabilities                                                                                                   |   | 232,571                      |      | 209,288                 |   |
| Deferred revenue                                                                                                      |   | 296,395                      |      | 250,012                 |   |
|                                                                                                                  |   |                         |      |                    |   |
| **Total Current Liabilities**                                                                                         |   | 1,093,658                    |      | 1,014,577               |   |
|                                                                                                                  |   |                         |      |                    |   |
| **Long-term debt, less current  portion**                                                                             |   | 565,560                      |      | 597,505                 |   |
|                                                                                                                  |   |                         |      |                    |   |
| **Total Liabilities**                                                                                                 |   | 1,659,218                    |      | 1,612,082               |   |
|                                                                                                                  |   |                         |      |                    |   |
| **Commitments:**                                                                                                      |   | —                       |      | —                  |   |
|                                                                                                                  |   |                         |      |                    |   |
| **Stockholders’ Equity (Deficit):**                                                                              |   |                         |      |                    |   |
| Common stock, $.005 par value, 50,000,000 shares  authorized, 12,106,557 and 10,656,057 shares issued and outstanding |   | 60,533                       |      | 53,280                  |   |
| Contributed capital                                                                                                   |   | 6,880,495                    |      | 6,338,351               |   |
| Accumulated deficit                                                                                                   |   | (6,985,016                   | )         | (6,823,443              | )      |
|                                                                                                                  |   |                         |      |                    |   |
| **Total Stockholders’ Equity  (Deficit)**                                                                        |   | (43,988                      | )         | (431,812                | )      |
|                                                                                                                  |   |                         |      |                    |   |
| **Total Liabilities and  Stockholders’ Equity (Deficit)**                                                        |   | $                            | 1,615,230 |                    | $      | 1,180,270 |   |

 

The Accompanying Notes are an Integral Partof the Consolidated Financial Statements

 

2

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**VITRIX, INC. AND SUBSIDIARY**

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 
|                                            |   | **Three Months Ended  September 30,** |     |
|-------------------------------------------------|--------|--------------------------------------------|----------|
|                                            |   | **2003**                                   |     | **2002** |   |
| **Revenues:**                                   |   |                                       |     |   |   |
| Product sales                                   |   | $                                          | 898,328  |   | $ | 909,683 |   |
| Services revenue                                |   | 228,069                                    |     | 198,553 |   |
|                                            |   |                                       |     |   |   |
| **Total Revenues**                              |   | 1,126,397                                  |     | 1,108,236 |   |
|                                            |   |                                       |     |   |   |
| **Cost of Revenues:**                           |   |                                       |     |   |   |
| Product                                         |   | 386,024                                    |     | 358,694 |   |
| Services                                        |   | 135,554                                    |     | 125,745 |   |
|                                            |   |                                       |     |   |   |
| **Total Cost of Revenues**                      |   | 521,578                                    |     | 484,439 |   |
|                                            |   |                                       |     |   |   |
| **Gross Profit**                                |   | 604,819                                    |     | 623,797 |   |
|                                            |   |                                       |     |   |   |
| **Costs and Expenses:**                         |   |                                       |     |   |   |
| Sales and marketing                             |   | 390,293                                    |     | 261,002 |   |
| Research and development                        |   | 171,632                                    |     | 169,040 |   |
| General and administrative                      |   | 184,649                                    |     | 164,906 |   |
|                                            |   |                                       |     |   |   |
| **Total Costs and Expenses**                    |   | 746,574                                    |     | 594,948 |   |
|                                            |   |                                       |     |   |   |
| **Net Income (Loss) from  Operations**          |   | (141,755                                   | )        | 28,849 |   |
|                                            |   |                                       |     |   |   |
| **Other Income (Expense):**                     |   |                                       |     |   |   |
| Interest expense                                |   | (19,811                                    | )        | (18,979 | ) |
| Other                                           |   | (7                                         | )        | — |   |
| Interest income                                 |   | —                                     |     | 745 |   |
|                                            |   |                                       |     |   |   |
|                                            |   | (19,818                                    | )        | (18,234 | ) |
|                                            |   |                                       |     |   |   |
| **Net Income (Loss)**                           |   | $                                          | (161,573 | ) | $ | 10,615 |   |
|                                            |   |                                       |     |   |   |
| **Net Income (Loss) per Common  Share**         |   |                                       |     |   |   |
| Basic                                           |   | $                                          | (0.01    | ) | $ | 0.00 |   |
| Diluted                                         |   | $                                          | (0.01    | ) | $ | 0.00 |   |
|                                            |   |                                       |     |   |   |
| **Weighted Average Common Shares  Outstanding** |   |                                       |     |   |   |
| Basic                                           |   | 11,476,709                                 |     | 9,144,087 |   |
| Diluted                                         |   | 11,476,709                                 |     | 9,167,787 |   |

 

The Accompanying Notes are an Integral Partof the Consolidated Financial Statements

 

3

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#### ** **

#### **VITRIX,INC. AND SUBSIDIARY**

CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEAR ENDED JUNE 30, 2003 AND

THE THREE MONTH PERIOD ENDEDSEPTEMBER 30, 2003 (Unaudited)

 
|                                  |   | **Common Stock** |   | **Contributed  Capital** |      | **Accumulated  Deficit** |   |       |   |
|---------------------------------------|--------|------------------|--------|--------------------------|-----------|--------------------------|--------|------------|--------|
|                                  |   | **Shares**       |   | **Amount**               | **Total** |                     |
|                                  |   |             |   |                     |      |                     |   |       |   |   |   |
| Balance at June 30, 2002         |   | 9,105,828        |   | $                        | 45,529    |                     | $      | 6,052,120  |   | $ | (6,670,715 | ) | $ | (573,066 | ) |
|                                  |   |             |   |                     |      |                     |   |       |   |   |   |
| Issuance of common stock for services |   | 161,340          |   | 807                      |      | 43,175                   |   | —     |   | 43,982 |   |
| Sale of common stock                  |   | 1,388,889        |   | 6,944                    |      | 243,056                  |   | —     |   | 250,000 |   |
| Net loss                              |   | —           |   | —                   |      | —                   |   | (152,728   | )      | (152,728 | ) |
| Balance at June 30, 2003         |   | 10,656,057       |   | 53,280                   |      | 6,338,351                |   | (6,823,443 | )      | (431,812 | ) |
|                                  |   |             |   |                     |      |                     |   |       |   |   |   |
| Exercise of Warrants                  |   | 147,500          |   | 738                      |      | 28,762                   |   | —     |   | 29,500 |   |
| Sale of common stock                  |   | 1,303,000        |   | 6,515                    |      | 513,382                  |   | —     |   | 519,897 |   |
| Net loss                              |   | —           |   | —                   |      | —                   |   | (161,573   | )      | (161,573 | ) |
| Balance at September 30, 2003    |   | 12,106,557       |   | $                        | 60,533    |                     | $      | 6,880,495  |   | $ | (6,985,016 | ) | $ | (43,988 | ) |

 

The Accompanying Notes are an Integral Partof the Consolidated Financial Statements

 

4

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#### ** **

#### **VITRIX,INC. AND SUBSIDIARY**

CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)

 
|                                                                                  |   | **Three Months Ended  September 30,** |     |
|---------------------------------------------------------------------------------------|--------|--------------------------------------------|----------|
|                                                                                  |   | **2003**                                   |     | **2002** |   |
| **Increase (Decrease) in Cash and  Cash Equivalents:**                                |   |                                       |     |   |   |
| **Cash flows from operating  activities:**                                            |   |                                       |     |   |   |
| Net income (loss)                                                                     |   | $                                          | (161,573 | ) | $ | 10,615 |   |
| Adjustments to reconcile net income (loss) to net  cash used by operating activities: |   |                                       |     |   |   |
| Depreciation                                                                          |   | 13,302                                     |     | 17,334 |   |
| Common stock issued for services                                                      |   | —                                     |     | 36,334 |   |
| Changes in Assets and Liabilities:                                                    |   |                                       |     |   |   |
| Accounts receivable-trade                                                             |   | (258,135                                   | )        | (20,752 | ) |
| Inventory                                                                             |   | (9,689                                     | )        | (20,671 | ) |
| Prepaid expenses and other current assets                                             |   | (7,414                                     | )        | (13,598 | ) |
| Accounts payable                                                                      |   | 9,998                                      |     | 64,660 |   |
| Accrued liabilities                                                                   |   | 23,283                                     |     | (39,324 | ) |
| Deferred revenue                                                                      |   | 46,383                                     |     | (42,465 | ) |
| **Net cash used by operating  activities**                                            |   | (343,845                                   | )        | (7,867 | ) |
|                                                                                  |   |                                       |     |   |   |
| **Cash flows from investing  activities:**                                            |   |                                       |     |   |   |
| Purchase of property and equipment                                                    |   | (48,144                                    | )        | (2,450 | ) |
| **Net cash used by investing  activities**                                            |   | (48,144                                    | )        | (2,450 | ) |
| **Cash flows from financing  activities:**                                            |   |                                       |     |   |   |
| Repayment of capital leases                                                           |   | (2,195                                     | )        | (6,381 | ) |
| Repayment of debt                                                                     |   | (30,333                                    | )        | (28,024 | ) |
| Proceeds from issuance of stock and exercise of  warrants                             |   | 549,397                                    |     | — |   |
| **Net cash provided (used) by  financing activities**                                 |   | 516,869                                    |     | (34,405 | ) |
|                                                                                  |   |                                       |     |   |   |
| Net change in cash and cash equivalents                                               |   | 124,880                                    |     | (44,722 | ) |
|                                                                                  |   |                                       |     |   |   |
| Cash and cash equivalents at beginning of period                                      |   | 245,795                                    |     | 195,249 |   |
|                                                                                  |   |                                       |     |   |   |
| Cash and cash equivalents at end of period                                            |   | $                                          | 370,675  |   | $ | 150,527 |   |
|                                                                                  |   |                                       |     |   |   |
| **Supplemental disclosure of cash  flow information:**                                |   |                                       |     |   |   |
| Interest paid                                                                         |   | $                                          | 19,811   |   | $ | 19,045 |   |
| Income taxes paid                                                                     |   | $                                          | —   |   | $ | — |   |

 

The Accompanying Notes are an Integral Partof the Consolidated Financial Statements

 

5

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**SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentationand Interim Consolidated Financial Statements**

 

Theaccompanying unaudited consolidated financial statements of Vitrix, Inc. andsubsidiary (“Vitrix” or the “Company”) have been prepared in accordance withgenerally accepted accounting principles (“GAAP”), pursuant to the rules andregulations of the Securities and Exchange Commission, and are unaudited.  Accordingly, they do not include all theinformation and footnotes required by GAAP for complete financial statements.  In the opinion of management, alladjustments (which include only normal recurring adjustments) necessary for afair presentation of the results for the interim periods presented have beenmade.  The results for the three monthperiod ended September 30, 2003, may not be indicative of the results forthe entire year.  These financialstatements should be read in conjunction with the Company’s Annual Report onForm 10-KSB for the fiscal year ended June 30, 2003.

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.

 

**Income(Loss) Per Share:**

 

Basicincome (loss) per share of common stock was computed by dividing the net income(loss) by the weighted average number of shares of common stock outstanding.

 

Dilutedearnings per share are computed based on the weighted average number of sharesof common stock and dilutive securities outstanding during the period.  Dilutive securities are options and warrantsthat are freely exercisable into common stock at less than the prevailingmarket price.  Dilutive securities arenot included in the weighted average number of shares when inclusion wouldincrease the earnings per share or decrease the loss per share.

 

Thefollowing table sets forth the computation of basic and diluted earnings pershare:

 

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|                                                     |   | **Three Months Ended**       |     |
|----------------------------------------------------------|--------|------------------------------|----------|
|                                                     |   | **September 30,  2003** |     | **September 30,  2002** |   |
|                                                     |   |                         |     |   |   |
| Net income (loss)                                        |   | $                            | (161,573 | ) | $ | 10,615 |   |
| Weighed average shares                                   |   | 11,476,709                   |     | 9,144,087 |   |
| Effect of dilutive securities:                           |   |                         |     |   |   |
| Employee stock options                                   |   | —                       |     | 23,700 |   |
| Adjusted weighed averages shares and assumed conversions |   | 11,476,709                   |     | 9,167,787 |   |
| Basic earnings (loss) per share                          |   | $                            | (0.01    | ) | $ | 0.00 |   |
| Diltued earnings (loss) per share                        |   | $                            | (0.01    | ) | $ | 0.00 |   |

 

Outstandingoptions to purchase 937,190 shares of common stock and warrants to purchase466,997 shares of common stock were not included in computing diluted earningsper share for period ended September 30, 2002 because their effects wereantidilutive.

 

**New Accounting Pronouncements:**

 

In May 2003, the FASB issued Statement of Financial AccountingStandards No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity” (SFAS 150).  This statement affects the classification,measurement and disclosure requirements of the following three types offreestanding financial instruments: 1) mandatory redeemable shares, which theissuing company is obligated to buy back with cash or other assets; 2)instruments that do or may require the issuer to buy back some of its shares inexchange for cash or other assets, which includes put options and forwardpurchase contracts; and 3) obligations that can be settled with shares, themonetary value of which is fixed, tied solely or predominantly to a variablesuch as a market index, or varies inversely with the value of the issuers’shares. In general, SFAS 150 is effective for all financial instruments enteredinto or modified after May 31, 2003, and otherwise is effective at thebeginning of the first interim period beginning after June 15, 2003.  The adoption of SFAS 150 did not have animpact on the Company’s consolidated financial position or disclosures.

 

In December 2002, the Financial Accounting Standards Board “FASB”issued Statement of Financial Accounting Standards “SFAS” No. 148, “Accountingfor Stock-Based Compensation - Transition and Disclosure - an amendment of FASBStatement No. 123.” This statement provides alternative methods of transitionfor a voluntary change to the fair value method of accounting for stock-basedcompensation. The statement amends the disclosure requirements of FASBStatement No. 123 to require prominent disclosure in both annual and interimfinancial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reported results. The Companyaccounts for stock-based compensation arrangements in accordance with theprovisions of Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and complies with the disclosure provisions of FASBStatement No. 123. The transition provisions are effective for fiscal yearsending after December 15, 2002. The disclosure provisions are effectivefor interim periods beginning after December 15, 2002. The Companyimplemented the required disclosure provisions in the

 

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three month period endedMarch 31, 2003. The adoption of this statement did not have a material impacton the Company’s consolidated financial position, results of operations or cashflows.  The Company does not anticipatemaking the voluntary change to the fair value method of accounting forstock-based compensation.

 

The Companyhas adopted Financial Accounting Standards (“FAS”) No. 123, “Accounting forStock-Based Compensation”.  Under FASNo. 123, companies can, but are not required to, elect to recognizecompensation expense for all stock-based awards using a fair valuemethodology.  The Company has adoptedthe disclosure-only provisions, as permitted by FAS No. 123.  The Company applies APB Opinion No. 25 andrelated interpretations in accounting for its stock-based plans.  Accordingly, there is no relatedcompensation expense recorded in the Company’s financial statements for theperiods presented. Had compensation cost for stock-based compensation beendetermined based on the fair value of the options at the grant dates consistentwith the method of SFAS 123, the Company’s net income (loss) and income (loss)per share for the three months ended September 30, 2003 and 2002 wouldhave been reduced to the pro forma amounts presented below:

 
|                                                                                                                                              |   | **Three Months Ended  September 30,** |     |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|----------|
|                                                                                                                                              |   | **2003**                                   |     | **2002** |   |
|                                                                                                                                              |   |                                       |     |   |   |
| **Net income (loss):**                                                                                                                            |   |                                       |     |   |   |
| As reported                                                                                                                                       |   | $                                          | (161,573 | ) | $ | 10,615 |   |
|                                                                                                                                              |   |                                       |     |   |   |
| Deduct: Total stock-based employee compensation  expense determined under the fair value based method for all awards, net of  related tax effects |   | (22,843                                    | )        | (22,353 | ) |
|                                                                                                                                              |   |                                       |     |   |   |
| Pro forma                                                                                                                                         |   | $                                          | (184,416 | ) | $ | (11,738 | ) |
|                                                                                                                                              |   |                                       |     |   |   |
| **Basic income (loss) per share:**                                                                                                                |   |                                       |     |   |   |
| As reported                                                                                                                                       |   | $                                          | (0.01    | ) | $ | (0.00 | ) |
| Pro forma                                                                                                                                         |   | $                                          | (0.02    | ) | $ | (0.00 | ) |
|                                                                                                                                              |   |                                       |     |   |   |
| **Diluted income (loss) per share:**                                                                                                              |   |                                       |     |   |   |
| As reported                                                                                                                                       |   | $                                          | (0.01    | ) | $ | (0.00 | ) |
| Pro forma                                                                                                                                         |   | $                                          | (0.02    | ) | $ | (0.00 | ) |

 

The fair value ofoption grants is estimated as of the date of grant utilizing the Black-Scholesoption-pricing model with the following weighted average assumptions for allgrants, expected life of options of three (3) years, risk-free interest ratesof seven percent (7%), volatility at twenty five percent (25%), and a zeropercent (0%) dividend yield.

 

**Stockholders’ Equity:**

 

InAugust 2003, the Company completed a private placement of 1,303,000 sharesof common stock at $0.42 per share.  TheCompany received net proceeds of $519,897 and intends to use those fundsprimarily for additional sales and engineering resources.

 

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** **

**Item 2.Management’s Discussion And Analysis Or Plan Of Operation.**

** **

### **CriticalAccounting Policies**

### ** **

Oursignificant accounting policies are described in the audited consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-KSB for the fiscal year ended June 30, 2003.  We believe our most critical accountingpolicies are revenue recognition, software development costs and the allowancefor potentially uncollectible accounts receivable.

 

The Companyderives its revenues from the sale of frontline labor management systems aswell as sales of application software, parts and components.  The Company’s systems consist of fullyintegrated software and intelligent data collection terminals.  The Company also derives revenues byproviding maintenance, professional, and educational services to its customers.   The Company recognizes revenues from salesof its systems, application software, parts, and components at the time ofshipment, unless the Company has significant obligations remaining.  When significant obligations remain, revenueis not recognized until such obligations have been completed or are no longersignificant.  The Company recognizesrevenues from its sales-type leases of systems at time of shipment.  Service revenues are recognized ratably overthe contractual period or as the services are performed.

 

TheCompany provides installation services and certain warranties to its customers.It also provides, without additional charge, certain software productenhancements for customers covered under software maintenance contracts.  The provision for these expenses are made atthe time revenues are recognized.

 

TheCompany capitalizes software development costs in accordance with SFAS No. 86,“Accounting for the Costs of Computer Software to be Sold, Leased, or OtherwiseMarketed.” Capitalization of software development costs begins upon the establishmentof technological feasibility of the product. The establishment of technological feasibility and the ongoingassessment of the recoverability of these costs require considerable judgmentby management with respect to certain external factors including, but notlimited to, anticipated future gross product revenue, estimated economic life,and changes in software and hardware technology.  Amortization of capitalized software development costs beginswhen the products are available for general release to customers and iscomputed on a product-by-product basis using straight-line amortization withuseful lives of five years or, if less, the remaining estimated economic lifeof the product.  Amounts related to internalsoftware development that could be capitalized under this statement wereimmaterial.

 

The Company provides forpotentially uncollectible accounts receivable by use of the allowancemethod.  The allowance is provided basedupon a review of the individual accounts outstanding, and the Company’s priorhistory of uncollectible accounts receivable. It is the Company’s practice to record an estimated allowance for salesreturns and adjustments based on historical experience and to record individualcharges for sales returns and adjustments directly to revenue as incurred.

 

### **Comparisonof the Three Months Ended September 30, 2003 and September 30, 2002**

### ** **

*Revenues*. Revenue for the three month period ended September 30, 2003 (the“reporting period”), rose 2% to $1,126,397, compared to revenue of $1,108,236for the three month period ended September 30, 2002 (the “comparableperiod”).  The Company’s product salesdecreased by 1% and services revenue increased by 15% over the comparableperiod.  The Company believes thatproduct revenue was flat

 

9

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primarily because the prioryear’s quarter was bolstered by a large customer purchase.  The current quarter is the largest revenuequarter in Company history and the comparable period last year is the secondhighest ever.

 

*Gross Profit*. Gross profit as a percentage of revenues decreased to 54% in thereporting period, compared to 56% in the comparable period.  The gross profit percentage on product salesdecreased by 4% over the comparable period and the gross profit percentage onservices revenue increased by 4% over the comparable period.

 

The decrease in gross profit percentage on products was primarilyattributable to two factors.  TheCompany’s product revenue is comprised of software and hardware sales.  In the reporting period revenue was derivedfrom sales of systems in which hardware, which yields a lower gross profit thansoftware, represented a higher proportion of product revenues than in thecomparable period.  Secondly, ourhardware is principally comprised of two general data collection terminals,badge terminals and biometric units. Our gross profit is greater on badge terminals than biometric unitsbecause we add value to our badge terminals by installing software on theterminals.  In the current quarter wesold a greater percentage of biometric units than in the comparable quarter infiscal 2002.

 

The increase in gross profit percentage on services revenue isprimarily due to a 15% increase in services revenue in the reporting periodwhile limiting the increase in cost of services to 8% in the reporting periodover the comparable period.

 

*Expenses*. Total costs and expenses were $746,574, or 66% of revenues, in thereporting period, compared to $594,948, or 54% of revenues, in the comparableperiod.  The increase in costs andexpenses as a percentage of revenue in the reporting period is primarily due toa 50% increase in sales and marketing expenses in the current period. Sales andmarketing expenses were $390,293, or 35% of revenues, in the reporting period,compared to $261,002, or 24% of revenues, in the comparable period.  In August 2003 we completed a privateplacement yielding net proceeds to the Company of approximately $550,000.  The primary use of proceeds of those fundswas to finance key marketing initiatives and add sales personnel.  Research and development expenses were$171,632, or 15% of revenues, in the reporting period, compared to $169,040, or15% of revenues, in the comparable period. General and administrative expenses were $184,649, or 16% of revenues,in the reporting period, compared to $164,906, or 15% of revenues, in thecomparable period.

 

# **Liquidity and Capital Resources**

# ** **

At September 30, 2003, the Company had working capital of$371,097, compared to $44,127 at September 30, 2002.  Cash and cash equivalents at those datesamounted to $370,675 and $150,527, respectively.

 

*Operations*. Net cash used by operations increased to $343,845 in the reportingperiod, compared to net cash used by operations of $7,867 in the comparable period.  The net cash used in the current period wasprimarily attributable to the net loss and an increase in accounts receivable,which was partially offset by decreases in accrued liabilities and deferredrevenue.

 

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*Investment Activities*.  For the reporting period, the Company used$48,144 to purchase property and equipment, compared to $2,450 of property andequipment purchases in the comparable period. Major purchases in the current quarter included a new trade show booth.

 

*Financing Activities.*  For the reporting period the Companygenerated $516,869 in financing activities primarily due to proceeds for theissuance of common stock in a private placement offering and warrant exercises.  In the comparable period the Company used$34,405 in financing activities primarily due to repayment of debt.

 

The Company’sliquidity is affected by many other factors, some based on the normal ongoingoperations of the business and others related to the uncertainties of theindustry and global economies.  Althoughthe Company’s cash requirements will fluctuate based on the timing and extentof these factors, management believes that cash generated from operations,together with the Company’s borrowing capacity under its two credit facilities,will be sufficient to satisfy commitments for capital expenditures and othercash requirements for the next 12 months. The Company may, however, seek to obtain additional capital through aline of credit at a financial institution or through additional debt or equityofferings during this time period.  Theraising of additional capital in public or private markets will primarily bedependent upon prevailing market conditions and the demand for the Company’sproducts and services.  No assurance canbe given that the Company will be able to raise additional capital, when neededor at all, or that such capital, if available, will be on acceptable terms.

 

**Item3. Controls and Procedures**

 

Our management, including our chief executive officerand chief financial officer, have carried out an evaluation of theeffectiveness of our disclosure controls and procedures as ofNovember      , 2003, pursuant to Exchange ActRules 13a-15(e) and 15(d)-15(e).  Basedupon that evaluation, our chief executive officer and chief financial officerhave concluded that as of such date, our disclosure controls and procedures inplace are adequate to ensure material information and other informationrequiring disclosure is identified and communicated on a timely basis.

 

# **FORWARD-LOOKING INFORMATION**

# ** **

Thestatements contained in this Quarterly Report on Form 10-QSB that are nothistorical fact are forward-looking statements (as such term is defined in thePrivate Securities Litigation Reform Act of 1995) which the Company believesare within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  The forward-looking statementscontained herein are based on current expectations that involve a number ofrisks and uncertainties.  Thesestatements can be identified by the use of forward-looking terminology such as“believes,” “expects,” “may,” “will,” “should,” or “anticipates,” or thenegative thereof or other variations thereon or comparable terminology, or bydiscussions of strategy that involve risks and uncertainties.  The Company wishes to caution the readerthat these forward-looking statements that are not historical facts are onlypredictions.  No assurances can be giventhat the future results indicated, whether expressed or implied, will beachieved.  While sometimes presentedwith numerical specificity, these projections and other forward-lookingstatements are based upon a variety of assumptions relating to the business ofthe Company, which, although considered reasonable by the Company, may not berealized.  Because of the number andrange of assumptions underlying the Company’s projections and forward-lookingstatements, many of which are subject to significant uncertainties andcontingencies that are beyond the reasonable

 

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control of theCompany, some of the assumptions inevitably will not materialize, andunanticipated events and circumstances may occur subsequent to the date of thisreport.  These forward-lookingstatements are based on current expectations and the Company assumes noobligation to update this information. Therefore, the actual experience of the Company and the results achievedduring the period covered by any particular projections or forward-lookingstatements may differ substantially from those projected.  Consequently, the inclusion of projectionsand other forward-looking statements should not be regarded as a representationby the Company or any other person that these estimates and projections will berealized, and actual results may vary materially.  There can be no assurance that any of these expectations will berealized or that any of the forward-looking statements contained herein willprove to be accurate.

 

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##### ** **

##### **PART II – OTHERINFORMATION**

##### ** **

**Item 1.  Legal Proceedings.**

** **

The Company isfrom time to time involved in legal proceedings arising from the normal courseof business.   As of the date of this report,the Company is not currently involved in any legal proceedings.

 

**Item 2.  Changes in Securitiesand Use of Proceeds.**

### ** **

In August 2003, the Company completed a private placement of1,303,000 shares of common stock at $0.42 per share with accredited investors.  The Company received net proceeds of$519,897 and intends to use those funds primarily for additional sales andengineering resources.  The common stockwas issued in reliance on the exemption provided under Section 4(2) of theSecurities Act of 1933, as amended, and Regulation D thereunder.

 

**Item 6.  Exhibits And Reports On Form 8-K.**

** **

(a)                                  Thefollowing exhibits are filed herewith pursuant to Regulation S-B.

 
| **No.** |   | **Description**                                                             |
|---------|--------|-----------------------------------------------------------------------------|
|    |   |                                                                        |
| 31      |   | Certifications Pursuant to Section 302 of Sarbanes-Oxley Act of  2002. |
|    |   |                                                                        |
| 32      |   | Certifications  Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |

 

(b)                                 Reportson Form 8-K

 

No reports were filed on Form 8-K during the quarter endedSeptember 30, 2003.

 

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**SIGNATURES**

 

In accordance with the requirements of theSecurities Exchange Act of 1934, the registrant caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                                | VITRIX, INC.                   |
|-------------------------------------|--------------------------------|
|                                |                           |
| Dated:  November 14, 2003 |                           |
|                                |                           |
|                                | By                             |  /s/  Craig J. Smith |   |
|                                | Craig J. Smith                 |
|                                | Chief Financial Officer        |
|                                | (Principal Accounting Officer) |

 

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**EXHIBIT INDEX**

 

 
| **Exhibit No.** |   | **Description**                                                             |
|-----------------|--------|-----------------------------------------------------------------------------|
|            |   |                                                                        |
| 31              |   | Certifications Pursuant to Section 302 of Sarbanes-Oxley Act of  2002. |
|            |   |                                                                        |
| 32              |   | Certifications  Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |

 

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