U. S. Securities and Exchange Commission
Washington, D.C. 20549FORM 10-Q
[X]��
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
JuneSeptember 30, 2001[ ]o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to
------------- -------------________________Commission File No. 02-99110
LIQUITEK ENTERPRISES, INC.
- -------------------------------------------------------------------------------- (Exact
(Exact name of Small Business Issuer in its Charter)NEVADA 91-1499978 ------ ---------- (State or Other Jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization)
NEVADA
91-1499978
(State or Other Jurisdiction of
(I.R.S. Employer I.D. No.)
incorporation or organization)
1350 East Draper Parkway
Draper, Utah 84020- -------------------------------------------------------------------------------- (Address
(Address of Principal Executive Offices)Issuer'sIssuer’s Telephone Number: (801) 553-8785
Not applicable.
(Former
(Former name, changed since last report)Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
(1) Yes
/X/ý No/ /o (2) Yes/X/ý No/ / (APPLICABLEo(APPLICABLE ONLY TO CORPORATE ISSUERS)
State the number of shares outstanding of each of the Issuer's classes of common equity, as of the latest practicable date:
As of
August 10,November 12, 2001, the Company had38,376,73739,776,737 shares of Common Stock outstanding.Another
15,576,94816,638,249 restricted shares of Common Stock of the registrant have been issued subject to a rescissionrights grantedright in connection with an acquisition.Transitional Small Business Issuer Format Yes
/ /o No/X/ý LIQUITEK ENTERPRISES INC.
TABLE OF CONTENTS
PageItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
162PART I - FINANCIAL INFORMATION
All statements, other than statements of historical fact, included in this Form 10-Q, including the statements under
"Management's“Management’s Discussion and Analysis,"” are, or may be deemed to be,"forward-looking statements"“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the"Securities Act"“Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the"Exchange Act"“Exchange Act”). Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by such statements contained in this Form 10-Q. Such potential risks and uncertainties include, without limitation, competitive technology advancements and other pressures from competitors, economic conditions generally and in our research and development efforts, availability of capital, cost of labor (foreign and domestic), cost of raw materials, occupancy costs, and other risk factors detailed herein and in our filings with the Securities and Exchange Commission. We assume no obligation to update the forward-looking statements or to update the reasons actual results could differ from those projected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements.The Management of Liquitek Enterprises Inc.
("(“we," "us,"” “us,” or"Company"“Company”) prepared the unaudited condensed consolidated financial statements together with related notes that are filed with this Form 10-Q Quarterly Report. In the opinion of management, these financial statements fairly present theconsolidatedfinancial condition of the Company, but should be read in conjunction with theconsolidatedfinancial statements for the year ended December 31, 2000 previously filed with the Securities and Exchange Commission.3LIQUITEK ENTERPRISES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET JUNELiquitek Enterprises, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 2001
AND DECEMBERand December 31, 2000
JUNE 30, 2001 DECEMBER 31, 2000 (UNAUDITED) (AUDITED) ------------- -----------------ASSETS CURRENT ASSETS CASH $ 31,350 $ 23,864 ACCOUNTS RECEIVABLE 219,273 200,575 ADVANCES TO COMPANY BEING ACQUIRED 1,390,637 620,000 PREPAID EXPENSES AND OTHER CURRENT ASSETS 190,540 113,830 ------------ ------------ TOTAL CURRENT ASSETS 1,831,800 958,269 PROPERTY AND EQUIPMENT, NET 3,100,405 3,153,130 DEPOSITS AND OTHER ASSETS 450,432 447,185 ACQUIRED COMPLETED TECHNOLOGY, NET 10,286,600 10,557,300 GOODWILL, NET 9,765,807 10,022,918 PATENTS AND OTHER INTANGIBLES, NET 770,717 848,097 ------------ ------------ TOTAL ASSETS $ 26,205,761 $ 25,986,899 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 1,084,386 $ 587,915 DUE TO RELATED PARTIES 2,808,897 967,079 DEFERRED INCOME TAXES 3,709,967 3,827,213 STOCKHOLDERS' EQUITY COMMON STOCK, par value $.001/ share, 100,000,000 shares authorized 38,376 38,126 June 30, 2001: 38,376,737 outstanding December 31, 2000: 38,126,737 outstanding ADDITIONAL PAID-IN CAPITAL 30,654,311 30,204,561 STOCK OPTIONS, WARRANTS AND DEFERRED COMPENSATION 1,506,241 1,356,241 ACCUMULATED DEFICIT (13,596,417) (10,994,236) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 18,602,511 20,604,692 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,205,761 $ 25,986,899 ============ ============
September 30, 2001 (Unaudited)
December 31, 2000
(Audited)
ASSETS
��
Current Assets
Cash
$
66,391
$
23,864
Accounts receivable
257,228
200,575
Advances to Company Being Acquired
1,465,025
620,000
Prepaid Expenses and Other Current Assets
165,524
113,830
Total Current Assets
1,954,168
958,269
Property and equipment, net
3,031,497
3,153,130
Deposits and other assets
456,364
447,185
Acquired completed technology, net
10,151,250
10,557,300
Goodwill, net
9,637,341
10,022,918
Patents and other intangibles, net
730,519
848,097
TOTAL ASSETS
$
25,961,139
$
25,986,899
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses
$
923,353
$
587,915
Notes Payable to related party
1,200,000
-
Total Current Liabilities
$
2,123,353
$
587,915
Due to Related Parties
311,859
967,079
Deferred income taxes
3,651,344
3,827,213
Stockholders' Equity
Common stock, par value $.001/ share, 100,000,000 shares authorized
39,776
38,126
09/30/2001: 39,776,737 outstanding
12/31/2000: 38,126,737 outstanding
Additional paid-in capital
32,752,911
30,204,561
Stock options, warrants and deferred compensation
1,581,241
1,356,241
Accumulated deficit
(14,499,345
)
(10,994,236
)
Total stockholders' equity
19,874,583
20,604,692
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
25,961,139
$
25,986,899
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4LIQUITEK ENTERPRISES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNELiquitek Enterprises, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three-month and Nine-month Periods Ended September 30 2001,ANDand 2000
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000 ------------------ ------------------ ---------------- ----------------SALES $ 430,482 $ 130,610 $ 896,317 $ 130,610 COST OF SALES 393,635 100,128 712,830 100,128 ----------- ----------- ----------- ----------- GROSS PROFIT 36,847 30,482 183,487 30,482 OPERATING EXPENSES SELLING AND DISTRIBUTION 89,560 43,758 239,235 43,758 GENERAL AND ADMINISTRATIVE 793,033 1,041,958 2,095,044 2,310,072 RESEARCH AND DEVELOPMENT: ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT -- 970,000 -- 970,000 OTHER 192,761 129,416 402,765 265,551 ----------- ----------- ----------- ----------- 1,075,354 2,185,132 2,737,044 3,589,381 ----------- ----------- ----------- ----------- LOSS BEFORE INTEREST AND INCOME TAX BENEFIT (1,038,507) (2,154,650) (2,553,557) (3,558,899) INTEREST INCOME / (EXPENSE) NET (33,550) 52,292 (48,623) 78,904 INCOME TAX BENEFIT, NET OF VALUATION ALLOWANCE -- -- -- -- ----------- ----------- ----------- ----------- NET (LOSS) $(1,072,057) $(2,102,358) $(2,602,180) $(3,479,995) =========== =========== =========== =========== BASIC AND DILUTED LOSS PER SHARE $ (0.03) $ (0.07) $ (0.07) $ (0.14) =========== =========== =========== ===========(Unaudited)
Three Months Ended September 30, 2001
Three Months Ended September 30, 2000
Nine Months Ended September 30, 2001
Nine Months Ended September 30, 2000
Sales
$
524,320
$
393,914
$
1,420,637
$
524,525
Cost of Sales
387,954
303,568
1,100,785
403,697
Gross profit
136,366
90,346
319,852
120,828
Operating Expenses
Selling and distribution expenses
72,459
151,043
311,694
194,801
General and administrative expenses
888,893
888,107
2,983,945
3,197,926
Research and development expenses:
Acquired In-Process Research and Development
-
-
-
970,000
Other
89,955
139,977
492,720
405,528
1,051,307
1,179,127
3,788,359
4,768,255
Loss before interest and income tax benefit
(914,941
)
(1,088,781
)
(3,468,507
)
(4,647,427
)
Interest and other income / (Expense) net
12,023
18,852
(36,601
)
97,756
Income tax benefit
-
-
-
-
Net (loss)
$
(902,918
)
$
(1,069,929
)
$
(3,505,108
)
$
(4,549,671
)
Basic and diluted loss per share
$
(0.02
)
$
(0.03
)
$
(0.09
)
$
(0.15
)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5Liquitek Enterprises, Inc. and Subsidiaries|
Condensed Consolidated Cash Flows
For the Nine-month Periods Ended September 30, 2001 and 2000(Unaudited)
Nine Months
Nine Months
Ended September 30, 2001
Ended September 30, 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)
(3,505,108
)
(4,549,671
)
Adjustments to reconcile net (loss) to net cash used
by operating activities:
Depreciation and amortization
1,150,386
1,407,097
Acquired in-process research and development
-
970,000
Stock options
225,000
108,336
Changes in current assets and liabilities:
Accounts receivable
(56,651
)
(99,042
)
Inventories
(34,116
)
(53,098
)
Prepaid expenses and Other Current Assets
(17,578
)
(14,626
)
Deposits and other assets
(9,179
)
-
Accounts payable, accrued expenses, and deferred income taxes
159,566
(147,575
)
Net cash (used) by operating activities
(2,087,680
)
(2,378,579
)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from companies acquired
-
70,867
Acquisition of Subsidiary Company
-
(50,000
)
Advances to companies being acquired
(845,025
)
(1,249,316
)
Acquisition of property and equipment
(90,797
)
(855,417
)
Capitalized patent costs and Other Technologies
(28,751
)
(995,563
)
Net cash (used) by investing activities
(964,573
)
(3,079,429
)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from (to) related parties
(655,220
)
(24,666
)
Proceeds from issuance of notes payable
1,200,000
-
Proceeds from issuance of common stock
2,550,000
6,727,999
Repayment of debt assumed in acquisition
-
(961,481
)
Net cash provided by financing activities
3,094,780
5,741,852
NET INCREASE IN CASH
42,527
283,844
CASH AT BEGINNING OF PERIOD
23,864
366,566
CASH AT END OF PERIOD
66,391
650,410
LIQUITEK ENTERPRISES INC.
AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2001 JUNE 30, 2000 ---------------- ----------------CASH FLOWS FROM OPERATING ACTIVITIES NET (LOSS) $(2,602,180) $(3,479,995) ADJUSTMENTS TO RECONCILE NET (LOSS) TO NET CASH USED BY OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 766,576 108,253 ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT -- 970,000 STOCK OPTIONS 150,000 365,750 CHANGES IN OPERATING ASSETS AND LIABILITIES: ACCOUNTS RECEIVABLE (18,698) (100,837) PREPAID EXPENSES AND OTHER CURRENT ASSETS (76,710) 5,387 DEPOSITS AND OTHER ASSETS (3,247) -- ACCOUNTS PAYABLE, ACCRUED EXPENSES, AND DEFERRED INCOME TAXES 379,224 (83,834) ---------- ---------- NET CASH (USED) BY OPERATING ACTIVITIES (1,405,035) (2,215,276) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES CASH FROM COMPANIES ACQUIRED -- 55,063 ADVANCES TO COMPANIES BEING ACQUIRED (770,637) (749,316) ACQUISITION OF PROPERTY AND EQUIPMENT (88,929) (559,599) CAPITALIZED PATENT COSTS AND OTHER TECHNOLOGIES (19,731) (10,162) ---------- ---------- NET CASH (USED) BY INVESTING ACTIVITIES (879,297) (1,264,014) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES ADVANCES FROM (TO) RELATED PARTIES 1,841,818 (6,912) PROCEEDS FROM ISSUANCE OF COMMON STOCK 450,000 6,728,000 REPAYMENT OF DEBT ASSUMED IN ACQUISITION -- (996,949) ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,291,818 5,724,139 ---------- ---------- NET INCREASE IN CASH 7,486 2,244,849 CASH AT BEGINNING OF PERIOD 23,864 366,566 ---------- ---------- CASH AT END OF PERIOD $ 31,350 $ 2,611,415 ========== ==========THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6LIQUITEK ENTERPRISES INC.Notes to the Unaudited Condensed Consolidated Financial Statements
for the Three-month and
Six-monthNine-month Periods EndedJuneSeptember 30, 2001 and 2000.1. NATURE OF BUSINESS, REORGANIZATION AND BASIS OF PRESENTATION
NATURE OF BUSINESSNature of Business
On February 12, 2001, we completed the acquisition of Distech Limited
("Distech"(“Distech”), a New Zealand corporation engaged in designing and manufacturing equipment for treating water and other fluids. Distech has developed unique, fail-safe, state-of-the-art, sub-atmospheric water distillation equipment. The technology employs vacuum distillation for low temperature evaporation and vapor compression for efficient recycling of heat energy. The result is a cost-efficient system for producing high-purity water in commercial quantities.SeveralInternational patents protect several ofDistech'sDistech’s technicalinnovations are protected by international patents.innovations. Management believes that features such as automatic clean-in-place (to protect against theproblemadversities ofmineralscaling), remote system management over telecommunication links, minimal pre-treatment requirements, compact size, small footprint and competitive pricing suggest a strong commercial opportunity for this equipment.In conjunction with that acquisition, we issued 15,340,104 shares of restricted common stock of the Company plus 790,896 warrants and 69,000 options for the purchase of additional shares of restricted common stock in exchange for 100% of the comparable equity securities of Distech. Warrants for 236,844 shares were exercised during the quarter ended June 30, 2001, yielding approximately US$165,000 (avg. US$0.70 per share) in additional investment in the Company. As the Company’s stock market price was in steady decline shortly after the warrant exploration date occurred, the Board approved a revision of the exercise price of the warrants. The revised exercise price was calculated as US$0.1267 which was the average closing price for the week ended September 28, 2001, as reported by the Over the Counter Bulletin Board. The Company was required to issue an additional 1,061,301 shares for the exercised warrants increasing the total shares issued under these warrants to 1,298,145.
The former holders of the Distech equity securities have a right of rescission on the transaction until the Company achieves an equity infusion of $5,000,000 or September 30, 2001, whichever occurs first. As of September 30, 2001 the Company had failed to raise the requisite amount of capital, and Distech had until October 31, 2001 to exercise their right of rescission. On October 25, 2001 the parties came to an agreement to extend the rescission date by six months to March 31, 2002. Because of this contingency,
the Distech acquisition has not been booked, andneither the Distech-related issuances, the Distech financial position atJuneSeptember 30, 2001, nor the Distech operating results for thesix-monthsnine-months endedJuneSeptember 30, 2001 is reflected in theJuneSeptember 30, 2001 financial statements contained in this Form 10-Q report.The Distech operations complement those of another
wholly-ownedwholly owned subsidiary, Liquitek Corporation. Together these businesses give us a suite of technologies offering competitive solutions to problems in water bottling, recycling, industrial wastewater, remediation, desalination and ultra-pure water applications. These businesses are further complemented by the operations of Thermoflow Corporation("Thermoflow"(“Thermoflow”), Interfluid Environmental Services, Inc.("Interfluid"(“Interfluid”), and VitriSeal, Inc.("VitriSeal"(”VitriSeal”), also wholly-owned subsidiaries of the Company. Liquitek Corporation, Thermoflow and Interfluid were all acquired through tax-free, stock-for-stock reorganizations in 2000.Thermoflow owns and operates a proprietary antifreeze recycling facility in Las Vegas, Nevada. The Thermoflow technology allows recycling of antifreeze to produce fully reformulated antifreeze indistinguishable from antifreeze made from virgin materials. The Thermoflow technology and subsets thereof are capable of economically treating/recycling many other contaminated liquids,
7including wastewater. Liquitek Corporation shares the rights to use any or all of the Thermoflow technology in meeting the needs of its clientele. Interfluid Environmental Services, Inc. operates a closed-loop waste antifreeze collection and recycled antifreeze distribution system in the San Diego, California area. The waste collected in San Diego is deposited at an unrelated transfer facility in the Los Angeles, California area. Such waste, along with that brought to the transfer facility by other closed-loop operators and waste antifreeze collectors, is then transported in
Interfluid'sInterfluid’s long-haul bulk transportation equipment to Las Vegas for processing in the Thermoflow plant. Interfluid also provides long-haul bulk transport services for others ofThermoflow'sThermoflow’s customers. Interfluid is an integral part of the Thermoflow operation, but is a separate legal entity to isolate higher risk operations.Liquitek Corporation has licensed a proprietary oily wastewater treatment system to
Hawaii'sHawaii’s largest recycling company. This client has recently been awarded a reduced inspection schedule from environmental regulators because of the effectiveness oftheirthe Liquitek water treatment system. The system, or derivatives thereof, may be readily replicated in other locations. Liquitek has also developed a proprietary system for recycling carwash, laundry and aqueous solvent wastewater.The Company has tested the system in Japan and is presently negotiating sales with a Japanese distributor. Liquitek plans to introduce a similar system in the United States.Finally, Liquitekisengaged in engineering customized solutions based on its proprietary technologies for potential customers with a variety of water treatmentproblems, e.g., a paper recycling operation in Mexico.problems.VitriSeal owns the rights for a series of patented processes and proprietary know-how called
VitriSeal(TM)VitriSeal™. The process is based on inorganic silicate chemistry. It produces superior, hard, bright, clear, corrosion-protective coatings on metal surfaces at a fraction of the cost of other clear coatings. TheVitriSeal(TM)VitriSeal™ waterborne coating has little to no organic vapor emissions and creates minimal waste during the normal process operation. Accordingly there are no abnormal regulatory impacts or special governmental approval requirements on theVitriSeal(TM)VitriSeal™ application process, either in our own facility or in potentiallicensees'licensees’ facilities. TheVitriSeal(TM)VitriSeal™ coating combines many of the attributes of other types of coatings, such as anodizing, chrome plating and painting. It has corrosion and weathering resistance comparable to organic paint coatings, and it does not delaminate, or"creep“creep back,"” from damage locations as chrome plating and painting do. This unique combination of properties is expected to afford opportunities in a wide variety of markets: vehicle wheels, fabricated aluminum products, extruded aluminum products and sheet/coil aluminum products. Ongoing research indicates potential for applying the coating to non-aluminum substrates as well.During the quarter ended
JuneSeptember 30, 2001 the Companypursued further refinement ofwas heavily involved in efforts to raise capital to fund continued operations. While energies were primarily focused on these efforts, the Company continued, on a reduced scale, to refine its products through its research and developmentfunctionsefforts andsales opportunities through promotional meetingsexpansion of potential customers. Distech has nurtured demonstration and selling possibilities withprospective customers.potential customers in the metal finishing, food processing, waste water treatment, and supermarket industries. The shortfall of available capital limited the ability to demonstrate the efficacy of the equipment and correspondingly the booking of orders. Vitriseal received positive test results for its applications with heavy truck wheels and aluminum coil processing, and is currently being tested by a major aluminum primary materials producer. Thermoflow expandedboth itsoperations with new sources of supplyfor waste antifreezeandits customer base for its recycled products. Liquitek developed a small scale electro-dialysis modulenew customers thatmay be used in conjunction with its previously developed small scale filtration equipment, thus offering customerswere added to the8ability to economically produce high purity fluids through on-site processing. Distech continued the development of its larger scale machine, the D-1000, and the testing of its technology in various applications, e.g., seawater desalination. VitriSeal relocated its laboratory to a facility adjacent to its production plantCompany in theMetropolitan Detroit area. The Company's preliminary and on-going sales contacts include: Distech Metal finishing operators Water bottlers A mid-East equipment sales representative A military supplier Retail store operators An airport Liquitek A Japanese distributor U. S. carwash operators Oil processors, domestic and international A paper recycler VitriSeal Automotive wheel suppliers Truck wheel suppliers and refurbishers Supplierssecond quarter.Basis of
fabricated aluminum parts for the truck industry An aircraft manufacturer BASIS OF PRESENTATIONPresentationWe prepared our condensed consolidated financial statements for the three-month and
six-monthnine-month periods endedJuneSeptember 30, 2001 and 2000 without audit by our independent auditors. In the opinion of management, all adjustments necessary to present fairly theCompany'sCompany’s financial position as ofJuneSeptember 30, 2001, and the results of operations and cash flows for the three-month andsix-monthnine-month periods endedJuneSeptember 30, 2001 and 2000 have been made. Such adjustments consist only of normal recurring adjustments.Certain note disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to instructions for Form 10-Q. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Form 10-KSB annual report for 2000 previously filed with the Securities and Exchange Commission.
The results of operations for the three-month and
six-monthnine-month periods endedJuneSeptember 30, 2001 are not necessarily indicative of the results to be expected for the full year.92. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
GOVERNMENT REGULATION
Thermoflow
Corporation'sCorporation’s facility is subject to certain government regulations regarding hazardous waste management, primarily related to the recycling of ethylene glycol (spent antifreeze) and storage of other hazardous materials used in the recycling process. Compliance with these provisions has not had, nor does the Company expect such compliance to have, any material effect upon the capital expenditures, operations, financial condition or competitive position of the Company. Management believes that its current practices and procedures comply with applicable requirements.Thermoflow is subject to inspections by the Nevada Department of Conservation and Natural Resources, a Division of Environmental Protection (the
"Department"“Department”), which evaluates compliance with applicable hazardous waste management regulations. No violations were reported by the Department during the 1999 and 2000 inspections. The Department then shifted to an annual inspection cycle for Thermoflow; the 2001 inspectionis expected to be performed in late August.has not been completed as of the date of this report. In addition, Thermoflow Corporation has an active Nevada hazardous material storage permit that expires on February 28, 2002. Finally, during the quarter ended June 30, 2001, Thermoflow began processing oily wastewater to render it harmless for disposal to the sewer system under a permit granted by the Department.Except as set forth below, the
Company'sCompany’s significant accounting policies are as described in the notes to theCompany'sCompany’s December 31, 2000 financial statements included in the related Form 10-KSB filed with the Securities and Exchange Commission.PRINCIPLES OF CONSOLIDATION
The accompanying
JuneSeptember 30, 2001 condensed consolidated financial statements include the accounts of the Company and itswholly-ownedwholly owned subsidiaries, except for Distech Limited which has not been consolidated because of the contingencies that remained in place atJuneSeptember 30, 2001, as noted above. All significant inter-company transactions and balances have been eliminated in consolidation.Because the Thermoflow and Liquitek Corporation subsidiaries were acquired on May 26, 2000, only approximately one month of their operations is included in the accompanying statements of operations for the three-month and six month periods ended June 30, 2000. Further, because the Interfluid subsidiary was acquired on July 1, 2000, none of its operations are included in the accompanying statements of operations for the three-month and six-month periods ended June 30, 2000.INTANGIBLE ASSETS OTHER THAN PATENTS
Goodwill and acquired completed technology are amortized on a straight-line basis over 20 years. Assembled workforce, acquired customer base and other intangible assets are amortized over 10, 5 and 2-3 years, respectively, on a straight-line basis.
10RECENT ACCOUNTING PRONOUNCEMENTS
For the three-month and
six-monthnine-month periods endedJuneSeptember 30, 2001, the Company adopted Statement of Financial Accounting Standards No. 133,"Accounting“Accounting for Derivative Instruments andHedging Activities" ("hedging activities” (“SFAS133"133”), as amended. Since the Company does not presently engage in activities covered by SFAS 133, there was no significant effect on theCompany's JuneCompany’s September 30, 2001 financial statements.In July, 2001, the Financial Accounting Standards Board issued Statements No. 141,
"Business Combinations" ("“Business Combinations” (“SFAS141"141”) and No. 142"Goodwill“Goodwill and Other IntangibleAssets" ("Assets” (“SFAS142"142”). SFAS 141 supersedes APB Opinion No. 16,"Business Combinations"“Business Combinations” andSFASFASB Statement No. 38,"Accounting“Accounting for Pre-acquisition Contingencies of Purchased Enterprises."” SFAS 141 is effective for fiscal years beginning after June 30, 2001 and requires that all business combinations be accounted for by a single method, the purchase method. SFAS 142 supersedes APB Opinion No. 17,"Intangible“Intangible Assets."” SFAS 142 is effective for fiscal years beginning after December 15, 2001 and provides that all existing and newly acquired goodwill and intangible assets will no longer be amortized but will be tested for impairment annually and written down only when impaired. Management has not determined exactly how the requirements of such pronouncements will affect theCompany'sCompany’s future financialstatements. The effect of SFAS 142 maystatements, though it is expected to be significant. With goodwill and acquired technology intangibles constituting approximately $20 million of the approximately $26 million in total assets(approximately(nearly 77%) as ofJuneSeptember 30, 2001, either the absence of amortization charges (for the three-months ended September 30, 2001, such amortization approximated $264,000) or the write-down of impaired values will have a significant impact whenever either occurs.Additionally, the Financial Accounting Standards Board has recently issued Statements No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143") and No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, and is effective for financial statements issued for fiscal years beginning after June 15, 2002. SFAS 144 supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and addresses financial accounting and reporting for the impairment of disposal of long-lived assets, including accounting for a segment of a business accounted for as a discontinued operation. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. Management has not determined exactly how the requirements of such pronouncements will affect the Company's future financial statements.
RECLASSIFICATIONS
Certain amounts in the 2000 financial statements have been reclassified to conform to their
JuneSeptember 30, 2001 presentation.3. RELATED PARTY AND STOCK TRANSACTIONS
In connection with the acquisition of Distech Limited (Note 1), the Company advanced approximately
$1,391,000$1,465,000 to Distech throughJuneSeptember 30, 2001. These advances are due on demand and are non-interest bearing. It is expected that once the contingencies in the transaction are fulfilled and the acquisition is recorded in the books of the Company, the inter-company receivable and payable shown in the books of the Company and Distech will be eliminated in consolidation. If Distech Limited were to move to implement theacquisition does not book, there is no assurance that suchrecission under the extended agreement (see Note 4), these advances will berepaid, but management expects the required financingconverted to an equity position in Destech Limited to bereceived priorowned by the Company. Additionally, the shares of Distech Limited would be returned toSeptember 30, 2001.the shareholders of Distech Limited and the Company's shares would be returned to the Company and retired.During the three-month period ended
JuneSeptember 30, 2001,advances from related parties increased by approximately $793,000. These werethe Company converted $2.1 million inthe form of working capital advances fromnotes payable to Lighthouse Capital, Inc. (“Lighthouse”), an affiliate of Culley W. Davis, theCompany'sformer Chairman of theBoard. The debt from these advances was subsequently converted toBoard of the Company, into restricted common stock of the Company at the rate of $1.50 per share.See Note 5,This rate exceeded the weighted average closing price, as stated on the Over the Counter Bulletin Board, of the shares on the dates monies were advanced by Lighthouse, which was approximately $1.14 per share. In connection with such transaction, approximately $47,000 of accrued interest on the note was written off, creating an extraordinary gain on the extinguishment of debt.On February 15, 2001, the Company reached agreements with Daniel L. Corbin (“Corbin”) and Dennis A. Repp (“Repp”) whereby each mutually agreed with the Company to rescind their respective royalty agreements in exchange for 100,000 shares each of the Company’s common stock. As a result of these rescission agreements, the Company, Corbin and Repp were released from all duties and obligations under the original royalty agreements. As the Company’s common stock had a closing price of $1.50 per share on that date, the Company recognized stock compensation expense in the amount of $300,000 pertaining to these issuances.
On March 22, 2001, the Company completed the sale of 50,000 shares of its restricted common stock at $3.00 per share under the terms of a private placement undertaken during the first quarter of 2000 pursuant to Rule 506 of Regulation D, based upon the offering being made only to “accredited investors” as defined by Federal securities law.
Other related party transactions are disclosed elsewhere in the notes to the condensed consolidated financial statements.
4. GOING CONCERN/LIQUIDITY CONSIDERATIONS
below. 114. STOCK TRANSACTIONS During the three-months ended June 30, 2001, holders of warrants that were issued in connection with the acquisition of Distech Limited exercised such warrants for the purchase of 236,844 restricted shares of the Company. The exercise price was approximately US$0.70 per share. Inasmuch as the contingency regarding the rescission right on the Distech acquisition remains in place, none of the Distech acquisition, including the exercise of these warrants, has been recorded in the Company's accounts or included in the financial statements in this Form 10-Q report. 5. GOING CONCERN/LIQUIDITY CONSIDERATIONSAs discussed in Note 1, the Company is engaged in three businesses: development of a metal coating process known as
"VitriSeal(TM)“VitriSeal™,"” recycling antifreeze, and providing equipment for processing other contaminated fluids to recycle them or render them harmless to the environment. The Company has not generated significant revenues in the past. Management expects that the Company will require significant additional capital to advance the development of these operations to the point at which they may become commercially viable. The acquisition of Distech (see Note 1)hasrequired expansion of our capital resources by a $5,000,000equitycapital infusion, which was initially to be completed by September 30, 2001 in order to eliminate a right of rescission on this transaction. The right of rescission was subsequently extended six months to March 31, 2002 in an agreement dated October 25, 2001.In the Form 10-Q report for the quarter ended March 31, 2001, the Company reported that the private placement of a
$5 million$5,000,000 equity investment in Liquitek Enterprises, Inc. had been fully subscribed by AcceleratedTechnologies Fund LLC("ATF"(“ATF”), an entity organized by Culley W. Davis, the former Chairman of the Board of the Company. In a press release to the general public issued on July 10, 2001, the Company announced that ATF would be unable to fulfill this commitment and that Lighthouse,Capital, Inc. ("Lighthouse"),an affiliate of Mr. Davis, would convert the $2.1 million it had advanced to the Company against the ATF commitment from debt to Company common stock of the Company at the rate of $1.50 per share. This rate exceeded the weighted average closing price of the shares on the dates monies were advanced by Lighthouse, which wasapproximately$1.14 per share.The Company has
addresseddealt with its liquidity problems in part by temporary layoffs plus payables and payroll deferrals. The Company is seeking further equity investment through a private placement offering of convertibledebentures. We also plandebentures and through a registered rights offering to current shareholders. While such investment is being sought, and to deal with pressing financial needs, the Company sought and obtainedonin August9,2001, a bridge loan in the amount of$1,000,000$1,200,000 from an existing shareholder. This note is collateralized by a UCCI filing on the assets of Thermoflow Corporation and carries a per annum interest rate of twelve percent (12%) with interest payable quarterly commencing on December 31, 2001 and continuing on the last day of each calendar quarter thereafter until paid in full, principal and accrued but unpaid interest payable on or before the close of business on August 9, 2002. Approximately $545,000 of thisamountwas used to pay off an overdue note held by HydroMaid International, Inc., a related party, for funds it had advanced to enable the Company to exercise the option it held on the building in North Las Vegas, Nevada, where the Thermoflow plant islocated.locatedThe
balanceCompany, as part of its ongoing fund raising efforts, has updated its operating plans and projections, and is developing a comprehensive presentation for potential investors. A list of potential accredited investors has been identified, and commitments made for further analysis and evaluation. The Company expects, from current contacts, to raise theproceeds will be usedrequired capital topay critical payablesmeet current andfinance ongoing operations while further equity investment in the convertible debentures is being pursued. 126.future operating needs.5. LOSS PER COMMON SHARE
Loss per common and common equivalent share is based on the weighted average number of shares of common stock and potential common stock (as retroactively adjusted for the effect of the Reorganization) outstanding during the period in accordance with Statement of Financial Accounting Standards No. 128,
"Earnings“Earnings per Share."”The weighted average numbers of common shares outstanding for the three-month periods ended
JuneSeptember 30, 2001 and 2000 were38,376,73739,609,346 and28,785,30737,951,247 respectively. The weighted average numbers of common shares outstanding for thesix-monthnine-month periods endedJuneSeptember 30, 2001 and 2000 were38,274,80338,601,457 and25,490,37129,674,315 respectively.A total of 15,340,104 restricted shares of Common Stock of the Company have been issued, subject to rescission, in connection with the exchange of shares with common stockholders of Distech Limited in a tax-free, stock-for-stock reorganization. An additional
236,8441,298,145 restricted shares of the Common Stock of the Company were issuedduring the three-month period ended June 30, 2001,under the exercise of warrants held by the stockholders of Distech Limited as a result of theacquisition.reorganization. Such issuances have not been reflected in theCompany's JuneCompany’s September 30, 2001 financial statements because of contingencies in the acquisition transaction.7.6. SEGMENT INFORMATION
Prior to the acquisitions discussed in Note 1, the Company operated in only one segment, metal coating, which was then and remains in the development stage. As of approximately June 1, 2000, the Company had three reportable segments (see the table below). Except as set forth herein, the
segments'segments’ significant accounting policies are the same as those described in the notes to theCompany'sCompany’s December 31, 2000 consolidated financial statements included in the related Form 10-KSB filed with the Securities and Exchange Commission. Interest expense is not allocated to individual operating segments when determining segment profit or loss. The Company evaluates performance based on profit or loss from operations before interest, income taxes and non-recurring gains and losses.The
Company'sCompany’s reportable segments are strategic business units that offer different products and services. Each segment is managed separately because they use different technologies and/or market to distinct classes of customers.13
For the six-months ended June 30, 2001 (Table and Related Text in Thousands) Metal Waste Coating Water Antifreeze Process Treatment Recycling Unallocated Totals ------- --------- --------- ----------- ------Sales to external customers $ -- $ 78 $ 818 $ -- $ 896 Segment loss $ 743 $ 544 $ 300 $ 1,015 $ 2,602 Segment assets $ 602 $12,562 $11,470 $27,284 $51,918For the nine-months ended September 30, 2001
(Table and Subsequent Paragraph in Thousands)
Metal
Waste
Coating
Water
Antifreeze
Process
Treatment
Recycling
Unallocated
Totals
Sales to external
customers
$
-
$
102
$
1,319
$
-
$
1,421
Segment loss
$
987
$
814
$
372
$
1,332
$
3,505
Segment assets
$
590
$
12,378
$
11,379
$
27,687
$
52,034
Unallocated segment assets in the foregoing table consist primarily of investments in subsidiaries ($18,730), subsidiary payables to the Company ($
6,860)7,165) and other assets ($1,694)1,792). The former two amounts were eliminated in consolidation, along with$120$177 of inter-company receivables and inventory holdings within a subsidiary. The net of the unallocated segment assets ($27,28427,687 as shown in the table) and the eliminations ($18,730,$6,860$7,165 and$120$177 as described in this paragraph) is$1,574.$1,615. When this amount is added to the segment assets in the other segments in the table ($602, $12,562590, $12,378 and$11,470)$11,379), the total of$26,208$25,962 corresponds (within a rounding allowance) to the consolidated total assets as presented in the balance sheet forJuneSeptember 30, 2001.8.7. MAJOR CUSTOMERS
For the
six-monthnine-month period endedJuneSeptember 30, 2001, one customer of theantifreeze recyclingantifreeze-recycling segment individually accounted for at least 10% of segment revenues and consolidated revenues. Furthermore,two customersone customer of the waste water treatment segmenteachaccounted for over 10% of thatsubsidiary'ssubsidiary’s revenues,though neither accountedbut did not account for more than 10% of consolidated revenues.9. SUBSEQUENT EVENTS In accordance with the month-to-month nature of the consulting contract with Hamlin Jennings, an independent contractor who provided technical consulting services to VitriSeal, Inc. over the past four years, his services were terminated as of April 30, 2001. The termination process and post-termination provisions of his agreements with the Company are being followed. The Company has replaced his consulting services with those of a scientist who will carry on the Company's research and development program as an employee.8. COMMITMENTS AND CONTINGENCIES
On August 14, 2001, the Company was served notice of a civil action filed by Hamlin Jennings in U. S. District Court, Northern District of Illinois, seeking a declaratory judgment on the ownership of inventions expected from work under a grant from the National Science Foundation. While serving the Company as a consultant, Mr. Jennings applied for and was awarded the grant to fund experimentation in using the
VitriSeal(TM)VitriSeal™ coating, or derivatives thereof, as an undercoating to vapor deposition hard coatings. The Company believes that the agreements that Mr. Jennings signed upon commencing his employment, particularly the Consulting Agreement and the contemporaneous Non-disclosure and Invention Assignment Agreement, protect theCompany'sCompany’s interest in this matter.Legal counsel 14has not had time to examine the complaint and formulate responses thereto as of the filing of this Form 10-Q report. In conjunctionThe Company is engaged in settlement discussions with
the termination of the Jennings contract, we have relocated our laboratory operations to the Detroit area inEET Corporation (“EET”) concerning afacility adjacent to the pilot production plant established in 2000. The physical consolidation of research and development and production operations is expected to benefitclaim by EET for approximately $634,000 from the Company. Thelaboratory spaceCompany believes that the amount due EET is less than $100,000, which expenses were accrued inEvanston, Illinois that we vacated in this relocation has been placed onthemarket. With such space in that area being limited, we anticipate that we will be able to eliminate most, if not all, of the cost of that facility prior to the termination of our contract on the space. However, with current economic conditionsCompany’s financial statements as theyare,were incurred. EET has prepared but not filed a complaint that also asserts a claim for treble damages under thereal estate market in Evanston is relatively soft. We may have to await a rebound or market the space as general office space rather than laboratory space, either of which options will entail further cost to the Company.Tennessee Consumer Protection Act. TheBoard of Directors took the following actions in various meetings subsequent to June 30, 2001: - Approved the conversion of $2,100,000 in debt owed to Lighthouse Capital, Inc. to common stock at the rate of $1.50 per share, i.e., 1,400,000 shares to be issued. - Authorized the issuance of investment units comprised of: o 12%, 36-month convertible debentures in the aggregate principal amount of up to $7,500,000 with a conversion rate of $0.50 per share, o One Class A warrant for each $2.00 of principal amount in the debentures exercisable at $0.25 per share and expiring 60 months from the date of issuance, and o One Class B warrant for each $1.00 of principal amount in the debentures exercisable at $1.00 per share and expiring 60 months from the date of issuance. - Authorized an amendment to the rescission rights in the Distech Limited Acquisition Agreement whereby the advances from theCompanyto Distech Limited will not be required to be repaid in the event the rescission is effected at a time when the Company is in a process of dissolution, whether or not under court supervision. - Authorized the Company to enter into a loan agreement between Distech Limited and Distillation Technologies Limited ("DTL"), a new New Zealand corporation organized to raise funds specificallybelieves that EET’s claims for thesupport of Distech Limited. DTL is to offer debentures that will mirror$634,000 and theterms and conditions of the Company's authorized debentures as described above. The proceeds from the DTL offering will be advanced to Distech under the loan agreement.trebled damages are without merit. If the Company issuccessful in raisingunable to reach a settlement with EET and EET decides to pursue litigation, the$5 million necessaryCompany intends toterminatedefend therescission rightsclaim vigorously. The Company’s defense of theformer Distech Limited shareholders, or ifEET claim may include a countersuit against EET. The Company cannot predict therescission rights are not exercised, the debentures issued by DTL will be replaced with the mirror image debenturesresolution ofthe Company. 15- Authorized the Company to enter into a loan agreement in an amount not to exceed $1,200,000 with the Bart C. Warner Revocable Trust. This loan is to provide bridge financing to the Company to enable the payment of other debts and the financing of ongoing operations while the debentures described above are being marketed. This loan is secured by a pledge of the Company's shares of Thermoflow Corporation, a deed of trust on the real property owned by Thermoflow Corporation and a financing statement on Form UCC-1 on the equipment and personal property of Thermoflow Corporation. The loan bears interestthis dispute atthe rate of 12% per annum, paid quarterly, and it matures in one year. An initial increment of financing underthisloan agreement in the amount of $1,000,000 was advanced to the Company on August 9, 2001.time.In conjunction with the Interfluid acquisition which closed on July 1, 2000, the previous stockholders of Interfluid received 200,000 shares of the
Company'sCompany’s restricted common stock. Under the original terms of the acquisition agreement, such stockholders were eligible to sell shares under Rule 144 after the restrictions pertaining to that rule were lifted on July 1, 2001. To the extent that such sales were made at prices below certain levels stipulated in the agreement, the Company would have to issue additional shares to the selling shareholder(s). An amendment to the agreement has been agreed upon by the shareholders and the Company. The original provisions for the issuance of additional shares have been voided. In their place, a right of rescission has been granted on the condition that the Company undertakes the dissolution of its business. If the funding necessary to continue operations is raised, the Company will buy back the 200,000 shares at a price of $3.00 in four equal installments. The first is due within fourteen days after raising the necessary funds to allow the Company to go forward with its business. The second is due on March 31, 2002, the third on March 31, 2003 and the fourth on March 31, 2004. Should the market price on any of those dates exceed $3.00 per share, the stockholder may opt to forego that installment with no further obligation on the Company for that installment. Management expects to formalize this amendment with a written agreement.9. SUBSEQUENT EVENTS
On October 24, 2001 the Company signed an agreement with representatives of Distech Limited for a six-month extension of the rescission rights contained in the agreement under which the Company is acquiring Distech. Under the original agreement whereby the Company acquired 100 percent of the common stock of Distech Limited, the Company was obligated to raise US$5.0 million in capital by September 30, 2001. The amended agreement allows the capital formation to continue through March 31, 2002 before the rescission rights may be exercised.
The Company announced on November 14, 2001 the first sale of Distech’s model D-1000 vacuum distillation machine to Almon Environmental, Ltd, of Toronto, Canada. The machine will be part of a system that will recover, concentrate and recycle aircraft de-icing fluid at Toronto’s Lester B. Pearson International Airport. The D-1000, the largest capacity machine that Distech has built to date, is expected to recapture and adequately concentrate and purify the glycol so that it may be recycled for aircraft de-icing without having to be transported off the airport premises.
The Company’s Liquitek Corporation subsidiary had previously leased equipment for the treatment of oily waste water for 60 months to a customer in Hawaii. As of October 1, 2001, after the conclusion of 28 months of the lease, the Company negotiated a buyout of this equipment by the customer for $192,000. The Company will recognize a loss of approximately $36,000 on the write-down of a related Intangible for the remaining valuation of this lease agreement, as was recorded at the acquisition of Liquitek Corporation.
During the three-month period ended September 30, 2001, the Company made principal and interest payments in the amount of $60,000 towards a $300,000 note payable to Lighthouse Capital, Inc. which was due November 8, 2001. As of the date of this report, the Company is in default on this note for principal and interest in the amount of approximately $259,000.
On November 19, 2001, the Company announced that its VitriSeal, Inc. subsidiary had received an official Notice of Allowability from the U.S. Patent and Trademark Office regarding the Company’s patent application titled “Protective Coating for Metals”.
RESULTS OF OPERATIONS
Consolidated net revenues for the three-month and
six-monthnine-month periods endedJuneSeptember 30, 2001, were$430,482$524,320 and$896,317$1,420,637 compared to$130,610$393,914 and$130,610$524,525 for the comparable periods in 2000. Consolidated costs of sales were$393,635$387,954 and$712,830$1,100,785 for the three-month andsix-monthnine-month periods endedJuneSeptember 30, 2001 compared to$100,128$303,568 and$100,128$403,697 for the comparable periods in 2000. These data yield a grossmarginsmargin of8.6%26% and20.5%22.5% for the three-month andsix-monthnine-month periods endedJuneSeptember 30, 2001 while this measure for the three-month andsix-monthnine-month periods endedJuneSeptember 30, 2000 was23.3%22.9% and23.3%23%.The 2001 periods include operations from Thermoflow, Liquitek and Interfluid while the 2000 periods contain Thermoflow and Liquitek operations for only approximately one month.The 2001 periods also include production facility overhead costs for the VitriSeal, Inc. subsidiary that had not been established in the comparable periods of the earlier year, and for which no revenues were generated in 2001.Consolidated operating expenses were
$1,075,354$1,051,307 and$2,737,044$3,788,359 for the three- month andsix-monthnine-month periods endedJuneSeptember 30, 2001 versus$2,185,132$1,179,127 and$3,589,381$4,768,255 for the comparable periods in 2000. The nine-month decreases are attributable to an amalgam of increases and decreases, the major elements of which are (1) the restructuring of theVitriSeal(TM)VitriSeal™ research and development process, (2) the consolidation of Thermoflow, Liquitek and Interfluid operating expenses, (3) the write-off upon acquisition in 2000 of $970,000 in in-process research and development intangibles for the Liquitek Corporation subsidiary, (4) the stock compensation associated with the royalty rescission agreements negotiated in 2001 with Daniel L. Corbin and Dennis A. Repp and (5) a reduction in financial consulting service fees associated with the 2000 equity fund raising.The Company experienced a consolidated net loss and corresponding loss per share of
$1,072,057$902,918 and$0.03,$0.02, respectively, for the three-month period endedJuneSeptember 30, 2001, compared to a consolidated net loss and loss per share of$2,102,358$1,069,929 and$0.07,$0.03, respectively, for the comparable 2000 period. The16losses for the six-monthnine-month period endingJuneSeptember 30, 2001, were$2,602,180$3,505,108 and$0.07$0.09 while the losses for the comparable 2000 period were$3,479,995$4,549,671 and$0.14.$0.15.CAPITAL RESOURCES AND LIQUIDITY
With the Distech acquisition described herein, and with the changes in management personnel, which occurred in late 2000, the primary thrust of our operating plans for 2001 is to
completeaccomplish the transition fromresearch anddevelopment stage businesses to commercial operations with production, sales and revenue. In early 2001, each operating company completed the development oflong rangelong-range strategic plans and operating plans. Control mechanisms have been put in place to monitor adherence to these plans.Additional acquisitions may occur, but only under compelling circumstances that would enhanceHowever, due to theperformancedeficiency of capital, thebusinesses already owned.operating plans have been delayed or significantly reduced. The Company expects to achieve the results from the operating plans in the future as efforts to raise capital are realized.The 2001 Operating Plan for VitriSeal, Inc. contemplates revenue from contract coating in our Detroit plant for a variety of forged, fabricated, extruded and sheet aluminum products. Over the ensuing three years, we expect to enlarge the volumes of these contract-coating services and license or franchise the use of our technology in the plants of customers. The ongoing research and development program will address definition of the characteristics of the coating, applying the coating to different forms of aluminum and experimenting with coatings for other metals.
The 2001 Operating Plan for Thermoflow Corporation calls for significant growth in the utilization of the capacity of the Las Vegas plant. We also have started to combine waste water treatment with waste antifreeze treatment in the Las Vegas facility. We expect to be at 100% of practical capacity sometime in
2002. The2003. Recent updates to the Thermoflow long-range strategic plancalls for starting constructionand operating plan have deferred the consideration of adding a secondplant in 2002 and additional plants as we achieve capacity operations in each successive plant, though changes in competitive circumstances may suggest other ways of competing in these markets.plant.The Liquitek Corporation 2001 Operating Plan
anticipatesenvisages revenues from the sale and/or engineering of small-, intermediate- and large-scale fluid treatment systems using theCompany'sCompany’s technologies.Growth through the next three years is expected to comeThe realization of these plans has been delayed because of current capital deficiencies and resignations fromthese same product lines with greater volumes following a reputation for successful implementations through earlier years' sales.principal personnel.The Distech Limited 2001 Operating Plan provides for sales of the D-50 model and derivatives thereof, models producing approximately 50 U.S. gallons of treated water per hour, in remediation, water bottling, desalination, closed-loop recycling and institutional markets.
Recently an opportunity has arisen in a market not contemplated in the 2001 Operating Plan. It has the potential to be bigger than any of the other markets identified in the plan and is being vigorously pursued.The research and development programwillis expected to support these sales objectives andwillalso expand the product line through development of larger scale equipment. Futureyears'years’ salesare expected towill grow as the product reputation spreads and will be augmented by products in the D-1000 and D-3000 series, models thatcanwill produce 1,000 and 3,000 U.S. gallons of treated water per hour,respectively.respectivelyThe updated operating plans for 2001 project that all of
ourthe Company’s businesses, except Liquitek Corporation, will yet generaterevenue,revenues, some for the first time. These updated forecasts show a delay on the onset of these revenues because of capital deficiencies. Thereare clearlycontinue to be risks associated with these assessments. We cannot know for certain at this point that the market will accept our product offerings, particularly when several of the products previously have not even been offered for sale. Nevertheless, management17believes that the functional performanceefficacy and consumer economics of these products will allow us to reach our goals.All Distech sales, financing and other significant transactions will be transacted in U.S. dollars. As such, the Company does not foresee any significant risks arising out of fluctuations of foreign currency exchange rates.
The Company expects to raise additional capital within the next twelve months to fund further development of present and anticipated operations. The acquisition of Distech has required expansion of our capital resources by a $5,000,000 equity infusion by
September 30,March 31, 2001. The Company is presently seeking equity investmentand debt financing.through a private placement offering (see Note 4, GOING CONCERN/LIQUIDITY CONSIDERATIONS).In the Form 10-Q report for the quarter ended March 31, 2001, the Company reported that the private placement of a $5 million equity investment in Liquitek Enterprises, Inc. had been fully subscribed by Accelerated Technologies Fund LLC
("ATF"(“ATF”), an entity organized by Culley W. Davis, the former Chairman of the Board of the Company. In a press releaseto the general publicissued on July 10, 2001, the Company announced that ATF would be unable to fulfill this commitment and that Lighthouse Capital, Inc.("Lighthouse"(“Lighthouse”), an affiliate of Mr. Davis, would convert the $2.1 million it had advanced to the Company against the ATF commitment from debt to Company common stock at the rate of $1.50 per share. This rate exceeded the weighted average closing price of the shares on the dates monies were advanced by Lighthouse, which was $1.14 per share.The July 10, 2001, press release went on to say that the Company was dealing with its liquidity problems in part by temporary layoffs plus payables and payroll deferrals. The Company sought and closed
onin August9,2001, a bridge financing arrangement with a$1$1.2 million loan from an existing shareholder.This loan may be increased to $1,200,000.The Company is also seeking permanent equity investment through a private placement offering of convertible debentures and through a registered rights offering to current shareholders. Certain accredited potential investors have been identified and are pursuing due diligence efforts to evaluate the investment as of the filing of this Form 10-Q report.Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not presently have any investments subject to market risks beyond those generally associated with being in business in the United States. All of our transactions are denominated in U.S. dollars.
18On August 14, 2001, the Company was served notice of a civil action filed by Hamlin Jennings in U. S. District Court, Northern District of Illinois, seeking a declaratory judgment on the ownership of inventions expected from work under a grant from the National Science Foundation. While serving the Company as a consultant, Mr. Jennings applied for and was awarded the grant to fund experimentation in using the
VitriSeal(TM)VitriSeal™ coating, or derivatives thereof, as an undercoating to vapor deposition hard coatings. The Company believes that the agreements that Mr. Jennings signed upon commencing his employment, particularly the Consulting Agreement and the contemporaneous Non-disclosure and Invention Assignment Agreement, protect theCompany'sCompany’s interest in this matter.Legal counselThe Company is engaged in settlement discussions with EET Corporation (“EET”) concerning a claim by EET for approximately $634,000 from the Company. The Company believes that the amount due EET is less than $100,000, which expenses were accrued in the Company’s financial statements as they were incurred. EET has prepared but not
had time asfiled a complaint that also asserts a claim for treble damages under the Tennessee Consumer Protection Act. The Company believes that EET’s claims for the $634,000 and the trebled damages are without merit. If the Company is unable to reach a settlement with EET and EET decides to pursue litigation, the Company intends to defend the claim vigorously. The Company’s defense of thefilingEET claim may include a countersuit against EET. The Company cannot predict the resolution of thisForm 10-Q report to examine the complaint and formulate responses thereto.dispute at this time.Item 2. Changes in Securities.
Warrants were exercised by former shareholders of Distech Limited during the quarter ended June 30, 2001. A total of 236,844 shares were issued for these warrants, and the exercise price was approximately US$0.70 per share. During the quarter ended September 30, 2001 the board approved a revision of the exercise price for the warrants exercised. The revised exercise price of US$.1267 resulted in the issuance of an additional 1,061,301 shares increasing the total number of shares issued on the exercise of these warrants to 1,298,145. These shares are subject to rescission under the terms of the Distech Limited Acquisition Agreement. That rescission right constitutes a contingency that has precluded the inclusion of the Distech Limited acquisition and operating results in the
Company'sCompany’s financial statements included in this Form 10-Q report.During the three-month period ended September 30, 2001, the Company converted $2.1 million in notes payable to Lighthouse Capital, Inc. into 1.4 million restricted common shares of the Company at a rate of $1.50 per share.
Item 3. Defaults Upon Senior Securities.
TheDuring the three-month period ended September 30, 2001, the Company
had beenmade principal and interest payments indefault since March 31, 2001, onthe amount of $60,000 towards a $300,000 note payable toHydroMaid International, Inc. TheLighthouse Capital, Inc, which was due November 8, 2001. As of the date of this report, the Company is in default on this note for principal and interest in the amountthereof was $525,000. That note and the interest accrued thereon were fully paid on August 10, 2001.of approximately $259,000.Item 4. Submission of Matters to a Vote of Security Holders.
None.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.*
None.
(b) Reports on Form 8-K.
None.
* A summary of any Exhibit is modified in its entirety by
19reference to the actual Exhibit. 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.
LIQUITEK ENTERPRISES INC. Date: 08/20/01 BY: /s/ LESTER W. B. MOORE -------------------------------- Lester W. B. Moore, Chief Executive Officer Date: 08/20/01 BY: /s/ JOHN W. NAGEL -------------------------------- John W. Nagel, Chief Financial Officer 20
LIQUITEK ENTERPRISES INC.
Date: 11/19/01
BY:
/s/ LESTER W. B. MOORE
Lester W. B. Moore, Chairman of the Board
Date: 11/19/01
BY:
/s/ JOHN W. NAGEL
John W. Nagel, President, Chief Executive Officer, Chief Financial Officer