Diversified Thermal Solutions (DVTS) Inactive
Filed: 15 Nov 04, 12:00am
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
(MARK ONE)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the quarterly period ended September 30, 2004
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from ____________ to ______________
Commission File Number: 000-28047
DIVERSIFIED THERMAL SOLUTIONS, INC.
| Nevada | 94-3342064 | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation) | Identification No.) |
4126 Delp Street, Memphis, Tennessee 38118
Registrant’s telephone number, including area code (901) 365-7650
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of
common stock, as of the latest practicable date.
| Common Stock, $0.0001 Par value | 20,467,571 shares | |
| (Class of Stock) | (Shares outstanding as of October 31, 2004) |
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Diversified Thermal Solutions, Inc.
INDEX TO FORM 10-QSB
Diversified Thermal Solutions, Inc.
Condensed Consolidated Balance Sheets
| September 30 | December 31 | |||||||
| 2004 | 2003 | |||||||
| (Unaudited) | ||||||||
Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 196 | $ | 4,168 | ||||
| Receivables: | ||||||||
| Trade, net | 15,611 | 17,467 | ||||||
| Related party | 3,005 | 2,338 | ||||||
| Total receivables | 18,616 | 19,805 | ||||||
| Unbilled revenue to related company | — | 926 | ||||||
| Inventories | 4,148 | 4,148 | ||||||
| Total current assets | 22,960 | 29,047 | ||||||
| Equipment | 59,843 | — | ||||||
| Accumulated depreciation | (2,992 | ) | — | |||||
| Net equipment | 56,851 | — | ||||||
| Deferred loan and acquisition costs | 27,554 | 364,704 | ||||||
| Total assets | $ | 107,365 | $ | 393,751 | ||||
Liabilities and shareholders’ deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 195,766 | $ | 358,363 | ||||
| Advances from related parties: | ||||||||
| Shareholder | 80,684 | 80,684 | ||||||
| Related company | 563,567 | 271,592 | ||||||
| Total advances from related parties | 644,251 | 352,276 | ||||||
| Total current liabilities | 840,017 | 710,639 | ||||||
| Shareholders’ deficit: | ||||||||
| Common stock, par value $0.0001, authorized 100,000,000 shares, issued and outstanding 20,467,571 in 2004 and 20,242,571 shares in 2003 | 2,047 | 2,024 | ||||||
| Additional paid-in capital | 10,966,587 | 10,870,767 | ||||||
| Accumulated deficit | (11,701,286 | ) | (11,189,679 | ) | ||||
| Net shareholders’ deficit | (732,652 | ) | (316,888 | ) | ||||
| Total liabilities and shareholders’ deficit | $ | 107,365 | $ | 393,751 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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Diversified Thermal Solutions, Inc
Condensed Consolidated Statements of Operations (Unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
| Revenues: | ||||||||||||||||
| Related companies | $ | 39,921 | $ | 109,448 | $ | 64,384 | $ | 434,468 | ||||||||
| Other | — | 35,478 | 15,611 | 41,298 | ||||||||||||
| Total revenues | 39,921 | 144,926 | 79,995 | 475,766 | ||||||||||||
| Costs of goods sold | 25,612 | 114,804 | 60,795 | 435,418 | ||||||||||||
| Gross profit | 14,309 | 30,122 | 19,200 | 40,348 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Professional and consulting services | 16,831 | 4,613 | 91,049 | 64,630 | ||||||||||||
| Marketing and advertising | — | 207 | — | 24,463 | ||||||||||||
| Office and administrative | 5,756 | 5,467 | 23,006 | 16,443 | ||||||||||||
| Total operating expenses | 22,587 | 10,287 | 114,055 | 105,536 | ||||||||||||
| Operating (loss) income | (8,278 | ) | 19,835 | (94,855 | ) | (65,188 | ) | |||||||||
| Other expenses: | ||||||||||||||||
| Write-off of deferred loan and acquisition costs | 4,987 | — | (410,259 | ) | — | |||||||||||
| Interest expense | (6,493 | ) | — | (6,493 | ) | (390 | ) | |||||||||
| Net (loss) income | $ | (9,784 | ) | $ | 19,835 | $ | (511,607 | ) | $ | (65,578 | ) | |||||
| Basic net loss earnings per share | $ | — | $ | — | $ | (0.03 | ) | $ | — | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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Diversified Thermal Solutions, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Nine months ended September 30 | ||||||||
| 2004 | 2003 | |||||||
Operating activities | ||||||||
| Net loss | $ | (511,607 | ) | $ | (65,578 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 2,992 | — | ||||||
| Write-off of deferred loan and acquisition costs | 410,259 | — | ||||||
| Stock issued for services | 36,000 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | 1,189 | 67,646 | ||||||
| Unbilled revenue to related company | 926 | 11,827 | ||||||
| Refundable income taxes | — | 8,068 | ||||||
| Inventories | — | (4,000 | ) | |||||
| Deferred loan and acquisition costs | 22,288 | (38,464 | ) | |||||
| Accounts payable and accrued expenses | (257,994 | ) | (14,070 | ) | ||||
| Net cash used in operating activities | (295,947 | ) | (34,571 | ) | ||||
Financing activities | ||||||||
| Net advances from related parties | 291,975 | 23,240 | ||||||
| Net decrease in cash | (3,972 | ) | (11,331 | ) | ||||
| Cash at beginning of period | 4,168 | 14,188 | ||||||
| Cash at end of period | $ | 196 | $ | 2,857 | ||||
Supplemental schedule of noncash activities
During the nine months ended September 30, 2004 and 2003, the Company has $95,397 and $44,905, respectively, in deferred loan and acquisition costs related to the acquisitions discussed in Note 3 that have not yet been paid.
Additionally, shareholders contributed equipment totaling $59,843 during the nine months ended September 30, 2004.
See accompanying Notes to Condensed Consolidated Financial Statements.
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Diversified Thermal Solutions, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Diversified Thermal Solutions, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.
The condensed consolidated financial statements include the accounts of Diversified Thermal Solutions, Inc. and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated.
The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2003.
2. Related Party Transactions
The Company’s revenues for the nine months ended September 30, 2004 were derived from two customers. One of these customers is a related company controlled by a family member of a major stockholder and Company board member. This related company also represented 16% of the Company’s accounts receivable at September 30, 2004.
Additionally, the Company has received advances from this related company and a shareholder in order to meet its current obligations. Effective July 1, 2004, these advances became interest bearing at an annual rate of 1.65%. These advances have no stated repayment terms.
During May 2004, the two majority shareholders of the Company contributed 100% of the outstanding stock in LW Precast Corp. (“LWP”) to the Company. LWP’s assets consist entirely of certain equipment used in the refractory industry and the entity has no revenues, expenses, or liabilities. Due to the related party nature of this transaction, in accordance with Financial Accounting Standards Board Statement No. 141,Business Combinations, these assets were recorded by the Company at their carrying amount of $59,843. Additional paid-in capital was increased by this same amount.
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Diversified Thermal Solutions, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
3. Acquisition Matters
During 2002, the Company entered into a letter of intent to acquire substantially all of the assets, with the exception of cash and receivables, of a company that manufactures specialized brick used in the refractory business. Due to delays amending and restructuring the original letter of intent, along with changes in the financing, the anticipated acquisition took longer than expected and the letter of intent expired. During the second quarter 2004, the management of Company determined they would no longer pursue this acquisition. Accordingly, the Company wrote off $415,246 in loan and acquisition costs that were previously capitalized related to this acquisition. During the third quarter 2004, the management of the Company negotiated the reduction of their accounts payable related to these costs by $4,987, reducing the amount of loan and acquisition costs by the same amount. The Company is currently disputing additional fees of approximately $93,000 related to this acquisition. The ultimate outcome of these fee disputes is not presently determinable and accordingly, such amounts have not been accrued in the accompanying condensed consolidated financial statements.
During August 2004, the Company entered into a separate non-binding letter of intent to acquire substantially all of the assets and assume certain liabilities of a separate company that operates in the refractory industry for approximately $4.9 million. The Company anticipates this acquisition will be financed through note agreements with a financial institution. The Company has capitalized $27,554 in acquisition and loan costs related to this new intended acquisition, which will be allocated between the direct costs of the acquisition and the debt issue costs upon the completion of the acquisition.
4. Stock Issuance
During June 2004, the Company issued under its2003 Diversified Thermal Solutions, Inc. Equity Incentive Plan225,000 shares of common stock valued at $36,000 to certain consultants of the Company. Two of these consultants received 100,000 shares each. One consultant is also a Company board member and the other consultant is also an officer of the Company. This amount has been recorded as professional and consulting services expenses in the accompanying condensed consolidated statement of operations.
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Diversified Thermal Solutions, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
5. Earnings (Loss) Per Share Data
Basic earnings (loss) per share assumes no dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of common stock outstanding during each period. As the Company has no outstanding stock options or warrants, there are no diluted earnings per share.
The following table sets forth the computation of basic (loss) earnings per share for the periods indicated:
| Three months ended | Nine months ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
| Net (loss) earnings | $ | (9,784 | ) | $ | 19,835 | $ | (511,607 | ) | $ | (65,578 | ) | |||||
| Average shares outstanding | 20,355,071 | 20,242,571 | 20,355,071 | 20,242,571 | ||||||||||||
| Net (loss) income per share | $ | — | $ | — | $ | (0.03 | ) | $ | — | |||||||
6. Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s continuing losses and cash requirements, among other things, may indicate the Company will be unable to continue as a going concern for a reasonable period of time. Management recognizes the Company must achieve profitable operations and generate additional funds in order to continue as a going concern. The Company anticipates the future operations and related financing of the pending asset acquisition discussed in Note 3 will provide the Company future positive cash flows necessary to continue as a going concern.
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ITEM 2. Management’s Discussion and Analysis or Plan of Operation.
Caution regarding Forward-Looking Statements
The following information specifies certain forward-looking statements that are not historical facts. These statements represent our expectations or beliefs, including but not limited to, statements concerning future acquisitions, future operating results, statements concerning industry performance, capital expenditures, financings, as well as assumptions related to the foregoing. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “shall,” “will,” “could,” “expect,” “estimate,” “anticipate,” “predict,” “should,” “continue” or similar terms, variations of those terms or the negative of those terms. Forward-looking statements are based on current expectations and involve various risks and uncertainties that could cause actual results and outcomes for future periods to differ materially from any forward-looking statement or view expressed herein. Our financial performance and the forward-looking statements contained in this report are further qualified by other risks including those set forth from time to time in documents filed by us with the SEC.
Introduction
This Quarterly Report on Form 10-QSB for the period ended September 30, 2004 should be read in conjunction with our unaudited financial statements included as part of this Form 10-QSB Report. This report contains forward-looking statements which are described and defined below.
General
Our primary business purpose is to acquire businesses related to the manufacturing and distribution of materials used in the refractory industry. We were previously negotiating the purchase of substantially all of the assets, with the exception of cash and receivables, of a company that manufactures specialized brick used in the refractory business. During the second quarter of 2004, a decision was made to cease further negotiations related to this acquisition; accordingly, we wrote-off $415,246 in previously recorded deferred loan and acquisition costs. During the third quarter, we were able to negotiate a reduction in the accounts payable related to these costs by $4,987. During August 2004, we entered into a separate letter of intent to acquire substantially all of the assets and assume certain liabilities of a separate company that operates in the refractory industry.
Refractory & Industrial Supply Group, Inc., one of our subsidiaries, was formed to operate as a distributor of refractory supplies. All of our current operations are presently conducted through this subsidiary. DT Solutions, Inc., another one of our subsidiaries, currently has no operations.
During May 2004, our two majority shareholders contributed 100% of the outstanding stock in LW Precast Corp. (“LWP”) to the Company. LWP’s assets consist entirely of certain equipment (with a carrying value of $59,843) used in the refractory industry and the entity has no revenues, expenses or liabilities. LWP became our latest wholly-owned subsidiary.
Balance Sheets
Our assets have changed significantly since December 31, 2003. This is primarily due to our write-off of previously recorded deferred loan and acquisition cost as discussed above. Our remaining deferred loan and acquisition costs relate to the new acquisition we are pursuing. During May 2004, we recorded the equipment contributed to us through LWP, as discussed above. Overall our total liabilities have increased somewhat due to our current limited cash flows. We received additional advances from a related company to fund our cash flow needs and to reduce our accounts payable and accrued expenses. During June 2004, we issued 225,000 shares of our common stock under the terms of our2003 Diversified Thermal Solutions, Inc. Equity Incentive Plan(the “Equity Incentive Plan”) resulting in an increase of $36,000 in our common stock and additional paid-in capital based on the fair value of the stock issued. There have been no other significant changes affecting our balance sheet since December 31, 2003.
Results Of Operations
Revenue – Our revenues for the first three quarters of 2004 were $79,995 which is a significant decrease from first three quarters of 2003. This decrease is attributable to our limited operations thus far in 2004 pending the acquisition discussed above.
Expenses – During second quarter of 2004, our professional and consulting services expenses increased significantly as a result of our issuing stock under our Equity Incentive Plan valued at $36,000 as previously discussed. With the exception of
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this expense, our overall operating expenses have decreased in the first three quarters of 2004 compared to the first three quarters of 2003 due to the slowdown in our operations pending the acquisition discussed above.
Liquidity And Capital Resources
Currently, our losses have been funded by a major shareholder and a related company that is also a customer. Effective July 1, 2004, these advances became interest bearing at 1.65%. These advances have no stated repayment terms.
We are currently in negotiations with a financial institution with which we anticipate obtaining a term loan and a line of credit to fund our pending acquisition and provide necessary working capital. If this funding fails to occur, this would harm our ability to implement our business plan which will, in turn, hurt our ability to generate revenue. Our independent auditors have expressed their concern that our continuing cash requirements, among other things, raise substantial doubt about our ability to continue as a going concern.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
We have instituted disclosure controls and procedures designed to ensure the timely recording, processing, summarization and reporting to our management, including our Chief Executive Officer, of information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Within the 90 days prior to the filing date of this Quarterly Report on Form 10-QSB, we have performed an evaluation of the effectiveness of the design and operation of these controls under the supervision and with the participation of our management, including our Chief Executive Officer. Based upon that evaluation, the Chief Executive Officer has concluded that the disclosure controls and procedures effectively alert management to material information related to the Company in a manner which allows timely decisions regarding required disclosures of such information. In the design and evaluation of our disclosure controls and procedures, management has recognized that risks of misstatements due to error, failures in compliance, or changes in conditions are inherent in any cost-effective control system. Thus, management can provide only reasonable assurance that its controls and procedures will achieve their stated goals under all potential future conditions. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of management’s evaluation.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
| (a). | Exhibits |
| 31.1 | Certification Pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 | |||
| 31.2 | Certification Pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 | |||
| 32.1 | Certification Pursuant to Section 906 of the Sarbanes – Oxley Act of 2002 | |||
| 32.2 | Certification Pursuant to Section 906 of the Sarbanes – Oxley Act of 2002 | |||
| (b). | Reports on Form 8-K |
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| DIVERSIFIED THERMAL SOLUTIONS, INC. | ||
| Registrant | ||
| Date: November 12, 2004 | /s/ B. Grant Hunter | |
| B. Grant Hunter | ||
| President and Chief Executive Officer | ||
| Date: November 12, 2004 | /s/ Mary Eubanks | |
| Mary Eubanks | ||
| Acting Chief Financial Officer |