UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 30, 1996
[ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange
Act For the transition period from ________________ to ______________
Commission File Number 33-55254
Essential Resources, Inc.
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(Exact name of Registrant as specified in its charter)
Nevada 87-0485317
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation) No.)
412 Pleasant Valley Way, Suite 205, West Orange, NJ 07052
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 669-2809
Indicate by a 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 [X] Yes [ ] No
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Outstanding as of
Class December 12, 1996
- ------------------------------------ -----------------
$.001 par value Class A Common Stock 3,795,179 Shares
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements
Balance Sheets as of June 30, 1996 and September 30, 1996.......1
Statement of Operations for the Three
Months Ended September 30, 1996...............................2
Statement of Stockholders' Equity for the Three Months
Ended September 30, 1996......................................3
Statement of Cash Flows for the Three
Months Ended September 30, 1996...............................4
Summary of Accounting Policies and
Notes to Financial Statements.................................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......12
Part II. Other Information..............................................14
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, September 30,
1996 1996
------------ -------------
(Unaudited)
ASSETS
Current:
Cash $ 218,195 $ 107,771
Receivables from factors 73,601 58,795
Accounts receivable 148,496 431,094
Inventories 329,597 681,183
Prepaid expenses 456,608 470,467
Deferred plantation management costs 62,299 120,357
Other current assets 94,237 106,012
------------ -------------
Total current assets 1,383,033 1,975,679
------------ -------------
Property, plant and equipment, at cost less
accumulated depreciation 76,291 286,319
Investment in Queensland Essential Oils Limited 133,250 141,969
Other assets 62,813 142,725
------------ -------------
$1,655,387 $2,546,692
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accruals and other $ 477,152 $ 748,164
Income taxes payable 91,000 123,543
Loans payable to related parties 525,113 271,355
Loans payable 300,000
Dividends payable 52,376 112,744
Current portion of capitalized lease obligations 29,031
Deferred income taxes 79,000 79,473
------------ -------------
Total current liabilities 1,224,641 1,664,310
------------ -------------
Accounts payable, long-term 98,680 27,980
Capitalized lease obligations 132,848
------------ -------------
Total liabilities 1,323,321 1,825,138
------------ -------------
Commitments and contingencies
Stockholders' equity
Common stock, $.001par value -
shares authorized 25,000,000; issued
2,519,058 and 2,885,084 respectively 2,519 2,855
Additional paid-in capital 863,960 1,350,324
Retained earnings 370,182 314,954
Foreign currency translation adjustment 63,778 21,794
Receivable from Collage (488,548) (418,756)
------------ -------------
811,891 1,271,171
Less: Treasury stock, 238,662 shares
and 265,139 shares at cost respectively (479,825) (549,617)
------------ -------------
Total stockholders' equity 332,066 721,554
------------ -------------
$1,655,387 $2,546,692
------------ -------------
See accompanying summary of accounting policies and notes
to consolidated financial statements.
1
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended September 30, 1996
(UNAUDITED)
SALES $1,187,542
COST OF SALES 509,877
----------
GROSS PROFIT 677,665
----------
OPERATING EXPENSES:
Selling, general and administrative 590,911
Depreciation 9,268
----------
TOTAL OPERATING EXPENSES 600,179
----------
OPERATING INCOME 77,486
OTHER INCOME (EXPENSE):
Export grant 39,610
Loss on foreign currency transactions (6,640)
Interest expense (20,940)
----------
NET INCOME BEFORE INCOME TAXES 89,516
INCOME TAXES 32,000
----------
NET INCOME $ 57,516
----------
Earnings per common share - primary and fully diluted $0.02
----------
Weighted average common shares outstanding 2,382,121
Weighted average common stock equivalents outstanding (options) 1,802,844
----------
Weighted average common shares outstanding and weighted
average common stock equivalents outstanding 4,184,965
----------
See accompanying summary of accounting policies and notes to
consolidated financial statements.
2
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended September 30, 1996
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign
Common stock Additional Retained currency Receivable Total
----------------- paid-in earnings translation from Treasury stockholders'
Shares Amount capital (deficit) adjustment Collage stock equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 1, 1996 2,519,058 $2,519 $ 863,960 $370,182 $63,778 ($488,548) ($479,825) $332,066
Net income for the period 57,516 57,516
Foreign currency translation
adjustment (41,984) (41,984)
Issuance of shares pursuant to
conversion of debt 170,200 170 370,530 370,700
Issuance of shares pursuant to
exercise of warrants 165,826 166 115,834 116,000
Dividends (112,744) (112,744)
- ------------------------------------------------------------------------------------------------------------------------------------
2,855,084 2,855 1,350,324 314,954 21,794 (488,548) (479,825) 721,554
Purchase of treasury stock 69,792 (69,792)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance September 30, 1996 2,855,084 $2,855 $1,350,324 $314,954 $21,794 ($418,756) ($549,617) $721,554
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies
and notes to consolidated financial statements.
3
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended September 30, 1996
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 57,516
----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 9,268
Loss on foreign currency transactions 6,640
Deferred income taxes 473
Shares issued for services rendered 23,200
Foreign currency translation adjustment and other (48,624)
(Increase) decrease in:
Receivable from factors 14,806
Accounts receivable (282,598)
Inventories (351,586)
Prepaid expenses 78,941
Deferred plantation management costs (58,058)
Other current assets (11,775)
Other assets (79,912)
Increase (decrease) in:
Accounts payable, accruals and other 271,012
Income taxes payable 32,543
----------
Total adjustments (395,670)
----------
Net cash used in operating activities (338,154)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (57,417)
Investment in Queensland Essential Oils (8,719)
----------
Net cash used in investing activities (66,136)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (52,376)
Loans payable 346,242
----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 293,866
----------
NET DECREASE IN CASH (110,424)
CASH, BEGINNING OF PERIOD 218,195
----------
CASH, END OF PERIOD $107,771
----------
See accompanying summary of accounting policies
and notes to consolidated financial statements.
4
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES - INFORMATION
AS OF SEPTEMBER 30, 1996 AND FOR THE PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED
Organization and Business Essential Resources, Inc. ("Essential"),
through its wholly- owned subsidiaries,
Collage International Health Pty Ltd.
("Collage International Health") and Essential
Nature Products Pty Ltd. ("Essential Nature
Products"), collectively referred to
hereinafter as the "Company", develops,
markets and distributes a wide variety of
health, nutritional, beauty-aid and lifestyle
products derived from the extracts and tissues
of Asian-Pacific region plants, flowers and
animals. The Company's products are sold
primarily in duty-free and tax-free stores in
Australia, New Zealand, Korea, Japan, Egypt,
Qatar and the United Kingdom.
Interim Financial Statements The financial statements for the Company
have been prepared in accordance with
generally accepted accounting principles for
interim financial information and with the
instructions to Form 10-Q and Article 10 of
Regulation S- X. Accordingly, they do not
include all of the information and footnotes
required by generally accepted accounting
principles for complete financial statements.
In the opinion of management, all adjustments
(consisting of normal recurring accruals)
considered necessary for a fair presentation
have been included. Operating results for the
three month period ended September 30, 1996
are not necessarily indicative of the results
that may be expected for the year ended June
30, 1997. All significant intercompany
balances and transactions have been eliminated
in consolidation. For further information,
refer to the audited consolidated financial
statements of the Company as of June 30, 1996.
Principles of Consolidation The consolidated financial statements include
the accounts of Essential, and its
wholly-owned Australian subsidiaries,
Essential Nature Products and Collage
International Health. All significant
intercompany balances and transactions have
been eliminated on consolidation.
5
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES - INFORMATION
AS OF SEPTEMBER 30, 1996 AND FOR THE PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED
Change in Fiscal Year In January 1996, the Company elected to
change from a December 31 to a June 30
year-end to correspond to the fiscal year of
its Australian subsidiaries.
Earnings Per Common Share Primary and fully diluted earnings per common
share are computed using the treasury stock
method, modified for stock options outstanding
in excess of 20% of the total outstanding
shares of common stock. Under this method, the
aggregate number of shares outstanding
reflects the assumed use of proceeds from the
hypothetical exercise of the outstanding
options and warrants, unless the effect on
earnings is anti-dilutive. The assumed
proceeds are used to repurchase shares of
common stock at the average market value
during the period to a maximum of 20% of the
shares outstanding. The balance of the
proceeds, if any, is used to reduce
outstanding debt and invest in treasury bills
with the assumed interest expense savings and
interest income being added to the results of
operations for the reported period.
Fully diluted earnings per share also reflects
the assumed use of proceeds from the
hypothetical exercise of options to purchase
common stock at the ending market price for
the reported period.
Inventories Inventories are valued at the lower of cost or
market. Cost for raw materials and finished
goods are determined by the first-in,
first-out (FIFO) method.
Property, Plant and Equipment Assets are stated at cost. Depreciation and
amortization is computed over the estimated
useful lives of the assets on the
straight-line method for financial reporting
purposes.
Foreign Currency Translation The Company's subsidiaries in Australia use
the Australian dollar as the functional
currency and translate all assets and
liabilities at year-end exchange rates, all
income and
6
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES - INFORMATION
AS OF SEPTEMBER 30, 1996 AND FOR THE PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED
expense accounts at average rates and record
adjustments resulting from the translation as
a separate component of stockholders' equity
titled, "Foreign currency translation
adjustments."
Export Grants Grants received from the Australian
government relating to expenses incurred in
connection with export market development are
recognized as income when conditions for
receipt are met.
Taxes on Income The Company does not provide taxes on
unremitted earnings of its Australian
subsidiaries since the Company's intention is
to indefinitely reinvest these earnings.
Fair Value of
Financial Instruments The carrying value of financial instruments at
June 30, 1996, including cash, trade and other
receivables, accounts payable, other payables
and loans payable to related parties,
approximate fair value due to the timing of
expected settlement of these financial
instruments.
7
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF SEPTEMBER 30, 1996 AND FOR THE PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED
1. Receivables from Factors The Company factors a significant portion of its
trade accounts receivable, with recourse, up to
maximums established by the factors for individual
accounts.
2. Inventories Inventories are summarized as follows:
September 30, 1996 June 30, 1996
(Unaudited)
-------------------------------------------------
Raw materials $ 375,536 $ 117,141
Packaging and supplies 154,645 108,140
Finished goods 151,002 104,316
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Total $ 681,183 $ 329,597
========= =========
3. Property, Plant and
Equipment Property, plant and equipment are summarized by
major classifications as follows:
September 30, 1996 June 30, 1996
(Unaudited)
-------------------------------------------------
Plant and equipment $ 49,864 $ 40,765
Display equipment 42,894 31,978
Office equipment 41,598 10,065
Furniture and fixtures 10,499 7,703
Motor vehicles 2,066 2,066
Equipment under capital
leases 164,952
------------------------------------------------
311,873 92,577
Less:
Accumulated depreciation 25,554 16,286
-------- --------
Total $286,319 $ 76,291
======== ========
4. Dividends Payable On September 12, 1996, dividends payable on October
30, 1996 of $.05 per share of common stock (on a
post-split basis) were declared.
5. Commitments and
Contingencies (a) In August 1996, the Company entered into an
agreement to purchase 200,000 kilograms of tea tree
oil annually for a period of ten years.
8
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF SEPTEMBER 30, 1996 AND FOR THE PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED
(b) The Company has an oral agreement (which terminates
in April 1997) to purchase for approximately
$1,000,000 the 248.6 acres of plantation land
currently being leased by Queensland Oils. Closing
is subject to execution of an agreement
satisfactory to the Company, delivery of clear
title to the property and the securing of
Australian Government Foreign Investment Review
Board approval (Australian law prohibits ownership
of land by foreign corporations without government
approval). The Company does not currently possess
sufficient funds for this purchase and is currently
seeking equity and/or asset based financing to
purchase the property. There can be no assurance
that the Company will be able to obtain such
funding.
(c) The Company entered into a sales agreement as of
November 15, 1996 with C.B. & P. Pty Ltd.
("C.B.P."), which is an overseas wholly-owned
subsidiary of China National Export Bases
Development Corporation, a state owned enterprise
of the Peoples Republic of China. The contract
covers the period November 15, 1996 to February 15,
1998 (a total of 27 months) for the supply
principally of Omega-3 oil capsules under the
Company's brand -Mother Nature. The initial order
is for approximately $1,600,000 which is scheduled
to be shipped in December 1996. The agreement
provides for a minimum purchase of $3,750,000 for
the first 15 months of the agreement.
6. Stockholders' Equity Stock Split
On August 14, 1996, the Company's Board
of Directors approved a two-for-one split of the
common stock. The additional shares resulting from
the stock split were distributed on September 23,
1996, to all stockholders of record at the close of
business on August 26, 1996. The consolidated
balance sheet as of September 30, 1996 and the
consolidated statement of stockholders' equity for
the three months ended September 30, 1996 reflect
the recording of the stock split as if it had
occurred on January 1, 1996. Further, all
references in the consolidated financial statements
to average number of shares outstanding and related
prices, per share amounts and stock option data
have been restated for all periods to reflect the
stock split.
9
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF SEPTEMBER 30, 1996 AND FOR THE PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED
7. Related Party
Transactions In January 1996, the Company acquired assets
consisting of inventories, receivables, plant and
equipment from Collage in consideration of the
issuance of 448,148 shares of common stock. In June
1996, Collage agreed to transfer 238,662 of such
shares to the Company in consideration of the
Company's assumption of payment of certain trade
payables of Collage totalling approximately
$479,825 which has been classified as treasury
stock at June 30, 1996. At September 30, 1996,
$27,980 of such payables are classified as
long-term since certain vendors have agreed to
accept payment from the proceeds of sale of the
treasury shares. In addition, in July 1996, Collage
pledged the balance (185,338) of its shares of the
Company's common stock as security for monies owed
by Collage to the Company for purchases of goods
totalling $488,548. The $488,548 receivable from
Collage, a stockholder, has been classified as a
reduction of stockholders' equity at June 30, 1996.
Under the agreement the Company is entitled to 1/7
of the 185,338 shares pledged each month commencing
September 1996, for each month in which Collage
fails to pay the Company for the indebtedness.
Collage failed to pay the Company in September and
October and, accordingly, the Company is entitled
to 52,954 of such shares to date which have been
classified as treasury stock as of September 30,
1996. In addition, the allocable portion of the
receivable from Collage has been reclassified to
treasury stock.
The accompanying consolidated statement of
operations for the three months ended September 30,
1996 does not include any compensation to the
Company's Chief Executive Officer since the Company
did not pay and it did not accrue any compensation
to him since it was not obligated to do so. An
employment agreement for the period subsequent to
September 30, 1996 is currently being negotiated.
Statements of Cash Flows Supplemental Disclosures of Cash Flow Information:
-------------------------------------------------
Cash paid during the three months ended September
30, 1996 for:
Interest $19,500
Taxes -
10
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF SEPTEMBER 30, 1996 AND FOR THE PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Capital lease obligations of $161,879 were incurred
for equipment during the three months ending
September 30, 1996.
During the quarter ended September 30, 1996 the
Company issued 170,200 shares pursuant to
conversion of debt in the amount of $370,700 and
issued 165,826 shares pursuant to the exercise of
warrants for services rendered in the quarter
($23,200) and services to be rendered in later
quarters ($92,800).
11
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF SEPTEMBER 30, 1996 AND FOR THE PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Effective January 1, 1996 the Company acquired certain assets of
Collage in a transaction accounted for as a reverse acquisition. The following
discussion and analysis of financial condition and results of operations are
for the three month period ending September 30, 1996 (post acquisition)
compared to the three month period ending September 30, 1995 (pre-acquisition).
(dollars in thousands) Three months ending Three months ending
September 30, 1996 September 30, 1995
(Unaudited) (Unaudited)
-------------------------------------------
Sales $ 1,187 $ 728
Cost of Sales 510 239
------- --------
Gross Profit 677 489
Operating Expenses 600 400
------- --------
Operating Income 77 89
Other Income/(Expense) 12 (3)
------- --------
Net Income Before Taxes 89 86
Income Taxes 32 30
------- --------
Net Income $ 57 $ 56
======= ========
Results of Operations
Operating revenues increased by approximately $459,000 (62.9%)
for the three months ended September 30, 1996 as compared to the same period
ended September 30, 1995. The increase in sales was primarily to sales to
additional customers, in particular Korean Airlines, as a result of increased
sales and marketing efforts.
The net increase in gross margin of approximately $188,000 resulted
from an increase in gross margin from additional sales of approximately $262,000
offset by a reduction in gross margin percentage of approximately $74,000. The
reduction in the gross margin percentage was due to the pricing strategies
utilized to increase sales volume to new customers. The Company anticipates
sustaining the gross margin for the three months ending September 30, 1996 as
the Company grows in revenues.
Operating expenses increased by approximately $200,000 due primarily
to an increase in sales and marketing expenses to support additional sales and
marketing efforts to generate sales.
12
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF SEPTEMBER 30, 1996 AND FOR THE PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED
Other income and expenses increased by approximately $15,000
primarily due to an increase in income from export grants.
Liquidity and Capital Resources
The Company's working capital increased by $152,000 from June 30,
1996 to September 30, 1996 primarily due to an increase in current assets of
approximately $592,000 offset by an increase in current liabilities of
approximately $271,000.
The increase in current assets consisted primarily of an increase in
accounts receivable by approximately $283,000 and an increase in inventory of
$350,000 offset by a reduction in cash of $110,000. The increase in current
liabilities were primarily due to an increase in accounts payable by
approximately $271,000, a decrease in loans to related parties by $257,000
(principally as a result of converting of a $300,000 stockholder loan, net of
additional advances of $46,000). In addition, the Company received loans of
$300,000 for the three months ended September 30, 1996.
Accounts payable, long-term was reduced by $70,700 due to a vendor
accepting the Company's stock in payment.
13
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
Part II. Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securityholders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports to Form 8-K
(a) Exhibits
Exhibit 1. Distributorship Agreement between Collage
International Health Pty and C.B. & P. Pty Ltd
(b) Reports on Form 8-K - None
14
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Essential Resources, Inc. December 12, 1996
- -------------------------
Registrant
By: /s/ Phillip G. Cook
-------------------
Phillip G. Cook
President, Chief Executive
Officer, Chief Financial
Officer and Chairman of the
Board and a Director (Principal
Executive and Financial Officer)
15