U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter period ended OCTOBER 31, 1995.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT
For the transition period from to
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Commission File No.: 0-18935
ORGANIK TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter.)
WASHINGTON 81-0440517
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization.) Identification No.)
1919 70TH AVENUE WEST, TACOMA, WASHINGTON 98466
(Address of principal executive offices.) (Zip Code.)
Issuer's telephone number: (206) 564-1400
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. Yes X No .
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6,650,698 SHARES OF COMMON STOCK OUTSTANDING AS OF DECEMBER 8, 1995
Indicate the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date.
Transitional Small Business Disclosure Format (check one): Yes No X .
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Page 1 of 26
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Organik Technologies, Inc.
Consolidated Balance Sheets
October 31, July 31,
1995(Unaudited) 1995
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ASSETS
Current assets:
Cash on hand and cash equivalents $ 1,899,142 $ 134,920
Accounts receivable less allowance
for doubtful accounts of $48,429
and $13,142, respectively 745,203 28,961
Other receivables 19,408 7,622
Inventories, net 824,118 994,118
Prepaid expenses 154,034 103,359
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Total current assets 3,641,905 1,268,980
Property and equipment, net of
accumulated depreciation 705,809 755,732
Other assets:
Purchased cotton technology net of
accumulated amortization of
$135,000 and $127,500, respectively 165,000 172,500
Other 159,410 196,746
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Total assets $ 4,672,124 $ 2,393,958
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------------------ ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to others $ - $ 126,898
Accounts payable 171,673 262,799
Accrued payroll and related liabilities 188,046 231,517
Other accrued expenses 429,665 325,098
------------------ ---------------
Total current liabilities 789,384 946,312
Shareholders' equity:
Preferred stock, no par value,
10,000,000 shares authorized,
11,500 shares outstanding 100,317 100,317
Common stock and additional paid-in
capital, no par value, 50,000,000
shares authorized, 6,650,698 and
5,180,523 shares issued and
outstanding, respectively 15,904,304 12,363,989
Accumulated deficit (12,121,881) (11,016,660)
------------------ ---------------
Total shareholders' equity 3,882,740 1,447,646
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Commitments and contingencies
Total liabilities and shareholders'
equity $ 4,672,124 $ 2,393,958
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See Notes to Consolidated Financial Statements
Page 2
Organik Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended October 31,
1995 1994
---------------- ----------------
Net sales $ 1,063,325 $ 1,469,250
Cost of sales 1,429,401 1,578,411
---------------- ----------------
Gross loss (366,076) (109,161)
Selling, general and administrative expenses 707,493 480,463
---------------- ----------------
Loss from operations (1,073,569) (589,624)
Other income (expense)
Interest income (expense) 12,025 11,890
Loan fees and other (40,802) (2,500)
---------------- ----------------
Net loss $ (1,102,346) $ (580,234)
---------------- ----------------
---------------- ----------------
Net loss per common share $(0.18) $(0.13)
---------------- ----------------
---------------- ----------------
Weighted average number of shares outstanding 6,038,041 4,376,502
---------------- ----------------
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See Notes to Consolidated Financial Statements
Page 3
Organik Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended October 31,
1995 1994
---------------- -----------------
Cash flows from operating activities:
Net loss $ (1,102,346) $ (580,234)
Adjustments to reconcile net loss to net cash used in operating
activities:
Common stock and warrants issued for services provided
and other costs 6,000 -
Depreciation and amortization 57,423 47,128
Consulting fees 18,375 -
Changes in:
Accounts receivable (716,242) (208,270)
Other receivables (11,786) (666)
Inventories 170,000 (10,938)
Prepaid expenses (50,675) 115,980
Accounts payable (91,126) (229,138)
Accrued expenses 61,096 155,043
---------------- -----------------
Net cash used in operating activities (1,659,281) (711,095)
---------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment - (218,039)
Proceeds from disposal of property and equipment 16,105 -
Other 12,050 9,551
---------------- -----------------
Net cash (used) provided by investing activities 28,155 (208,488)
---------------- -----------------
Cash flows from financing activities:
Prepaid consulting fees (75,000) -
Proceeds from short-term debt incurred 255,377 -
Retirement of short-term debt (382,275) -
Gross proceeds from issuance of common stock and warrants 3,822,442 -
Common stock and warrant offering costs (325,627) -
Deferred offering costs capitalized 103,306 -
Payment of preferred stock dividends (2,875) (2,875)
---------------- -----------------
Net cash (used) provided by financing activities 3,395,348 (2,875)
---------------- -----------------
Net increase (decrease) in cash 1,764,222 (922,458)
Beginning cash and cash equivalents 134,920 1,641,803
---------------- -----------------
Ending cash and cash equivalents $ 1,899,142 $ 719,345
---------------- -----------------
---------------- -----------------
See Notes to Consolidated Financial Statements
Page 4
Organik Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1. FINANCIAL PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. They do not include all information and disclosures
required by generally accepted accounting principles for annual financial
statements. Users of these interim consolidated financial statements should
refer to the consolidated annual financial statements for additional information
and disclosure.
In the opinion of management, all adjustments consisting of normal
recurring accruals considered necessary for a fair presentation have been
included. Interim operating results are not necessarily indicative of the
results that may be expected for a full year.
The Company has experienced losses since July 31, 1994. Management
believes that the Company has adequate resources to continue at the present
level of operations, should it choose to do so, through the end of its current
fiscal year (July 31, 1996), subject to a reduction of operating losses.
However, the Company's internal forecasts indicate that it may have need for
additional funds through equity or debt financing, in order for the Company
to fully manufacture its backlog of ORGANIK-TM- apparel orders. Should the
Company not be able to obtain suitable financing, or if the Company's
operating expectations should be substantially less than anticipated, the
Company may elect to scale back its operations by taking one or more of the
following actions: liquidating non-essential equipment and inventories,
deferring planned capital expenditures, and decreasing personnel expenditures
through reduction of administrative support staff and deferral of certain
management salaries. There can be no assurance that any such measures, if
taken, would be adequate to reduce costs to an acceptable level or would not
unduly damage the Company's credibility as a supplier to its major customers to
an extent that would not preclude its ability to timely recover operations to an
acceptable level.
NOTE 2. INVENTORIES
Inventories at October 31, 1995 and July 31, 1995, net of reserves of
$235,000 and $45,000, respectively, consist of the following:
October 31, July 31,
1995 1995
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Raw materials $720,835 $763,997
Work in process 77,140 153,465
Finished Goods 26,143 76,656
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$824,118 $994,118
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NOTE 3. EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number
of common shares outstanding for each period. The potential effect of common
shares contingently issuable have not been included in the calculation as their
effect would be antidilutive. The net loss per share for the three month
periods have been adjusted for dividends paid to the holders of the Company's
preferred stock.
NOTE 4. CONVERTIBLE PROMISSORY NOTE
On August 16, 1995, the Company issued a $255,377 convertible promissory
note and repaid the note in full August 25, 1995 with proceeds from the July 17,
1995 offering. (See Note 5) The note bore interest at 9% annually. In
connection therewith the Company issued warrants to purchase 25,538 shares of
the Company's common stock at $1.75 per share. The warrants, valued at $6000,
are included in loan fees for the quarter ended October 31, 1995.
Page 5
NOTE 5.
On July 17, 1995 and for a period of time initially expiring August 18,
1995, which was extended until September 12, 1995 (the "Special Offering
Period"), the Company allowed warrantholders to exercise the outstanding Class A
and Class B Warrants at $3.25 per warrant, and receive one-quarter share of
Common Stock and a Class C Warrant. Each Class C Warrant entitles the
warrantholder to purchase one share of Common Stock for $5.00 and expires in
March 1999. As of September 12, 1995, 245,552, or 86% of the then outstanding
Class A Warrants and 921,584 or 84% of the outstanding Class B Warrants were
exercised generating net proceeds to the Company of $3,496,815. The proceeds
from the exercise of the Class A and Class B Warrants were added to working
capital for general corporate purposes, including financing the manufacture of
the Company's products off-shore and the implementation of a marketing program
for obtaining additional orders for Organik garments. This offering may or may
not limit the Company's ability to utilize net operating loss carryforwards due
to changes in ownership.
In October 1995, the Company entered into an agreement with the
underwriter of its 1994 stock offering, Whale Securities Co., L.P., to extend
its current consulting agreement which expires in March 1996, another two years.
The terms include $75,000 of cash compensation and a warrant to purchase 150,000
shares of common stock at a price of $3.23 per share. The warrants were valued
at $37,500.
NOTE 6. STOCK OPTIONS
In October 1995, the Company granted, subject to certain conditions, a
director and Board Vice Chairman a non-qualified stock option to purchase 75,000
shares at $3.23 per share, vesting between April 1996 and April 1998. Non-
qualified stock options to purchase an additional 35,000 shares at $3.23 per
share were granted, subject to certain conditions, on the same date to employees
of the Company.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Included in cash and cash equivalents is a $100,000 short-term certificates
of deposit. This deposit is collateral for a standby letter of credit issued to
the Company's factor as security against potential chargebacks, if any,
allowable under contract with one of its customers.
NOTE 8. CONSOLIDATED STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In October 1995 warrants were issued to Whale Securities Co., L.P., valued
at $37,500, were recorded as an increase to both common stock and deferred
consulting fees.
Page 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
During the 1st quarter 1996, the Company shipped $1,063,000 of ORGANIK
garments as compared to $473,000 in first quarter 1995. Of the $2,400,000 of
orders booked through November 1995 for initial production in Central America,
the Company shipped approximately 64% of the backlog net of returns and
markdowns. Substantial quality control problems and production inefficiencies
associated with start up operations and liquidity limitations in August and
September 1995 as well as inadequate production and accounting controls have
led to losses during the initial start-up operations in Central America. The
Company anticipates that during fiscal 1996, its workforce will become trained
and stabilized, supplier relations will be further developed, and production
and accounting controls and procedures will be subsequently improved. However,
there can be no assurance that the Company will be successful in eliminating
manufacturing losses in the future, or that its off-shore manufacturing
operations or cost-reduction strategies will result in increased revenues or
profitable operations. Expenditures of various types related to the
establishment of Central American manufacturing operations are expected to
continue at least through the second quarter of fiscal 1996. Reflecting the
Company's seasonality, at December 14, 1994, the backlog of orders for ORGANIK
apparel was approximately $1,300,000 compared to approximately $60,000 a year
ago.
In December 1995 the Board of Directors appointed Jeff Harden as Chief
Executive Officer. Mr. Harden who has been a member of the Board of Directors
since January of 1994 has had over 20 years of apparel industry experience.
Since 1993, Mr. Harden has been the President and Chief Executive Officer of
Pacific Print Works, a privately-held apparel screen printer. From 1987 to
1993, Mr. Harden was Western Divisional Vice President of London Fog, a
division of Londontown Manufacturing Co., a manufacturer of outerwear apparel.
Previously, Mr. Harden spent 12 years as Sales Manager for Jantzen, Inc., an
international sportswear manufacturer. The Company is conducting a search for
a new Chief Financial Officer to fill an anticipated vacancy in that position.
Page 7
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1995 COMPARED TO THREE MONTHS ENDED OCTOBER
31, 1994
In accordance with its cost reduction strategy, in June 1995, the Company
closed its domestic sewing operations and relocated the manufacture of its
ORGANIK products off-shore which as expected, affected revenues during this
transitional period. Net sales for the three months ended October 31, 1995 were
$1,063,325, a decrease of $405,925, or 27.6 percent as compared to net sales
for the three months ended October 31, 1994. The decrease in net sales was
attributable to a decrease in domestic contract manufacturing services of
$996,414, partially offset by an increase in ORGANIK product sales of $590,267.
Of the $2,400,000 of orders booked through November 1995 for initial production
in Honduras, the Company shipped approximately 64% of the backlog net of returns
and markdowns. Certain liquidity constraints and start-up Central American
operations caused production inefficiencies which resulted in delayed shipments
and cancellations of some orders. During fiscal 1996, the Company anticipates
continuing to concentrate its sales efforts on ORGANIK products and improving
off-shore production capabilities and profitability. The 36% cancellations,
returns, and markdowns of the $2,400,000 backlog of orders booked through
November 1995, may adversely affect results of the Company's sales efforts in
the next several quarters.
The following table sets forth information relating to the dollar amounts
and percentages of revenues derived from the Company's principal activities.
YEAR ENDED JULY 31,
-----------------------------------------------------
1995 1994
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Organik Products $1,063,096 100.0% $ 472,829 32.2%
Contract Manufacturing - 996,414 67.8
Other 229 7
---------- ------ ---------- ------
$1,063,325 100.0% $1,469,250 100.0%
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---------- ------ ---------- ------
Gross loss for the three months ended October 31, 1995 was $(366,076) as
compared to $(109,161) in the three months ended October 31, 1994. The gross
margin also decreased as a percent of sales from (7.4)% for the 1994 three
month period to (34.4)% for the same period in 1995. The decreases were the
result of substantial quality and production inefficiencies associated with
start-up operations in Central America. The Company also increased inventory
reserves for potential losses on goods either not shipped on time, which do
not meet quality standards, or which may be overstated as inventory due to
production waste, theft, or inventory error, all of which are presently under
review. The Company anticipates that during fiscal 1996, its workforce will
become trained and stabilized, supplier relations will be further developed,
and production and accounting controls and procedures will be substantially
improved.
Selling, general and administrative expenses for the three months ended
October 31, 1995 were $707,493 an increase of $227,030, or 47.3%, from the same
period of the same period of the prior year. This increase reflects the
Company's increased focus on marketing, filling several management positions
primarily related to the offshore operations, significant travel and other
costs associated with the development of off-shore sourcing and manufacturing
capabilities, and air freight to customers due to late deliveries.
For the three months ended October 31, 1995, loan fees of $39,530 were
related to bridge loans funded and repaid in August 1995.
As a result of the foregoing, the Company incurred a net loss of
$(1,102,346) or $(0.18) per share, for the three months ended October 31, 1995,
compared to a net loss of $(580,234), or $(0.13) per share, for the three months
ended October 31, 1994.
Page 8
LIQUIDITY AND CAPITAL RESOURCES
The Company's strategy to reduce costs, including the establishment of off-
shore operations, has required significant up front expenditures. This strategy
has been financed through a public stock offering in March 1994 and warrant
exercises in May 1995 and September 1995. Since inception, the Company has been
substantially dependent upon the sales of its securities and various borrowings
in order to finance its working capital requirements and expects to be
substantially dependent on such sales and borrowings for the foreseeable future.
The Company had working capital of $2,852,521 on October 31, 1995, as
compared to working capital of $322,668 on July 31, 1995. Subsequent to July
31, 1995, working capital was substantially increased when the Company
received net proceeds of approximately $3,500,000 through the exercise of its
outstanding Class A and Class B Warrants. Accounts receivable increased from
$28,961 at July 31, 1995 to $745,203 at October 31, 1995 due to low levels of
shipments in June and July associated with closing the domestic manufacturing
operation as compared to start-up shipments from the Honduran manufacturing
during first quarter 1996. The allowance for doubtful accounts was increased
from $13,142 at July 31, 1995 to $48,429 due to returns and markdowns
associated with late deliveries and quality control problems. Because of the
startup phase of Honduran operations, there can be no assurance that the
reserve for allowance for doubtful accounts will prove to be adequate. The
reduction in inventory from $994,118 at July 31, 1995 to $824,118 at October
31, 1995 reflects the increase in inventory reserves from $45,000 to
$235,000. Reserves were increased for potential losses on goods not shipped
on time, which do not meet quality standards, or which may be overstated as
inventory due to production waste, theft, or inventory error, all of which are
presently under review. Reserves will be reduced as the Company trains and
develops a stable workforce, develops supplier relations, sells excess and
poor quality inventories, and substantially improves production and
accounting controls.
During the three months ended October 31, 1995 net cash used in operations
was $1,659,281. Losses from the Company's start-up manufacturing operations
were $1,102,346. During the transition from domestic contract manufacturing
to private label off-shore production, the Company, as anticipated,
experienced a substantial reduction in revenues, income, liquidity, and cash
flow.
Net cash provided by investing activities was $28,155 for the three
months ended October 31, 1995. Investing activities consisted primarily of
the sale of excess fixed assets associated with the closedown of the domestic
manufacturing facility. During the three months ended October 31, 1995, net
cash provided by financing activities was $3,395,348, reflecting the proceeds
received from the exercise of the Company's outstanding Class A and Class B
Warrants, together with the borrowing and repayment of bridge financing.
In January 1995, the Company entered into a factoring agreement secured by
the Company's accounts receivable and other collateral. Advances under the
agreement may be made for up to 80% to 90% of the eligible accounts receivable
and bear interest at prime plus 4% to 7%, depending on the outstanding balance.
As of October 31, 1995, the Company had no advances against receivables and
incurred interest of $2,189 at a weighted average interest rate of 16% under
this agreement during three months ended October 31, 1995. The high credit
under the agreement was $226,885 and the average credit was $55,143.
Encumbrance of certain of the Company's assets pledged to secure the above
factoring agreement has resulted in such assets, which excludes inventory and
the process technology, not being available to secure additional indebtedness,
which may adversely affect the Company's ability to borrow in the future,
including the ability to obtain a working capital loan.
On July 17, 1995 and for a period of time initially expiring August 18,
1995, which was extended until September 12, 1995 (the "Special Offering
Period"), the Company allowed warrantholders to exercise the outstanding Class A
and Class B Warrants at $3.25 per warrant, and receive an additional one-quarter
share of Common Stock and a Class C Warrant. As of September 12, 1995, 254,552,
or 86% of the then outstanding Class A Warrants and 921,584, or 84% of the
outstanding Class B Warrants were exercised generating net proceeds to the
Company of approximately $3,500,000. The proceeds from the exercise of the
Class A and Class B Warrants are being used to refine and enhance the Company's
process technology, purchase equipment, finance production of ORGANIK products,
expand sales and marketing, and otherwise for working capital and general
corporate purposes.
In July 1995, the Company entered into a $100,000 unsecured note payable
bearing interest at 14% with its Honduran landlord. During the three months
ended October 31, 1995, the note was paid in full.
On August 16, 1995, the Company issued a $255,377 convertible promissory
note and repaid the note in full August 25, 1995 with proceeds from the July 17,
1995 offering. (See Note 5) The note bore interest at 9% annually. In
connection therewith the Company issued warrants to purchase 25,538 shares of
the Company's common stock at $1.75 per share.
Page 9
The Company's cash flow and capital requirements are significantly affected
by the seasonal nature of its business. The timing of production orders for
private label products and manufacturing services are also generally seasonal,
with product shipments heavily concentrated in advance of the fall and spring
seasons. Unanticipated events, including insufficient funds to purchase, or
delays in securing, adequate raw materials at the time of peak sales or
significant decreases in sales during such periods, could result in significant
losses which would not be easily reversed before the following year. At this
time, the Company anticipates making additional capital expenditures of
approximately $300,000 during fiscal 1996, primarily in investments in
technology for the manufacture of its Organik fabrics and finished garments,
including the enhancement of off-shore manufacturing operations.
The Company is not currently generating sufficient cash flow to fund its
operations and is dependent on the net proceeds from the recent exercises of the
Class A and Class B Warrants to meet its backlog of Organik apparel orders, and
further implement its cost reduction strategy. In the event that these net
proceeds, together with the current factoring agreement, prove to be
insufficient to fund operations (due to seasonal customer product demands,
unanticipated expenses, technical difficulties, problems or otherwise), the
Company will require additional financing until such time as the Company is able
to generate sufficient profits to fund operations. The Company believes that
increasing its profitability is dependent upon, among other things, the
Company's ability to successfully implement its cost reduction strategy and
significantly increase the sale of its private label products. The Company
has not identified any potential sources of financing beyond its current
factoring line and there can be no assurance that the Company would be able
to obtain additional financing if and when needed or that, if available,
financing would be on terms acceptable to the Company. Should the Company
not be able to obtain suitable financing, or if the Company's operating
expectations should be substantially less than anticipated, the Company may
elect to scale back its operations. In this regard, the Company has
periodically experienced liquidity constraints (including in recent months)
which have resulted in the deferral or cancellation of orders. There can be
no assurance that any measures taken would be adequate to reduce costs and
increase cash flow to an acceptable level or would not unduly damage the
Company's credibility as a supplier to its major customers.
At December 14, 1995, the Company had cash of approximately $934,000,
receivables of approximately $1,093,000 and borrowings against receivables of
approximately $39,559.
To provide incentive to employees, officers, directors, lenders and
consultants of the Company, as well as to minimize cash expenditures, the
Company has traditionally issued options and warrants as a means of
compensation or payment for services. During the three months ended
October 31, 1995, officers, directors, employees, consultants, and a lender
were granted options and warrants to purchase an aggregate of 360,538 shares
of Common Stock at prices ranging from $1.75 to $3.23 per share. The Company
has and intends to continue this form of compensation or payment for services
in fiscal 1996.
NET OPERATING LOSS CARRYFORWARDS
At July 31, 1995, the Company had net operating loss carryforwards for
federal tax purposes of $10,562,000 to offset future taxable income. Due to a
change in ownership, the Company is subject to an annual limitation of
approximately $350,000 on its ability to utilize net operating loss
carryforwards for losses prior to July 31, 1994. Utilization of these
carryforwards is dependent on future taxable income. The July 17, 1995 Warrant
Offerring may or may not limit the Company's ability to utilize net operating
loss carryforwards due to changes in ownership.
INFLATION
Inflation has historically not had a material effect on the Company's
operations.
Page 10
PART II
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
NUMBER DESCRIPTION
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10.21 Extension of March 21, 1994 Consulting Agreement with Whale
Securities Co., L.P.; dated October 25, 1995 including Warrant
Agreement and Warrant Certificate.
27.1 Financial Data Schedule
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.
ORGANIK TECHNOLOGIES, INC.
Registrant
/s/ Helen M. Hull DECEMBER 15, 1995
- - --------------------------------------- -----------------
Helen M. Hull, Chief Financial Officer Date
Page 11