U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
CVF TECHNOLOGIES CORPORATION
(Exact name of small business issuer as specified in its charter)
NEVADA 0-29266 87-0429335
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation or organization) Number) Identification No.)
8604 Main Street, Suite 1
WILLIAMSVILLE, NEW YORK 14221
(716) 565-4711
(Address, including zip code, and telephone number,
including area code, of issuer's principal executive offices)
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 registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]
As of April 30, 2004, there were 12,216,269 shares of common stock, $0.001
par value per share, of the issuer outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
Item I. Financial Statements
CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Currency)
March 31, December 31,
2004 2003
(unaudited) (audited)
------------ ------------
(Note 2) (Note 2)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 507,080 $ 225,535
Trade receivables 1,832,144 2,461,980
Inventory (Note 5) 103,701 586,009
Prepaid expenses and other 57,459 75,669
Income taxes receivable 533,315 550,830
------------ ------------
TOTAL CURRENT ASSETS 3,033,699 3,900,023
Property and equipment, net of accumulated depreciation 230,658 220,889
Loans receivable 142,251 142,251
Holdings available for sale, at market 2,042 4,772
Technology, net of accumulated amortization 123,146 228,001
Goodwill 1,405,222 1,405,222
------------ ------------
TOTAL ASSETS $ 4,937,018 $ 5,901,158
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Bank indebtedness $ 26,424 $ -
Current portion of long-term debt (Note 14) 457,620 82,297
Subsidiary loans past due or in default 218,774 221,269
Accounts payables and accrued liabilities 4,977,409 6,212,368
Preferred and other non-voting stock of subsidiaries 190,675 192,850
------------ ------------
TOTAL CURRENT LIABILITIES 5,870,902 6,708,784
------------ ------------
Notes payable - officers and directors (Note 14) 743,704 1,836,256
Notes payable - other 25,000 -
Deferred income taxes 329,171 368,566
Minority interest 40,155 79,220
Pension obligation 565,574 577,457
------------ ------------
1,703,604 2,861,499
------------ ------------
Redeemable Series A preferred stock, $0.001 par value,
redeemable at $18.25 per share, authorized 500,000 shares,
issued and outstanding 3,477 shares 63,455 63,455
------------ ------------
7,637,961 9,633,738
------------ ------------
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock, $0.001 par value, authorized 50,000,000 shares,
12,216,269 issued (2003; 10,855,549) and in
treasury 481,700 (2003; 481,700) 12,698 11,338
Series B convertible preferred stock, $0.001 par value,
liquidation preference of 130% of stated value, authorized,
issued and outstanding 339,000 shares (Note 7) - 339
Series C convertible preferred stock, $0.001 par value,
issued and outstanding 100,000 shares (Note 7) 100 -
Warrants 111,094 111,094
Additional paid in capital 29,024,534 28,473,130
Treasury stock (2,747,174) (2,747,174)
Accumulated other comprehensive loss (1,516,788) (1,750,291)
Accumulated deficit (27,585,407) (27,831,016)
------------ ------------
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (2,700,943) (3,732,580)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY $ 4,937,018 $ 5,901,158
============ ============
See notes to consolidated financial statements
CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(Expressed in U.S. Currency)
Three months ended March 31,
2004 2003
------------ ------------
(Note 2) (Note 2)
SALES $ 2,353,222 $ 1,558,858
Cost of sales 1,362,017 820,099
------------ ------------
GROSS MARGIN 991,205 738,759
------------ ------------
EXPENSES:
Selling, general and administrative 1,241,760 1,383,628
Research and development 155,111 131,029
------------ ------------
TOTAL EXPENSES 1,396,871 1,514,657
------------ ------------
(Loss) from continuing operations before under noted items (405,666) (775,898)
------------ ------------
OTHER (EXPENSES) INCOME
Interest (expense), net (87,863) (44,778)
Other income (expense), net (5,773) 74,119
Gain (loss) on sale of holdings (2,035) 6,906
Gain on sale of equity in subsidiary 742,568 -
------------ ------------
TOTAL OTHER INCOME 646,897 36,247
------------ ------------
Income (loss) before income taxes and minority interest 241,231 (739,651)
Income taxes (recovery) 32,868 (30,274)
------------ ------------
Income (loss) before minority interest: 208,363 (709,377)
Minority interest in loss 38,016 80,660
------------ ------------
NET INCOME (LOSS) $ 246,379 $ (628,717)
============ ============
------------ ------------
BASIC INCOME (LOSS) PER SHARE $ 0.02 $ (0.07)
============ ============
------------ ------------
DILUTED INCOME (LOSS) PER SHARE $ 0.02 $ (0.07)
============ ============
WEIGHTED SHARES USED IN COMPUTATION - BASIC 11,242,663 10,692,674
============ ============
WEIGHTED SHARES USED IN COMPUTATION - DILUTED 13,418,471 10,692,674
============ ============
See notes to consolidated financial statements
CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Expressed in U.S. Currency)
Three Months Ended March 31,
-------------------------------
2004 2003
----------- -----------
(Note 2) (Note 2)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 246,379 $ (628,717)
Adjustments to reconcile net loss
from operating activities:
Depreciation and amortization 120,457 102,035
Gain on sale of subsidiary 742,568 -
Loss (gain) on sale of holdings 2,035 (6,906)
Minority interest in losses of subsidiaries (38,016) (80,660)
Pension expense (12,185) 7,111
Deferred tax income 32,868 (30,274)
Stock option compensation (108,230) -
Changes in non-cash working capital items
Decrease (increase) in trade receivables 599,622 15,182
(Increase) in inventory 473,766 (101,342)
(Increase) decrease in prepaid expenses and other 17,286 (7,459)
Decrease in income taxes receivable 11,257 420,044
Increase (decrease) in trade payables and accrued liabilities (1,160,160) 446,089
----------- -----------
681,268 763,820
----------- -----------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 927,647 135,103
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Disposal of property and equipment 239,321 4,038
Proceeds from sale of holdings 2,432 46,724
----------- -----------
CASH PROVIDED BY INVESTING ACTIVITIES 241,753 50,762
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bank indebtedness 21,238 68,073
Increase (decrease) in note payable to officer (734,675) 312,731
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES (713,437) 380,804
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (174,418) 18,195
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 281,545 584,864
CASH AND CASH EQUIVALENTS - beginning of period 225,535 218,003
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 507,080 $ 802,867
=========== ===========
See notes to consolidated financial statements
CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
(Expressed in U.S. Currency)
Three months ended March 31,
2004 2003
--------- ---------
Net Income (loss) $ 246,379 $(628,717)
--------- ---------
Other comprehensive income, net of tax:
Foreign currency translation adjustments 232,281 (179,581)
Unrealized holding gains:
Unrealized holding losses arising during period (see note below) 1,222 (4,306)
--------- ---------
Total other comprehensive income (loss) 233,503 (183,887)
--------- ---------
Comprehensive income (loss) during period $ 479,882 $(812,604)
========= =========
Note: Unrealized holding losses are net of tax (benefit) of $815 and
($2,871) for the three months ended March 31, 2004 and 2003
respectively
See notes to consolidated financial statements
CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
(Expressed in U.S. Currency)
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited, but reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation of financial position and the results of operations for the
interim periods presented. All such adjustments are of a normal and
recurring nature. The results of operations for any interim period are not
necessarily indicative of the results attainable for a full fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Certain of the comparative figures have been reclassified to conform with
the presentation adopted in the current period. The Canadian dollar is the
functional currency used by the Company, whereas the reporting currency is
the U.S. dollar.
2. ACCOUNTING POLICIES
(i) Going Concern
These consolidated financial statements have been prepared on a
going concern basis, which presumes that assets will be realized and
liabilities discharged in the normal course of business over the
foreseeable future. The Company's current liabilities exceed its current
assets and the Company has incurred significant losses over the past six
years, which have reduced the Company's cash reserves, and depleted
stockholders' equity. Further, the Company has contingent liabilities
(note 13). These conditions raise substantial doubt about the Company's
ability to continue in the normal course of business as a going concern.
The Company's primary need for cash is to maintain its ability to
support the operations and ultimately the carrying values of certain of
its individual investee companies. The Company is actively pursuing the
sale of a portion of its interests in two of its investee companies as a
source of funds, as well as reducing its cash flow needs. The Company has
been successful in obtaining $1 million Canadian through this method over
the last year. In addition the Company has borrowed $381,350 from one of
its investee directors. The Company will continue to assist its
investee companies in their efforts to obtain outside financing in order
to fund the growth and development of their respective businesses and has
taken steps to reduce the operating cash requirements of the parent
company and its investees. The Company is also seeking outside investment.
There is no assurance that these initiatives will be successful or that
the Company or certain of its investees will continue to have adequate
cash resources and capital to be able to continue as going concerns.
The Company's ability to continue to realize assets and discharge
liabilities in the normal course of business is uncertain. These financial
statements do not include any of the adjustments to the amounts or
classification of assets and liabilities that might be necessary should
the Company be unable to continue its business in the normal course.
(ii) Stock Based Compensation Plans
The Company accounts for stock-based compensation plans under
Accounting Principles Board Opinion 25, (APB 25) Accounting for Stock
Issued to Employees and the related interpretation, for which no
compensation cost is recorded in the statement of operations for the
estimated fair value of stock options issued with an exercise price equal
to the fair value of the common stock on the date of grant. Statement of
Financial Accounting Standards No.123 (SFAS 123) Accounting for
Stock-Based Compensation, as amended by Statement of Financial Accounting
Standards No. 148 (SFAS 148) Accounting for Stock-Based Compensation -
Transition and Disclosure, requires that companies, which do not elect to
account for stock-based compensation as prescribed by this statement,
disclose the pro-forma effects on earnings and earnings per share as if
SFAS 123 has been adopted.
If the Company had applied the recognition provisions of SFAS 123
using the Black-Scholes option pricing model, the resulting pro-forma net
income (loss) available to common shareholders, and pro-forma net income
(loss) available to common shareholders per share would be as follows:
For the three months ended
March 31,
--------------------------------
2004 2003
---- ----
Net income (loss) available to common
shareholders, as reported $ 239,771 $ (712,946)
Deduct (Add): Stock-based compensation, net of
tax - -
Net income (loss) available to common
shareholders, pro-forma $ 239,771 $ (712,946)
========= ============
Basic earnings (loss) per share:
As reported - $ .02 $ ( .07)
Pro-forma - $ .02 $ ( .07)
Diluted earnings (loss) per share:
As reported - $ .02 $ ( .07)
Pro-forma - $ .02 $ ( .07)
The above stock-based employee compensation expense has been determined
utilizing a fair value method, the Black-Scholes option-pricing model.
The Company has recorded no compensation expense for stock options as none
were granted to employees during the three months ended March 31, 2004 and
March 31, 2003.
In accordance with SFAS 123, the fair value of each option grant has been
estimated as of the date of the grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
For the Three months Ended March 31,
------------------------------------
2004 2003
---- ----
Risk free interest rate 5.0% 5.0%
Expected life 5.0 years 5.0 years
Dividend rate 0.00% 0.00%
Expected volatility 95.2% 95.2%
3. SALE OF EQUITY IN SUBSIDIARY
As of March 25, 2004, SRE as a result of signing a Memorandum of
Agreement has received $500,000 Cdn investment in new equity into the
Company. As part of the requirements of the new investment all debt in the
Company excluding $390,000 Cdn held by other shareholders of the Company
was converted into equity. The net result of the new investment and the
restructuring of the debt is that CVF holds approximately 37% of the
current shares of SRE. The gain of $742,568 is shown as a separate line,
"Gain on sale of equity in subsidiary" in other income within the income
statement.
4. INCOME (LOSS) PER SHARE
Basic loss per share amounts are computed by dividing net loss from
continuing operations available to common stockholders from continuing
operation and loss from discontinued operations, and net loss available to
common stockholders by the weighted average number of common shares
outstanding during the period. The net loss from continuing operations and
net loss available to common stockholders consists of net loss from
continuing operations and net loss amounts reduced by the dividends on the
Company's Series A, B and C preferred stock. Diluted loss per share
reflects the per share amount that would have resulted if diluted
potential common stock had been converted to common stock, as prescribed
by SFAS 128. The Company has presented dilutive income per share in those
periods where there was net income and therefore reduced income per share
and not presented dilutive loss per share information when the dilution
would reduce the loss per share.
For the three months ended
March 31,
-------------------------------------
2004 2003
---- ----
Weighted-average number of shares outstanding
during period 11,242,663 10,692,674
Common Stock equivalents-
Incremental shares under stock option plans 1,223,024 -
Incremental shares under warrants 952,784 -
Number of shares on which diluted earnings per
share is based 13,418,471 10,692,674
Net income (loss) available to common
shareholders, pro-forma $ 239,771 $ (712,946)
============ ============
Basic earnings (loss) per share:
As reported - $ .02 $ ( .07)
Pro-forma - $ .02 $ ( .07)
Diluted earnings (loss) per share:
As reported - $ .02 $ ( .07)
Pro-forma - $ .02 $ ( .07)
5. INVENTORY
Inventory consists of the following:
March 31, 2004 December 31, 2003
-------------- -----------------
Raw Material $ 39,688 $ 568,364
Finished goods 64,013 87,071
Less obsolescence reserve - (69,426)
--------- ---------
$ 103,701 $ 586,009
--------- ---------
6. INVESTMENTS
The following table provides certain summarized unaudited financial
information related to the Company's equity basis holdings:
Three Months Ended March 31,
---------------------------
2004 2003
---- ----
Net Sales $ 477,456 $ 50,801
Gross profit on sales 139,691 18,792
Net loss $ ( 298,770) $ ( 63,617)
----------- ----------
Included in the above results for the three months ended March 31,
2004 are the full quarter SRE results. All but 5 days (the date the equity
holdings changed) are also included in the consolidated results.
7. SERIES B PREFERRED DIVIDENDS
In February 2004 the Company's outstanding Series B Convertible
Preferred Stock was restructured in a transaction agreed to with the
holder of this stock. The holder exchanged its Series B Convertible
Preferred Stock with a stated value of $3,385,000 and accrued dividends of
approximately $673,600 for 1,000,000 shares of the Company's common stock
and a new Series C 6% Convertible Preferred Stock with a stated value of
$1,000,000, convertible into common stock at $1 per share. The Series C
Preferred will be subject to mandatory redemption on February 27, 2006;
however, the Company's obligation to redeem will be limited to available
cash in excess of working capital requirements for the next twelve months.
The Company also issued to the former Series B holder a three-year warrant
to purchase 100,000 shares of the Company's common stock at an exercise
price of $0.35 per share.
8. INTERIM FINANCIAL STATEMENT DISCLOSURES
Certain information and footnote disclosures normally included in
annual financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted from the
accompanying unaudited interim financial statements. Reference is made to
the Company's audited financial statements for the year ended December 31,
2003 included in the Company's Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on April 2, 2004.
9. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has implemented new accounting standards as follows.
Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, "Consolidation of Variable Entities", (FIN No.
46) an interpretation of Accounting Research Bulletin No. 51. FIN No. 46
requires that variable interest entities be consolidated by a company if
that company is subject to a majority of the risk and loss from the
variable interest entity's activities or is entitled to receive a majority
of the entity's residual returns or both. FIN No. 46 requires disclosures
about variable interest entities that companies are not required to
consolidate but which the company has a significant variable interest. The
consolidation requirements will apply immediately for newly formed
variable interest entities created after January 31, 2003 and entities
established prior to
January 31, 2003, in the first fiscal year or interim period beginning
after June 30, 2003. The Company does have investments in unconsolidated
entities, but such entities are virtually inactive and CVF does not
support them financially. The adoption of FIN No. 46 will not have a
material impact on our consolidated results of operations and financial
position.
Derivative Instruments and Hedging Activities
In April 2003, the FASB issued Statements of Financial Accounting
Standards No. 149 ("SFAS No. 149"), an amendment to SFAS No. 133. SFAS No.
149 clarifies under what circumstances a contract with initial investments
meets the characteristics of a derivative and when a derivative contains a
financing component. This SFAS is effective for contracts entered into or
modified after June 30, 2003. The adoption of SFAS No. 149 will not have a
material impact on our consolidated results of operations and financial
position.
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
In May 2003, the FASB issued Statements of Financial Accounting Standards
No. 150 ("SFAS No. 150"), SFAS No. 150 established standards for how an
issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances)
because that financial instrument embodies an obligation of the issuer.
This SFAS is effective for financial instruments entered into or modified
after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of
SFAS No. 150 and still existing at the beginning of the interim period of
adoption. Restatement is not permitted. The adoption of SFAS No. 150 will
not have a material effect on the financial statements.
Employer's Disclosure about Pensions and Other Postretirement Benefits
In December 2003, the FASB revised SFAS No. 132 Employers' Disclosures
about Pensions and Other Post Retirement Benefits. This revision requires
additional disclosures to those in the original SFAS No. 132 about assets,
obligations, cash flows and net periodic benefit cost of deferred benefit
pension plans and other deferred benefit post-retirement plans. The
required information should be provided separately for pension plans and
for other post-retirement benefit plans. This statement revision is
effective for fiscal year ending after December 14, 2003 and interim
periods beginning after December 15, 2003. The adoption of this revision
will not have a material impact on our results of operations, financial
position or disclosures.
10. STOCK OPTIONS AND WARRANTS
Due to the re-pricing of stock options in 2002 those options are
subject to variable plan accounting using the intrinsic value method as
prescribed by APB-25. As the fair market value of the Company's stock as
of March 31, 2004 was $0.32 compared to $0.41 at December 31, 2003, a
reversal of compensation expense of $200,050 was recorded during the 2004
first quarter.
11. SEGMENTED INFORMATION
The Company has five reportable segments: bioremediation, machine
controls, precious gem identification, and natural horticultural and
general corporate. In 2002, as a result of growth in the natural
horticultural segment, as a percentage of consolidated sales, the Company
reallocated business units to business segments to more appropriately
group units for chief operating decision purposes and reporting in
accordance with SFAS 131. This change was applied on a retroactive basis.
The bioremediation segment consists of one company that applies
bio-filtration technology to odor and air pollution control for
environmental applications. The machine controls segment designs,
manufactures and sells electric motor controls to electric vehicle
manufacturers. The gem identification segment consists of one company that
has developed identification and database systems, and markets its
products and services to the companies in the precious gem business,
including producers, cutters, distributors and retailers. The natural
horticultural segment consists of one company that develops, manufactures
and markets natural fertilizers, insecticides and herbicides. The
Company's general corporate segment includes one company which provides
funding and management overview services to the holdings. This segment's
profits include interest income and gains on sales of its various
holdings.
The Company evaluates performance and allocates resources based on
continuing profit or loss from operations before income taxes,
depreciation and research and development. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
There are no intersegment sales, transfers, or profit or loss.
Industry Segments for the Three Months Ended March 31, 2004 and 2003
Biorem- Machine Identification Natural Corporate
ediation Controls Systems Horticultural Administration Total
--------- -------- ------- ------------- -------------- -----
2004 $ $ $ $ $ $
Sales 1,668,083 404,907 156,823 123,409 - 2,353,222
Income (Loss) from 258,512 (207,255) (66,217) (62,897) (327,809) (405,666)
continuing operations
before other income
Other income (27,872) (23,341) (10,614) (14,167) (19,677) (95,671)
Income (loss) from
continuing operations
before income taxes 230,640 (230,596) (76,831) (77,064) (347,486) (501,337)
2003
Sales 924,912 418,499 140,179 75,268 - 1,558,858
Income (Loss) from 189,468 (177,716) (38,183) (149,958) (599,509) (775,898)
continuing operations
before other income
(expense)
Other income (expense) 10,605 (16,898) (14,467) 2,173 54,834 36,247
(Loss) from continuing
operations before income
taxes 200,073 (194,614) (52,650) (147,785) (544,675) (739,651)
12. CONTINGENCIES
The Company is currently under an audit by the Internal Revenue
Service ("IRS"). As part of the routine audit, the IRS indicated that they
reviewed the treatment of capital losses claimed in the prior year and
refunds of $2,532,000 received in 2001. A proposed deficiency in federal
income tax was issued by the IRS on December 1, 2003 totaling $2,969,123.
On February 5, 2004 CVF issued a formal protest to the proposed deficiency
and it is expected that this will now go before appeals at the IRS. If it
is not resolved at the appeals level of the IRS, CVF intends to challenge
the IRS ruling in federal tax court, as CVF and its legal counsel strongly
believes its original deductions were correctly taken. This process could
take up to 2 more years to be resolved.
13. COMMON SHARES ISSUED
In January 2004, the Company issued 57,316 shares of its common
stock in consideration of consulting services to the Company. The expense
associated with this was $12,000 and was accrued as an expense in 2003.
In January 2003, the Company issued 92,593 shares of its common
stock in consideration of legal services to the Company. The expense
associated with this was $25,000 and was accrued as an expense in 2002.
14. DEBT DUE TO OFFICERS AND DIRECTORS OF SUBSIDIARIES
Included in current portion of long-term debt and in long term notes
payable - officers and directors - are amounts due to subsidiary officers
and subsidiary directors totaling $457,620 and $743,704 respectively at
March 31, 2004. These notes accrue interest at varying interest rates from
Canadian prime interest rate plus 3% or 4%, to fixed rates of 5%, 10% or
12%.
In September 2003 a subsidiary director closed on a $1 million
Canadian (approximately $ 762,700 US) convertible note to the subsidiary
bearing interest at 10% per annum and convertible into the common stock of
the subsidiary at $1.76 cnd per share. The note has a 3 year term. If
converted the holder of the note will be entitled to a 7 1/2 % ownership
interest in Biorem on a fully diluted basis.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW:
CVF Technologies Corporation ("CVF" or the "Company") was incorporated in 1995
and is involved in the business of managing early and expansion stage companies
primarily engaged in the environmental technology and information technology
sectors. CVF's mandate is to acquire significant holdings in new and emerging
technology companies and then to assist them in their management, and through
them to engage in their respective businesses. CVF's current holdings include
investments made in its investee companies during the period from 1990 to the
present.
CVF's mandate is to generate revenues and profits through consolidation of the
operating results of its investee companies. CVF also endeavors to realize gains
through the eventual sale of some or all of its holdings in these companies at
such time as management determines that CVF's funds can be better deployed in
other industries or companies. CVF's goal is to maximize the value of its
holdings in its investee companies for the Company's shareholders. One important
way that CVF accomplishes this is by taking an investee company public at the
appropriate time. This has been done with the investee companies Certicom
Corporation and TurboSonic Technologies, Inc. CVF plans to offer its
shareholders the opportunity to directly participate in public offerings of its
investee companies, where this is considered appropriate.
After CVF's initial investment, an investee company often requires additional
capital to meet its business plan. Consequently, the Company actively assists
its investee companies in obtaining additional capital which is usually sourced
through CVF's own resources or via other participants.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2003:
Consolidated sales of CVF subsidiaries for the three months ended March 31, 2004
amounted to $2,353,222, representing an increase of $794,364 (51%) compared to
sales of $1,558,858 for the same period in 2003. On a stand-alone basis, CVF has
no sales from operations. Sales and gross profit from sales reflect the
operations of CVF's consolidated subsidiaries only. The consolidated
subsidiaries are Biorem Technologies Inc. ("Biorem"), Gemprint(TM) Corporation
("Gemprint"), SRE Controls Inc. ("SRE") ") (results consolidated through March
24, 2004 only, the date CVF sold its majority interest in SRE), Ecoval
Corporation ("Ecoval"), and CVF Capital Management Corporation ("CVF Capital
Management"). CVF records profit and loss using the equity method for companies
in which CVF holds 50% to 20% ownership. These companies are Petrozyme
Technologies Inc. ("Petrozyme"), IMT Systems ("IMT") and SRE (subsequent to
March 24, 2004 when CV's ownership position in SRE declined to 37%).
For the three months ended March 31, 2004, Biorem's sales increased by $743,172
or 80% compared to the same quarter of 2003. This increase was mainly due to
numerous modular system installations in the US in the 2004 period. Ecoval's
sales increased by $48,140 (64%) as Ecoval had a relatively weak sales quarter
in the 2003 period. Gemprint's sales increased by $16,644 or 12% compared to the
same quarter of 2003 due to the weaker US dollar in the 2004 period. SRE's sales
decreased in the 2004 period by $13,592 or 3% from the 2003 period. SRE had a
relatively strong sales quarter in the 2003 period.
CVF's gross margin of $991,205 for the first quarter of 2004 represents an
increase of $252,446 (34%) from the same period last year. This increase is
mainly due to Biorem which had $283,532 higher gross margin in the first quarter
of 2004 due to higher sales volumes. Ecoval's gross margin increased by $26,538
(130%) due to the sales increase and generally improved margin percentages on
its business. SRE had $46,287 lower gross margin in the first quarter of 2004 as
SRE's sales were down in the 2004 period. Gemprint had a gross margin decrease
of $11,337 (10%) due to weaker sales. Gross margin of CVF as a percentage of
sales decreased to 42.1% for the first quarter of 2004 from 47.4% for the first
quarter of
2003. This gross margin percentage decrease is mainly attributable to Biorem
where sales were concentrated on larger jobs which traditionally generate lower
margin percentages.
Selling, general and administrative expenses on a consolidated basis for the
three months ended March 31, 2004 amounted to $1,241,760, representing a
decrease of $141,868 (10%) compared to expense of $1,383,628 for the same period
in 2003. The decrease is due to $82,000 (77%) lower accounting fees due to the
Company switching independent auditors in mid 2003 and a $58,000 reduction in
expense related to the decrease in the CVF market price and the related effect
on the outstanding stock options. Also, included in the 2003 period was $112,650
expense for the settlement by a former officer of one of the subsidiaries. These
decreases are offset somewhat by expenses related to the sales increase.
Management continues to undertake a concerted effort to effect an overall
reduction in administrative costs. Over the past 2 1/2 years CVF has undertaken
many initiatives to lower the Company's expenses. (See further discussion in the
Liquidity and Capital Resources section).
Research and development expenses for the first quarter of 2004 amounted to
$155,111 compared to $131,029 incurred in the comparable 2003 period, or an
increase of $24,082 (18%). Spending increased at Biorem offset somewhat by a
decrease in spending for such activity at Ecoval.
Net interest expense increased to $87,863 for the first quarter of 2004 compared
to net interest expense of $44,778 for the first quarter of 2003. This increase
is due to lower cash balances on hand in the 2004 period compared to the 2003
period and an increase in loans outstanding in the 2004 period.
Other expense increased to $5,773 in the first quarter of 2004 from income of
$74,119 for the first quarter of 2003 due to foreign currency exchange related
to the weakening US dollar.
Loss on sale of holdings amounted to $2,035 in the 2004 period compared to
$6,906 gain in the 2003 period. In the 2004 period the Company sold additional
holdings in TurboSonic and in the 2003 period some holdings in RDM. The
remaining holdings are relatively small and are not expected to contribute
significant gains to the Company.
Gain on sale of equity in subsidiary totaling $742,568 in the 2004 period
represented the Company agreeing to a restructuring at SRE whereby another
shareholder (also a director of SRE) obtained control of SRE and CVF's position
decreased from 75% to 37%.
Income tax expense in the first quarter 2004 of $32,868 compared to recovery of
$30,274 in the 2003 period represented expense at Biorem due to that company's
profitability condition.
Minority interest portion of the loss decreased to $38,016 in the first quarter
of 2004 from $80,660 in the comparable 2003 period. This amount in the 2004
period relates only to Gemprint while the 2003 period loss related to Gemprint
and SRE. SRE's minority interest balance is now zero and because the Company no
longer has an obligation to fund such operating losses to the extent they are
incurred by SRE no further amounts are recognized.
CVF on a consolidated basis recorded a net income of $246,379 for the three
months ended March 31, 2004 resulting from the operations described above. This
compares to a net loss of $628,717 incurred in the corresponding period of 2003.
LIQUIDITY AND CAPITAL RESOURCES:
Stockholders' deficit as of March 31, 2004 amounted to $2,700,943 compared to a
deficit of $3,732,580 at December 31, 2003. This net decrease in the deficit of
$1,031,637 is primarily attributable to the restructuring of the Series B
Preferred Stock and the net income of $246,379 which was recognized in the first
quarter 2004.
The current ratio of CVF at March 31, 2004 is .52 to 1, which is almost
unchanged from .58 to 1 at December 31, 2003
CVF management anticipates that over the next twelve month period CVF should
have sufficient cash from various sources to sustain itself. Between cash on
hand, the issuance of new securities, and the sales of a portion of its holdings
in certain investee companies, the Company expects to have enough cash to fund
itself and certain of its investee companies that are currently not profitable.
Additionally, CVF has limited outside debt and a line of credit could be sought.
The Company has been successful in obtaining $ 1 million Canadian in financing
through an investment in one of its holdings in September 2003, and in 2003
received $961,000 as repayment of back interest and dividends from one of its
investee companies.
Over the past two and a half years CVF has undertaken many initiatives to lower
the parent company's expenses. These initiatives have included lowering the head
count of its office staff as well as the elimination of one executive position.
The use of consultants has been significantly reduced except those consultants
who have been satisfied to receive their fee in CVF common shares. Travel and
entertainment has been significantly reduced over the last year and will
continue at the reduced level going forward. CVF management has adopted a very
aggressive cost and expenditure controls and monitoring policy. In February
2004, CVF and the holder of CVF's Series B Convertible Preferred Stock entered
into a transaction whereby the holder exchanged its Series B Convertible
Preferred Stock with a stated value of $3,385,000 and accrued dividends of
approximately $673,600 for 1,000,000 shares of CVF's common stock and a new
Series C 6% Convertible Preferred Stock with a stated value of $1,000,000,
convertible into common stock at $1 per share. The Series C Preferred and all
accrued dividends thereon will be subject to mandatory redemption on February
27, 2006; however, CVF's obligation to redeem will be limited to available cash
in excess of working capital requirements for the next twelve months. The
Company also issued to the former Series B holder a three-year warrant to
purchase 100,000 shares of CVF's common stock at an exercise price of $0.35 per
share.
The Company no longer anticipates having to fund Gemprint or Biorem as both are
currently operating on positive cash flow, although no assurances can be given
that this trend will continue. Also the Company no longer anticipates having to
fund SRE in conjunction with the restructuring of SRE whereby CVF's position
decreased to 37%.
As at March 31, 2004, CVF's cash balance was $507,080 which is an increase of
$281,545 compared to December 31, 2003. The primary source of cash for the
Company is expected to be from sale of a portion of its investments in its
subsidiaries or from CVF issuing additional securities. The company is pursuing
opportunities to raise funds from potential investors in CVF. In addition,
certain subsidiaries are producing a positive cash flow and will be able to
supplement other cash requirements of the Company. If the above mentioned
liquidity events do not occur, the Company estimates that it could run out of
operating cash in the third quarter of 2004, if other sources of cash are not
available. The Company will also continue to assist its investee companies in
their efforts to obtain outside financing in order to fund their growth and
development of their business plans. Certain of the Company's financial
obligations included in current liabilities related to items that will not be
paid in the near term. The Company will carefully manage its cash payments on
such obligations.
CRITICAL ACCOUNTING POLICIES:
An understanding of CVF's accounting policies is necessary for a complete
analysis of our results, financial position, liquidity and trends. We focus your
attention on the following accounting policies of the Company:
Going concern - These consolidated financial statements have been prepared on a
going concern basis, which presumes that assets will be realized and liabilities
discharged in the normal course of business over the foreseeable future. The
Company's current liabilities exceed its current assets and the Company has
incurred losses over the past six fiscal years, which have reduced the Company's
cash reserves, and depleted stockholders' equity. Further, the Company has
contingent liabilities. These conditions raise substantial doubt about the
consolidated Company's ability to continue in the normal course of business as a
going concern.
The Company's primary need for cash is to maintain its ability to support the
operations and ultimately the carrying values of certain of its individual
investee companies. The Company is actively pursuing the sale of a portion of
its interests in two of its investee companies as a source of funds, and
reduction of cash flow needs. The Company will continue to assist its investee
companies in their efforts to obtain outside financing in order to fund the
growth and development of their respective businesses and has taken steps to
reduce the operating cash requirements of the parent company and its investees.
The Company is also seeking outside investment. There is no assurance that these
initiatives will be successful or that the Company or certain of its investees
will have adequate cash resources and capital to be able to continue as going
concerns.
The Company's ability to continue to realize assets and discharge liabilities in
the normal course is uncertain and dependent on these and other initiatives. The
accompanying financial statements do not include any of the adjustments to the
amounts or classification of assets and liabilities that might be necessary
should the Company be unable to continue its business in the normal course.
Revenue recognition - Revenue from the sale of manufactured products is
recognized when the goods are shipped and accepted by the customer. The Company
recognizes revenue on long-term contracts on the percentage of completion basis,
based on costs incurred relative to the estimated total contract costs. Losses
on such contracts are accrued when the estimate of total costs indicates that a
loss will be realized. Contract billings in excess of costs and accrued profit
margins are included as deferred revenue, which is part of current liabilities.
Service revenue is recognized when the services are performed.
Inventory - Finished goods are stated at the lower of cost or market using the
first-in, first-out method of costing. Raw materials are stated at the lower of
cost or replacement value, using the first-in, first-out method.
Goodwill - In June 2001, the FASB issued SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies criteria which
intangible assets acquired in purchase method business combinations after June
30, 2001 must meet to be recognized and reported apart from goodwill. SFAS No.
142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 requires
that intangible assets with finite useful lives be amortized, and that goodwill
and intangible assets with indefinite lives no longer be amortized, but instead
be tested for impairment at least annually.
The Company adopted the provisions of SFAS No. 141 on July 1, 2001. Such
adoption had no effect on the Company's financial position or results of
operations. The Company adopted the provisions of SFAS No. 142 effective January
1, 2002, at which time the amortization of the Company's existing goodwill
ceased. The new standard also required that the Company test the goodwill for
impairment. Any impairment, arising from the test, is charged to income. As of
December 31, 2002 the Company's goodwill was tested and the Company calculated
that no impairment existed at that time. No further circumstances have arisen
during the first quarter of fiscal 2004 that would indicate an impairment of
goodwill has occurred subsequent to year end.
Intangible assets with finite useful lives are amortized over their estimated
useful lives. Intangible assets are reviewed for impairment when there are
indications that the carrying value of an asset may not be recoverable over its
estimated useful life. Impairment testing involves estimating the fair value of
intangible assets using anticipated future cash flows and comparing the fair
value to the carrying value of the asset. The Company's only intangible asset is
acquired technology of Ecoval which is amortized over 5 years.
Contingencies - The Company is currently under an audit by the Internal Revenue
Service ("IRS"). As part of the routine audit, the IRS indicated that they
reviewed the treatment of capital losses claimed in the prior year and refunds
of $2,532,000 received in 2001. A proposed deficiency in federal income tax was
issued by the IRS on December 1, 2003 totaling $2,969,123. On February 5, 2004
CVF issued a formal protest to the proposed deficiency and it is expected that
this will now go before appeals at the IRS. If it is not
resolved at the appeals level of the IRS, CVF intends to challenge the IRS
ruling in federal tax court, as CVF and its legal counsel strongly believes its
original deductions were correctly taken. This process could take up to 2 more
years to be resolved.
In February 2004 the Company's outstanding Series B Convertible Preferred Stock
was restructured in a transaction agreed to with the holder of this stock. The
holder exchanged its Series B Convertible Preferred Stock with a stated value of
$3,385,000 and accrued dividends of approximately $673,600 for 1,000,000 shares
of the Company's common stock and a new Series C 6% Convertible Preferred Stock
with a stated value of $1,000,000, convertible into common stock at $1 per
share. The Series C Preferred will be subject to mandatory redemption on
February 27, 2006; however, the Company's obligation to redeem will be limited
to cash available to it at that time in excess of one year's prospective working
capital. The Company also issued to the former Series B holder a three-year
warrant to purchase 100,000 shares of the Company's common stock at an exercise
price of $0.35 per share.
Stock Options/Warrants - Due to the re-pricing of stock options in 2002 those
options are subject to variable plan accounting using the intrinsic value as
prescribed by APB-25. As the fair market value of the Company's stock as of
March 31, 2004 was $0.32 compared to $0.41 at December 31, 2003, a reversal of
compensation expense of $200,050 was recorded during the 2004 first quarter.
The Company also issued warrants which were priced at $0.16 on April 16, 2002.
The warrants are fully vested and subject to fair value accounting in accordance
with SFAS 123.
FINANCIAL CONSIDERATIONS:
Early Stage Development Companies. Each of the investees is an early stage
development company with a limited relevant operating history upon which an
evaluation of its prospects can be made. As such, there can be no assurance of
the future success of any of the investees.
Quarterly Fluctuations. CVF's financial results have historically been, and will
continue to be, subject to quarterly and annual fluctuations due to a variety of
factors, primarily resulting from the nature of the companies in which it
invests. Any shortfall in revenues in a given quarter may impact CVF's results
of operations due to an inability to adjust expenses during the quarter to match
the level of revenues for the quarter. There can be no assurance that CVF will
report income in any period in the future. While some of CVF's investees have
consistently reported losses, CVF has recorded income in certain fiscal periods
and experienced fluctuations from period to period due to the sale of some of
its holdings, other one-time transactions and similar events.
Rapid Technological Change. The markets for CVF's investees products are
generally characterized by rapidly changing technology, evolving industry
standards, changes in customer needs and frequent new product introductions. The
future success of the investees will depend on their ability to enhance current
products, develop new products on a timely and cost-effective basis that meet
changing customer needs and to respond to emerging industry standards and other
technological changes. There can be no assurance that the investees will be
successful in developing new products or enhancing their existing products on a
timely basis, or that such new products or product enhancements will achieve
market acceptance.
AMEX Listing. CVF has been advised by the AMEX that if it wishes to be
considered for continued listing privileges it will need to present its
financial statements on a non-consolidated basis, which presents the fair
market value of its investments. CVF is considering various alternative means
of complying with the AMEX's requirement, and is taking specific action to so
comply. In the event CVF is unable to comply with the AMEX's requirement or
determines that it is inadvisable to do so, CVF will be delisted from the AMEX.
In such an event, CVF would seek to have its common stock quoted on the National
Association of Securities Dealers' Over-the-Counter Bulletin Board, or OTCBB.
This may adversely affect shareholders' ability to trade CVF common stock, as
the OTCBB market is generally less liquid and more volatile than the AMEX. In
addition, any such delisting of CVF's common stock could result in a decline in
CVF's stock price. In the event CVF determines to register or elects to be
regulated as an investment company under the Investment Company Act of 1940, its
ability to raise capital
and otherwise operate its business consistent with past practice may be
significantly affected. In addition, the costs of compliance and registration
under the Investment Company Act may be substantial.
FORWARD LOOKING STATEMENTS:
CVF believes that certain statements contained in this Quarterly Report on Form
10-QSB constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the Company's actual results, performance or achievements to vary materially
from the Company's expected results, performance or achievements. Other factors
that may affect CVF's future results include:
- general economic and business conditions;
- foreign currency fluctuations, particularly involving the Canadian
dollar:
- the Company's ability to find additional suitable investments and the
ability of those investments to generate an acceptable return on
invested capital; and
- the uncertainties and risks involved in investing in early-stage
development companies which can arise because of the lack of a
customer base, lack of name recognition and credibility, the need to
locate and retain experienced management and the need to develop and
refine the business and its operations, among other reasons.
- the Company's ability to obtain capital to fund its operations and
those of its investees.
The Company will not update any forward-looking statements to reflect actual
results or changes in the factors affecting the forward-looking statements.
Item 3. Controls and Procedures
(a) The Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's
Chief Executive Office and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective as of the
end of the period covered by this report. Disclosure controls and
procedures are controls and procedures that are designed to ensure
that information required to be disclosed in Company reports filed or
submitted under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC rules and
forms.
(b) There has been no significant change in the Company's internal
controls over financial reporting that occurred during the last fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities.
In January 2004, the Company issued 57,316 shares of its common stock in
consideration of consultation services to the Company. This transaction was
exempt from registration under Section 4 (2) of the Securities Act of 1933, as
amended.
In February 2004 the Company's outstanding Series B Convertible Preferred
Stock was restructured in a transaction agreed to with the holder of this stock.
The holder exchanged its Series B Convertible Preferred Stock with a stated
value of $3,385,000 and accrued dividends of approximately $673,600 for
1,000,000 shares of the Company's common stock and a new Series C 6% Convertible
Preferred Stock with a stated value of $1,000,000, convertible into common stock
at $1 per share. The Series C Preferred will be subject to mandatory redemption
on February 27, 2006; however, the Company's obligation to redeem will be
limited to cash available to it at that time in excess of one year's prospective
working capital. The Company also issued to the former Series B holder a
three-year warrant to purchase 100,000 shares of the Company's common stock at
an exercise price of $0.35 per share.
In February 2004, the Company issued 303,047 shares of its common stock to
one its officers who exercised stock options.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement re computation of per share earnings
(31.1) Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
(32) Certifications Pursuant to 18 U.S.C. 1350 As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATED: May 24, 2004
CVF TECHNOLOGIES CORPORATION
By: /s/ Jeffrey I. Dreben
-----------------------------------
Name: Jeffrey I. Dreben
Title: Chairman of the Board, President
and Chief Executive Officer
By: /s/ Robert L. Miller
-----------------------------------
Name: Robert L. Miller
Title: Chief Financial Officer
EXHIBIT INDEX
No. Description
--- -----------
(11) Statement re computation of per share earnings
(31.1) Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(31.2) Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(32) Certifications Pursuant to 18 U.S.C. 1350 As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002