1
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, 1999
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.)
916 CENTER STREET
LEWISTON, NEW YORK 14092
(716) 754-7883
(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 May 14, 1999, there were 6,725,328 shares of common stock, $0.001 par
value per share, of the issuer outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
---- ----
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
(UNAUDITED)
-----------
March 31,
1999
------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,108,366
Restricted cash 173,831
Marketable securities, at market 249,742
Trade receivables 2,419,706
Inventory 823,013
Prepaid expenses and other 107,326
Income taxes receivable 1,151,894
------------
TOTAL CURRENT ASSETS 7,033,878
PROPERTY AND EQUIPMENT, net of accumulated depreciation 520,158
HOLDINGS, carried at cost or equity 2,353,455
HOLDINGS AVAILABLE FOR SALE , at market 2,317,255
GOODWILL, net of accumulated amortization 7,624,966
Deferred income taxes 179,785
------------
$ 20,029,497
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Bank indebtedness $ 175,556
Current portion of long-term debt 285,656
Trade payables 1,930,673
Accrued expenses 846,093
Dividends payable on Series A preferred stock 75,600
Dividends payable on subsidiary's shares 218,558
------------
TOTAL CURRENT LIABILITIES 3,532,136
------------
LONG TERM DEBT 632,913
DEFERRED INCOME TAXES 342,742
MINORITY INTEREST 3,545,193
PENSION OBLIGATION 509,266
PREFERRED STOCK OF SUBSIDIARIES 1,138,972
REDEEMABLE SERIES A PREFERRED STOCK 456,250
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, authorized 50,000,000 shares,
7,155,328 issued and 429,900 in treasury 7,155
Additional paid in capital 18,951,228
Treasury stock (2,678,624)
Accumulated other comprehensive income (212,391)
Retained earnings (accumulated deficit) (6,195,343)
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TOTAL STOCKHOLDERS' EQUITY 9,872,025
------------
$ 20,029,497
============
See notes to consolidated financial statements
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CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(UNAUDITED)
-----------
Three months ended March 31,
1999 1998
----------- -----------
SALES $ 3,236,170 $ 647,753
COST OF SALES 2,725,372 420,535
----------- -----------
GROSS PROFIT 510,798 227,218
----------- -----------
EXPENSES:
Selling, general and administrative 1,575,705 2,840,364
Research and development 192,359 -
----------- -----------
TOTAL EXPENSES 1,768,064 2,840,364
----------- -----------
INCOME (LOSS) FROM OPERATIONS (1,257,266) (2,613,146)
----------- -----------
OTHER INCOME AND (EXPENSES):
Interest income (expense), net (55,695) 290,935
Other income (expense), net 29,501 258,751
Income (loss) from equity affiliates (252,806) (302,473)
Gain (loss) on investments 146,753 372,294
Minority interest 128,456 328,028
----------- -----------
TOTAL OTHER INCOME AND (EXPENSES) (3,791) 947,535
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (1,261,057) (1,665,611)
Provision (benefit) for income taxes (172,213) (79,800)
----------- -----------
NET INCOME (LOSS) $(1,088,844) $(1,585,811)
=========== ===========
NET INCOME (LOSS) PER SHARE - BASIC $ (0.16) (0.28)
=========== ===========
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.16) (0.28)
=========== ===========
WEIGHTED SHARES USED IN COMPUTATION - BASIC 6,727,722 5,748,539
=========== ===========
WEIGHTED SHARES USED IN COMPUTATION - DILUTED 6,727,722 5,748,539
=========== ===========
See notes to consolidated financial statements
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CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(UNAUDITED)
-----------
Three Months Ended March 31,
----------------------------
1999 1998
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $(1,088,844) $(1,585,811)
----------- -----------
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization 192,226 89,745
(Income) loss from equity affiliates 252,806 302,473
Gain on sale of investments (146,753) (372,294)
Deferred tax benefit -- (79,800)
Minority interest in earnings (losses) of subsidiaries (128,456) (328,028)
Decrease in pension obligation (4,404) --
Changes in operating assets and liabilities (net of acquisitions):
(Increase) decrease in accounts receivable 754,583 (229,244)
(Increase) decrease in inventory (21,294) (54,507)
(Increase) decrease in prepaid expenses and other 230,643 (163,162)
(Increase) decrease in income taxes receivable (138,910) --
Increase (decrease) in accounts payable and accrued expenses (661,825) (796,538)
Increase (decrease) in income taxes payable (241,929) (1,820,598)
----------- -----------
86,687 (3,451,953)
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CASH PROVIDED (USED) IN OPERATING ACTIVITIES (1,002,157) (5,037,764)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (11,527) (38,574)
Investments in and advances to equity affiliates (803,134) (599,375)
Repayments from equity affiliates -- 235,828
Purchase of marketable securities (316,734) (118,118)
Aquisitions, net of cash acquired -- (978,608)
Proceeds from sale of investments -- 382,952
----------- -----------
CASH PROVIDED (USED) IN INVESTING ACTIVITIES (1,131,395) (1,115,895)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) of debt 4,158 (380,354)
Decrease in restricted cash (1,467) (13,509)
Sale of common stock -- 360,000
Purchase of treasury stock (16,521) (480,618)
----------- -----------
CASH PROVIDED (USED) IN FINANCING ACTIVITIES (13,830) (514,481)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (41,429) 141,884
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,188,811) (6,526,256)
CASH AND CASH EQUIVALENTS - beginning of period 4,297,177 9,931,906
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 2,108,366 $ 3,405,650
=========== ===========
See notes to consolidated financial statements
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CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
---------------------------------------------
STATEMENT OF COMPREHENSIVE INCOME
---------------------------------
(UNAUDITED)
-----------
Three Months Ended March 31,
----------------------------
1999 1998
----------- -----------
Net income (loss) $(1,088,844) $(1,585,811)
----------- -----------
Other comprehensive income, net of tax:
Foreign currency translation adjustments 54,094 (479,772)
Unrealized holding gains:
Unrealized holding gains arising during period (net of tax expense of
$259,500 in 1999 and $191,549 in 1998) 389,250 298,200
Reclassification adjustments for previously recognized unrealized holding gains
(net of tax (benefit) of $(164,671) in 1998) 0 (305,818)
----------- -----------
Net unrealized holding gains 389,250 (7,618)
----------- -----------
Total other comprehensive income (loss) 443,344 (487,390)
----------- -----------
Comprehensive income (loss) during period $ (645,500) $(2,073,201)
=========== ===========
See notes to consolidated financial statements
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CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------
(UNAUDITED)
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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 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.
2. INCOME (LOSS) PER SHARE
-----------------------
Basic earnings (loss) per share is computed by dividing net
income (loss) available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted earnings
(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.
3. INVESTMENTS
-----------
The following table gives certain summarized unaudited
financial information related to the Company's equity basis holdings:
Three Months Ended
March 31,
---------------------------
1999 1998
---------------------------
Net sales $ 93,380 $ 330,116
Gross profit on sales (40,582) 70,938
Income (loss) from continuing
operations (1,083,873) (776,350)
Net income (loss) (1,083,873) (776,350)
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4. INTERIM FINANCIAL STATEMENT DISCLOSURES
---------------------------------------
Certain information and footnote disclosures normally included
in 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, 1998 included in the Company's Annual Report on Form
10-KSB filed with the Securities and Exchange Commission on March 31,
1999.
5. ADOPTION OF ACCOUNTING STANDARD
-------------------------------
During the quarter ended March 31, 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income". Statement No. 130
requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosures of certain
financial information that historically has not been recognized in the
calculation of net income. Other comprehensive income for the three
months ended March 31, 1999 consisted of a $389,250 increase in
unrealized gains from available for sale securities and a $54,094 gain
on foreign currency translation totaling to $443,344. The amounts for
the three months ended March 31, 1998 consisted of a $7,618 decrease in
unrealized gains from available for sale securities and a $479,772
decrease in foreign currency translation totaling to $487,390.
6. SEGMENTED INFORMATION
---------------------
In June 1997, The Financial Accounting Standards Board issued
Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information, which was adopted by the Company for the year
ended December 31, 1998. Under the new requirements, financial
information about operating segments is reported on the basis that is
used internally by the Company for evaluating operating segments and
resource allocation decisions.
The Company has three reportable segments: information
technology, environmental products and services and general corporate.
The Company's information technology segment consists of three
companies that develop and sell electronic motor controllers, advanced
process control systems and precious gem identification services to
manufacturers, wholesale distributors and retailers. The Company's
environmental products and services segment has two operating
companies. One develops bioremediation methods to clean soil, air and
water which are marketed to heavy industrial manufacturers and
municipalities. The other company is in the retail selling of
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natural products. The Company's general corporate segment includes
three companies (two in 1998) which hold various entities, and provide
funding to the holdings. This segment's profits arise from interest
income and gains on sales of its various holdings.
There are no intersegment sales, transfers or profit or loss.
Industry Segments for the Quarters Ended March 31, 1999 and 1998
Information Environmental General Total
Technology Products and Corporate
Services
1999
Sales $ 2,920,473 $ 315,697 $ - $ 3,236,170
(Loss) from operations (637,008) (224,335) (395,923) (1,257,266)
Other income (expense) 98,382 22,774 (124,947) (3,791)
(Loss) before
Income taxes (538,626) (201,561) (520,870) (1,261,057)
1998
Sales $ 564,579 $ 83,174 $ - $ 647,753
(Loss) from operations (531,224) (1,532,650) (549,272) (2,613,146)
Other income (expense) (32,955) (9,672) 990,162 947,535
(Loss) before
Income taxes (564,179) (1,542,322) 440,890 (1,665,611)
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999 COMPARED
TO THE THREE MONTH PERIOD ENDED MARCH 31, 1998:
Consolidated sales of CVF Technologies Corporation ("CVF" or the "Company") for
the three months ended March 31, 1999 are $3,236,170, representing an increase
of $2,588,417 (400%) compared to sales of $647,753 for the first quarter of
1998. CVF, on a stand-alone basis, has no sales from operations. Sales and gross
profit from sales reflect the operations of CVF's consolidated subsidiaries
only. These subsidiaries include Biorem Technologies Inc., GemprintTM
Corporation ("GemprintTM"), Solaria Research Enterprises Ltd. ("Solaria"),
Dantec Corporation ("Dantec"), Canadian Venture Founders Leasing Corporation,
Eastview Marketing One LLC, Grand Island Marketing Inc. ("Elements") and Grand
Island Marketing Two LLC. Companies that are not consolidated include, Ecoval
Inc., RDM Corporation (formerly Mindflight), Petrozyme Technologies, Inc., and
TurboSonic, Inc.
Solaria continued full production on a joint venture, which started in the third
quarter of 1998, with a major original equipment manufacturer. This resulted in
Solaria's sales increasing by $2,363,395 over the same quarter in 1998. This
sales growth should continue through 1999 since this joint venture will be
active for the entire year.
Gross profit on a consolidated basis increased by $283,580 or 125%, to $510,798
from $227,218 for the same quarter one year earlier. As with sales the main
contributor to this increase is Solaria. The gross profit as a percent of sales
declined from 35% in 1998 to 16% in 1999 mainly due to the fact that one of the
subsidiary companies reduced its usual profit percentage on a major contract, in
order to increase market share. That subsidiary plans to increase its margins on
future contracts.
Selling, general and administrative expenses on a consolidated basis amounted to
$1,575,705 for the first quarter of 1999. This represents a decrease of
$1,264,659 or 45% compared to the first quarter of 1998. The high selling,
general and administrative costs incurred in 1998 were chiefly due to
advertising costs for an infomercial for Eastview Marketing in the amount of
$776,438 and start up costs of $604,224 in Elements. In addition, management is
undertaking a concerted effort to effect an overall reduction in administrative
costs.
Research and development expenses for the quarter ended March 31, 1999 were
$192,359 with no corresponding costs for 1998. GemprintTM, Dantec and Solaria
all have ongoing new product development and product enhancement projects moving
forward.
Net interest income (expense) decreased from interest income of $290,935 for the
quarter ended March 31, 1998 to interest expense of $55,695 for the 1999 first
quarter end. Investment of large cash balances during the 1998 first quarter
gave rise to the 1998 interest income.
A tax benefit of $172,213 was booked for the quarter ended March 31, 1999. This
is the result of being able to carry current losses back to 1997 when the
Company made gains on the sale of shares of one of its investments. The tax
benefit is based on losses incurred by the consolidated US entities being
carried back. Losses incurred by Canadian subsidiaries are not available to
recover US taxes paid but will be utilized for Canadian tax purposes when each
such entity has taxable income.
As a result of the operations described above, in the first three months of 1999
the Company recorded a net loss of $1,088,844, which represents a 31% decrease
in relation to the net loss of $1,585,811 incurred in the comparable period of
1998.
LIQUIDITY AND CAPITAL RESOURCES:
At March 31, 1999, stockholders' equity was $9,872,025 as compared to
$10,539,132 at December 31, 1998. This net decrease of $667,107 was primarily
attributed to the net loss of $1,088,844 for the quarter
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ended March 31, 1999 which was partially offset by a $389,250 unrealized gain on
investment holdings recognized in the same quarter.
The current ratio of the Company at March 31, 1999 is 2.0 to 1. Although the
current ratio declined from 2.3 to 1 at December 31, 1998 it still remains
strong. The decline in the current ratio is attributable to the use of cash and
cash equivalents to fund ongoing operations during the first quarter of 1999.
As it did in 1998, CVF plans to raise additional funds through either private
placement or public offering in order to further augment the growth of its
companies. The money raised will be used to acquire additional positions in its
existing companies or to acquire companies that are synergistic to the current
portfolio. Also as the CVF investee companies mature, CVF will endeavor to
assist them in obtaining financing in order to position them for future growth.
IMPACT OF YEAR 2000 COMPLIANCE
The Year 2000 problem, which is a pervasive issue throughout the industrial,
financial and service sectors, arises because most computer software was
originally created with a two digit date code and would read "00," "01," etc. as
meaning 1900, 1901, etc. not 2000, 2001, etc. The Company has completed the
upgrade of its software and computer systems to make them Year 2000 ("Y2K")
compliant. The cost of this upgrade was approximately $20,000, including
software and hardware. The Company's management has surveyed its subsidiary
companies and, based upon their responses, does not expect any major malfunction
in their internal systems.
Company management has reviewed potential Y2K problems, especially related to
third party suppliers and providers of services over which the Company has no
control. CVF and its subsidiaries have done an extensive review of their
external third party suppliers. All financial institutions with which CVF does
business with have responded that they are either now Y2K compliant or will be
by December 31, 1999. Also all major suppliers and customers have given
assurances that they will be Y2K compliant. While there can be no assurances
that there will be no material, adverse consequences, the Company believes that
there will be no material cost incurred to become Y2K compliant and does not
consider contingency plans to deal with Y2K to be necessary.
FORWARD LOOKING STATEMENTS
The Company 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.
These factors include, among others, the following:
- general economic and business conditions;
- foreign currency fluctuations, particularly involving Canada;
- the Company's ability to find additional suitable investments and the
ability of those investments to generate an acceptable return on invested
capital;
- 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 bring in
experienced management and the need to develop and refine the business
and its operations, among other reasons;
- because many of the businesses that the Company may invest in are
developing products that require significant additional development,
testing and financial support prior to commercialization, the likelihood
that such products can be successfully developed, produced in commercial
quantities at reasonable costs and successfully marketed, including,
without limitation, the expense, difficulty and
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delay frequently encountered in connection with the development of new
technology and the highly competitive environment of the technology
industry;
- the ability of the Company to assist its investee companies in obtaining
additional capital, either from the Company's own resources or other
participants, so as to permit these companies to grow;
- the ability of the Company and its investee companies to attract and
retain qualified management and technical personnel;
- with respect to certain of the Company's investee companies that provide
environmental and other highly regulated products and services, the risk
of the enactment of new laws and regulations or amendment of existing
laws and regulations that adversely affect the business operations and
prospects of these companies; and
- various other factors referenced in this Quarterly Report on 10-QSB.
The Company will not update any forward-looking information to reflect actual
results or changes in the factors affecting the forward-looking information.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(3) (i) Articles of Incorporation
Filed as an exhibit to CVF's Registration Statement on Form
10SB dated May 29, 1997 and is incorporated herein by
reference.
(3) (ii) By-laws
Filed as an exhibit to CVF's Registration Statement on Form
10SB dated May 29, 1997 and is incorporated herein by
reference
(27) Financial Data Schedule
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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 14, 1999
CVF TECHNOLOGIES CORPORATION
By: /s/ Jeffrey Dreben
------------------------------------
Name: Jeffrey Dreben
Title: Chairman of the Board, President
and Chief Executive Officer
By: /s/ Robert Seyler
---------------------------
Name: Robert Seyler
Title: Chief Financial Officer