1
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 Ended: March 31, 2002
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period from _____________ to ____________
Commission File Number 0-10147
-------
DIATECT INTERNATIONAL CORPORATION
----------------------------------------------
(Name of Small Business Issuer in its charter)
California 95-355578
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
875 S Industrial Parkway, Heber City, Utah 84032
-----------------------------------------------------
(Address of principal executive offices and Zip Code)
(435) 654-4370
----------------------------------------------------
(Registrant's telephone number, including area code)
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.
(1) Yes X No (2) Yes X No
--- --- --- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, No Par Value 39,447,734
- -------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of March 31, 2002
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Board of Directors
Diatect International Corp.
Boise, ID 83714
ACCOUNTANT'S REVIEW REPORT
We have reviewed the accompanying consolidated balance sheet of Diatect
International Corp. as of March 31, 2002, and the related statements of
operations, stockholders' equity, and cash flows for the three months ended
March 31, 2002 and 2001. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements in order for them to
be in conformity with accounting principles generally accepted in the United
States of America.
The financial statements for the year ended December 31, 2001 were audited by
us and we expressed an unqualified opinion on it in our report dated March 22,
2002, but we have not performed any auditing procedures since that date.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/S/ Williams & Webster
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
May 15, 2002
3
DIATECT INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001
March 31,
2002 December 31,
(Unaudited) 2001
----------- ------------
ASSETS
CURRENT ASSETS
Cash $ 739 $ 888
Cash in escrow 400,000 400,000
Accounts receivable 190,424 202,660
Prepaid interest 143,743 154,019
Prepaid royalties 26,559 26,804
Inventories 833,167 109,332
----------- -----------
Total Current Assets 1,594,632 893,703
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Mining property 540 540
Building 23,501 23,501
Equipment 213,666 185,180
Less accumulated depreciation (49,308) (38,338)
----------- -----------
Total Property, Plant and Equipment 188,399 170,883
----------- -----------
OTHER ASSETS
Deposits 28,500 28,500
Goodwill, net of amortization 27,050 27,050
Investment in EPA labels 1,736,322 1,736,322
----------- -----------
Total Other Assets 1,791,872 1,791,872
----------- -----------
TOTAL ASSETS $ 3,574,903 $ 2,856,458
=========== ===========
See accompanying notes and accountant's review report.
4
DIATECT INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS (Continued)
March 31,
2002 December 31,
(Unaudited) 2001
----------- ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 819,367 259,459
Accounts payable - related parties 5,652 -
Bank overdraft 27,716 22,268
Line of credit 102,030 97,000
Interest payable 273,396 288,928
Settlements payable 212,693 214,693
Other accrued liabilities 50,718 16,051
Notes payable 1,533,094 1,703,914
----------- -----------
Total Current Liabilities 3,024,666 2,602,313
----------- -----------
COMMITMENTS AND CONTINGENCIES 461,605 461,605
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; 50,000,000
shares authorized; 39,447,734 and 36,928,161
shares issued and outstanding, respectively 14,127,944 13,391,574
Common stock subscribed (20,000) (70,000)
Stock options 18,791 84,901
Accumulated deficit (14,038,103) (13,613,935)
----------- -----------
Total Stockholders' Equity (Deficit) 88,632 (207,460)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 3,574,903 $ 2,856,458
=========== ===========
See accompanying notes and accountant's review report.
5
DIATECT INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
March 31,
2002 2001
(Unaudited) (Unaudited)
------------ ------------
REVENUES $ 46,260 $ 58,495
COST OF SALES 20,817 29,411
------------ ------------
GROSS PROFIT 25,443 29,081
------------ ------------
OPERATING EXPENSES
Salaries, wages and benefits 99,968 11,066
Executive compensation 48,462 87,755
Distributor expense - 38,276
Registration fees 11,720 11,720
Depreciation and amortization 10,970 73,356
Legal and professional fees 35,666 70,817
Other operating expense 162,461 39,520
------------ ------------
Total Operating Expenses 368,552 332,510
------------ ------------
OPERATING LOSS $ (343,109) $ (303,429)
------------ ------------
OTHER INCOME (EXPENSES)
Interest expense (63,684) (37,382)
Bad debts (17,450) -
Miscellaneous 75 358
------------ ------------
Total Other Income (Expenses) (81,059) (37,024)
------------ ------------
LOSS BEFORE INCOME TAXES (424,168) (340,453)
INCOME TAXES - -
------------ ------------
NET LOSS $ (424,168) $ (340,453)
============ ============
BASIC AND DILUTED
NET LOSS PER SHARE $ (0.01) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 37,916,550 28,716,073
============ ============
See accompanying notes and accountant's review report.
6
DIATECT INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the periods ended March 31, 2002 and December 31, 2001
Common
Common Stock Stock Stock Accumulated
Shares Amount Options Subscribed Deficit Total
----------- ----------- ----------- ----------- ----------- ------------
Balances as of December 31,
2000 28,716,073 12,260,630 51,370 - (12,562,513) (250,513)
Issuance of shares for
debt at $0.15 to $0.25
per share 1,408,343 266,619 - - - 266,619
Issuance of shares for
guarantee of debt and
line of credit at $0.07
to $0.50 per share 2,107,500 196,550 - - - 196,550
Issuance of shares for
cash at $0.10 to $0.12
per share 400,000 44,000 - - - 44,000
Issuance of share in
settlement of salary
claim at $0.25 per share 188,000 47,000 - - - 47,000
Issuance of shares for
consulting at $0.08 per
share 50,000 3,750 - - - 3,750
Issuance of shares to
officers for services
at $0.08 per share 1,250,000 93,750 - - - 93,750
Issuance of shares for
settlement of distributor
agreement and severance
agreement at $0.08 per share 1,000,000 75,000 - - - 75,000
Issuance of shares for
cash and receivable at $0.10
to $0.25 per share 800,000 170,000 - (70,000) - 100,000
Issuance of shares for
payment of accounts payable
at $0.21 per share 200,000 41,035 - - - 41,035
Issuance of shares for
payment of legal fees and
exercise of options
at $0.06 per share 499,998 85,354 (55,354) - - 30,000
Issuance of shares to
officers for payment of
accrued legal fees and
debt at $0.35 per share 308,247 107,886 - - - 107,886
Options granted to
officer as bonus for
contract - - 18,890 - - 18,890
Options granted to
stockholder for financing
and extension of options
to officer - - 69,995 - - 69,995
Net loss for the year ended,
December 31, 2001 - - - - (1,051,422) (1,051,422)
----------- ----------- ----------- ----------- ----------- ------------
Balances as of December 31,
2001 36,928,161 $ 13,391,574 $ 84,901 $ (70,000) $(13,613,935) $ (207,460)
----------- ----------- ----------- ----------- ----------- ------------
See accompany notes and accountant's review report.
7
DIATECT INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
For the periods ended March 31, 2002 and December 31, 2001
Common
Common Stock Stock Stock Accumulated
Shares Amount Options Subscribed Deficit Total
----------- ----------- ----------- ----------- ----------- ------------
Balance as of December 31,
2001 (brought forward) 36,928,161 $ 13,391,574 $ 84,901 $ (70,000) $(13,613,935) $ (207,460)
Issuance of stock for cash
at $0.25 to $0.30 per share 1,036,260 263,565 - - - 263,565
Issuance of shares for cash
at $0.25 per share and
exercise of options 600,000 216,110 (66,110) - - 150,000
Issuance of stock for debt
and interest at $0.25 to
$0.35 per share 883,313 256,695 - - - 256,695
Payment of stock
subscription - - - 50,000 - 50,000
Net loss for the period
ended March 31, 2002
(unaudited) - - - - (424,168) (424,168)
----------- ----------- ----------- ----------- ----------- ------------
Balances as of March 31,
2002 (unaudited) 39,447,734 $ 14,127,944 $ 18,791 $ (20,000) $(14,038,103) $ 88,632
=========== =========== =========== =========== =========== ============
See accompanying notes and accountant's review report.
8
DIATECT INTERNATIONAL CORP.
CONSOLIDATED CASH FLOW STATEMENTS
Three Months Ended
March 31,
2002 2001
(Unaudited) (Unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (424,168) $ (340,453)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 10,970 73,356
Issuance of stock options for services - 18,890
Changes in assets and liabilities:
Accounts receivable 12,236 37,529
Prepaid interest 10,276 2,392
Prepaid royalties 245 1,755
Prepaid expenses - (424)
Inventories (723,835) (48,588)
Accounts payable 559,908 101,136
Accounts payable - related parties 5,652 12,439
Interest payable 32,843 32,768
Accrued salaries - 56,306
Stockholder advance - 48,990
Other accrued liabilities 34,667 1,116
------------ ------------
NET CASH FLOWS USED BY OPERATING ACTIVITIES (475,758) (2,788)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (28,486) -
------------ ------------
NET CASH FLOWS USED BY INVESTING ACTIVITIES (28,486) -
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock for cash 413,565 -
Proceeds from stock subscriptions 50,000 -
Payment of settlements (2,000) -
Proceeds from line of credit 5,030 -
Net payments of notes payable (22,500) -
Net proceeds from notes payable 60,000 -
------------ ------------
NET CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES 504,095 -
------------ ------------
NET INCREASE (DECREASE) IN CASH (149) (2,788)
CASH AT BEGINNING OF YEAR 888 3,384
------------ ------------
CASH AT END OF YEAR $ 739 $ 596
============ ============
See accompanying notes and accountant's review report.
9
DIATECT INTERNATIONAL CORP.
CONSOLIDATED CASH FLOW STATEMENTS (Continued)
Three Months Ended
March 31,
2002 2001
(Unaudited) (Unaudited)
------------ ------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest expense paid $ - $ -
Income taxes paid $ - $ -
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for
debt and interest $ 256,695 $ -
Issuance of stock options for services $ - $ 18,890
See accompanying notes and accountant's review report.
10
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Diatect International Corp. (formerly Applied Earth Technologies, Inc.)
(formerly San Diego Bancorp) (SDBC) was incorporated in California in 1979 as
a bank holding corporation. During 1986, the Company liquidated its
subsidiaries and became a dormant "shell" corporation.
On August 22, 1996, the Company changed its name from San Diego Bancorp to
Applied Earth Technologies, Inc. to better reflect the Company's principal
business activities, which primarily consist of developing and marketing
pesticide products. The Company later became informed that another
corporation already had been authorized to use the name Applied Earth
Technologies, Inc. and approval of this name had been granted in error. In
response to this information, the Company changed its name to Diatect
International Corp. on June 5, 1998.
The Company's wholly owned subsidiaries consist of Magic international, Inc.,
Enviro-Guard Corporation, Diatect International, Inc. and D.S.D., Inc. Apart
from Diatect International, Inc. and Magic International, Inc., the Company's
subsidiaries are inactive.
Magic International, Inc.
- -------------------------
On May 24, 1999, the Company entered into an agreement to purchase Magic
International, Inc. ("Magic") in exchange for $3,000 cash, effective payment
of an outstanding obligation in the amount of $4,050 and 200,000 shares of
Diatect International Corporation's common stock. This transaction was valued
at $27,050. At the time of the transaction, the authorized level of the
Company's capitalization did not permit an issuance of 200,000 shares of
stock. The Company increased its authorized capital, issued the aforementioned
stock and finalized the acquisition in March 2000, at which time Magic became
a wholly owned subsidiary.
National Diatect, Inc.
- ----------------------
In July 2000, the Company signed a letter of intent to purchase National
Diatect, Inc. in a transaction which requires the issuance of 400,000 shares
of the Company's common stock, payment of future royalties in the amount of
$120,000 payable at the rate of $0.10 per pound of certain products and
assumption of a note payable in the amount of $110,000 (bearing interest at
12% and collateralized by inventory and equipment). The Company has issued
400,000 shares and the agreement has been ratified by the board of directors
to a mutually agreed upon reduced note payable balance of $70,419 as of the
date of these financial statements. See Note 13.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Diatect International Corp.
is presented to assist in understanding the Company's financial statements.
The financial statements and notes are representations of the Company's
management, which is responsible for their integrity and objectivity. These
accounting policies conform to accounting principles generally accepted in the
United States of America and have been consistently applied in the preparation
of the financial statements.
11
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Method
- -----------------
The Company's financial statements are prepared using the accrual method of
accounting in accordance with accounting principles generally accepted in the
United States of America.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, after elimination of the intercompany accounts
and transactions. Wholly owned subsidiaries of the Company are listed in Note
1.
Cash and Cash Equivalents
- -------------------------
For purposes of the statement of cash flows, the Company considers all highly
liquid investment (or short-term debt) purchased with original maturity of
three months or less to be cash equivalents.
Allowance for Doubtful Accounts
- -------------------------------
Provision for losses on trade accounts receivable is made in amounts required
to maintain an adequate allowance to cover anticipated bad debts. Accounts
receivable are charged against the allowance when it is determined by the
Company that payment will not be received.
Inventories
- -----------
Inventories consist primarily of packaging materials, raw materials and
finished product and are valued at the lower of cost (first in, first out) or
market.
Property and Equipment
- ----------------------
Property, plant and equipment are stated at cost including the allocable
purchase price applicable to the respective assets of purchased subsidiaries.
All expenditures for improvements, replacements and additions are added to the
asset accounts at cost.
Expenditures for normal repairs and maintenance are charged against earnings
as incurred. The cost and related accumulated depreciation are eliminated
from the accounts and the resulting gain or loss is reflected in the
statements of operations when depreciable assets are retired or otherwise
disposed. Depreciation is provided for by the use of straight-line and
accelerated methods over the estimated useful lives of the assets. Depletion
is computed using the unit-of-production method, for any mining property
placed in production. Depreciation expense for the three months ended March
31, 2002 and 2001 was $10,970 and $2,553, respectively.
Goodwill
- --------
Goodwill represents the excess of the purchase price and related direct costs
over the fair value of net assets acquired as of the date of the acquisition.
The Company periodically reviews its goodwill to assess recoverability based
on projected undiscounted cash flows from operations. Impairments are
recognized in operating results when a permanent diminution in value occurs.
12
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible Assets
- -----------------
Most intangible assets were amortized over the remaining useful life on a
straight-line basis, which ranged from 15 to 17 years. EPA labels were
amortized on a straight-line basis over a 15-year life, commencing with the
beginning of product sales. Amortization expense for the three months ending
March 31, 2001 was $70,803. On January 1, 2002, the Company adopted SFAS No.
142. Application of the nonamortization provision of SFAS No. 142 which
resulted in an increase in net income of approximately $70,000 during the
three months ended March 31, 2002.
Income Taxes
- ------------
Income taxes are provided based upon the liability method of accounting
pursuant to SFAS No. 109 "Accounting for Income Taxes." Under this approach,
deferred income taxes are recorded to reflect the tax consequences on future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year-end. A valuation allowance is
recorded against deferred tax assets if management does not believe the
Company has met the "more likely than not" standard imposed by SFAS No. 109 to
allow recognition of such an asset.
At December 31, 2001, the Company had net deferred tax assets of approximately
$2,069,000, principally arising from net operating loss carryforwards for
income tax purposes. As management of the Company cannot determine that it is
more likely than not that the Company will realize the benefit of the net
deferred tax asset, a valuation allowance equal to the net deferred tax asset
has been established at March 31, 2002.
At March 31, 2002, the Company has net operating loss carryforwards of
approximately $13,790,000, which expire in the years 2011 through 2022.
Basic and Diluted Loss Per Share
- --------------------------------
Loss per share was computed by dividing the net loss by the weighted average
number of shares outstanding during the year. The weighted average number of
shares was calculated by taking the number of shares outstanding and weighting
them by the amount of time they were outstanding. Outstanding options were not
included in the computation of net loss per share because they would be
antidilutive.
Revenue Recognition Policy
- --------------------------
Revenues from sales of product are recognized when the product is shipped.
Shipping and Handling Fees and Costs
- ------------------------------------
The Emerging Issues Task Force ("EITF") issued EITF No. 00-10, "Accounting for
Shipping and Handling Fees and Costs", which was adopted during fiscal 2001.
The impact of adopting EITF No. 00-10 was to increase revenues and cost of
sales by approximately $1,388 and $1,634 in the three months ended March 31,
2002 and 2001 respectively. All amounts in the accompanying Consolidated
Statements of Operations and Comprehensive Loss have been reclassified to
reflect this adoption.
13
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Product Warranties
- ------------------
The Company sold the majority of its products to distributors along with
replacement warranties. Warranty expense is included in cost of sales.
Compensated Absences
- --------------------
Employees of the Company are entitled to paid vacation, paid sick days and
personal days off, depending on job classification, length of service, and
other factors. Due to the existence of a relatively high employee turnover
rate, it is impractical to estimate the amount of compensation for future
absences. Accordingly, no liability has been recorded in the accompanying
financial statements. The Company's policy is to recognize the costs of
compensated absences when actually paid to employees.
Estimates
- ---------
The process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements.
Accordingly, upon settlement, actual results may differ from estimated
amounts.
Fair Value of Financial Instruments
- -----------------------------------
The Company's financial instruments as defined by SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments," include cash, advances to
affiliate, trade accounts receivable, investment in securities
available-for-sale, restricted cash, accounts payable and accrued expenses and
short-term borrowings. All instruments other than the investment in
securities available-for-sale are accounted for on a historical cost basis,
which, due to the short maturity of these financial instruments, approximates
fair value at March 31, 2002. The Company has no investment in securities
available-for-sale at March 31, 2002.
Derivative Instruments
- ----------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB No. 133", and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which is effective for the
Company as of January 1, 2001. This standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the consolidated balance sheet and measure those instruments at
fair value.
14
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Derivative Instruments (Continued)
- ----------------------
If certain conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the changes
in the fair value of the hedged asset or liability that are attributable to
the hedged risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change.
Historically, the Company has not entered into derivatives contracts to hedge
existing risks or for speculative purposes.
At March 31, 2002, the Company has not engaged in any transactions that would
be considered derivative instruments or hedging activities.
Segment Information
- -------------------
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," during the 2001. SFAS No. 131 established standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in
interim financial reports issued to stockholders. It also established
standards for related disclosures about products and services and geographic
areas. Operating segments are defined as components of an enterprise about
which separate financial information is available, evaluated regularly by the
chief operating decision makers, or a decision making group, in deciding how
to allocate resources and in assessing performance.
Accounting Pronouncements
- -------------------------
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS 144 replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." This new standard establishes a single accounting model
for long-lived assets to be disposed of by sale, including discontinued
operations. Statement 144 requires that these long-lived assets be measured
at the lower of carrying amount or fair value less cost to sell, whether
reported in continuing operations or discontinued operations. This statement
is effective beginning for fiscal years after December 15, 2001, with earlier
application encouraged. The Company adopted SFAS 144 and does not believe
that the adoption will have a material impact on the financial statements of
the Company at March 31, 2002.
15
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Pronouncements (Continued)
- -------------------------
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). SFAS No. 143 establishes guidelines related to
the retirement of tangible long-lived assets of the Company and the associated
retirement costs. This statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived assets. This statement is effective for financial statements
issued for the fiscal years beginning after June 15, 2002 and with earlier
application encouraged. The Company adopted SFAS No. 143 and does not believe
that the adoption will have a material impact on the financial statements of
the Company at March 31, 2002.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 provides for the
elimination of the pooling-of-interests method of accounting for business
combinations with an acquisition date of July 1, 2001 or later. SFAS No. 142
prohibits the amortization of goodwill and other intangible assets with
indefinite lives and requires periodic reassessment of the underlying value of
such assets for impairment. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. An early adoption provision exists for
companies with fiscal years beginning after March 15, 2001. On January 1,
2002, the Company adopted SFAS No. 142. Application of the nonamortization
provision of SFAS No. 142 is expected to result in an increase in net income
of approximately $280,000 in fiscal 2002. The Company is currently evaluating
the impact of the transitional provisions of the statement.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities and also
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 140 is
effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000, and is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The Company believes that the adoption of this standard
will not have a material effect on the Company's results of operations or
financial position.
Going Concern
- -------------
As shown in the financial statements, the Company incurred a net loss of
$424,168 for the three months ended March 31, 2002 and has an accumulated
deficit of $14,038,103 at March 31, 2002. (This equates to a potential NOL
tax carryforward of approximately $13,790,000.) The Company recently received
a purchase order from a major new customer and ramped up production to meet
the demand. Because the customer has asked for a delay in shipment until mid
2002, this has given Diatect excess inventory. Upon shipment, the Company
expects to improve working capital, increase its profitability and
stockholders' equity and commence repayment of its debt obligations.
16
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Going Concern (Continued)
- -------------
Without sales the Company may be unable to continue in existence. The
financial statements do not include any adjustments related to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue existence.
Management's plans for ensuring the Company's continued viability are based on
an aggressive, direct and indirect marketing program to all of the major
independent U.S. hardware chains (Ace, TrueValue, DoItBest, Handy Hardware) in
addition to increased emphasis on drug stores (Walgreen's).
Management's plans include increased product placement and sales and the sale
of new stock issuances, which are expected to raise the capital needed to
satisfy collection judgments and repay debt obligations.
NOTE 3 - INVENTORIES
Inventories at March 31, 2002 and December 31, 2001 consist of the following:
March 31, December 31,
2002 2001
------------ ------------
Raw Materials $ 34,742 $ 32,813
Packaging Material 69,522 -
Finished Goods 728,903 76,519
------------ ------------
Total $ 833,167 $ 109,332
============ ============
NOTE 4 - INVESTMENT IN EPA LABELS
The Company has acquired five product registrations ("labels") approved by the
U.S. Environmental Protection Agency granting federal clearance to
manufacture, market and sell specified insecticide products. Included are:
No. 42850-1 for use against flies, roaches, ants, etc., in and around homes
and commercial buildings; No. 42850-2 for use in grain storage; No. 42850-3
for use against fleas, ticks and lice on pets; No. 42850-4 for use against
over 60 insects on over 130 edible crops and plants; and No. 42850-5 (approved
November 23, 1999) for use in the organic market to control all major pest
problems.
NOTE 5 - NOTES PAYABLE
All of the Company's notes payable are considered short-term. At March 31,
2002 and December 31, 2001, notes payable consisted of the following:
17
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 5 - NOTES PAYABLE (Continued)
March 31, December 31,
Creditor and Conditions 2002 2001
- ----------------------- ---------- ------------
Jeffrey Linabery, unsecured, interest at 14%, due
on demand. $ 7,500 $ 7,500
David Russell (a shareholder of the Company),
unsecured, interest at 10%, due on demand. 15,000 15,000
David Russell, (a shareholder of the Company),
unsecured, interest at 8%, due on demand. 25,000 25,000
David J. Black, (a shareholder of the Company),
unsecured, interest at 10%, dated August 5, 1997,
due on demand. 20,000 20,000
Greg Cloward, (a shareholder of the Company),
unsecured, interest at 15%, dated January 6, 1997,
due on demand. 251,000 251,000
David N. Sim, (a shareholder of the Company),
unsecured, interest at 15%, dated October 1, 1999,
due on December 31, 1999, delinquent. 6,500 6,500
Shining Star Investment, Inc., a Nevada corporation,
(a shareholder of the Company), unsecured, interest
at 14%, dated July 14, 1995, due December 31, 1995,
delinquent. 5,239 5,239
Hopper Asset Management Company,
conditionally secured by 50,000 shares
Diatect International Corporation common
stock, interest at 15%, dated May 22, 1998,
due May 5, 1999, delinquent. - 10,000
Jack S. Stites, (a shareholder of the Company),
unsecured, interest at 15%, dated September 1, 1999,
due on December 31, 1999, delinquent. 8,800 8,800
---------- ------------
Subtotals (carried forward) $ 339,039 $ 349,039
---------- ------------
18
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 5 - NOTES PAYABLE (Continued)
March 31, December 31,
Creditor and Conditions (Continued) 2002 2001
- ----------------------- ---------- ------------
Subtotal (brought forward) $ 339,039 $ 349,039
Hopper Asset Management Company, unsecured
Interest at 15%, dated June 19, 1999, due on
December 31, 1999, delinquent. - 50,000
D. N. Sim, (a shareholder of the Company)
unsecured, interest at 10%, dated January 4,
2000, due on May 4, 2000, delinquent. 2,500 2,500
George H. Henderson, (a shareholder
of the Company), unsecured, interest
at 10%, dated April 14, 2000, due on
December 31, 2000, delinquent. 40,000 50,000
Robert L. Drake and Sandra K Drake,
(shareholders of the Company), secured by
sale of inventory, interest at 12%, dated
July 12, 2000, due on July 12, 2001,
delinquent. 52,445 62,445
Johnny and Jack Stites, (a shareholder of
the Company) unsecured , interest at 10%,
dated February 25, 2000, due on May 1, 2000,
delinquent. 20,000 20,000
K & R "Stuff" LC, unsecured, interest at
12%, dated August 22, 2000, due on
August 22, 2001, renewed on November
22, 2001, convertible to 232,000 shares of
the Company's common stock on demand,
due on August 22, 2002. - 58,000
Joseph E. Pigg, Jr., unsecured, interest at
10%, dated September 25, 2000, due on
September 25, 2001, delinquent. 10,000 10,000
---------- ------------
Subtotals (carried forward) $ 463,984 $ 601,984
---------- ------------
19
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 5 - NOTES PAYABLE (Continued)
March 31, December 31,
Creditor and Conditions 2002 2001
- ----------------------- ---------- ------------
Subtotal (brought forward) $ 463,984 $ 601,984
Robert B. Crouch, (officer and shareholder
of the Company), unsecured, interest at 12%,
dated November 16, 2000, due on demand. 610 2,610
Jack Stites, (shareholder of the
Company), unsecured, interest at 12%,
dated December 22, 2000, due on demand. 3,000 3,000
Venture Creations, Inc. (shareholders of the
Company), unsecured, interest at 10%,
dated September 20, 2001, due on
October 1, 2003. 50,000 50,000
Gary Hanson (shareholder of the Company),
unsecured, interest at 12%, dated July 24, 2001,
due on October 24, 2001, delinquent. - 20,000
RCK, LLC, (a shareholder of the Company)
unsecured, interest at 12%, dated September
28, 2001, due on demand 600,000 600,000
Ed L. Shannon, Jr. and Bruce L Shannon,
(shareholders of the Company), unsecured,
interest at 12%, dated August 1, 2001, due on
August 1, 2002. 200,000 200,000
Robinson Family, LLC, (shareholders of the
Company), unsecured, interest at 12%, dated
April 1, 2001, due on April 1, 2002. 106,000 106,000
Ronald Davis, (a shareholder of the
Company), unsecured, interest at 12%, dated
December 28, 2001, due on June 28, 2002. 24,500 25,000
---------- ------------
Subtotals (carried forward) $ 1,448,094 $ 1,608,594
---------- ------------
20
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 5 - NOTES PAYABLE (Continued)
March 31, December 31,
Creditor and Conditions 2002 2001
- ----------------------- ---------- ------------
Subtotal (brought forward) $ 1,448,094 $ 1,608,594
Kyle Baird, (a shareholder of the Company),
unsecured, interest at 12%, dated November
26, 2001, due on March 26, 2002 25,000 25,000
Max Burdick, (a shareholder of the Company),
unsecured, interest at 12%, dated November 26,
2001, due on March 1, 2002 - 30,000
Richard Humphries, (a shareholder of the
(Company), unsecured, interest at 12%, dated
October 1, 2001, due on April 1, 2002 - 10,000
Jay Downs (an officer and shareholder of the
Company), unsecured, non-interest bearing,
dated October 15, 2001, due on October 15,
2002, convertible to common stock at $0.35
per share - 30,320
Kyle Baird (a shareholder of the Company),
unsecured, interest at 12%, dated March 20,
2002, due on May 5, 2002 25,000 -
Amanda Wright, unsecured, interest at 10%,
dated January 11, 2002, due on July 11, 2002 10,000 -
Ronald Davis, (a shareholder of the Company),
unsecured, interest at 12%, dated March 20,
2002, due on May 5, 2002 25,000 -
---------- ------------
Totals $ 1,533,094 $ 1,703,914
========== ============
NOTE 6 - LINE OF CREDIT
At March 31, 2002 and December 31, 2001, the Company had $97,000 borrowed on
an outstanding line of credit. The line of credit was extended to the Company
by a director utilizing his personal line of credit. This credit facility is
unsecured, has no stated maturity, and bears interest at 12%.
21
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 6 - LINE OF CREDIT (Continued)
At March 31, 2002, the Company had $5,030 borrowed on an automatic line of
credit with America First Credit Union. This credit facility is unsecured,
has no stated maturity and bears interest at 9.75%.
NOTE 7 - LITIGATION
Sloan, Listrom, Eisenbarth, Sloan & Glassman, LLC
- -------------------------------------------------
In November 1999, the Company's former legal counsel was awarded a default
judgment against the Company in the amount of $42,166 plus post-judgment
interest. This judgment remains outstanding and unpaid and is included as a
liability on the Company's balance sheet in settlements payable at March 31,
2002 and December 31, 2001 in the amount of $40,166.
Terrance Dunne
- --------------
Terrance Dunne, the Company's former auditor, initiated action against the
Company for payment of unpaid fees. In response to the allegations, the
Company has counter sued for reimbursement of fees paid for work not
performed. The outcome of this action is uncertain and, accordingly, no
amounts have been accrued in these financial statements.
Ogilvy, Adams & Rinehart
- ------------------------
Ogilvy, Adams & Rinehart (Ogilvy) obtained a judgment against Diatect on
November 1, 1995 in the sum of $24,346. The entire judgment amount plus
attorney's fees and interest thereon is approximately $36,000 and has been
included on the Company's balance sheet in settlements payable at March 31,
2002 and December 31, 2001. Since mid-1996, there has been no communication
with the plaintiff or its attorneys, nor has the plaintiff made any attempt to
satisfy or settle this case.
L. Craig Hunt
- -------------
L. Craig Hunt brought action on January 14, 1998 against Diatect for damages
and breach of contract on a promissory note for the sum of $42,750 plus
interest, penalties and attorney's fees. Judgment against Diatect
International Corp. was rendered on February 1, 1999 in the sum of $61,543.
This judgment is presently outstanding and unpaid. At March 31, 2002 and
December 31, 2001, $60,543 is included in settlements payable in these
financial statements. To date, plaintiffs have made no attempt to collect on
this judgment.
Mid-America Venture Capital Fund, Inc.
- --------------------------------------
Mid-America Venture Capital Funds, Inc. brought action on July 23, 1997
against the Company for failure to pay loans on two promissory notes totaling
$35,000. Judgment was awarded on August 4, 1997 for a total of $39,336
including principal, interest, and attorney's fees and costs. Since that
time, Diatect has paid a total of $6,000 and is currently in arrears on the
payment schedule. The balance owing is included in settlements payable in
these financial statements at March 31, 2002 and December 31, 2001.
22
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 7 - LITIGATION (Continued)
Mike Glazer
- -----------
A consultant rendered services to a Company subsidiary during 1996 in the
amount of $17,230 and has brought action for this amount. The Company has
chosen not to contest this case. Settlement efforts are expected to be
undertaken after entry of judgment and demonstration that the assets of the
subsidiary, Diatect International, Inc., are fully encumbered. This amount
was paid in full during the year ended December 31, 2001.
Danny Wirken
- ------------
The Company is considering litigation against Danny Wirkin, (one of the
brokers involved in the selling of Diatect stock, which gave rise to certain
litigation for stock manipulation) with the objective of obtaining a judgment
for damages and foreclosing on the Company's obligation under its note to Mr.
Wirkin. During June 2001, the Company declared this note in the amount of
$386,581 and the interest accrued thereon as invalid and void. Legal counsel
for the Company further asserted that the obligation has passed the statute of
limitations for collection thereon. This resulted in a gain from termination
of debt, which was reflected in the financial statements at December 31, 2001
as an extraordinary item. (See Notes 5, and 17.)
George Brink
- ------------
During December 2000, George Brink was awarded a default judgment in the total
amount of $44,648, including interest and legal fees, for the balance due on a
promissory note. At this time, active collection on the judgment has not been
pursued. The outstanding and unpaid amount is included as a liability on the
Company's balance sheet in settlements payable at March 31, 2002 and December
31, 2001.
23
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 7 - LITIGATION (Continued)
Former Officers and Consultant
- ------------------------------
In September 2000, the Company received notice from two former officers and a
former consultant that they intend to bring action for nonpayment of back
wages. During May 2001, the Company issued 188,000 shares of its common stock
to one former officer valued at $47,000 ($0.25 per share) in full settlement.
During August 2001, the Company paid $5,000 to another former officer for
settlement with mutual release of his claim for nonpayment of back wages in
the amount of $38,500. The remaining amount in dispute totals $25,745.
Because the Company plans to contest the related claim, which it does not
expect to pay, the amount disputed is not recorded in the accompanying
financial statements.
The Company is not aware of any other threatened litigation against it or its
subsidiaries. However, there remains a possibility of litigation against
Diatect and/or its subsidiaries by creditors.
NOTE 8 - COMMON STOCK
During the year ended December 31, 2001, the Company issued 2,107,500 shares
of its common stock valued at $196,550 in consideration for a note payable,
1,716,590 shares of its common stock valued at $374,505 for debt, 188,000
shares of its common stock valued at $47,000 to a former officer for back
wages (Note 7), 1,300,000 shares of its common stock valued at $97,500 for
services to officers and others, 500,000 shares of its common stock valued at
$37,500 in settlement of a distributor agreement, 500,000 shares of its common
stock valued at $37,500 as a severance bonus to the Company's former president
and 200,000 shares of its common stock valued at $41,035 in payment of a
vendor account. The shares were valued at their fair market value on the date
of issuance. The Company also sold 1,200,000 shares of its common stock at
prices ranging from $0.10 to $0.25 per share for cash and a receivable. An
officer, to whom options with a FMV of $55,534 had been previously issued,
exercised the options and purchased 499,998 shares of common stock. The
exercise price of the stock of $30,000 was exchanged for accrued legal fees.
During the three months the Company issued 883,313 shares of its common stock
valued at $256,695 in payment of notes payable and accrued interest and sold
1,036,260 shares of its common stock for $263,565. The Company also sold
600,000 shares of its common stock for $150,000 and exercise of options. See
Note 10.
24
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 9 - COMMON STOCK SUBSCRIBED
During the year ended December 31, 2001, the Company sold stock valued at
$170,000 and received $100,000. During the quarter ended March 31, 2002, the
Company received $50,000 in payment of the stock subscription. The remaining
$20,000 is reflected in the attached financial statements as stock
subscription receivable. See Note 8.
NOTE 10 - STOCK OPTIONS
The Company has a 1995 Stock Option Plan, which was initiated in order to aid
the Company in maintaining and developing a management team, attracting
qualified officers and employees. A total of 3,000,000 shares of stock may be
subject to, or issued pursuant to the terms of the plan.
Following is a summary of the status of these performance-based options during
the years ended December 31, 2001 and 2000:
Weighted Average
Number of Shares Price per Share
---------------- ----------------
Outstanding at December 31, 2000 499,304 $0.06
Granted 1,000,000 0.18
Exercised (499,304) 0.06
Expired or forfeited - -
---------------- ----------------
Outstanding at December 31, 2001 1,100,000 $0.18
Options exercisable at
December 31, 2001 1,100,000 $0.18
=============== ================
Weighted average fair value of
options granted during 2001 $0.08
================
Outstanding at December 31, 2001 1,100,000 $0.18
Granted - -
Exercised (600,000) 0.11
Expired or forfeited - -
---------------- ----------------
Outstanding at March 31, 2002 500,000 $0.25
================ ================
Options exercisable at
March 31, 2002 500,000 $0.25
================ ================
Weighted average fair value of
options granted during 2002 $0.08
================
Weighted Average
Exercise Date Number of Shares Price per Share
---------------- ----------------
On or before December 31, 2004 500,000 $0.10
25
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 10 - STOCK OPTIONS (Continued)
SFAS No. 123 requires the Company to provide pro forma information regarding
net loss and loss per share as if compensation cost for the Company's stock
option plan had been determined in accordance with the fair value based method
prescribed by SFAS No. 123. The Company estimates the fair value of each
stock option at the grant date by using the Black-Scholes option-
pricing model with the following weighted-average assumptions used: dividend
yield of zero percent; expected volatility of thirty percent; risk-free
interest rate of six percent. The weighted average fair value at date of
grant for options granted to employees and stockholders in the periods ended
March 31, 2002 and December 31, 2001 was $0.08 per option, respectively.
Compensation cost charged to operations was $18,890 during the year ended
December 31, 2001. Finance fees charged to other expenses was $66,010 and
legal fees charged to operations was $3,985 during the year ended December 31,
2001.
NOTE 11 - CONCENTRATION OF RISK
Credit
- ------
The Company is a wholesale supplier of products and grants credit to its
customers, a substantial portion of which are retailers of agricultural
products throughout the country.
NOTE 12 - SETTLEMENTS PAYABLE
The Company is obligated to pay certain notes and settlements under judgments
awarded to outside parties. (Note 7.) These amounts, included in settlements
payable at March 31, 2002 and December 31, 2001, are as follows:
March 31, December 31,
2002 2001
------------ ------------
L. Craig Hunt $ 60,543 $ 60,543
Mid-America Venture Capital Fund, Inc. 31,336 33,336
Sloan, Listrom, Eisenbarth, Sloan &
Glassman, LLC 40,166 40,166
Ogilvy, Adams & Rinehart 36,000 36,000
George Brink 44,648 44,648
------------ ------------
$ 212,693 $ 214,693
============ ============
26
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Futura Title Corporation
- ------------------------
During the year ended December 31, 2001, the Company reclassified a note
payable to Futura Title Corporation dba Alliance Title & Escrow plus interest
accrued thereon to commitments and contingencies in the total amount of
$461,605. The Company is currently negotiating a settlement agreement on this
liability. Although the outcome is uncertain, the Company expects to settle
for considerably less.
National Diatect, Inc.
- ----------------------
In July 2000, the Company signed a letter of intent to purchase National
Diatect, Inc. The agreement is subject to ratification by the board of
directors and has not been finalized as of the date of these financial
statements. See Note 1.
Lease Commitments
- -----------------
In April 2000, the Company entered into a lease agreement for new office
facilities in Boise. The agreement called a three-year lease with monthly
payments of $820 during the first year, $838 during the second year and $857
during the third year. The Company occupied these facilities from May 1, 2000
through October 1, 2001. The Company negotiated a settlement on the remaining
lease in the amount of $2,089.
The Company leased operating facilities in Smith Center, Kansas from an
individual through July 2001. The lease was a month-to-month handshake
agreement, with monthly payments of $273.
Other Contingencies
- -------------------
The production of pesticides is subject to complex environmental regulations.
As of the date of these financial statements and the date of this report, the
Company is unaware of any pending environmentally related litigation or of any
specific past or prospective matters involving environmental concerns which
could impair the marketing of its products.
On November 14, 2001, Diatect entered into an agreement with IX Group, Inc.
(hereinafter "IXG") whereby Diatect would sell to IXG all of the common stock
of a subsidiary, Magic International, Inc. (hereinafter "Magic"), in exchange
for approximately 5% of the common stock of Magic after IXG's merger with and
into Magic and the post-merger payment of cash. The transaction, if
consummated, would be a related party event because IXG's president and
principal shareholder is also a shareholder of Diatect. At March 31, 2002,
Magic had no assets or liabilities.
27
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Purchase of Facilities
- ----------------------
During October 2001, the Company relocated both its office and operating
facilities to Heber City, Utah. The Company is currently negotiating the
purchase of its new facilities at a cost of $825,000. Under terms of the
agreement, the Company may continue occupying the facilities with no charge
until closing occurs but not longer than July 2002. Other terms of the
agreement call for a down payment of $28,500, escrow deposit in the amount of
$384,000 and a letter of credit in the amount of $412,500. The Company paid
the down payment of $28,500 during the fourth quarter of the year ended
December 31, 2001 and this amount is reflected in the attached financial
statements as deposits. During the same period, the Company also secured cash
in the amount of $400,000, which is considered restricted and will be used for
closing on the building. The Company occupied the facilities on October 10,
2001 and closing is scheduled to occur in July 2002.
NOTE 14 - RELATED PARTY TRANSACTIONS
Diatect International Corp. has notes payable to twenty-four shareholders
totaling $1,505,594 and $1,633,851 as of March 31, 2002 and December 31, 2001,
respectively. See Note 5.
The Company's secretary performs services as the Company's main legal counsel.
Legal services performed by this officer totaled $5,652 and $17,067 for the
three months ended March 31, 2002 and 2001, respectively, of which $5,652 are
included in accounts payable - related party at March 31, 2002.
The Company has employment contracts to pay the Company's president and
vice-president of operations annual compensation in the amounts of $120,000
and $90,000 respectively. During January 2001, the Company's president
received a signing bonus of 350,000 options for the purchase of shares of
common stock. The Company also had an employment contract to pay the
Company's former president annual compensation of $120,000. See Note 10.
Executive compensation totaled $48,462 and $87,755 for the three months ended
March 31, 2002 and 2001, respectively. See Note 18.
NOTE 15 - MINING PROPERTY
During September 2001, the Company was acquired title to unpatented mining
claims on a section of land in Malheaur County, Oregon. This property, with
proven and probable reserves of diatomaceous earth, is recorded on the
Company's balance sheet at $540.
28
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 16 - BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA
The Company's operations were classified into two principal reporting segments
based upon geographical location during the year ended December 31, 2001. All
operations were relocated to Utah during the fourth quarter of fiscal 2001,
therefore, no reportable segments are deemed to exist for the period ended
March 31, 2002. Separate accounting for each segment for the period ended
March 31, 2001 is required due to varying strategies used by the Company in
each location.
The table below presents information about the Company's reportable segments
during the prior period:
Three Months Ended March 31, 2001
Kansas Idaho Eliminations Consolidated
========= ========== ============ ============
External revenue $ - $ 58,492 $ - $ 58,492
========= ========== ========= ===========
Operating income
(loss) $ (17,482) $ (322,971) $ - $ (340,453)
========= ========== =========
Corporate expenses -
-----------
Total operating
income (loss) $ (340,453)
===========
Depreciation and
Amortization $ 152 $ 73,204 $ - $ 73,356
========= ========== ========= ===========
Interest expense
and finance
charges $ - $ 45,113 $ - $ 45,113
========= ========== ========= ===========
Identifiable assets $ 284,884 $ 2,433,953 $ (278,515) $ 2,440,322
========= ========== =========
General corporate
assets -
-----------
Total assets $ 2,440,322
===========
Kansas operations, the first reportable segment, performed services including
mixing and distribution of pesticide products during early 2001. Idaho
operations, the second reportable segment, manufactures product and generates
sales revenues.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-looking Statements
- ---------------------------------------------------------
This report may contain "forward-looking" statements. Examples of forward-
looking statements include, but are not limited to: (a) projections of
revenues, capital expenditures, growth, prospects, dividends, capital
structure and other financial matters; (b) statements of the plans and
objectives of our management or Board of Directors; (c) statements of future
economic performance; (d) statements of assumptions underlying other
statements and statements about us and our business relating to the future;
and (e) any statements using the words "anticipate," "expect," "may,"
"project," "intend" or similar expressions.
Quarter ended March 31, 2002 compared to March 31, 2001
- -------------------------------------------------------
During the quarter ended March 31, 2002, our revenues were $46,260 with costs
of sales of $20,817 with gross profit of $25,443 compared to the same period
the prior year in which our revenues were $58,495 and costs of sales were
$29,411 with gross profit of $29,081. The decrease in our revenues in the
first quarter of 2002 compared to 2001 is attributable to a number of factors.
First, we had one large order in 2001 which accounted for most of our revenues
that quarter. Primarily due to different weather conditions in 2002, this
customer did not order a comparable amount of product in the first quarter of
this year. However, we have also made significant changes to our sales and
distribution efforts to broaden our sales base, and have been ramping up
production in our new facility in Heber, Utah in expectation of increased
sales of product. Although our total sales were lower than the previous year,
we made sales to many different customers which we believe will reduce our
dependence on any one customer or single order in the future. Therefore, we
believe the decrease in revenues for the period ended March 31, 2002 compared
to same period in the preceding year is not indicative of our revenue
prospects for the balance of the fiscal year. Subsequent to the date of the
attached financial statements, in the month of April 2002 our sales have been
greater than during the previous three months and based on our internal
projections we anticipate continuing increases in sales throughout the balance
of the fiscal year.
Operating Expenses. For the quarter ended March 31, 2002, total operating
expenses were $368,552, consisting of salaries, wages and benefits of $99,968,
executive compensation of $48,462, registration fees of $11,025, depreciation
and amortization of $10,970, legal and professional fees of $35,666 and other
operating expenses of $162,461, resulting in an operating loss of $343,109.
For the quarter ended March 31, 2001 total operating expenses were $332,510,
consisting of salaries, wages and benefits of $11,066, executive compensation
of $87,755, distributor expense of $38,276, registration fees of $11,720,
depreciation and amortization expenses of $73,356, legal and professional fees
of $70,817, and other expenses of $39,520, resulting in an operating loss of
$303,429. The operating expenses for the period ended March 31, 2002 were
higher than the prior year period primarily due to large increases in
salaries, wages and benefits due to increased sales and production staffing
and other operating expenses relating to the larger staffing requirements.
These increases were offset by substantial decreases in executive compensation
due to executive management changes and restructuring, and legal and
professional fees due to our decision to perform some professional functions
internally and carefully monitor legal expenses. Depreciation and
amortization expenses were also substantially reduced due to the write off of
previously amortized expenses. We expect our operating expenses to increase
during the balance of the fiscal year due to additional production and
distribution expenses as our sales volume increases.
30
Other Income and Expenses. Other expenses were $81,059 in the quarter ended
March 31, 2002 compared to $37,024 the prior year. Interest expense for the
quarter ended March 31, 2002 was $63,684 compared to $37,382 for the prior
year period due to increased borrowing and debt service. Also, in the current
period, we recorded $17,450 for bad debts due to uncollectible receivables.
For the quarter ended March 31, 2002, we had a net loss of $424,168 and loss
per share was $0.01. For the quarter ended March 31, 2001, we had a net loss
of $340,453, and loss per share was $0.01 per share.
Liquidity and Capital Resources
- -------------------------------
In the period ended March 31, 2002, our liquidity was substantially derived
from the issuance of notes payable and the issuance of common stock for cash.
Cash used in operations far exceeded revenues. We hope that the remainder of
the fiscal year will demonstrate the effectiveness of our marketing and
distribution efforts and we continue to anticipate increases in production and
sales which will bring us closer to profitability.
At March 31, 2002, we had current assets of $1,594,632, consisting primarily
of $400,000 cash in escrow for the proposed purchase of the building we
occupy, accounts receivable of $190,424 , prepaid interest of $143,743 , and
$833,167 in inventory. We had current liabilities of $3,024,666, consisting
primarily of accounts payable of $819,367, a line of credit of $102,030,
interest payable of $273,396, settlements payable of $212,693 and notes
payable of $1,533,094, for a working capital deficit of $1,430,034. At March
31, 2002, we had property, plant and equipment totaling $188,399, net of
depreciation, and other assets of $1,791,872, consisting primarily of our
investment in EPA labels.
Cash used in operations for the quarter ended March 31, 2002 was $475,758. In
2002, our operations have been funded primarily by the sale of stock and
proceeds from notes payable. Cash flows used by operating activities over the
prior year period increased primarily as a result of our decision to build up
inventories in anticipation of future purchase orders.
Cash used by investing activities for the quarter ended March 31, 2002 totaled
$28,486 for the purchase of plant, property and equipment.
Cash flows from financing activities for the quarter ended March 31, 2002
totaled $504,095, consisting of cash received from the sale of common stock,
proceeds from a line of credit and proceeds from newly issued notes payable,
offset by payments on previously issued notes payable and payment of
settlements. Non-cash financing activities included the issuance of common
stock for debt and interest totaling $256,695.
In February 2002 we received a Purchase Order for a large quantity of our
Results Fireant product, and in March 2002 we stepped up production to meet
this customer's delivery schedule. Subsequently the customer asked to delay
shipments because they still had previously purchased inventory stocks of
competing products that they needed to use up before taking in new product
from us. We anticipate that the new delivery date will be mid-year 2002.
31
As a result of our production increase and the delay in shipment, we currently
have over 769,000 finished product units with a potential wholesale value of
over $4.2 million. If the customer does not take shipment or delays the
shipment further, we will have to find other customers to take our products in
order to reduce our inventory. We are continuing to expand our markets and
are confident that if necessary we will be able to sell a significant portion
of this inventory to other customers.
During the balance of fiscal year 2002, we may seek working capital from
several sources, including the equity markets and private investors. In
February 2002, we engaged Wood Roberts, LLC to assist us in formulating and
developing a strategic financing plan and to advise and assist us in
implementing the plan with respect to institutional and other sources of
equity and/or debt financing. The agreement calls for the initial payment of
100,000 shares of our restricted common stock, with additional fees including
cash and issuance of warrants for the purchase of common stock to be paid upon
completion of certain transactions. There is no assurance, however, that any
fund raising efforts will be successful and no funding has developed as a
result of our agreement to date.
We believe that in the remainder of fiscal 2002, we will increase revenues
from operations as we continue to move from the development stage of our
products to a full marketing and sales program. We have initiated an
aggressive marketing campaign to the thousands of small retail stores within
the Ace, True Value, Do it Best, Scotty's & Walgreen Companies. With our
current inventory and our ability to manufacture 60,000 + units per day, we
believe we can rapidly meet the potential demand for large quantities of our
products.
However, we continue to lack working capital and that affects our ability to
effectively market our products. We believe two of the largest and most
important markets for our products are the agricultural and home and garden
markets. When we obtain sufficient working capital, we plan to conduct
affordable advertising and maintain a sales force that can effectively reach
these markets. Accordingly, although we anticipate more revenue from the sale
of our products than we have received in the past, we will not be as
profitable without additional cash to fund our advertising and marketing
campaign.
Impact of Inflation
- -------------------
We do not anticipate that inflation will have a material impact on our current
or proposed operations.
Seasonality
- -----------
We have not experienced significant variations in sales of products
attributable to seasonal factors.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Sloan, Listrom, Eisenbarth, Sloan & Glassman, LLC
- -------------------------------------------------
In November 1999, our former legal counsel was awarded a default judgment
against us in the amount of $42,166 plus post-judgment interest. During
fiscal 2001, we reclassified this amount to a settlement payable in the amount
of $40,166, which settlement remains outstanding and unpaid.
32
Ogilvy, Adams & Rinehart
- ------------------------
Ogilvy, Adams & Rinehart (Ogilvy) obtained a judgment against us on November
1, 1995 in the sum of $24,346. The entire judgment amount plus attorney's
fees and interest thereon is approximately $36,000. During fiscal 2001, we
reclassified this amount to a settlement payable, which settlement remains
outstanding and unpaid. Since mid-1996, there has been no communication with
the plaintiff or its attorneys, nor has the plaintiff made any attempt to
satisfy or settle this case.
L. Craig Hunt
- -------------
L. Craig Hunt obtained a judgment against us on February 1, 1999 in the sum of
$61,543. During fiscal 2001, we reclassified this amount to a settlement
payable, which settlement remains outstanding and unpaid. To date, plaintiffs
have made no attempt to collect on this judgment.
Mid-America Venture Capital Fund, Inc.
- --------------------------------------
Mid-America Venture Capital Funds, Inc. obtained a judgment against us on
August 4, 1997 for a total of $39,336 including principal, interest, and
attorney's fees and costs. During fiscal 2001, we reclassified this amount to
a settlement payable. At March 31, 2002, we have paid a total of $6,000 and
are currently in arrears on the payment schedule.
George Brink
- ------------
During December 2000, George Brink was awarded a default judgment against us
in the total amount of $44,648, including interest and legal fees, for the
balance due on a promissory note. During fiscal 2001, we reclassified this
amount to a settlement payable, which settlement remains outstanding and
unpaid. To date, plaintiffs have made no attempt to collect on this judgment.
Terrance Dunne
- --------------
Terrance Dunne, a former auditor, initiated action against us for payment of
unpaid fees. In response to the allegations, we have countersued for
reimbursement of fees paid for work not performed. The outcome of this action
is uncertain.
Former Officers and Consultant
- ------------------------------
In September 2000, we received notice from two former officers and a former
consultant that they intend to bring action for nonpayment of back wages.
During May 2001, we issued 188,000 shares of our common stock to one former
officer valued at $47,000 ($0.25 per share) in full settlement. During August
2001, we paid $5,000 in settlement to another former officer in settlement of
$38,500 claimed as back wages. The remaining amount in dispute totals $25,745
and we plan to contest the claims.
We are not aware of any other threatened litigation against us or our
subsidiaries. However, there remains a possibility of litigation against us
and/or our subsidiaries by creditors.
33
ITEM 2. CHANGES IN SECURITIES
During the three months ended March 31, 2002, we issued 883,313 shares of our
common stock valued at $256,695 in payment of notes payable and accrued
interest. We also sold 1,036,260 shares of our common stock for cash proceeds
of $263,565, and issued 600,000 shares of our common stock for $150,000 cash
exercise of options. The above securities have been issued pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933,
as amended. (See Consolidated Statements of Stockholders' Equity in the
financial statements and the notes thereto.)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
None.
(b) Reports on Form 8-K.
--------------------
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this amended report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
DIATECT INTERNATIONAL CORPORATION
Date: May 17, 2002
/s/ Jay W. Downs, Chief Executive Officer, Principal Accounting Officer
/s/ John L. Runft, Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this amended report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
Date: May 17, 2002
/s/ Jay W. Downs, Director
/s/ John L. Runft, Director
/s/ David Andrus, Director
/s/ M. Stewart Hyndman, Director
/s/ John H. Zenger, Director
/s/ Nelson A. Carter, Director