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: June 30, 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
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DIATECT INTERNATIONAL CORPORATION
----------------------------------------------
(Name of Small Business Issuer in its charter)
California 82-0513109
- ------------------------------- --------------------------
(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 41,312,603
- -------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of June 30, 2002
2
Board of Directors
Diatect International Corp.
Heber City, UT
ACCOUNTANT'S REVIEW REPORT
We have reviewed the accompanying consolidated balance sheet of Diatect
International Corp. as of June 30, 2002, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the six months
and three months ended June 30, 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, P.S.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
August 6, 2002
3
Diatect International Corp.
Consolidated Balance Sheets
June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
ASSETS
CURRENT ASSETS
Cash $ 154 $ 888
Cash in escrow 400,000 400,000
Accounts receivable 98,702 202,660
Prepaid interest 149,273 154,019
Prepaid royalties 21,731 26,804
Inventories 1,338,518 109,332
----------- ------------
Total Current Assets 2,008,378 893,703
----------- ------------
PROPERTY, PLANT AND EQUIPMENT
Mining property 540 540
Building 23,501 23,501
Equipment 388,701 185,180
Less accumulated depreciation (68,477) (38,338)
----------- ------------
Total Property, Plant and Equipment 344,265 170,883
----------- ------------
OTHER ASSETS
Deposits 28,500 28,500
Goodwill 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 $ 4,144,515 $ 2,856,458
=========== ============
See accompanying notes and accountant's review report.
4
Diatect International Corp.
Consolidated Balance Sheets
June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 1,549,042 $ 259,459
Accounts payable - related parties 8,282 -
Bank overdraft 3,919 22,268
Deposit payable - -
Line of credit 101,982 97,000
Interest payable 288,613 288,928
Settlements payable 210,693 214,693
Other accrued liabilities 88,670 16,051
Notes payable 1,707,194 1,703,914
----------- ------------
Total Current Liabilities 3,958,395 2,602,313
----------- ------------
COMMITMENTS AND CONTINGENCIES 461,605 461,605
----------- ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; 50,000,000 shares
authorized; 41,312,603 and 36,928,161 shares
issued and outstanding 14,526,183 13,391,574
Common stock subscribed (20,000) (70,000)
Stock options 18,791 84,901
Accumulated deficit (14,800,459) (13,613,935)
----------- ------------
Total Stockholders' Equity (Deficit) (275,485) (207,460)
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 4,144,515 $ 2,856,458
=========== ============
See accompanying notes and accountant's review report.
5
Diatect International Corp.
Consolidated Statements of Operations
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
REVENUES $ 116,423 $ 180,490 $ 162,683 $ 238,982
COST OF SALES 45,568 80,621 66,385 110,032
------------ ------------ ------------ ------------
GROSS PROFIT 70,855 99,869 96,298 128,950
------------ ------------ ------------ ------------
OPERATING EXPENSES
Salaries, wages and benefits 136,339 10,793 236,307 21,859
Executive compensation 95,138 107,000 143,600 194,755
Distributor expense - - - 38,276
Registration fees - 160 11,025 11,880
Depreciation and amortization 19,168 73,357 30,138 146,713
Legal and professional fees 42,679 72,161 78,345 142,978
Advertising, promotion and
marketing 66,157 2,008 84,629 5,532
Contract labor 31,493 20,561 66,361 38,639
Consulting 56,300 - 77,806 363
Travel and entertainment 14,913 6,050 27,749 10,113
Supplies 70,395 3,865 86,350 11,889
Bad debts 90,136 - 107,586 -
Other operating expense 122,121 3,691 180,945 9,159
------------ ------------ ------------ ------------
Total Operating Expenses 744,839 299,646 1,130,841 632,156
------------ ------------ ------------ ------------
OPERATING LOSS (673,984) (199,777) (1,034,543) (503,206)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Gain from debt forgiveness - 8,100 - 8,100
Gain from debt restructure - 603,152 - 603,152
Interest expense (87,850) (66,620) (151,534) (104,002)
Miscellaneous (522) (1,988) (447) (1,630)
------------ ------------ ------------ ------------
Total Other Income (Expenses) (88,372) 542,644 (151,981) 505,620
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (762,356) 342,867 (1,186,524) 2,414
INCOME TAXES - - - -
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (762,356) $ 342,867 $ (1,186,524) $ 2,414
============ ============ ============ ============
BASIC AND DILUTED
NET INCOME (LOSS) PER SHARE $ (0.02) $ 0.01 $ (0.03) $ Nil
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 40,628,418 29,539,020 38,931,790 29,130,648
============ ============ ============ ============
See accompanying notes and accountant's review report.
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DIATECT INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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.
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DIATECT INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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 $0.20 to $0.30 per share 1,945,260 472,065 - - - 472,065
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 1,142,182 318,934 - - - 318,934
Issuance of stock for
services at $0.25 to
$0.35 per share 697,000 127,500 - - - 127,500
Payment of stock
subscription - - - 50,000 - 50,000
Net loss for the period
ended June 30, 2002
(unaudited) - - - - (1,186,524) (1,186,524)
----------- ----------- ----------- ----------- ----------- ------------
Balances as of June 30,
2002 (unaudited) 41,312,603 $ 14,526,183 $ 18,791 $ (20,000) $(14,800,459) $ (275,485)
=========== =========== =========== =========== =========== ============
See accompanying notes and accountant's review report.
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Diatect International Corp.
Consolidated Cash Flow Statements
For the Six Months Ended
June 30,
2002 2001
(Unaudited) (Unaudited)
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,186,524) $ 2,414
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Gain from debt restructure - (603,152)
Gain from debt forgiveness - (8,100)
Depreciation and amortization 30,138 146,713
Issuance of stock for services 127,500 47,000
Issuance of stock options for services - 18,890
Issuance of stock for finance charges 31,875 35,000
Prepaid finance charges paid by issuance of stock 21,250 -
Stock issued for payment of accrued expenses 50,103 -
Changes in assets and liabilities:
Accounts receivable 103,958 (135,648)
Employee receivable - (2,750)
Prepaid interest (25,996) (2,183)
Prepaid royalties 5,073 2,171
Prepaid expenses - (424)
Inventories (1,229,186) (9,719)
Deposits - -
Accounts payable 1,289,583 59,666
Accounts payable - related parties 8,282 12,439
Interest payable 37,414 79,263
Accrued salaries - 98,184
Stockholder advance - 120,980
Other accrued liabilities 72,619 1,822
------------ -------------
NET CASH FLOWS USED BY OPERATING ACTIVITIES (663,911) (137,434)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (203,521) -
------------ -------------
NET CASH FLOWS USED BY INVESTING ACTIVITIES (203,521) -
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock subscriptions 50,000 -
Payment of settlements (4,000) -
Proceeds from line of credit 4,982 -
Net payment of bank overdraft (18,349) -
Proceeds from sale of stock 622,065 44,000
Net payments of notes payable (30,500) -
Net proceeds from notes payable 242,500 95,990
------------ -------------
NET CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES 866,698 139,990
------------ -------------
NET INCREASE (DECREASE) IN CASH (734) 2,556
CASH AT BEGINNING OF YEAR 888 2,160
------------ -------------
CASH AT END OF PERIOD $ 154 $ 4,716
============ =============
See accompanying notes and accountant's review report.
9
Diatect International Corp.
Consolidated Cash Flow Statements (Continued)
For the Six Months Ended
June 30,
2002 2001
(Unaudited) (Unaudited)
------------ -------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest expense paid $ - $ -
============ =============
Income taxes paid $ - $ -
============ =============
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for prepaid finance charges $ 21,250 $ 10,000
Issuance of common stock for services $ 127,500 $ 47,000
Issuance of common stock for debt and interest $ 318,934 $ -
Issuance of common stock for forbearance of
notes payable and line of credit $ - $ 25,000
Issuance of stock options for services $ - $ 18,890
Issuance of common stock for debt $ - $ 72,880
See accompanying notes and accountant's review report.
10
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 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
June 30, 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 six months ended June 30,
2002 and 2001 was $30,138 and $5,106, 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
June 30, 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 six months ending
June 30, 2001 was $141,607. On January 1, 2002, the Company adopted SFAS No.
142. Application of the nonamortization provision of SFAS No. 142 resulted in
an increase in net income of approximately $140,000 during the six months
ended June 30, 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 June 30, 2002, the Company had net deferred tax assets of approximately
$2,190,000, 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 June 30, 2002.
At June 30, 2002, the Company has net operating loss carryforwards of
approximately $14,602,000, 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 $1,814 and $1,634 in the six months ended June 30, 2002
and 2001 respectively. All amounts in the accompanying Consolidated
Statements of Operations have been reclassified to reflect this adoption.
13
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 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 June 30, 2002. The Company has no investment in securities
available-for-sale at June 30, 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
June 30, 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 June 30, 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.
Interim Financial Statements
The interim financial statements for the period ended June 30, 2002 included
herein have not been audited, at the request of the Company. They reflect all
adjustments, which are, in the opinion of management, necessary to present
fairly the results of operations for the period. All such adjustments are
normal recurring adjustments. The results of operations for the period
presented is not necessarily indicative of the results to be expected for the
full fiscal year.
Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which
updates, clarifies and simplifies existing accounting pronouncements. FASB
No. 4, which required all gains and losses from the extinguishment of debt to
be aggregated and, if material, classified as an extraordinary item, net of
related tax effect was rescinded, as a result, FASB 64, which amended FASB 4,
was rescinded as it was no longer necessary. FASB 145 amended FASB 13 to
require certain lease modifications that have economic manner as
sale-leaseback transactions. Management has not yet determined the effects of
adopting this Statement on the financial position or results of operations,
except for the need to reclassify debt extinguishments previously reported as
extraordinary.
15
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 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. 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 June 30, 2002.
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 June 30, 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.
16
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Pronouncements (Continued)
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
$1,186,524 for the six months ended June 30, 2002 and has an accumulated
deficit of $14,800,459 at June 30, 2002. (This equates to a potential NOL tax
carryforward of approximately $14,600,000.) The Company recently received a
purchase order from major new customers 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.
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 big box accounts and niche markets.
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 June 30, 2002 and December 31, 2001 consist of the following:
17
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 3 - INVENTORIES (Continued)
June 30, December 31,
2002 2001
------------ ------------
Raw Materials $ 135,739 $ 32,813
Packaging Material 28,838 -
Finished Goods 1,173,941 76,519
------------ ------------
Total $ 1,338,518 $ 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 June 30,
2002 and December 31, 2001, notes payable consisted of the following:
June 30, 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
----------- -----------
Subtotals (carried forward) $ 67,500 $ 67,500
----------- -----------
18
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 5 - NOTES PAYABLE (Continued)
June 30, December 31,
Creditor and Conditions (Continued) 2002 2001
- ----------------------- ----------- -----------
Subtotal (brought forward) $ 67,500 $ 67,500
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
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
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. 44,445 62,445
----------- -----------
Subtotals (carried forward) $ 385,984 $ 463,984
----------- -----------
19
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 5 - NOTES PAYABLE (Continued)
June 30, December 31,
Creditor and Conditions (Continued) 2002 2001
- ----------------------- ----------- -----------
Subtotal (brought forward) $ 385,984 $ 463,984
George H. Henderson, (a shareholder
of the Company), unsecured, interest
at 10%, dated April 14, 2000, due on
December 31, 2000, amended on
September 20, 2001, payable in principal
installments of $5,000 per month
commencing January 15, 2002, delinquent. 40,000 50,000
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
Robert B. Crouch, (officer and shareholder
of the Company), unsecured, interest at 12%,
dated November 16, 2000, due on demand. 210 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
----------- -----------
Subtotals (carried forward) $ 509,194 $ 657,594
----------- -----------
20
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 5 - NOTES PAYABLE (Continued)
June 30, December 31,
Creditor and Conditions (Continued) 2002 2001
- ----------------------- ----------- -----------
Subtotal (brought forward) $ 509,194 $ 657,594
Gary Hanson (shareholder of the Company),
unsecured, interest at 12%, dated July 24, 2001,
due on October 24, 2001. - 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,
delinquent. 24,500 25,000
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
----------- -----------
Subtotals (carried forward) $ 1,464,694 $ 1,673,594
----------- -----------
21
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 5 - NOTES PAYABLE (Continued)
June 30, December 31,
Creditor and Conditions (Continued) 2002 2001
- ----------------------- ----------- -----------
Subtotal (brought forward) $ 1,464,694 $ 1,673,594
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 -
Marelko L.C., (a shareholder of the Company),
unsecured, interest at 12%, dated April 3, 2002,
due on July 3, 2002. 40,000 -
Jack Stites, (a shareholder of the Company),
interest at 12%, dated June 19, 2002, due on
August 18, 2002. 40,000 -
Mike Witt, Jr., (a shareholder of the Company),
convertible to common stock of the Company at
$0.33 per share, interest at 12%, dated April 16,
2002, due on May 30, 2002, delinquent. 30,000 -
Hyrum L. & Helen Mae Andrus, (shareholders of
the Company), interest at 8%, dated April 24, 2002,
due on June 24, 2002, delinquent. 37,500 -
----------- -----------
Subtotal $ 1,672,194 $ 1,703,914
----------- -----------
22
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 5 - NOTES PAYABLE (Continued)
June 30, December 31,
Creditor and Conditions (Continued) 2002 2001
- ----------------------- ----------- -----------
Subtotal (brought forward) $ 1,672,194 $ 1,703,914
Jeffrey Matthews, (a shareholder of the
Company), interest at 8%, dated April 25, 2002,
due on June 25, 2002, extended to July 20, 2002
with interest at 14%. 20,000 -
C & R Investments, (a shareholder of the Company),
Interest at 10%, dated April 15,2002 due on July 14,
2002. 10,000 -
Mike McQuade, (a shareholder of the Company),
interest at 10%, dated June 28, 2002, due on
demand. 5,000 -
----------- -----------
Total $ 1,707,194 $ 1,703,914
=========== ===========
NOTE 6 - LINE OF CREDIT
At June 30, 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 shareholder utilizing his personal line of credit. This credit facility is
unsecured, has no stated maturity, and bears interest at 12%.
At June 30, 2002, the Company had $4,982 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 June 30,
2002 and December 31, 2001 in the amount of $40,166.
23
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 7 - LITIGATION (Continued)
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 countersued 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 June 30,
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 June 30, 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 June 30, 2002 and December 31, 2001.
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.
24
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 7 - LITIGATION (Continued)
Danny Wirken
During June 2001, the Company declared a note payable to Danny Wirkin (one of
the brokers involved in the selling of Diatect stock, which gave rise to
certain litigation for stock manipulation) 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. This amount has been reclassified to other income in
accordance with FAS 145. (See Note 5.) The Company was considering litigation
however, at this time, all consideration of litigation against Danny Wirken
has been discontinued.
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 June 30, 2002 and December
31, 2001.
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.
Other Matters
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
25
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 8 - COMMON STOCK (Continued)
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 six months ended June 30, 2002, the Company issued 697,000 shares
of its common stock valued at $127,500 in payment of services, 1,142,182
shares of its common stock valued at $318,934 in payment of notes payable and
accrued interest and sold 1,945,260 shares of its common stock for $472,065.
The Company also sold 600,000 shares of its common stock for $150,000 and
exercise of options. See Note 10.
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 period ended June 30, 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 1,100,000 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
================= ================
26
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 10 - STOCK OPTIONS (Continued)
Weighted Average
Number of Shares Price per Share
----------------- ----------------
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 June 30, 2002 500,000 $0.25
================= ================
Options exercisable at
June 30, 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
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
June 30, 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.
27
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
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 June 30, 2002 and December 31, 2001, are as follows:
June 30, December 31,
2002 2001
------------ ----------
L. Craig Hunt $ 60,543 $ 60,543
Mid-America Venture Capital Fund, Inc. 29,336 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
------------ ----------
$ 210,693 $ 214,693
============ ==========
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.
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.
28
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Other Contingencies (Continued)
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 June 30, 2002,
Magic had no assets or liabilities.
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
original 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 has extended provisions of the agreement to January 2003.
NOTE 14 - RELATED PARTY TRANSACTIONS
Diatect International Corp. has notes payable to twenty-four shareholders
totaling $1,724,694 and $1,633,851 as of June 30, 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 $8,282 and $17,067 for the
six months ended June 30, 2002 and 2001, respectively, of which $8,282 are
included in accounts payable - related party at June 30, 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 $143,600 and $87,755 for the six months ended
June 30, 2002 and 2001, respectively. See Note 18.
29
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 15 - MINING PROPERTY
During September 2001, the Company 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 at cost on the
Company's balance sheet.
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
June 30, 2002. Separate accounting for each segment for the period ended June
30, 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:
Six Months Ended June 30, 2001
Kansas Idaho Eliminations Consolidated
========= ========== ============ ============
External revenue $ - $ 238,982 $ - $ 238,982
========= ========== ============ ============
Operating income
(loss) $ (25,803) $ (583,035) $ - $ (608,838)
========= ========== ============
Corporate expenses -
------------
Total operating
income (loss) $ (608,838)
============
Depreciation and
Amortization $ 305 $ 146,408 $ - $ 146,713
========= ========= ============ ============
Interest expense
and finance charges $ - $ 104,002 $ - $ 104,002
========= ========= ============ ============
Identifiable assets $ 178,115 $2,507,565 $ (172,154)$ 2,513,526
========= ========= ============
General corporate
assets -
------------
Total assets $ 2,513,526
============
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.
30
Diatect International Corp.
Notes to the Consolidated Financial Statements
June 30, 2002
NOTE 17 -OTHER LIABILITIES
At June 30, 2002, the Company had a $83,232 liability for unpaid federal and
state withholding taxes, social security tax, medicare tax and federal and
state unemployment taxes. This amount may be subject to penalties and
interest.
NOTE 18 - SUBSEQUENT EVENT
Effective July 12, 2002, the Company's board of directors elected to grant
458,370 stock options to former directors based upon their prior service to
the Company. The options vest immediately upon issuance and expire on
December 31, 2002.
31
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.
Three and Six Months ended June 30, 2002 compared to June 30, 2001
- ------------------------------------------------------------------
During the three and six months ended June 30, 2002, our revenues were
$116,423 and $162,683, respectively, with costs of sales of $45,568 and
$66,385 with gross profit of $70,855 and $96,298 compared to the same period
the prior year in which our revenues were $180,490 and $238,982, respectively,
and costs of sales were $80,621 and $110,032 with gross profit of $99,869 and
$128,950. The decrease in our revenues in the three and six months ended June
30, 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 two quarters 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 three and six months period ended June 30, 2002
compared to same periods in the preceding year is not indicative of our
revenue prospects for the balance of the fiscal year. Based on our internal
projections, we expect increased sales to impact revenues beginning in the
third quarter of fiscal 2002.
Operating Expenses. For the three and six months ended June 30, 2002, total
operating expenses were $744,839 and $1,130,841, respectively, for total
operating losses of $673,984 and $1,034,543, compared to total operating
expenses of $299,646 and $632,156, respectively, for total operating losses of
$199,777 and $503,206 for the prior year periods. The operating expenses for
the three and six months ended June 30, 2002 were considerable higher than the
prior year period for a number of reasons. We had large increases in
salaries, wages and benefits ($125,546 and $214,448, respectively) as well as
contract labor ($10,932 and $27,722, respectively) due to increased sales and
administrative staffing. We also had large increases in expenses for supplies
($66,530 and $74,461, respectively) and other operating expense ($118,430 and
$171,786, respectively) relating to the larger staffing requirements. We also
incurred large increases in advertising, promotion and marketing expenses
($64,149 and $79,097, respectively) due to increased marketing efforts, as
well as additional consulting and travel expenses ($65,163 and $95,079,
respectively) related to those marketing efforts. We also wrote off bad debt
expenses totaling $107,586 for the six month period ended June 30, 2002 with
no comparable write off in the prior year.
32
These increases in expenses were offset by decreases in executive compensation
($11,862 and $51,155, respectively) due to executive management changes and
restructuring, and decreases in legal and professional fees ($29,482 and
$64,633, respectively) 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.
Other Income and Expenses. Other expenses were $88,372 and $151,981,
respectively, for the three and six months ended June 30, 2002, compared to
$68,608 and $105,632 the prior year (without consideration of one time gains
of $611,252 from debt restructure and forgiveness). Interest expense was the
primary component of other expenses for the respective periods and was higher
in 2002 due to increased borrowing and debt service.
For the three and six months ended June 30, 2002, we had net losses of
$762,356 and $1,186,524 and loss per share was $0.01 and $0.03, respectively.
For the three and six months ended June 30, 2001 (without consideration of one
time gains of $611,252 from debt restructure and forgiveness), we had a net
losses of $268,385 and $608,838.
Liquidity and Capital Resources
- -------------------------------
In the three and six months ended June 30, 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 June 30, 2002, we had current assets of $2,008,378, consisting primarily of
$400,000 cash in escrow for the proposed purchase of the building we occupy,
accounts receivable of $98,702, prepaid interest of $149,273, and $1,338,518
in inventory. We had current liabilities of $3,958,395, consisting primarily
of accounts payable of $1,549,042, a line of credit of $102,982, interest
payable of $288,613, settlements payable of $210,693 and notes payable of
$1,707,194, plus other accrued liabilities of $88,670 that includes a $83,232
liability for unpaid federal and state taxes which may be subject to penalties
and interest. Accordingly, we have a working capital deficit of $1,950,017.
At June 30, 2002, we had property, plant and equipment totaling $344,265, 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 June 30, 2002 was $663,911. 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 June 30, 2002 totaled
$203,521 for the purchase of plant, property and equipment.
Cash flows from financing activities for the quarter ended June 30, 2002
totaled $866,698, 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, payment of settlements,
and net payment of a bank overdraft. Non-cash financing activities included
the issuance of common stock for debt and interest totaling $297,684, issuance
of common stock for prepaid finance charges totaling $21,250, and issuance of
common stock for services totaling $127,500.
33
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 it still had previously purchased inventory stocks of
competing products that it needed to use up before taking in new product from
us. At this filing date, we cannot predict when a new delivery date will be
set.
As a result of our production increase and the delay in shipment, we currently
have over 800,000 finished product units with a potential wholesale value of
over $4.4 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.
To that end, we have recently signed contracts with 118 Future Farmers of
America ("FFA") Chapters in Texas. FFA is a non-profit organization that
raises funds for educational activities. We are one of only 12 preferred
vendors for FFA's fundraising activities at Texas high schools. The FFA
Chapters intend to sell our Results FireAnt Insect Control to home owners and
farms within individual chapter boundaries. We expect that in the third and
fourth quarters of fiscal 2002, we will ship initial orders to the individual
FFA Chapters in Texas with anticipated revenues from these sales totaling
approximately $800,000. We anticipate that additional sales to the FFA could
occur in the first and second quarter of fiscal 2003.
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.
34
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.
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.
35
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.
ITEM 2. CHANGES IN SECURITIES
During the six months ended June 30, 2002, we issued 1,142,182 shares of our
common stock valued at $318,934 in payment of debt and accrued interest. We
also sold 1,945,260 shares of our common stock for cash proceeds of $472,065,
and issued 600,000 shares of our common stock for $150,000 cash and the
exercise of options. We also issued 697,000 shares of our common stock for
services valued at $127,500. 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.
---------
Exhibit 99 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(b) Reports on Form 8-K.
--------------------
None.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this 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: August 14, 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 report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Date: August 14, 2002
/s/ Jay W. Downs, Director
/s/ John L. Runft, Director
/s/ David Andrus, Director
/s/ Michael McQuade, Director
/s/ Nelson A. Carter, Director