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: September 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 42,594,603
- -------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of September 30, 2002
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIATECT INTERNATIONAL CORP.
FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying financial statements have been prepared by the
Company, without audit, in accordance with the instructions to Form 10-QSB
pursuant to the rules and regulations of the Securities and Exchange
Commission and, therefore may not include all information and footnotes
necessary for a complete presentation of the financial position, results of
operations, cash flows, and stockholders' equity in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments
(which include only normal recurring accruals) necessary to present fairly the
financial position and results of operations for the periods presented have
been made. These financial statements should be read in conjunction with the
accompanying notes, and with the historical financial information of the
Company.
3
Diatect International Corp.
Consolidated Balance Sheets
September 30,
2002 December 31,
(Unaudited) 2001
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 15,016 $ 888
Cash in escrow 400,000 400,000
Accounts receivable 398,299 202,660
Prepaid interest 105,374 154,019
Prepaid royalties 8,995 26,804
Inventories 1,183,419 109,332
------------ ------------
Total Current Assets 2,111,103 893,703
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Mining property 940 540
Building - 23,501
Equipment 420,140 185,180
Less accumulated depreciation (79,778) (38,338)
------------ ------------
Total Property, Plant and Equipment 341,302 170,883
------------ ------------
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 $ 4,244,277 $ 2,856,458
============ ============
See condensed notes to interim consolidated financial statements.
4
Diatect International Corp.
Consolidated Balance Sheets
September 30,
2002 December 31,
(Unaudited) 2001
------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 1,483,108 $ 259,459
Accounts payable - related party 14,452 -
Bank overdraft - 22,268
Lines of credit 343,941 97,000
Lease payable 25,826 -
Interest payable 278,495 288,928
Settlements payable 181,357 214,693
Other accrued liabilities 138,153 16,051
Notes payable 1,858,638 1,703,914
------------ ------------
Total Current Liabilities 4,323,970 2,602,313
------------ ------------
COMMITMENTS AND CONTINGENCIES 460,605 461,605
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; 50,000,000
shares authorized; 42,594,603 and
36,928,161 shares issued and outstanding 14,693,118 13,391,574
Common stock subscribed (20,000) (70,000)
Stock options 18,791 84,901
Accumulated deficit (15,232,207) (13,613,935)
------------ ------------
Total Stockholders' Equity (Deficit) (540,298) (207,460)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 4,244,277 $ 2,856,458
============ ============
See condensed notes to interim consolidated financial statements.
5
Diatect International Corp.
Consolidated Statements of Operations
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
REVENUES $ 424,450 $ 271,600 $ 587,133 $ 510,582
COST OF SALES 98,333 74,542 164,718 184,574
----------- ----------- ----------- -----------
GROSS PROFIT 326,117 197,058 422,415 326,008
----------- ----------- ----------- -----------
OPERATING EXPENSES
Salaries, wages and
benefits 233,459 7,807 469,766 29,666
Consulting 20,700 4,112 98,506 4,112
Executive compensation 60,693 166,720 204,293 361,475
Distributor expense - 112,642 - 150,918
Registration fees 6,797 240 17,822 12,120
Depreciation and
amortization 17,186 72,776 47,324 219,489
Legal and
professional fees 47,960 24,821 126,305 167,799
Other operating expense 165,421 41,518 719,041 117,290
----------- ----------- ----------- -----------
Total Operating
Expenses 552,216 430,636 1,683,057 1,062,869
----------- ----------- ----------- -----------
OPERATING LOSS (226,099) (233,578) (1,260,642) (736,861)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Gain from debt restructure - - - 603,152
Gain from debt forgiveness - - - 8,100
Interest income/expense (182,718) (106,991) (334,250) (210,993)
Contributions (23,414) - (23,414) -
Miscellaneous 483 (9) 34 (1,564)
----------- ----------- ----------- -----------
Total Other Income
(Expenses) (205,649) (107,000) (357,630) 398,695
----------- ----------- ----------- -----------
LOSS BEFORE
INCOME TAXES (431,748) (340,578) (1,618,272) (338,166)
INCOME TAXES - - - -
----------- ----------- ----------- -----------
NET LOSS $ (431,748) $ (340,578) $ (1,618,272) $ (338,166)
=========== =========== =========== ===========
BASIC AND DILUTED
NET LOSS PER SHARE $ (0.01) $ (0.01) $ (0.04) $ (0.01)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 41,512,331 30,520,707 40,038,428 29,520,707
=========== =========== =========== ===========
See condensed notes to interim consolidated financial statements.
6
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)
----------- ----------- ----------- ----------- ----------- ------------
7
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 $0.10 to
$0.35 per share 1,632,182 409,799 - - - 409,799
Issuance of stock to
directors and others at
$0.06 to $0.35 per share 749,000 130,620 - - - 130,620
Payment of stock
subscription - - - 50,000 - 50,000
Issuance of stock for loan
consideration and
guarantee of line of
credit at $0.05 to $0.19
per share 740,000 72,950 - - - 72,950
Net loss for the period
ended September 30, 2002
(unaudited) - - - - (1,618,272) (1,618,272)
----------- ----------- ----------- ----------- ----------- ------------
Balances as of September 30,
2002 (unaudited) 42,594,603 $ 14,693,118 $ 18,791 $ (20,000) $(15,232,207) $ (540,298)
=========== =========== =========== =========== =========== ============
See condensed notes to interim consolidated financial statements.
8
Diatect International Corp.
Consolidated Cash Flow Statements
For the Nine Months Ended
September 30,
2002 2001
(Unaudited) (Unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,618,272) $ (338,166)
Adjustments to reconcile net loss to net cash
used by operating activities:
Gain from debt restructure - (603,152)
Gain from debt forgiveness - (8,100)
Donation of building 23,164 -
Depreciation and amortization 47,324 219,489
Issuance of stock for services 130,620 144,500
Issuance of stock options for services - 18,890
Issuance of stock for finance charges and interest 141,690 74,375
Issuance of stock for settlements - 75,000
Issuance of stock for debt 100,000 266,619
Prepaid finance charges paid by issuance of stock 21,250 -
Stock issued for payment of accrued expenses 51,700 -
Note payable issued for distributor expenses - 50,000
Changes in assets and liabilities:
Accounts receivable (195,639) (352,020)
Employee receivable - (3,555)
Prepaid interest 17,903 (33,563)
Prepaid royalties 17,809 10,280
Prepaid expenses - (374)
Inventories (1,074,087) (2,414)
Deposits - 110,000
Accounts payable 1,223,649 13,690
Accounts payable - related parties 14,452 84,195
Deposit payable - (20,000)
Interest payable (17,499) (108,812)
Commitments and contingencies (1,000) (17,230)
Other accrued liabilities 122,102 3,666
------------ ------------
NET CASH FLOWS USED BY OPERATING
ACTIVITIES (994,834) (416,682)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (234,960) (2,094)
------------ ------------
NET CASH FLOWS USED BY INVESTING ACTIVITIES (234,960) (2,094)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from lease payable 25,826 -
Payment of settlements (33,336) -
Proceeds from lines of credit 246,941 -
Proceeds from bank overdraft - 14,430
Net payment of bank overdraft (22,268) -
Proceeds from sale of stock 622,065 44,000
Net payments of notes payable (70,306) -
Net proceeds from notes payable 475,000 361,335
------------ ------------
NET CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES 1,243,922 419,765
------------ ------------
NET INCREASE IN CASH 14,128 989
CASH AT BEGINNING OF PERIOD 888 3,384
------------ ------------
CASH AT END OF PERIOD $ 15,016 $ 4,373
============ ============
See condensed notes to interim consolidated financial statements.
9
Diatect International Corp.
Consolidated Cash Flow Statements
For the Nine Months Ended
September 30,
2002 2001
(Unaudited) (Unaudited)
------------ ------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest expense paid $ 1,449 $ -
Income taxes paid $ - $ -
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for prepaid finance charges $ 21,250 $ 50,375
Issuance of common stock for services $ 130,620 $ 182,000
Issuance of common stock of forbearance of
notes payable and line of credit $ - $ 25,000
Issuance of common stock for debt and interest $ 409,799 $ 266,619
Issuance of common stock $ - $ 37,500
Issuance of note payable for distributor expense $ - $ 50,000
Issuance of common stock for finance charges $ 51,700 $ -
Donation of building $ 23,164 $ -
See condensed notes to interim consolidated financial statements.
10
Diatect International Corp.
Notes to the Interim Consolidated Financial Statements
September 30, 2002
NOTE 1 - Basis and Presentation
The foregoing unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Regulation S-B as
promulgated by the Securities and Exchange Commission. Accordingly, these
financial statements do not include all of the disclosures required by
generally accepted accounting principles for complete financial statements.
These unaudited interim financial statements should be read in conjunction
with the audited financial statements for the year ended December 31, 2001.
In the opinion of management, the unaudited interim financial statements
furnished herein include all adjustments, all of which are of a normal
recurring nature, necessary for a fair statement of the results for the
interim period presented.
The preparation of financial statements in accordance with generally accepted
accounting principles requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities known to exist as of the date the financial
statements are published, and the reported amounts of revenues and expenses
during the reporting period. Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of the Company's financial
statements; accordingly, it is possible that the actual results could differ
from these estimates and assumptions that could have a material effect on the
reported amounts of the Company's financial position and results of
operations.
Operating results for the three-month and nine-month periods ended September
30, 2002 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2002.
NOTE 2 - INVENTORIES
Inventories at September 30, 2002 and December 31, 2001 consist of the
following:
September 30, December 31,
2002 2001
------------ ------------
Raw Materials $ 82,444 $ 32,813
Packaging Materials 11,023 -
Finished Goods 1,089,952 76,519
------------ ------------
Total $ 1,183,419 $ 109,332
============ ============
11
Diatect International Corp.
Notes to the Interim Consolidated Financial Statements
September 30, 2002
NOTE 3 - NOTES PAYABLE
All of the Company's notes payable are considered short-term. A
reconciliation of notes payable at September 30, 2002 follows.
Balance, December 31, 2001 $ 1,703,914
David Russell, paid by issuance of stock (15,000)
David Russell, paid by issuance of stock (25,000)
Hopper Asset Management Company,
paid by issuance of stock (10,000)
Hopper Asset Management Company,
paid by issuance of stock (50,000)
George H. Henderson, cash payment
during current period (10,000)
Robert L. Drake and Sandra K Drake,
cash payment during current period. (18,000)
K & R "Stuff" LC,
paid by issuance of stock (58,000)
Robert B. Crouch
cash paid during current period (2,610)
Gary Hanson
paid by issuance of stock (20,000)
Ronald Davis
paid by issuance of new note payable (25,000)
Kyle Baird
paid by issuance of new note payable (25,000)
Max Burdick
paid by issuance of stock (30,000)
------------
Subtotal (carried forward) $ 1,415,304
------------
12
Diatect International Corp.
Notes to the Interim Consolidated Financial Statements
September 30, 2002
NOTE 3 - NOTES PAYABLE (Continued)
Subtotal (brought forward) $ 1,415,304
Richard Humphries
paid by issuance of stock (10,000)
Jay Downs
paid by issuance of stock (30,320)
Amanda Wright, unsecured, interest at 10%,
dated January 11, 2002, due on July 11, 2002
delinquent 10,000
Marelko LC, (a shareholder of the Company),
unsecured, interest at 12%, dated April 3, 2002,
due on July 3, 2002 delinquent 40,000
Jack Stites, (a shareholder of the Company),
unsecured, interest at 12%, dated June 19, 2002,
due on August 18, 2002, delinquent 40,000
Hyrum L. & Helen Mae Andrus, (shareholders of
the Company), unsecured, interest at 8%,
dated April 24, 2002, due on demand 37,500
Jeffrey Matthews (a shareholder of the Company),
unsecured, interest at 8%, dated April 25, 2002,
due on June 25,2002, delinquent 10,404
Brent J. Larsen, (a shareholder of the Company),
unsecured, interest at 10%, dated July 17, 2002,
due on October 17, 2002 50,000
Scot & Jan Lythgoe (shareholders of the Company),
unsecured, interest at 10%, dated August 21 2002,
due on November 21,2002 30,000
Keven Jensen (a shareholder of the Company),
unsecured, interest at 10%, dated September 30,
2002, due on March 30, 2003 50,000
------------
Subtotal (carried forward) $ 1,642,888
------------
13
Diatect International Corp.
Notes to the Interim Consolidated Financial Statements
September 30, 2002
NOTE 3 - NOTES PAYABLE (Continued)
Subtotal (brought forward) $ 1,642,888
Keven Jensen (a shareholder of the Company),
unsecured, interest at 10%, dated September
11, 2002, due on March 11, 2003 50,000
Orion B. & Sue Bishop (a shareholder of
the Company), unsecured, interest at 10%,
dated September 30, 2002, due on April
30, 2003 12,500
Ronald Davis (a shareholder of the company),
unsecured, interest at 10% dated July 10, 2002
due on December 31, 2002 79,250
Kyle Baird (a shareholder of the company),
unsecured, interest at 10% dated July 5, 2002
due on September 30, 2002, delinquent 74,000
-----------
Total $ 1,858,638
===========
NOTE 4 - LINE OF CREDIT
The Company has utilized new lines of credit during the period ended September
30, 2002. Information on these lines of credit follows.
At September 30, 2002, the Company borrowed $4,291 on an automatic line of
credit with America First Credit Union. This credit line is unsecured, has no
stated maturity and bears interest at 9.75%.
At July 19, 2002, the Company secured a $250,000 line of credit with Zion
Bank. As of September 30, 2002 the Company has borrowed $242,650. This line
of credit was secured by Company assets and carries a stated interest rate of
6.75%, and matures on January 19, 2003.
NOTE 5 - LEASE PAYBALE
At March 2002, the Company secured credit with HP/Compaq Financial Services in
the amount of $37,606. The Company used this credit to supply the business
with computer related equipment. This is a 36-month lease with a $1 buy out
option at the end of the lease. At September 30, 2002, $11,780 is included in
accounts payable. The balance is reflected as lease payable.
14
Diatect International Corp.
Notes to the Interim Consolidated Financial Statements
September 30, 2002
NOTE 6 - LITIGATION
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, attorney's fees and costs. This amount was
paid in full during the period ended September 30, 2002.
Iver J. Longeteig
Mr. Longeteig has pursued a claim outside of the White Mountain Group Contract
escrowed with Alliance Title and filed a complaint on an outstanding note for
$23,887. In compromise of the claim for forbearance, the Company did not
answer the complaint and a default was entered. Mr. Longeteig has agreed to
forebear obtaining a default judgment as long as the Company continues to make
payments on the outstanding balance. At the current time Mr. Longeteig has
been paid $14,488 on this claim.
The Company is not aware of any other threatened litigation against it or its
subsidiaries.
NOTE 7 - COMMON STOCK
During the nine months ended September 30, 2002, the Company issued 749,000
shares of its common stock valued at $130,620 in payment of services,
1,632,182 shares of its common stock valued at $409,799 in payment of notes
payable and accrued interest, 740,000 shares of its common stock valued at
$72,950 for loan consideration 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 9.
NOTE 8 - 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 September 30, 2002,
the Company received $50,000 in partial payment of a stock subscription. The
remaining $20,000 receivable is reflected in the attached financial statements
as stock subscription receivable.
NOTE 9 - 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.
15
Diatect International Corp.
Notes to the Interim Consolidated Financial Statements
September 30, 2002
NOTE 9 - STOCK OPTIONS (Continued)
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 September 30, 2002 500,000 $0.25
============ ============
Options exercisable at
September 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
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 September 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 were $66,010 and legal fees charged to operations were $3,985
during the year ended December 31, 2001.
16
Diatect International Corp.
Notes to the Interim Consolidated Financial Statements
September 30, 2002
NOTE 10 - SETTLEMENTS PAYABLE
The Company is obligated to pay certain notes and settlements under judgments
awarded to outside parties. (Note 6.) A reconciliation of settlements
payable at September 30, 2002 follows:
Balance December 31, 2001 $ 214,693
Payments (33,336)
------------
Balance September 30, 2002 $ 181,357
============
NOTE 11 - COMMITMENTS AND CONTINGENCIES
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 January 2003. 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 12 - OTHER LIABILITIES
At September 30, 2002, the Company had a $133,857 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 13 - DONATION OF BUILDING
During the quarter ended September 30, 2002, the Company donated the land and
building located in Lebanon, Kansas to a qualified non-profit organization.
This donation was valued at $23,164, which was the net book value on the
transaction date.
17
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 Nine Months ended September 30, 2002 compared to September 30, 2001
- -----------------------------------------------------------------------------
During the three and nine months ended Sept 30, 2002, our revenues were
$424,450 and $587,133, respectively, with costs of sales of $98,333 and
$164,718 with gross profit of $326,117 and $422,415 compared to the same
period the prior year in which our revenues were $271,600 and $510,582,
respectively, and costs of sales were $74,542 and $184,574 with gross profit
of $197,058 and $326,008. The increase in our revenues in the three and nine
months ended Sept 30, 2002 compared to 2001 is attributable to a number of
factors. First, the new business with the FFA Fundraisers program that was
started during this period has generated some additional revenues. Second,
our base business has been broadened with the inclusion of a number of
smaller retail outlets with in the southern region between Texas and Florida.
Third, we have agreements with three new independent distributors which we
expect to facilitate sales and distribution in strategic areas.
We feel the increase in revenues for the three and nine months period ended
Sept 30 2002 compared to the same periods in the proceeding year is indicative
of our revenue prospects for the balance of the fiscal year.
Operating Expenses. For the three and nine months ended Sept 30, 2002, total
operating expenses were $552,216 and $1,683,057, respectively, for total
operating losses of $226,099 and $1,260,642, compared to total operating
expenses of $430,636 and $1,062,869 respectively, for total operating losses
of $233,578 and $736,861 for the prior year periods.
The operating expenses for the three and nine months ended Sept 30, 2002 were
considerably higher than the prior year period for a number of reasons.
First, we had large increases in salaries, wages and benefits ($225,652 and
$440,100, respectively) which is attributed to increased sales and
administrative staffing needed to meet current demands. Second, other
operating expenses increased substantially ($123,903 and $601,751,
respectively). The majority of this increase is related to the increased
frequency of shipping, promotions and advertising (especially due to increased
marketing efforts), as well as additional consulting and travel expenses,
related to those marketing efforts.
18
The increases in expenses were offset by decreases in executive compensation
($106,027 and $157,182, respectively) due to executive management changes and
restructuring. Depreciation and amortization expenses were also substantially
reduced due to the write off of previously amortized expenses. We expect our
operating expenses to for the balance of the fiscal year to be relatively
consistent with our expenses during the nine months ended September 30, 2002.
Other Income and Expenses. Other expenses showed a loss of $205,649 and
$357,630, respectively, for the three and nine months ended September 30,
2002, compared to a loss of $107,000 and a gain of $398,695 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 nine months ended September 30, 2002, we had net losses of
$431,748 and $1,618,272 and loss per share was $0.01 and $0.04, respectively.
Liquidity and Capital Resources
- -------------------------------
In the three and nine months ended September 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 September 30, 2002, we had current assets of $2,111,103, consisting
primarily of $400,000 cash in escrow for the proposed purchase of the building
we occupy, accounts receivable of $398,299, prepaid interest of $105,374, and
$1,183,419 in inventory. We had current liabilities of $4,323,970, consisting
primarily of accounts payable of $1,483,108, a line of credit of $343,941,
interest payable of $278,495, settlements payable of $181,357 and notes
payable of $1,858,638, plus other accrued liabilities of $138,153 that
includes a $133,856 liability for unpaid federal and state taxes which may be
subject to penalties and interest. Accordingly, we have a working capital
deficit of $2,212,867. At September 30, 2002, we had property, plant and
equipment totaling $341,302, 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 September 30, 2002 was $994,834.
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 September 30, 2002
totaled $234,960 for the purchase of plant, property and equipment.
Cash flows from financing activities for the quarter ended September 30, 2002
totaled $1,243,922, 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 $409,799, issuance
of common stock for prepaid finance charges totaling $21,250, and issuance of
common stock for services totaling $130,620, donation of building of $23,164,
and issuance of common stock for finance charges of $51,700.
19
In February 2002, we received a purchase order for a large quantity of our
Results products. At this filing date, we cannot predict when a delivery date
will be set.
As a result of our production increase and delays in scheduled shipments, we
currently have over 734,000 finished product units with a potential wholesale
value of over $4.1 million. We are continuing to find other customers to take
our products in order to reduce our inventory. We are also 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.
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
Southern region. 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.
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.
20
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.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. We believe our
disclosure controls and procedures (as defined in Sections 13a-14(c) and 15d-
14(c) of the Securities Exchange Act of 1934, as amended) are adequate, based
on our evaluation of such disclosure controls and procedures on [date].
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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, attorney's fees and costs. This amount was
paid in full during the period ended September 30, 2002.
Iver J. Longeteig
- -----------------
Mr. Longeteig has pursued a claim outside of the White Mountain Group Contract
escrowed with Alliance Title and filed a complaint on an outstanding note for
$23,887. In compromise of the claim for forbearance, the Company did not
answer the complaint and a default was entered. Mr. Longeteig has agreed to
forebear obtaining a default judgment as long as the Company continues to make
payments on the outstanding balance. At the current time Mr. Longeteig has
been paid $14,488 on this claim.
At September 30, 2002, we have outstanding settlements payable due on
outstanding judgments totaling $181,357. The Company is not aware of any
other threatened litigation against it or its subsidiaries.
21
ITEM 2. CHANGES IN SECURITIES
During the nine months ended September 30, 2002, we issued 1,632,182 shares of
our common stock valued at $409,799 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 749,000 shares of our common stock to
directors and others for services valued at $130,620. We also issued 740,000
shares of our common stock for loan consideration and guarantee of a line of
credit valued at $72,950. 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
interim financial statements and the notes thereto.)
Subsequent to the date of the financial statements included with this report,
on October 18, 2002, our board of directors approved the 2002 Stock Option and
Award Plan, reserving up to 3,000,000 shares of our common stock for issuance
under the plan to officers, directors, employees and consultants. On October
18, 2002, our board of directors approved grants of options to acquire our
common stock at an exercise price of $.168 per share to our president, Jay
Downs (option to purchase 1,250,000 shares) and vice-president, Dave Andrus
(option to purchase 750,000 shares). These options vest only on the
occurrence of performance benchmarks for gross annual sales as follows: one
third of the options granted at vest when gross annual sales reach $5,000,000,
one third vest when gross annual sales reach $10,000,000, and one third vest
when gross annual sales reach $15,000,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On October 18, 2002, John L. Runft tendered his resignation as our Secretary.
The board of directors appointed Margie Humphries as our new Secretary,
effective the same day.
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.
22
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: October 23, 2002
/s/ Jay W. Downs, Chief Executive Officer, Principal Accounting Officer
/s/ Margie Humpries, 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: October 23, 2002
/s/ Jay W. Downs, Director
/s/ John L. Runft, Director
/s/ David Andrus, Director
/s/ Michael McQuade, Director
/s/ M. Stewart Hyndman, Director
/s/ John H. Zenger, Director
/s/ Frank S. Priestley, Director
/s/ Robert E. Crouch, Director
23
CERTIFICATIONS
I, Jay W. Downs, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Diatect
International Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether of not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 23, 2002 /S/Jay W. Downs
Principal Executive Officer
Principal Financial Officer