U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 02-99110
LIQUITEK ENTERPRISES, INC.
--------------------------------------------------------------------------------
(Exact name of Small Business Issuer in its Charter)
NEVADA 91-1499978
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(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
1350 East Draper Parkway
Draper, Utah 84020
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(Address of Principal Executive Offices)
Issuer's Telephone Number: (801) 553-8785
Not applicable.
(Former name, changed since last report)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Company 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 / /
(APPLICABLE ONLY TO CORPORATE ISSUERS)
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date:
As of August 10, 2001, the Company had 38,376,737 shares of Common Stock
outstanding.
Another 15,576,948 restricted shares of Common Stock of the registrant have been
issued subject to rescission rights granted in connection with an acquisition.
Transitional Small Business Issuer Format Yes / / No /X/
LIQUITEK ENTERPRISES INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements: 3
Unaudited Condensed Consolidated Balance Sheet as of June 30, 2001 and
Audited Condensed Consolidated Balance Sheet As of December 31, 2000 4
Unaudited Condensed Consolidated Statements of Operations for the
Three-month and Six-month Periods Ended June 30, 2001 and 2000 5
Unaudited Condensed Consolidated Statements of Cash Flows for the
Six-month Periods Ended June 30, 2001 and 2000 6
Notes to the Unaudited Condensed Consolidated Financial Statements
for the Three-month and Six-month Periods Ended June 30, 2001 and 2000 7
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
PART I - FINANCIAL INFORMATION
All statements, other than statements of historical fact, included
in this Form 10-Q, including the statements under "Management's Discussion
and Analysis," are, or may be deemed to be, "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), and Section 21E of the Securities Exchange Act of
1934 (the "Exchange Act"). Such forward-looking statements involve
assumptions, known and unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements to be materially
different from any future results, performance, or achievements expressed or
implied by such statements contained in this Form 10-Q. Such potential
risks and uncertainties include, without limitation, competitive technology
advancements and other pressures from competitors, economic conditions
generally and in our research and development efforts, availability of
capital, cost of labor (foreign and domestic), cost of raw materials,
occupancy costs, and other risk factors detailed herein and in our filings
with the Securities and Exchange Commission. We assume no obligation to
update the forward-looking statements or to update the reasons actual results
could differ from those projected in such statements. Readers are cautioned not
to place undue reliance on these forward-looking statements.
Item 1. Financial Statements.
The Management of Liquitek Enterprises Inc. ("we," "us," or "Company")
prepared the unaudited condensed consolidated financial statements together
with related notes that are filed with this Form 10-Q Quarterly Report. In
the opinion of management, these financial statements fairly present the
consolidated financial condition of the Company, but should be read in
conjunction with the consolidated financial statements for the year ended
December 31, 2000 previously filed with the Securities and Exchange
Commission.
3
LIQUITEK ENTERPRISES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2001 AND DECEMBER 31, 2000
JUNE 30, 2001 DECEMBER 31, 2000
(UNAUDITED) (AUDITED)
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ASSETS
CURRENT ASSETS
CASH $ 31,350 $ 23,864
ACCOUNTS RECEIVABLE 219,273 200,575
ADVANCES TO COMPANY BEING ACQUIRED 1,390,637 620,000
PREPAID EXPENSES AND OTHER CURRENT ASSETS 190,540 113,830
------------ ------------
TOTAL CURRENT ASSETS 1,831,800 958,269
PROPERTY AND EQUIPMENT, NET 3,100,405 3,153,130
DEPOSITS AND OTHER ASSETS 450,432 447,185
ACQUIRED COMPLETED TECHNOLOGY, NET 10,286,600 10,557,300
GOODWILL, NET 9,765,807 10,022,918
PATENTS AND OTHER INTANGIBLES, NET 770,717 848,097
------------ ------------
TOTAL ASSETS $ 26,205,761 $ 25,986,899
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 1,084,386 $ 587,915
DUE TO RELATED PARTIES 2,808,897 967,079
DEFERRED INCOME TAXES 3,709,967 3,827,213
STOCKHOLDERS' EQUITY
COMMON STOCK, par value $.001/ share, 100,000,000 shares authorized 38,376 38,126
June 30, 2001: 38,376,737 outstanding
December 31, 2000: 38,126,737 outstanding
ADDITIONAL PAID-IN CAPITAL 30,654,311 30,204,561
STOCK OPTIONS, WARRANTS AND DEFERRED COMPENSATION 1,506,241 1,356,241
ACCUMULATED DEFICIT (13,596,417) (10,994,236)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 18,602,511 20,604,692
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,205,761 $ 25,986,899
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
4
LIQUITEK ENTERPRISES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------------ ------------------ ---------------- ----------------
SALES $ 430,482 $ 130,610 $ 896,317 $ 130,610
COST OF SALES 393,635 100,128 712,830 100,128
----------- ----------- ----------- -----------
GROSS PROFIT 36,847 30,482 183,487 30,482
OPERATING EXPENSES
SELLING AND DISTRIBUTION 89,560 43,758 239,235 43,758
GENERAL AND ADMINISTRATIVE 793,033 1,041,958 2,095,044 2,310,072
RESEARCH AND DEVELOPMENT:
ACQUIRED IN-PROCESS RESEARCH AND
DEVELOPMENT -- 970,000 -- 970,000
OTHER 192,761 129,416 402,765 265,551
----------- ----------- ----------- -----------
1,075,354 2,185,132 2,737,044 3,589,381
----------- ----------- ----------- -----------
LOSS BEFORE INTEREST AND INCOME TAX BENEFIT (1,038,507) (2,154,650) (2,553,557) (3,558,899)
INTEREST INCOME / (EXPENSE) NET (33,550) 52,292 (48,623) 78,904
INCOME TAX BENEFIT, NET OF VALUATION ALLOWANCE -- -- -- --
----------- ----------- ----------- -----------
NET (LOSS) $(1,072,057) $(2,102,358) $(2,602,180) $(3,479,995)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.03) $ (0.07) $ (0.07) $ (0.14)
=========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
5
LIQUITEK ENTERPRISES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET (LOSS) $(2,602,180) $(3,479,995)
ADJUSTMENTS TO RECONCILE NET (LOSS) TO
NET CASH USED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 766,576 108,253
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT -- 970,000
STOCK OPTIONS 150,000 365,750
CHANGES IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (18,698) (100,837)
PREPAID EXPENSES AND OTHER CURRENT ASSETS (76,710) 5,387
DEPOSITS AND OTHER ASSETS (3,247) --
ACCOUNTS PAYABLE, ACCRUED EXPENSES, AND
DEFERRED INCOME TAXES 379,224 (83,834)
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NET CASH (USED) BY OPERATING ACTIVITIES (1,405,035) (2,215,276)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
CASH FROM COMPANIES ACQUIRED -- 55,063
ADVANCES TO COMPANIES BEING ACQUIRED (770,637) (749,316)
ACQUISITION OF PROPERTY AND EQUIPMENT (88,929) (559,599)
CAPITALIZED PATENT COSTS AND OTHER TECHNOLOGIES (19,731) (10,162)
---------- ----------
NET CASH (USED) BY INVESTING ACTIVITIES (879,297) (1,264,014)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
ADVANCES FROM (TO) RELATED PARTIES 1,841,818 (6,912)
PROCEEDS FROM ISSUANCE OF COMMON STOCK 450,000 6,728,000
REPAYMENT OF DEBT ASSUMED IN ACQUISITION -- (996,949)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,291,818 5,724,139
---------- ----------
NET INCREASE IN CASH 7,486 2,244,849
CASH AT BEGINNING OF PERIOD 23,864 366,566
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CASH AT END OF PERIOD $ 31,350 $ 2,611,415
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
6
LIQUITEK ENTERPRISES INC.
Notes to the Unaudited Condensed Consolidated Financial Statements for the
Three-month and Six-month Periods Ended June 30, 2001 and 2000.
1. NATURE OF BUSINESS, REORGANIZATION AND BASIS OF PRESENTATION
NATURE OF BUSINESS
On February 12, 2001, we completed the acquisition of Distech Limited
("Distech"), a New Zealand corporation engaged in designing and manufacturing
equipment for treating water and other fluids. Distech has developed unique,
fail-safe, state-of-the-art, sub-atmospheric water distillation equipment.
The technology employs vacuum distillation for low temperature evaporation
and vapor compression for efficient recycling of heat energy. The result is a
cost-efficient system for producing high-purity water in commercial
quantities. Several of Distech's technical innovations are protected by
international patents. Management believes that features such as automatic
clean-in-place (to protect against the problem of mineral scaling), remote
system management over telecommunication links, minimal pre-treatment
requirements, compact size, small footprint and competitive pricing suggest a
strong commercial opportunity for this equipment.
In conjunction with that acquisition, we issued 15,340,104 shares of
restricted common stock of the Company plus 790,896 warrants and 69,000
options for the purchase of additional shares of restricted common stock in
exchange for 100% of the comparable equity securities of Distech. Warrants
for 236,844 shares were exercised during the quarter ended June 30, 2001,
yielding approximately US$165,000 in additional investment in the Company.
The former holders of the Distech equity securities have a right of
rescission on the transaction until the Company achieves an equity infusion
of $5,000,000 or September 30, 2001, whichever occurs first. Because of this
contingency, the Distech acquisition has not been booked, and neither the
Distech-related issuances, the Distech financial position at June 30, 2001
nor the Distech operating results for the six-months ended June 30, 2001 is
reflected in the June 30, 2001 financial statements contained in this Form
10-Q report.
The Distech operations complement those of another wholly-owned subsidiary,
Liquitek Corporation. Together these businesses give us a suite of technologies
offering competitive solutions to problems in water bottling, recycling,
industrial wastewater, remediation, desalination and ultra-pure water
applications. These businesses are further complemented by the operations of
Thermoflow Corporation ("Thermoflow"), Interfluid Environmental Services, Inc.
("Interfluid"), and VitriSeal, Inc. ("VitriSeal"), also wholly-owned
subsidiaries of the Company. Liquitek Corporation, Thermoflow and Interfluid
were all acquired through tax-free, stock-for-stock reorganizations in 2000.
Thermoflow owns and operates a proprietary antifreeze recycling facility in Las
Vegas, Nevada. The Thermoflow technology allows recycling of antifreeze to
produce fully reformulated antifreeze indistinguishable from antifreeze made
from virgin materials. The Thermoflow technology and subsets thereof are capable
of economically treating/recycling many other contaminated liquids,
7
including wastewater. Liquitek Corporation shares the rights to use any or all
of the Thermoflow technology in meeting the needs of its clientele.
Interfluid Environmental Services, Inc. operates a closed-loop waste antifreeze
collection and recycled antifreeze distribution system in the San Diego,
California area. The waste collected in San Diego is deposited at an unrelated
transfer facility in the Los Angeles, California area. Such waste, along with
that brought to the transfer facility by other closed-loop operators and waste
antifreeze collectors, is then transported in Interfluid's long-haul bulk
transportation equipment to Las Vegas for processing in the Thermoflow plant.
Interfluid also provides long-haul bulk transport services for others of
Thermoflow's customers. Interfluid is an integral part of the Thermoflow
operation, but is a separate legal entity to isolate higher risk operations.
Liquitek Corporation has licensed a proprietary oily wastewater treatment system
to Hawaii's largest recycling company. This client has recently been awarded a
reduced inspection schedule from environmental regulators because of the
effectiveness of their water treatment system. The system, or derivatives
thereof, may be readily replicated in other locations. Liquitek has also
developed a proprietary system for recycling carwash, laundry and aqueous
solvent wastewater. The Company has tested the system in Japan and is presently
negotiating sales with a Japanese distributor. Liquitek plans to introduce a
similar system in the United States. Finally, Liquitek is engaged in engineering
customized solutions based on its proprietary technologies for potential
customers with a variety of water treatment problems, e.g., a paper recycling
operation in Mexico.
VitriSeal owns the rights for a series of patented processes and proprietary
know-how called VitriSeal(TM). The process is based on inorganic silicate
chemistry. It produces superior, hard, bright, clear, corrosion-protective
coatings on metal surfaces at a fraction of the cost of other clear coatings.
The VitriSeal(TM) waterborne coating has little to no organic vapor emissions
and creates minimal waste during the normal process operation. Accordingly there
are no abnormal regulatory impacts or special governmental approval requirements
on the VitriSeal(TM) application process, either in our own facility or in
potential licensees' facilities. The VitriSeal(TM) coating combines many of the
attributes of other types of coatings, such as anodizing, chrome plating and
painting. It has corrosion and weathering resistance comparable to organic paint
coatings, and it does not delaminate, or "creep back," from damage locations as
chrome plating and painting do. This unique combination of properties is
expected to afford opportunities in a wide variety of markets: vehicle wheels,
fabricated aluminum products, extruded aluminum products and sheet/coil aluminum
products. Ongoing research indicates potential for applying the coating to
non-aluminum substrates as well.
During the quarter ended June 30, 2001, the Company pursued further refinement
of its products through its research and development functions and sales
opportunities through promotional meetings with prospective customers.
Thermoflow expanded both its sources of supply for waste antifreeze and its
customer base for its recycled products. Liquitek developed a small scale
electro-dialysis module that may be used in conjunction with its previously
developed small scale filtration equipment, thus offering customers the
8
ability to economically produce high purity fluids through on-site
processing. Distech continued the development of its larger scale machine,
the D-1000, and the testing of its technology in various applications, e.g.,
seawater desalination. VitriSeal relocated its laboratory to a facility
adjacent to its production plant in the Metropolitan Detroit area. The
Company's preliminary and on-going sales contacts include:
Distech
Metal finishing operators
Water bottlers
A mid-East equipment sales representative
A military supplier
Retail store operators
An airport
Liquitek
A Japanese distributor
U. S. carwash operators
Oil processors, domestic and international
A paper recycler
VitriSeal
Automotive wheel suppliers
Truck wheel suppliers and refurbishers
Suppliers of fabricated aluminum parts for the truck industry
An aircraft manufacturer
BASIS OF PRESENTATION
We prepared our condensed consolidated financial statements for the three-month
and six-month periods ended June 30, 2001 and 2000 without audit by our
independent auditors. In the opinion of management, all adjustments necessary to
present fairly the Company's financial position as of June 30, 2001, and the
results of operations and cash flows for the three-month and six-month periods
ended June 30, 2001 and 2000 have been made. Such adjustments consist only of
normal recurring adjustments.
Certain note disclosures normally included in our annual financial statements
prepared in accordance with GAAP have been condensed or omitted pursuant to
instructions for Form 10-Q. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in our Form 10-KSB annual report for 2000 previously
filed with the Securities and Exchange Commission.
The results of operations for the three-month and six-month periods ended June
30, 2001 are not necessarily indicative of the results to be expected for the
full year.
9
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
GOVERNMENT REGULATION
Thermoflow Corporation's facility is subject to certain government regulations
regarding hazardous waste management, primarily related to the recycling of
ethylene glycol (spent antifreeze) and storage of other hazardous materials used
in the recycling process. Compliance with these provisions has not had, nor does
the Company expect such compliance to have, any material effect upon the capital
expenditures, operations, financial condition or competitive position of the
Company. Management believes that its current practices and procedures comply
with applicable requirements.
Thermoflow is subject to inspections by the Nevada Department of Conservation
and Natural Resources, a Division of Environmental Protection (the
"Department"), which evaluates compliance with applicable hazardous waste
management regulations. No violations were reported by the Department during the
1999 and 2000 inspections. The Department then shifted to an annual inspection
cycle for Thermoflow; the 2001 inspection is expected to be performed in late
August. In addition, Thermoflow Corporation has an active Nevada hazardous
material storage permit that expires on February 28, 2002. Finally, during the
quarter ended June 30, 2001, Thermoflow began processing oily wastewater to
render it harmless for disposal to the sewer system under a permit granted by
the Department.
Except as set forth below, the Company's significant accounting policies are as
described in the notes to the Company's December 31, 2000 financial statements
included in the related Form 10-KSB filed with the Securities and Exchange
Commission.
PRINCIPLES OF CONSOLIDATION
The accompanying June 30, 2001 financial statements include the accounts of the
Company and its wholly-owned subsidiaries, except for Distech Limited which has
not been consolidated because of the contingencies that remained in place at
June 30, 2001, as noted above. All significant inter-company transactions and
balances have been eliminated in consolidation. Because the Thermoflow and
Liquitek Corporation subsidiaries were acquired on May 26, 2000, only
approximately one month of their operations is included in the accompanying
statements of operations for the three-month and six month periods ended June
30, 2000. Further, because the Interfluid subsidiary was acquired on July 1,
2000, none of its operations are included in the accompanying statements of
operations for the three-month and six-month periods ended June 30, 2000.
INTANGIBLE ASSETS OTHER THAN PATENTS
Goodwill and acquired completed technology are amortized on a straight-line
basis over 20 years. Assembled workforce, acquired customer base and other
intangible assets are amortized over 10, 5 and 2-3 years, respectively, on a
straight-line basis.
10
RECENT ACCOUNTING PRONOUNCEMENTS
For the three-month and six-month periods ended June 30, 2001, the Company
adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended. Since
the Company does not presently engage in activities covered by SFAS 133, there
was no significant effect on the Company's June 30, 2001 financial statements.
In July, 2001, the Financial Accounting Standards Board issued Statements No.
141, "Business Combinations" ("SFAS 141") and No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 supersedes APB Opinion No. 16,
"Business Combinations" and SFAS 38, "Accounting for Pre-acquisition
Contingencies of Purchased Enterprises." SFAS 141 is effective for fiscal
years beginning after June 30, 2001 and requires that all business
combinations be accounted for by the purchase method. SFAS 142 supersedes APB
Opinion No. 17, "Intangible Assets." SFAS 142 is effective for fiscal years
beginning after December 15, 2001 and provides that all existing and newly
acquired goodwill and intangible assets will no longer be amortized but will
be tested for impairment annually and written down only when impaired.
Management has not determined exactly how the requirements of such
pronouncements will affect the Company's future financial statements. The
effect of SFAS 142 may be significant. With goodwill and acquired technology
intangibles constituting approximately $20 million of the approximately $26
million in total assets (approximately 77%) as of June 30, 2001, either the
absence of amortization charges or the write-down of impaired values will
have a significant impact whenever either occurs.
RECLASSIFICATIONS
Certain amounts in the 2000 financial statements have been reclassified to
conform to their June 30, 2001 presentation.
3. RELATED PARTY TRANSACTIONS
In connection with the acquisition of Distech Limited (Note 1), the Company
advanced approximately $1,391,000 to Distech through June 30, 2001. These
advances are due on demand and are non-interest bearing. It is expected that
once the contingencies in the transaction are fulfilled and the acquisition is
recorded in the books of the Company, the inter-company receivable and payable
shown in the books of the Company and Distech will be eliminated in
consolidation. If the acquisition does not book, there is no assurance that
such advances will be repaid, but management expects the required financing
to be received prior to September 30, 2001.
During the three-month period ended June 30, 2001, advances from related parties
increased by approximately $793,000. These were in the form of working capital
advances from Lighthouse Capital, Inc., an affiliate of Culley W. Davis, the
Company's Chairman of the Board. The debt from these advances was subsequently
converted to Company common stock at the rate of $1.50 per share. See Note 5,
GOING CONCERN/LIQUIDITY CONSIDERATIONS, below.
11
4. STOCK TRANSACTIONS
During the three-months ended June 30, 2001, holders of warrants that were
issued in connection with the acquisition of Distech Limited exercised such
warrants for the purchase of 236,844 restricted shares of the Company. The
exercise price was approximately US$0.70 per share. Inasmuch as the contingency
regarding the rescission right on the Distech acquisition remains in place, none
of the Distech acquisition, including the exercise of these warrants, has been
recorded in the Company's accounts or included in the financial statements in
this Form 10-Q report.
5. GOING CONCERN/LIQUIDITY CONSIDERATIONS
As discussed in Note 1, the Company is engaged in three businesses: development
of a metal coating process known as "VitriSeal(TM)," recycling antifreeze, and
providing equipment for processing other contaminated fluids to recycle them or
render them harmless to the environment. The Company has not generated
significant revenues in the past. Management expects that the Company will
require significant additional capital to advance the development of these
operations to the point at which they may become commercially viable. The
acquisition of Distech (see Note 1) has required expansion of our capital
resources by a $5,000,000 equity infusion by September 30, 2001 in order to
eliminate a right of rescission on this transaction.
In the Form 10-Q report for the quarter ended March 31, 2001, the Company
reported that the private placement of a $5 million equity investment in
Liquitek Enterprises, Inc. had been fully subscribed by Accelerated Technologies
Fund LLC ("ATF"), an entity organized by Culley W. Davis, the Chairman of the
Board of the Company. In a press release to the general public issued on July
10, 2001, the Company announced that ATF would be unable to fulfill this
commitment and that Lighthouse Capital, Inc. ("Lighthouse"), an affiliate of Mr.
Davis, would convert the $2.1 million it had advanced to the Company against the
ATF commitment from debt to Company common stock at the rate of $1.50 per share.
This rate exceeded the weighted average closing price of the shares on the dates
monies were advanced by Lighthouse, which was approximately $1.14 per share.
The Company has addressed its liquidity problems in part by temporary layoffs
plus payables and payroll deferrals. The Company is seeking further equity
investment through a private placement offering of convertible debentures. We
also plan a registered rights offering to current shareholders. While such
investment is being sought, and to deal with pressing financial needs, the
Company obtained on August 9, 2001 a bridge loan in the amount of $1,000,000
from an existing shareholder. Approximately $545,000 of this amount was used
to pay off an overdue note held by HydroMaid International, Inc. for funds it
had advanced to enable the Company to exercise the option it held on the
building in North Las Vegas, Nevada, where the Thermoflow plant is located.
The balance of the proceeds will be used to pay critical payables and finance
ongoing operations while further equity investment in the convertible
debentures is being pursued.
12
6. LOSS PER COMMON SHARE
Loss per common and common equivalent share is based on the weighted average
number of shares of common stock and potential common stock (as retroactively
adjusted for the effect of the Reorganization) outstanding during the period in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
per Share."
The weighted average numbers of common shares outstanding for the three-month
periods ended June 30, 2001 and 2000 were 38,376,737 and 28,785,307
respectively. The weighted average numbers of common shares outstanding for the
six-month periods ended June 30, 2001 and 2000 were 38,274,803 and 25,490,371
respectively.
A total of 15,340,104 restricted shares of Common Stock of the Company have been
issued, subject to rescission, in connection with the exchange of shares with
common stockholders of Distech Limited in a tax-free, stock-for-stock
reorganization. An additional 236,844 restricted shares of the Common Stock of
the Company were issued during the three-month period ended June 30, 2001, under
the exercise of warrants held by the stockholders of Distech Limited as a result
of the acquisition. Such issuances have not been reflected in the Company's
June 30, 2001 financial statements because of contingencies in the acquisition
transaction.
7. SEGMENT INFORMATION
Prior to the acquisitions discussed in Note 1, the Company operated in only one
segment, metal coating, which was then and remains in the development stage. As
of approximately June 1, 2000, the Company had three reportable segments (see
the table below). Except as set forth herein, the segments' significant
accounting policies are the same as those described in the notes to the
Company's December 31, 2000 financial statements included in the related Form
10-KSB filed with the Securities and Exchange Commission. Interest expense is
not allocated to individual operating segments when determining segment profit
or loss. The Company evaluates performance based on profit or loss from
operations before interest, income taxes and non-recurring gains and losses.
The Company's reportable segments are strategic business units that offer
different products and services. Each segment is managed separately because they
use different technologies and/or market to distinct classes of customers.
13
For the six-months ended June 30, 2001
(Table and Related Text in Thousands)
Metal Waste
Coating Water Antifreeze
Process Treatment Recycling Unallocated Totals
------- --------- --------- ----------- ------
Sales to external
customers $ -- $ 78 $ 818 $ -- $ 896
Segment loss $ 743 $ 544 $ 300 $ 1,015 $ 2,602
Segment assets $ 602 $12,562 $11,470 $27,284 $51,918
Unallocated segment assets in the foregoing table consist primarily of
investments in subsidiaries ($18,730), subsidiary payables to the Company
($6,860) and other assets ($1,694). The former two amounts were eliminated in
consolidation, along with $120 of inter-company receivables and inventory
holdings within a subsidiary. The net of the unallocated segment assets ($27,284
as shown in the table) and the eliminations ($18,730, $6,860 and $120 as
described in this paragraph) is $1,574. When this amount is added to the segment
assets in the other segments in the table ($602, $12,562 and $11,470), the total
of $26,208 corresponds (within a rounding allowance) to the consolidated total
assets as presented in the balance sheet for June 30, 2001.
8. MAJOR CUSTOMERS
For the six-month period ended June 30, 2001, one customer of the antifreeze
recycling segment individually accounted for at least 10% of segment revenues
and consolidated revenues. Furthermore, two customers of the waste water
treatment segment each accounted for over 10% of that subsidiary's revenues,
though neither accounted for 10% of consolidated revenues.
9. SUBSEQUENT EVENTS
In accordance with the month-to-month nature of the consulting contract with
Hamlin Jennings, an independent contractor who provided technical consulting
services to VitriSeal, Inc. over the past four years, his services were
terminated as of April 30, 2001. The termination process and post-termination
provisions of his agreements with the Company are being followed. The Company
has replaced his consulting services with those of a scientist who will carry on
the Company's research and development program as an employee.
On August 14, 2001, the Company was served notice of a civil action filed by
Hamlin Jennings in U. S. District Court, Northern District of Illinois, seeking
a declaratory judgment on the ownership of inventions expected from work under a
grant from the National Science Foundation. While serving the Company as a
consultant, Mr. Jennings applied for and was awarded the grant to fund
experimentation in using the VitriSeal(TM) coating, or derivatives thereof, as
an undercoating to vapor deposition hard coatings. The Company believes that the
agreements that Mr. Jennings signed upon commencing his employment, particularly
the Consulting Agreement and the contemporaneous Non-disclosure and Invention
Assignment Agreement, protect the Company's interest in this matter. Legal
counsel
14
has not had time to examine the complaint and formulate responses thereto as of
the filing of this Form 10-Q report.
In conjunction with the termination of the Jennings contract, we have relocated
our laboratory operations to the Detroit area in a facility adjacent to the
pilot production plant established in 2000. The physical consolidation of
research and development and production operations is expected to benefit the
Company. The laboratory space in Evanston, Illinois that we vacated in this
relocation has been placed on the market. With such space in that area being
limited, we anticipate that we will be able to eliminate most, if not all, of
the cost of that facility prior to the termination of our contract on the space.
However, with current economic conditions as they are, the real estate market in
Evanston is relatively soft. We may have to await a rebound or market the space
as general office space rather than laboratory space, either of which options
will entail further cost to the Company.
The Board of Directors took the following actions in various meetings subsequent
to June 30, 2001:
- Approved the conversion of $2,100,000 in debt owed to Lighthouse
Capital, Inc. to common stock at the rate of $1.50 per share, i.e.,
1,400,000 shares to be issued.
- Authorized the issuance of investment units comprised of:
o 12%, 36-month convertible debentures in the aggregate principal
amount of up to $7,500,000 with a conversion rate of $0.50 per
share,
o One Class A warrant for each $2.00 of principal amount in the
debentures exercisable at $0.25 per share and expiring 60 months
from the date of issuance, and
o One Class B warrant for each $1.00 of principal amount in the
debentures exercisable at $1.00 per share and expiring 60 months
from the date of issuance.
- Authorized an amendment to the rescission rights in the Distech
Limited Acquisition Agreement whereby the advances from the Company to
Distech Limited will not be required to be repaid in the event the
rescission is effected at a time when the Company is in a process of
dissolution, whether or not under court supervision.
- Authorized the Company to enter into a loan agreement between Distech
Limited and Distillation Technologies Limited ("DTL"), a new New
Zealand corporation organized to raise funds specifically for the
support of Distech Limited. DTL is to offer debentures that will
mirror the terms and conditions of the Company's authorized debentures
as described above. The proceeds from the DTL offering will be
advanced to Distech under the loan agreement. If the Company is
successful in raising the $5 million necessary to terminate the
rescission rights of the former Distech Limited shareholders, or if
the rescission rights are not exercised, the debentures issued by DTL
will be replaced with the mirror image debentures of the Company.
15
- Authorized the Company to enter into a loan agreement in an amount not
to exceed $1,200,000 with the Bart C. Warner Revocable Trust. This
loan is to provide bridge financing to the Company to enable the
payment of other debts and the financing of ongoing operations while
the debentures described above are being marketed. This loan is
secured by a pledge of the Company's shares of Thermoflow Corporation,
a deed of trust on the real property owned by Thermoflow Corporation
and a financing statement on Form UCC-1 on the equipment and personal
property of Thermoflow Corporation. The loan bears interest at the
rate of 12% per annum, paid quarterly, and it matures in one year. An
initial increment of financing under this loan agreement in the amount
of $1,000,000 was advanced to the Company on August 9, 2001.
In conjunction with the Interfluid acquisition which closed on July 1, 2000,
the previous stockholders of Interfluid received 200,000 shares of the
Company's restricted common stock. Under the original terms of the
acquisition agreement, such stockholders were eligible to sell shares under
Rule 144 after the restrictions pertaining to that rule were lifted on July
1, 2001. To the extent that such sales were made at prices below certain
levels stipulated in the agreement, the Company would have to issue
additional shares to the selling shareholder(s). An amendment to the
agreement has been agreed upon by the shareholders and the Company. The
original provisions for the issuance of additional shares have been voided.
In their place, a right of rescission has been granted on the condition that
the Company undertakes the dissolution of its business. If the funding
necessary to continue operations is raised, the Company will buy back the
200,000 shares at a price of $3.00 in four equal installments. The first is
due within fourteen days after raising the necessary funds to allow the
Company to go forward with its business. The second is due on March 31, 2002,
the third on March 31, 2003 and the fourth on March 31, 2004. Should the
market price on any of those dates exceed $3.00 per share, the stockholder
may opt to forego that installment with no further obligation on the Company
for that installment. Management expects to formalize this amendment with a
written agreement.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
Consolidated net revenues for the three-month and six-month periods ended
June 30, 2001, were $430,482 and $896,317 compared to $130,610 and $130,610
for the comparable periods in 2000. Consolidated costs of sales were $393,635
and $712,830 for the three-month and six-month periods ended June 30, 2001
compared to $100,128 and $100,128 for the comparable periods in 2000. These
data yield gross margins of 8.6% and 20.5% for the three-month and six-month
periods ended June 30, 2001 while this measure for the three-month and
six-month periods ended June 30, 2000 was 23.3% and 23.3%. The 2001 periods
include operations from Thermoflow, Liquitek and Interfluid while the 2000
periods contain Thermoflow and Liquitek operations for only approximately one
month. The 2001 periods also include production facility overhead costs for
the VitriSeal, Inc. subsidiary that had not been established in the
comparable periods of the earlier year, and for which no revenues were
generated in 2001.
Consolidated operating expenses were $1,075,354 and $2,737,044 for the three-
month and six-month periods ended June 30, 2001 versus $2,185,132 and $3,589,381
for the comparable periods in 2000. The decreases are attributable to an amalgam
of increases and decreases, the major elements of which are (1) the
restructuring of the VitriSeal(TM) research and development process, (2) the
consolidation of Thermoflow, Liquitek and Interfluid operating expenses, (3) the
write-off upon acquisition in 2000 of $970,000 in in-process research and
development intangibles for the Liquitek Corporation subsidiary, (4) the stock
compensation associated with the royalty rescission agreements negotiated in
2001 with Daniel L. Corbin and Dennis A. Repp and (5) a reduction in financial
consulting service fees associated with the 2000 equity fund raising.
The Company experienced a consolidated net loss and corresponding loss per share
of $1,072,057 and $0.03, respectively, for the three-month period ended June 30,
2001, compared to a consolidated net loss and loss per share of $2,102,358 and
$0.07, respectively, for the comparable 2000 period. The
16
losses for the six-month period ending June 30, 2001, were $2,602,180 and $0.07
while the losses for the comparable 2000 period were $3,479,995 and $0.14.
CAPITAL RESOURCES AND LIQUIDITY
With the Distech acquisition described herein, and with the changes in
management personnel which occurred in late 2000, the primary thrust of our
operating plans for 2001 is to complete the transition from research and
development to commercial operations with production, sales and revenue. In
early 2001, each operating company completed the development of long range
strategic plans and operating plans. Control mechanisms have been put in
place to monitor adherence to these plans. Additional acquisitions may occur,
but only under compelling circumstances that would enhance the performance of
the businesses already owned.
The 2001 Operating Plan for VitriSeal, Inc. contemplates revenue from contract
coating in our Detroit plant for a variety of forged, fabricated, extruded and
sheet aluminum products. Over the ensuing three years, we expect to enlarge the
volumes of these contract-coating services and license or franchise the use of
our technology in the plants of customers. The ongoing research and development
program will address definition of the characteristics of the coating, applying
the coating to different forms of aluminum and experimenting with coatings for
other metals.
The 2001 Operating Plan for Thermoflow Corporation calls for significant growth
in the utilization of the capacity of the Las Vegas plant. We also have started
to combine waste water treatment with waste antifreeze treatment in the Las
Vegas facility. We expect to be at 100% of practical capacity sometime in 2002.
The plan calls for starting construction of a second plant in 2002 and
additional plants as we achieve capacity operations in each successive plant,
though changes in competitive circumstances may suggest other ways of competing
in these markets.
The Liquitek Corporation 2001 Operating Plan anticipates revenues from the sale
and/or engineering of small-, intermediate- and large-scale fluid treatment
systems using the Company's technologies. Growth through the next three years is
expected to come from these same product lines with greater volumes following a
reputation for successful implementations through earlier years' sales.
The Distech Limited 2001 Operating Plan provides for sales of the D-50 model
and derivatives thereof, models producing approximately 50 U.S. gallons of
treated water per hour, in remediation, water bottling, desalination,
closed-loop recycling and institutional markets. Recently an opportunity has
arisen in a market not contemplated in the 2001 Operating Plan. It has the
potential to be bigger than any of the other markets identified in the plan
and is being vigorously pursued. The research and development program will
support these sales objectives and will expand the product line through
development of larger scale equipment. Future years' sales are expected to
grow as the product reputation spreads and will be augmented by products in
the D-1000 and D-3000 series, models that can produce 1,000 and 3,000 U.S.
gallons of treated water per hour, respectively.
The operating plans for 2001 project that all of our businesses will generate
revenue, some for the first time. There are clearly risks associated with these
assessments. We cannot know for certain at this point that the market will
accept our product offerings, particularly when several of the products
previously have not even been offered for sale. Nevertheless, management
17
believes that the functional performance and consumer economics of these
products will allow us to reach our goals.
All Distech sales, financing and other significant transactions will be
transacted in U.S. dollars. As such, the Company does not foresee any
significant risks arising out of fluctuations of foreign currency exchange
rates.
The Company expects to raise additional capital within the next twelve months to
fund further development of present and anticipated operations. The acquisition
of Distech has required expansion of our capital resources by a $5,000,000
equity infusion by September 30, 2001. The Company is presently seeking equity
investment and debt financing.
In the Form 10-Q report for the quarter ended March 31, 2001, the Company
reported that the private placement of a $5 million equity investment in
Liquitek Enterprises, Inc. had been fully subscribed by Accelerated Technologies
Fund LLC ("ATF"), an entity organized by Culley W. Davis, the Chairman of the
Board of the Company. In a press release to the general public issued on July
10, 2001, the Company announced that ATF would be unable to fulfill this
commitment and that Lighthouse Capital, Inc. ("Lighthouse"), an affiliate of Mr.
Davis, would convert the $2.1 million it had advanced to the Company against the
ATF commitment from debt to Company common stock at the rate of $1.50 per share.
This rate exceeded the weighted average closing price of the shares on the dates
monies were advanced by Lighthouse, which was $1.14 per share.
The July 10, 2001, press release went on to say that the Company was dealing
with its liquidity problems in part by temporary layoffs plus payables and
payroll deferrals. The Company sought and closed on August 9, 2001, a bridge
financing arrangement with a $1 million loan from an existing shareholder. This
loan may be increased to $1,200,000. The Company is also seeking permanent
equity investment through a private placement offering of convertible debentures
and through a registered rights offering to current shareholders. Certain
accredited potential investors have been identified and are pursuing due
diligence efforts to evaluate the investment as of the filing of this Form 10-Q
report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not presently have any investments subject to market risks
beyond those generally associated with being in business in the United States.
All of our transactions are denominated in U.S. dollars.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On August 14, 2001, the Company was served notice of a civil action filed by
Hamlin Jennings in U. S. District Court, Northern District of Illinois, seeking
a declaratory judgment on the ownership of inventions expected from work under a
grant from the National Science Foundation. While serving the Company as a
consultant, Mr. Jennings applied for and was awarded the grant to fund
experimentation in using the VitriSeal(TM) coating, or derivatives thereof, as
an undercoating to vapor deposition hard coatings. The Company believes that the
agreements that Mr. Jennings signed upon commencing his employment, particularly
the Consulting Agreement and the contemporaneous Non-disclosure and Invention
Assignment Agreement, protect the Company's interest in this matter. Legal
counsel has not had time as of the filing of this Form 10-Q report to examine
the complaint and formulate responses thereto.
Item 2. Changes in Securities.
Warrants were exercised by former shareholders of Distech Limited during the
quarter ended June 30, 2001. A total of 236,844 shares were issued for these
warrants, and the exercise price was approximately US$0.70 per share. These
shares are subject to rescission under the terms of the Distech Limited
Acquisition Agreement. That rescission right constitutes a contingency that has
precluded the inclusion of the Distech Limited acquisition and operating results
in the Company's financial statements included in this Form 10-Q report.
Item 3. Defaults Upon Senior Securities.
The Company had been in default since March 31, 2001, on a note payable to
HydroMaid International, Inc. The principal amount thereof was $525,000. That
note and the interest accrued thereon were fully paid on August 10, 2001.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.*
None.
(b) Reports on Form 8-K.
None.
* A summary of any Exhibit is modified in its entirety by
19
reference to the actual Exhibit.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIQUITEK ENTERPRISES INC.
Date: 08/20/01 BY: /s/ LESTER W. B. MOORE
--------------------------------
Lester W. B. Moore, Chief
Executive Officer
Date: 08/20/01 BY: /s/ JOHN W. NAGEL
--------------------------------
John W. Nagel, Chief Financial
Officer
20