UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from
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Commission file number 0-27803
COVOL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0547337
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
3280 North Frontage Road, Lehi, Utah 84043
(Address of principal executive offices (Zip Code)
(801) 768-4481
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
---------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 14 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. Yes No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Stock Amount Outstanding
$.001 par value Common Stock 7,294,123 Shares of Common Stock
at June 30, 1996
<PAGE>
COVOL TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page No.
Part I - Financial Information
Item 1. Consolidated Financial Statements
Balance Sheet. . . . . . . . . . . . . . . . . . .3
Statement of Operations. . . . . . . . . . . . . .4
Statements of Cash Flows . . . . . . . . . . . . .5
Notes to Financial Statements. . . . . . . . . . .6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . 7
Part II. - Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . 10
Item 2. Changes in Securities. . . . . . . . . . . . . . 10
Item 3. Defaults upon Senior Securities. . . . . . . . . 10
Item 4. Submission of Matters to a Vote
of Security Holders. . . . . . . . . . . . . . . 10
Item 5. Other information. . . . . . . . . . . . . . . . 10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 10
<PAGE>
The accompanying condensed consolidated financial statements of Covol
Technologies, Inc. and subsidiaries, have been prepared without audit, pursuant
to the rules and regulations of the Securities and Exchanges Commission.
Although, certain information normally included in financial statements prepared
in accordance with generally accepted accounting principles has been condensed
or omitted, Covol believes that the disclosures are adequate to make the
information presented not misleading. The condensed financial statements should
be read in conjunction with the financial statements and notes thereto included
in Covol's form 10 for the fiscal year ended September 30, 1995.
2. Loss Per Share Calculation
Primary average shares include only common shares outstanding. The computation
of fully diluted net loss per common share was antidilutive in each period for
which a net loss was presented; therefore, the amounts reported for primary and
fully diluted loss are the same for those periods.
<PAGE>
COVOL TECHNOLOGIES, INC.
(FORMERLY ENVIRONMENTAL TECHNOLOGIES GROUP INTERNATIONAL)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of As of
June 30, September 30,
1,996 1,995
--------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $131,799 $583,757
Receivables 79,040 22,005
Inventories 22,208 0
Prepaid expenses 3,349 12,525
--------------- ---------------
Total current assets 236,396 618,287
--------------- ---------------
Property, plant and equipment, net of
accumulated depreciation 1,242,654 1,330,300
Other assets:
Restricted cash 0 500,000
Cash surrender value of life insurance 152,112 139,612
Deferred tax asset 23,000 23,000
Deposits and other assets 68,017 39,463
--------------- ---------------
Total other assets 243,129 702,075
--------------- ---------------
Construction - Work in Progress 2,526,700 0
--------------- ---------------
Net assets - discontinued operations 2,579,600 9,315
--------------- ---------------
Total assets $6,828,479 $2,659,977
=============== ===============
As of As of
June 30, June 30,
1996 1995
--------------- ---------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $2,109,174 $747,137
Accrued liabilities 165,863 286,451
Notes payable - current 175,396 26,084
Notes payable - related parties, current 0 39,035
--------------- --------------
Total current liabilities 2,450,433 1,098,707
--------------- ---------------
Long-term liabilities:
Notes payable, non-current 161,321 176,601
Deferred compensation 209,882 201,901
--------------- ---------------
Total long-term liabilities 371,203 378,502
--------------- ---------------
Total liabilities 2,821,636 1,477,209
--------------- ---------------
Commitments (Notes 10, 13 and 16)
Stockholders' equity:
Common stock; $0.001 par value;
authorized 25,000,000 shares
issued and outstanding 5,260,042 at September
30, 1995, and 7,294,123 at June 30, 1996 7,294 5,260
Common stock to be issued 119,334 shares at
30, 1995 0 119
Capital in excess of par value 29,069,173 9,617,512
Capital in excess of par value - common
stock to be issued 0 581,881
Accumulated deficit (12,912,265) (7,360,156)
Notes receivable from issuance
of common stock (5,775,076) (240,000)
Deferred compensation from stock options (6,382,283) (1,421,848)
--------------- ---------------
Total stockholders' equity 4,006,843 1,182,768
--------------- --------------
Total liabilities and
stockholders' equity $6,828,479 $2,659,977
=============== ===============
<PAGE>
COVOL TECHNOLOGIES, INC.
(FORMERLY ENVIRONMENTAL TECHNOLOGIES GROUP INTERNATIONAL)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Ended June 30, Nine Months Ended June 30,
----------------------------- ----------------------------
1996 1995 1996 1995
----------- ------------ ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
<S> <C> <C> <C> <C>
License fees $500,000 $100,000 $500,000 $100,000
Briquette sales 29,174 2,760 37,172 12,558
----------- ------------ ----------- -----------
Total revenues 529,174 102,760 537,172 112,558
----------- ------------ ----------- -----------
Operating costs and expenses:
Cost of briquettes 92,077 0 144,018 0
Research and development 558,116 185,139 1,479,439 491,497
Selling, general and
administrative 1,359,159 387,310 2,962,780 888,488
Compensation expense
on stock options 537,384 0 1,188,019 0
----------- ------------ ----------- -----------
Total operating costs
and expenses 2,546,736 572,449 5,774,256 1,379,985
----------- ------------ ----------- -----------
Operating loss (2,017,562) (469,689) (5,237,084) (1,267,427)
----------- ------------ ------------ ------------
Other income (expense):
Interest income 239,055 0 261,817 0
Interest expense (17,002) (30,672) (53,051) (88,356)
Loss on sale of asset (145,000) 0 (145,000) 0
Other income (10) 0 564 0
----------- ------------ ------------ ------------
Total other income
(expense) 77,043 (30,672) 64,330 (88,356)
----------- ------------ ------------ ------------
Loss from continuing operations
before income tax benefit
(provision) (1,940,519) (500,361) (5,172,754) (1,355,783)
Income tax benefit (provision) 0 0 0 14,000
----------- ------------ ------------ ------------
Loss from continuing operations (1,940,519) (500,361) (5,172,754) (1,341,783)
Discontinued operations:
Income (loss) from discontinued operations (less applicable income tax
(provision) benefit of $0,$0, $0, $(14,000),
and $0 respectively) (122,014) (114,318) (379,355) 28,533
----------- ------------ ----------- -------------
Net (loss) ($2,062,533) ($614,679) ($5,552,109) ($1,313,250)
============ ============ ============ =============
Net (loss) per common share:
Loss per share from
continuing operations ($0.27) ($0.11) ($0.77) ($0.31)
Income (loss) per share from
discontinued operations (0.02) (0.03) (0.06) 0.01
------------ ------------ ------------ -------------
Net (loss) per share ($0.28) ($0.13) ($0.83) ($0.30)
============ ============ ============ =============
Weighted average shares
outstanding 7,257,237 4,572,361 6,687,190 4,319,668
============ ============ ============ =============
</TABLE>
<PAGE>
COVOL TECHNOLOGIES, INC.
(FORMERLY ENVIRONMENTAL TECHNOLOGIES GROUP INTERNATIONAL)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
Three Months Ended June 30, Nine Months Ended June 30,
----------------------------- -----------------------------
1996 1995 1996 1995
------------- ------------- -------------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income (loss) ($2,062,533) ($614,679) ($5,552,109) ($1,313,250)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization (25,061) 18,026 86,419 58,899
Deferred income taxes 0 0 0 488,000
Common stock issued for services 4,500 0 365,956 0
Amortization of deferred compensation on stock options 537,384 0 1,188,019 0
Increase (decrease) from changes in assets and liabilities:
of continuing operations:
Receivables (26,020) (24,157) (57,035) (25,216)
Inventories 0 0 (22,208) (14,534)
Prepaid expenses 3,771 1,221 9,176 (3,054)
Deposits and other assets 70,605 15,000 (28,554) 17,823
Accounts payable 1,232,141 79,997 1,362,037 193,445
Accrued liabilities 62,859 (31,569) (120,588) (112,138)
Deferred compensation 9,993 2,486 15,280 7,458
Discontinued operations noncash charges and working
capital changes (22,757) 142,345 (592,345) 236,648
-------------- ------------- -------------- ------------
Net cash provided by (used in) operating
activities (215,118) (411,330) (3,345,952) (465,919)
-------------- ------------- -------------- ------------
Cash flows from investing activities:
Cash paid for property, plant and equipment (717,490) (46,724) (2,439,054) (114,526)
Purchase of subsidiaries 0 0 0 (10,000)
Increase in cash surrender value of life insurance (6,250) (6,250) (12,500) (18,750)
Investing activities of discontinued operations 0 221,098 (142,910) 42,244
-------------- ------------- -------------- ------------
Net cash used in investing activities (723,740) 168,124 (2,594,464) (101,032)
-------------- ------------- -------------- ------------
Cash flows from financing activities:
Payment of capital lease obligations 0 0 0 (27,345)
Proceeds from notes payable 160,000 525,000 160,000 525,000
Payment of notes payable (533) (21,771) (10,688) (46,976)
Payment of notes payable - related parties 0 (867,000) (39,035) (1,178,098)
Proceeds from note receivable from issuance of common stock 468,497 0 633,337 0
Proceeds from issuance of common stock 616,500 580,774 6,197,909 1,103,339
Financing activities of discontinued operations (281,966) 677,987 (1,763,767) 782,165
-------------- ------------- -------------- -----------
Net cash provided by financing activities 962,498 894,990 5,177,756 1,158,085
-------------- ------------- -------------- -----------
Net increase (decrease) in cash 23,640 651,784 (762,660) 591,134
Total cash and cash equivalents, beginning of period: 504,866 211,233 1,291,166 271,883
Cash and cash equivalents, end of period
Continuing operations:
Cash and cash equivalents 131,799 681,839 131,799 681,839
Discontinued operations 396,707 181,178 396,707 181,178
-------------- ------------- -------------- ------------
Total cash and cash equivalents, end of period $528,506 $863,017 $528,506 $863,017
============== ============= ============== ============
Supplemental schedule of noncash investing and financing activities:
Common stock issued for notes receivable $9,038 $6,168,413
Common stockissued to repay advances $45,613
Commonn stock issued to repay notes payable 100,000
Supplemental disclosure of cash flow information: Cash paid for interest:
Continuing operations $17,002 $30,672 $53,051 $88,356
Discontinued operations 54,789 24,788 190,025 86,677
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Results of Operations
Three months ended June 30, 1996 compared to three months ended June 30,
1995
Revenues
Total revenues increased by $426,414 or approximately 415% in the three
months ended June 30, 1996 from the $102,760 reported in the comparable period
in 1995. During the 1995 period, the Company was in the process of liquidating
its "Clean Coal" inventory, which accounted for the revenue in 1995.
The 1996
revenue was from the briquetting operations at Geneva. The Company was in the
process of restarting the Geneva plant to process iron rich briquettes.
Production continued to increase through July. During the period ended June 30,
1996, the Company sold a license to produce coal extrusions to Utah Synfuel #1,
a Delaware limited partnership, of which the Company is the general partner. The
partnership paid the Company $500,000 for the license. As described in
"Liquidity and Capital Resources" below, the Company has entered into a letter
of intent to sell its construction and limestone businesses. The revenues for
the construction and limestone businesses are included in the line item "Income
(loss) from operations of discontinued construction companies", for the periods
ended June 30, 1996 and 1995 the revenues for these entities are included in the
line item "Income (loss) from discontinued operations" .
Margins, Costs and Expenses
The Company's operating loss increased in the 1996 period from the
comparable period in 1995 due in part to the recognition of compensation expense
of $538,614 on stock options, a charge to income in the amount of $561,766 as a
settlement of the past presidents employment contract, a charge to income in the
amount of $145,000 as a result of the option on the Wellington property expiring
and the increased research and development expenses of $372,977 or approximately
201% from the $185,139 expended in the comparable period in 1995.
General and administrative expenses increased by $310,083 or 80% during the
three months ended June 30, 1996 from the comparable period in 1995. This
increase is due to the Company's increase in staff, the related costs associated
with licensing and exploiting the Briquetting Technology and the startup costs
associated with the Geneva briquetting plant.
Net Loss
Net loss increased for the three months ended June 30, 1996 by $1,440,158
as compared to the three months ended June 30, 1995. The increase in loss is
primarily due to increased general and administrative costs the Company has
incurred as a result of the increase in corporate staff, a charge to income in
the amount of $537,384 for the issuance of options at below market value, a
charge to income in the amount of $561,766 for the settlement of the past
presidents employment contract, a charge to income in the amount of $145,000 for
the expiration of the Wellington property and the startup costs of the Geneva
briquetting plant. The construction companies contributed a net loss of $122,014
to the consolidated net loss for the three month period ended June 30, 1995.
Nine months ended June 30, 1996 as compared to nine months ended June 30,
1995
Revenues
Net revenues from the sale of briquettes increased by $24,614 in 1996 from
the $12,558 reported in the previous year. As described in "Liquidity and
Capital Resources" below, the Company has entered into a letter of intent to
sell its construction and limestone businesses. The revenues for the
construction businesses are included in the line item "Income (loss) from
operations of discontinued construction companies".
Margins, Cost and Expenses
The Company's operating costs increased $4,394,271 from the $1,379,985
reported in 1995. This is due in part to the recognition of compensation expense
of $1,188,019 on stock options issued below market price.
The Company's research and development expenditures increased $987,942 or
201% for 1996 as a result of increased expenses relating to the coal and revert
Briquetting Technology.
General and administrative expenses increased by $2,074,292 or 233% during
1996 from the previous year. This increase is due to the Company building
infrastructure and increasing the corporate staff and a charge to income for the
settlement of the past presidents employment contract.
Net Loss
Net loss increased from $1,313,250 in 1995 to $5,552,109 in 1996. The
increased loss is primarily due to the increased research and development costs
associated with the Briquetting Technology, compensation expense on stock
options in the amount of $1,188,019 and the increase in general and
administrative costs. The construction companies contributed a net profit of
$28,533 in 1995 and a net loss of $379,355 in 1996 to the consolidated net
losses.
Liquidity and Capital Resources
During the three months ended June 30, 1996, the Company was increasing
it's research and development expenditures, increasing it's staff and their
related costs, as well as starting up it's Geneva plant, and as a result the
Company's operating activities used $215,118 of cash as compared to $411,330
cash used for the three months ended June 30, 1995. During this same period
expenditures for new property, plant and equipment increased to $717,490 from
$46,724 for the same periods. During the 1996 period the Company was making down
payments on equipment to be used in its coal briquetting plants as well as
paying for the on site engineering costs associated with these plants. The
Company was able to fund this growth through the issuance of common stock.
The Company has made a strategic decision to focus its efforts exclusively
on commercializing the Briquetting Technology and to divest itself of its
construction and limestone businesses. Accordingly in February, 1996, the
Company entered into a stock purchase agreement with Mike McEwan and Jerry
Larson, former principles of the subsidiaries, to sell all of the common stock
of the subsidiaries operating these businesses for $1,500,000. The Company will
however retain certain real property and other specified assets of certain
subsidiaries along with the related debt for such real property. The Company
will also provide a working capital loan in the amount of $3,500,000 to secured
the release of the Company from certain loans and other obligations. The
<PAGE>
purchase price and the working capital loan will be paid back at 6% interest
over the next four years. As of March 31, 1996, the Company had made advances of
$1,877,440, leaving $1,622,560 left to advance to the construction companies. No
assurance can be given that this transaction will be successfully consummated
or, in the event it is not consummated, that the Company can divest itself of
the construction and limestone businesses to another purchaser on favorable
terms or otherwise. Since these businesses generate a substantial portion of the
Company's revenues and cash flows, the Company will require additional financing
to exploit the Briquetting Technology.
The Company is currently producing revert briquettes for Geneva according
to specifications supplied by Geneva. The Company anticipates that cash flows
from operations, principally the gross profit from sales to Geneva under the
Geneva agreement, the sale of the Section 29 tax credits to third parties and
cash payments from Utah limited partnerships operated by the Company, are
expected to fund working capital needs for approximately eighteen months,
excluding the capital required to exploit the Briquetting Technology. At this
time, the Company has no written agreement to sell Section 29 tax credits and
there is no assurance that the Company will receive any cash payments from the
sale of Section 29 tax credits or the operation of limited partnerships.
In May, 1995, the Company secured financing in the form of an $825,000
master equipment lease funded by a commercial bank to equip its initial
briquetting plant at Geneva's facilities and simultaneously entered into a lease
with Geneva wherein the Company has the right to operate the facility. The
Company has the option to purchase the equipment from the bank at the end of the
lease term. However, the Company will be required to obtain significant
financing to establish future commercial briquetting plants, whether directly or
through joint venture partners or licensees.
On December 28, 1995, the Company entered into Design and Construction
Agreements ("Agreements") with an engineering firm to design and build
twenty-two coal fines agglomeration facilities ("Facilities"). As required by
the Agreements, the Company has given notice to proceed on the first contract
for a Facility to be located in Utah. The Company has paid the engineering firm
an advance payment of $500,000 on the first Facility. The total cost of the
first Facility is contractually limited to $17,000,000. In the event that the
Agreement is terminated by the Company on the first Facility, a penalty of 6% of
the total cost of the Facility will be payable to the engineering firm. The
terms of the remaining twenty-one Agreements are similar to the first Agreement,
however, the Company did not provide notice to the engineering firm in
accordance with those Agreements. On February 5, 1996, the Company and the
engineering firm amended the remaining Agreements to allow for notice to be
provided to the engineering firm by May 31, 1996. Essentially, for each
Agreement which the Company provides the required notice, the Company will be
obligated for either the total cost of the Facility if built (not to exceed
$17,000,000), or 6% of the total cost if the Agreement is terminated by the
Company.
As of August 13, 1996, the Company does not have sufficient capital
resources available to implement the Agreements, including the 6% of the total
cost of the first facility.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Those exhibits previously filed with the Securities and Exchange
Commission as required by Item 601 of Regulation S-K, are
incorporated herein by reference in accordance with the
provisions of Rule 12b-32.
(b) Reports on Form 8-K
A current report on Form 8-K, dated June 3, 1996, was filed
during the quarter.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1996.
COVOL TECHNOLOGIES, INC.
By: /s/ Kenneth M. Young
Kenneth M. Young, Chairman of the
Board, Chief Executive Officer and
Principal Executive Officer
By: /s/ Michael Midgley
Michael Midgley, Principal
Financial Officer
