UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One) AMENDMENT No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-27803
COVOL TECHNOLOGIES, INC.
(Exact name of registrant 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 [X] No [ ]
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 7,215,158 Shares of Common Stock
at March, 31, 1996
<PAGE>
COVOL TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page No.
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets.......................1
Consolidated Statements of Operations.............2
Consolidated Statements of Cash Flows.............3
Notes to Financial Statements.....................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................................10
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.................14
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------
<TABLE>
<CAPTION>
As of As of
March 31, September 30,
1996 1995
--------------- ------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 0 $ 583,757
Receivables 1,443 22,005
Inventories 22,208 0
Notes receivable - related parties current 8,495 0
Prepaid expenses and other current assets 7,123 12,525
---------------- ------------------
Total current assets 39,269 618,287
---------------- ------------------
Property, plant and equipment, net of accumulated depreciation 2,980,548 1,330,300
---------------- ------------------
Other assets:
Restricted cash 0 500,000
Cash surrender value of life insurance 145,862 139,612
Deferred tax asset 0 23,000
Deposits and other assets 82,016 39,463
---------------- ------------------
Total other assets 227,878 702,075
---------------- ------------------
Net assets - discontinued operations 0 9,315
---------------- ------------------
Total assets $ 3,247,695 $ 2,659,977
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Cash overdraft $ 14,464 $ 0
Accounts payable 966,009 747,137
Accrued liabilities 114,894 286,451
Notes payable - current 23,785 26,084
Notes payable - related parties, current 2,506,131 39,035
---------------- ------------------
Total current liabilities 3,625,283 1,098,707
---------------- ------------------
Long-term liabilities:
Notes payable, non-current 167,739 176,601
Deferred compensation 207,188 201,901
---------------- ------------------
Total long-term liabilities 374,927 378,502
---------------- ------------------
Total liabilities 4,000,210 1,477,209
---------------- ------------------
Commitments and contingencies (notes 6, 7 and 8)
Stockholders' equity (deficit) :
Common stock: $0.001 par value; authorized: 25,000,000
shares issued and outstanding:7,215,158 at March 31, 1996 and
5,260,042 at September 30, 1995 7,215 5,260
Common stock to be issued: 0 at March 31, 1996 and
119,334 shares at September 30, 1995 0 119
Capital in excess of par value 27,509,120 9,617,512
Capital in excess of par value - common stock to be issued 0 581,881
Accumulated deficit (14,123,544) (7,360,156)
Notes and interest receivable - related parties from issuance of
or collateralized by common stock (net of allowance) (10,473,128) (240,000)
Deferred compensation from stock options (3,672,178) (1,421,848)
---------------- ------------------
Total stockholders' equity (deficit) (752,515) 1,182,768
---------------- ------------------
Total liabilities and stockholders' equity (deficit) $ 3,247,695 $ 2,659,977
================ ==================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
1
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1996 1995 1996 1995
--------------- --------------- --------------- --------------
Revenues:
<S> <C> <C> <C> <C>
Coal briquetting sales $ 0 $ 8,213 $ 3,741 $ 9,798
--------------- --------------- --------------- --------------
Total revenues 0 8,213 3,741 9,798
--------------- --------------- --------------- --------------
Operating costs and expenses:
Cost of briquetting operations 430,326 0 430,326 0
Research and development 90,357 200,971 525,251 306,358
Selling, general and administrative 675,618 358,731 1,671,590 501,178
Compensation expense on stock options 2,576,910 0 2,889,869 0
Compensation expense on issuance of
common stock 45,873 0 69,123 0
--------------- --------------- --------------- --------------
Total operating costs and expenses 3,819,084 559,702 5,586,159 807,536
--------------- --------------- --------------- --------------
Operating income (loss) (3,819,084) (551,489) (5,582,418) (797,738)
--------------- --------------- --------------- --------------
Other income (expense):
Interest income 92,861 0 111,356 0
Write-down of note receivable (199,575) 0 (199,575) 0
Interest expense (29,776) (32,944) (44,048) (57,685)
Other income (loss) (144,794) 0 (144,198) 0
--------------- --------------- --------------- --------------
Total other income (281,284) (32,944) (276,465) (57,685)
--------------- --------------- --------------- --------------
Loss from continuing operations before
income taxes (4,100,368) (584,433) (5,858,883) (855,423)
Income tax benefit (provision) (23,000) 31,000 (23,000) 76,000
--------------- --------------- --------------- --------------
Loss from continuing operations (4,123,368) (553,433) (5,881,883) (779,423)
--------------- --------------- --------------- --------------
Discontinued operations:
Income (loss) from discontinued operations
(less applicable income tax benefit
(provision) of $(23,000), $31,000,
and $76,000 respectively) (440,588) 62,855 (590,480) 156,851
Loss on disposal of discontinued operations (291,025) 0 (291,025) 0
--------------- --------------- --------------- --------------
Income (loss) from discontinued operations (731,613) 62,855 (881,505) 156,851
--------------- --------------- --------------- --------------
Net loss $ (4,854,981) $ (490,578) $ (6,763,388) $ (622,572)
=============== =============== =============== ==============
Net loss per common share:
Loss per share from continuing operations $ (0.58) $ (0.13) $ (0.90) $ (0.19)
Income (loss) per share from
discontinued operations (0.10) 0.01 (0.13) 0.04
--------------- --------------- --------------- --------------
Net loss per common share $ (0.69) $ (0.12) $ (1.03) $ (0.15)
=============== =============== =============== ==============
Weighted average shares outstanding 7,084,704 4,262,609 6,546,244 4,189,613
=============== =============== =============== ==============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
2
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
------------ -------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (6,763,388) $ (622,572)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 86,421 40,873
Common stock issued for services 361,456 0
Deferred income taxes 23,000 488,000
Write-down of note receivable - related party, collateralized by common stock 199,575 0
Amortization of deferred compensation on stock options 2,889,869 0
Loss on disposal of discontinued subsidiaries 291,025 0
Interest earned on notes receivable - related parties, collateralized by (88,594) 0
common stock
Increase (decrease) from changes in assets and liabilities of continuing
operations:
Receivables 20,562 (1,059)
Inventories (22,208) (14,534)
Prepaid expenses and other current assets 5,402 (4,275)
Deposits and other assets (42,553) 2,823
Accounts payable 218,872 113,448
Accrued liabilities (171,557) (80,569)
Deferred compensation 5,287 4,972
Discontinued operations noncash charges and working capital changes (202,259) 94,303
------------ ----------
Net cash provided by (used in) operating activities (3,189,090) 21,410
------------ -----------
Cash flows from investing activities:
Cash paid for property, plant and equipment (1,736,669) (67,802)
Issuance of notes receivable - related parties (8,495) 0
Increase in cash surrender value of life insurance (6,250) (12,500)
Investing activities of discontinued operations 0 (188,854)
------------ -----------
Net cash provided by (used in) investing activities (1,751,414) (269,156)
------------ -----------
Cash flows from financing activities:
Proceeds from cash overdraft 14,464 0
Proceeds from note receivable -related parties, collateralized by common stock 164,841 522,565
Payments on capital lease obligations 0 (27,345)
Payment on notes payable (11,159) (25,205)
Payment on notes payable - related parties (2,169,339) (311,098)
Proceeds from issuance of common stock 5,650,531 0
Financing activities of discontinued operations 0 28,179
------------ ----------
Net cash provided by (used in) financing activities 3,649,338 187,096
------------ ----------
Net decrease in cash (1,291,166) (60,650)
Total cash and cash equivalents, beginning of period: 1,291,166 271,883
Cash and cash equivalents, end of period
Continuing operations 0 151,648
Discontinued operations 0 59,585
------------ ----------
Total cash and cash equivalents, end of period $ 0 $ 211,233
============ ==========
The accompanying notes are an integral
part of the consolidated financial statements
3
<PAGE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------
Supplemental schedule of noncash investing and financing activities:
Common stock issued for notes receivable $ 6,159,375
Common stock issued to repay advances $ 45,613
Common stock issued to repay notes payable $ 100,000
Obligations assumed in connection with sale of subsidiaries $ 4,636,435
Note receivable received for subsidiaries (net of imputed interest) $ 4,349,575
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
4
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------
1. Management Opinion
In the opinion of management, the accompanying financial statements present
fairly the financial position of Covol Technologies, Inc. and Subsidiaries (the
Company) as of September 30, 1995 and March 31, 1996, the results of its
operations for the three months and six months ended March 31, 1995 and March
31, 1996 and its cash flows for the six months ended March 31, 1995 and March
31, 1996. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Company's Annual Report included in Form 10 for
the 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.
3. Inventories
Inventories are stated at the lower of average cost or market and consist of
coal fines available for sale and binder materials.
4. Discontinued Operations
In 1995, the Company made a strategic decision to focus its efforts exclusively
on commercializing the synthetic fuel technology (the "Briquetting Technology")
and to divest itself of its construction and limestone subsidiaries
("Subsidiaries"). In September 1995, the Board of Directors approved a plan to
dispose of the Company's construction and limestone business. Accordingly, on
February 1, 1996, the Company entered into a Stock Purchase Agreement (the
Agreement) with former principals of IME, State, CIC and Larson (Buyers) to sell
all of the common shares of the subsidiaries to the Buyers for a $5,000,000 face
value 6% promissory note (the Note). Under the terms of the Agreement, the
Company agreed to pay off $3,500,000 of accounts payable and lines of credit
outstanding in the subsidiaries. One of the Buyers is the son of a director of
the Company at the time of the transaction. The Note is collateralized by
100,000 shares of the Company's common stock owned by the Buyers and held by the
Company, 100,000 shares of the Company's common stock committed by the Buyers to
be provided to the Company, and personal guarantees of the Buyers. Because the
Note includes a favorable interest rate for the Buyers, the Company has
calculated the present value of the Note using a market rate of 10.25% over the
term of the Note. The effect of discounting the Note at 10.25% is to reduce the
Note to $4,349,575 as of the date of the Agreement. The discount on the Note was
include in the estimated loss on disposal of discontinued operations.
Because the Note is collateralized by the Company's common stock, the Note is
reflected in the consolidated financial statements as a reduction to
stockholders' equity (or an increase in the stockholders' deficit).
Additionally, the Note is adjusted to reflect subsequent increase or decrease in
the fair value of the Company's stock held as collateral. Because of a decrease
in the trading price of the Company's common stock subsequent to the date of the
Agreement, an allowance of $199,575 is reflected in the Company's consolidated
financial statements as of March 31, 1996. Subsequent changes in the value of
the collateral will be reflected in the consolidated statement of operations as
an increase or decrease to the Note.
5
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. Discontinued Operations, continued
The results of the construction and limestone operations have been classified as
discontinued operations for all periods presented in the Consolidated Statements
of Operations. The assets and liabilities of the discontinued operations have
been classified in the Consolidated Balance Sheets as "Net assets - discontinued
operations." Discontinued operations have also been segregated for all periods
presented in the Consolidated Statements of Cash Flows.
6
<PAGE>
COVOL TECHOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------
5. Stockholders' Deficit
The table below presents the activity in stockholders' deficit from January 1,
1996 to March 31, 1996.
COVOL TECHOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------
<TABLE>
<CAPTION>
Common Stock Notes and interest
receivable-related
Capital in parties from issuance Deferred
in excess Accumulated of, or collateralized compensation
Shares Amount par value Deficit by common stock options
---------- ------- ------------- -------------- ----------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 6,979,626 $6,979 $18,935,432 ($9,268,563) ($6,234,535) ($1,108,888)
Common stock issued for 232,325 233 3,387,618
cash, including exercise
of stock options and
warrants
Deferred compensation 2,743,284 (2,743,284)
related to the issuance
of stock options at
below market value to
officers, directors,
employees and
consultants
Compensation expense 2,396,916
related to the issuance
of stock options at
below market value
Amortization of deferred 179,994
compensation on stock
options
Interest earned on notes (88,593)
receivable - related
parties from issuance of
or collateralized by
common stock
Note receivable - (4,349,575)
related parties,
collateralized by common
stock
Write-down of note 199,575
receivable - related
parties, collateralized
by common stock
Compensation expense 3,207 3 45,870
related to the issuance
of stock for services
Net loss for the quarter (4,854,981)
ended March 31, 1996
---------------------------------------------------------------------------------------------------
Balance at March 31, 1996 7,215,158 7,215 27,509,120 (14,123,544) (10,473,128) (3,672,178)
===================================================================================================
</TABLE>
7
<PAGE>
COVOL TECHOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------
6. Construction Agreements
In December 1995, the Company entered into a design and construction agreement
with Lockwood Greene Engineers, Inc. ("Lockwood") to design and build the Utah
Plant. The Company paid Lockwood an advance payment of $500,000 on the facility
on February 9, 1996. The total cost of the Utah Plant to the Company is expected
to be $3,600,000. Lockwood and the Company have agreed to cooperate with each
other in future projects by either party in the field of coal agglomeration or
metallic recovery. Also in December 1995, the Company entered into additional
contracts to design and build additional facilities with Lockwood.
7. Coal Venture
On January 30, 1996, the Company entered into a letter of understanding with
CoBon Energy, L.L.C. ("CE"), a Utah professional service company based in Salt
Lake City, Utah, to form five entities to commercialize and exploit the
Briquetting Technology for the production of coal briquettes.
8. Contingencies
Larson Limestone
In May of 1995 the Company's wholly owned subsidiary, Larson Limestone Company,
Inc. ("Larson"), filed a complaint in the Fourth Judicial District Court in and
for the County of Utah, State of Utah against Farrell Larson, Larson's former
president and director. In January, 1996 the complaint was amended to add the
Company as a plaintiff. In addition Irene Larson, Gary Birmingham d.b.a.
Birmingham and Company, and Birmingham Enterprises, Inc. were added as
defendants . The plaintiffs allege that defendants misrepresented facts and made
material omissions in connection with the sale of 50% of Larson to the Company
in 1994. Furthermore, plaintiffs allege that the share purchase agreement was
breached by defendant Farrell Larson and that state securities laws were
violated. The complaint seeks to enjoin Farrell Larson from harassing the
Company and seeks an order releasing all collateral held to secure plaintiff's
performance including the 50% of Larson held in escrow as security for the note
given by the Company in the purchase of Larson, and damages of not less than
$325,000 treble damages in accordance with Utah securities laws, punitive
damages of $1,000,000 and costs. The suit is in the discovery phase. Subject to
conducting further discovery, the Company intends to vigorously pursue an award
of damages against the defendants in this case. In February 1996, Farrell Larson
and Irene Larson filed counterclaims against the Company asserting breach of
contract by the Company and Larson in respect to the agreements through which
the Company purchased Farrell Larson's 50% interest in Larson; breach of the
covenant of good faith and fair dealing with respect to the same contracts;
interference with contractual and economic relations; defamation, which relates
to alleged statements by the Company concerning the litigation, either just
prior to or during the litigation; breach of fiduciary duty, alleging that the
Company owed Farrell Larson a fiduciary duty with respect to the conduct of
business of Larson; and in violation of Larson's bylaws. In their counterclaim,
Farrell Larson and Irene Larson ask for the forfeiture of the shares of Larson
acquired by the Company, for management of Larson to be reinstated as directed
by Farrell Larson, for reimbursement of all attorney fees and costs incurred by
Farrell Larson, for an order allowing Farrell Larson to foreclose on collateral
held under the Share Purchase Agreement with the Company, for final payment of
$325,000 under other contracts between the Company and Farrell Larson, and other
unspecified amounts of actual and punitive damages. The Company believes that
all payments due to Farrell Larson have been made or have been deposited with
the court to be held pending the resolution of the litigation. The Company
intends to vigorously defend all counterclaims filed against it. However, the
Company is currently conducting further discovery activities with respect to the
counterclaims. The remaining defendants have answered the complaint and did not
assert counterclaims, but may assert counterclaims in the future.
8
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
8. Contingencies, continued
In connection with the facts at issue in the Company's action against Farrell
Larson, in January 1996 Farrell Larson and his wife, Irene Larson, filed a new
lawsuit in the Fourth Judicial District Court in and for Utah County, State of
Utah against among other defendants, Michael Midgley (the Chief Financial
Officer of the Company and President and Director of Larson), Mark Hardman (a
Vice-President and Director of Larson), and Kenneth M. Young (the Company's
Chairman of the Board and former President). This complaint includes three
causes of action: (1) interference with Larson's business relations, (2)
defamation, and (3) breach of fiduciary duty. The factual basis for these claims
for relief are substantially the same as the facts at issue in the Company's
action against Farrell Larson. Accordingly, the Court has consolidated these two
cases at the Company's request so that all of the related issues will be
resolved together. The Company believes that all acts alleged as basis for
liability against Messrs. Midgley, Hardman, and Young were performed by them in
the course and scope of their employment for the Company and Larson.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Explanation of Amendment
The financial statements of the Company for the period ended March 31, 1996 have
been restated to be consistent with certain adjustments made in connection with
the audit of the fiscal year ended September 30, 1996 and to provide a proper
basis of comparison with future financial statements.
Results of Operations
Three months ended March 31, 1996 compared to three months ended March 31, 1995
Revenues
Total revenues decreased by $8,213 during the three months ended March 31, 1996
from the $8,213 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. No revenue was generated
during the 1996 period since production had not begun nor were any assets sold.
As described in "Liquidity and Capital Resources" below, the Company has entered
into an agreement to sell its construction and limestone businesses
("Subsidiaries"). The revenues for the construction and limestone businesses 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 $551,489 to
$3,819,084 from the comparable period in 1995 due in part to the recognition of
compensation expense of $2,576,910 on stock options and compensation expense on
issuance of common stock of $45,873. Selling, general and administrative expense
increased by $316,887 or approximately 88% from the $358,731 ended in 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 administration costs associated with the Geneva
briquetting plant. The Company incurred $430,326 for briquetting operations that
did not occur in the comparable 1995 period because the Geneva plant was not yet
operational. Research and development expenses decreased $110,614 principally
due to a reduction in activity in the development of the Briquetting Technology
in the three month 1996 period relative to the 1995 period.
Net Loss
Net loss increased for the three months ended March 31, 1996 by $4,364,403 as
compared to the three months ended March 31, 1995. The loss is primarily due to
the differences as explained above. Additionally, in the 1996 period the Company
recognized a write down on the note receivable from the sale of its subsidiaries
of $199,575. Discontinued operations contributed a net loss of $440,588 and the
company recognized a loss on the disposal of discontinued operations of $291,025
for the three month period ended March 31, 1995.
10
<PAGE>
Results of Operations
Six months ended March 31, 1996 compared to six months ended March 31, 1995
Revenues
Total revenues from the sale of "Clean Coal" and the testing of other coal
products decreased to $3,741 in 1996 from the $9,798 reported in the previous
year. As described in "Liquidity and Capital Resources" below, the Company has
entered into an agreement to sell its construction and limestone businesses. The
revenues for the construction and limestone businesses are included in the line
item "Income (loss) from discontinued operations".
Margins, Costs and Expenses
The Company's operating costs increased to $5,586,159 in the 1996 period from
$807,536 in the comparable period in 1995. This is due in part to the
recognition of compensation expense of $2,889,869 on stock options and
compensation expense on issuance of common stock of $69,123. The Company
incurred $430,326 for briquetting operations that did not occur in the
comparable 1995 period. The Company's research and development expenditures
increased $218,893 or approximately 71% for the six month's ended March 31, 1996
as a result of increased expenses relating to the coal and revert Briquetting
Technology, primarily during the first quarter. Selling, general and
administrative expenses increased by $1,170,412 or 234% during the period ended
March 31, 1996 from the comparable period ended March 31, 1995 due to the
Company's increase in staff, the related costs associated with licensing and
exploiting the Briquetting Technology and the administrative costs associated
with the Geneva briquetting plant.
Net Loss
Net loss increased from $622,572 in 1995 to $6,763,388 in 1996. The increased
loss is primarily due to the differences as explained above. Additionally, in
the 1996 period the Company recognized a write down on the note receivable from
the sale of its subsidiaries of $199,575. The construction companies contributed
a net profit of $156,851 in 1995 and a net loss, including losses from disposal,
of $881,505 in 1996.
Liquidity and Capital Resources
During the six months ended March 31, 1996, the Company was increasing its
research and development expenditures, increasing its staff and their related
costs, as well as starting up its Geneva plant. As a result the Company's
operating activities used $3,189,090 of cash compared to a cash surplus of
$21,410 for the six months ended March 31, 1995. Expenditures for new property,
plant and equipment increased in the 1996 period to $1,736,669 from $67,802 in
the 1995 period. 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
onsite engineering costs associated with these plants. The Company was able to
fund this growth through the issuance of common stock.
11
<PAGE>
In 1995, the Company made a strategic decision to focus its efforts exclusively
on commercializing the Briquetting Technology and to divest itself of its
construction and limestone subsidiaries ("Subsidiaries"). In September 1995, the
Board of Directors approved a plan to dispose of the Company's construction and
limestone businesses. Accordingly, on February 1, 1996, the Company entered into
a Stock Purchase Agreement (the Agreement) with former principals of IME, State,
CIC and Larson (Buyers) to sell all of the common shares of the subsidiaries to
the Buyers for a $5,000,000 face value 6% promissory note (the Note). Under the
terms of the Agreement, the Company agreed to pay off $3,500,000 of accounts
payable and lines of credit outstanding in the subsidiaries. One of the Buyers
is the son of a director of the Company at the time of the transaction. The Note
is collateralized by 100,000 shares of the Company's common stock owned by the
Buyers and held by the Company, 100,000 shares of the Company's common stock
committed by the Buyers to be provided to the Company, and personal guarantees
of the Buyers. Because the Note includes a favorable interest rate for the
Buyers, the Company has calculated the present value of the Note using a market
rate of 10.25% over the term of the Note. The effect of discounting the Note at
10.25% is to reduce the Note to $4,349,575 as of the date of the Agreement. The
discount on the Note was included in the estimated loss on disposal of
discontinued operations.
Because the Note is collateralized by the Company's common stock, the Note is
reflected in the consolidated financial statements as a reduction to
stockholders' equity (or an increase in the stockholders' deficit).
Additionally, the Note is adjusted to reflect subsequent increases or decreases
in the fair value of the Company's stock held as collateral. Because of a
decrease in the trading price of the Company's common stock subsequent to the
date of the Agreement, an allowance of approximately $199,575 is reflected in
the Company's consolidated financial statements as of March 31, 1996. Subsequent
changes in the value of the collateral will be reflected in the consolidated
statement of operations and as an increase or decrease to the Note.
The result of the construction and limestone operations have been classified as
discontinued operations for all periods presented in the Consolidated Statements
of Operations. The assets and liabilities of the discontinued operations have
been classified in the Consolidated Balance Sheets as "Net assets - discontinued
operations." Discontinued operations have also been segregated for all periods
presented in the Consolidated Statements of Cash Flows.
The Company is currently in negotiations to produce revert briquettes for Geneva
according to specifications supplied by Geneva. 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 under
the Greystone agreement, are expected to fund working capital needs for
approximately eighteen months, excluding the capital required to exploit the
Briquetting Technology.
The Company is presently offering units of the Company's common stock to
accredited investors at a purchase price of $71.50 per unit in amounts of
$100,000 or greater. A unit consists of five shares of restricted common stock
and one A warrant with an exercise price of $25.00, one B warrant with an
exercise price of $30.00 and one C warrant with an exercise price of $35.00.
Such offering is only made by means of an offering memorandum and statements
related to such offering herein are neither offers to sell or solicitations of
12
<PAGE>
offers to buy. During the three month period ended March 31, 1996, the Company
raised $3,244,237 in this private placement of common stock and is also
exploring various sources of working capital to fund the exploitation of the
Briquetting Technology over the next 18 months, including additional private or
public offerings of equity or debt securities and the outright sale of the coal
agglomeration plants to third parties.
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.
The Company will be required to obtain significant financing to establish future
commercial briquetting plants, whether directly or through joint venture
partners or licenses.
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 May 3, 1996, the Company does not have sufficient capital resources
available to implement the Agreements, including the 6% of the total cost of the
facility.
Forward Looking Statements
Statements regarding the Company's expectations as to its liquidity, capital
resources and certain other information presented in this Form 10-Q constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Those exhibits previously field 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.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
There have been no reports on Form 8-K filed during the quarter for which this
report is filed.
14
<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: May 16, 1997
COVOL TECHNOLOGIES, INC.
By:/s/ Brent M. Cook
-------------------------------------
Brent M. Cook, Chairman of the Board
Chief Executive Officer and Principal
Executive Officer
By: /s/ Stanley M. Kimball
--------------------------------------
Stanley M. Kimball,
Principal Financial Officer
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