================================================================================
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 March 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File Number 333-26673
--------------------
EUROTECH, LTD.
(Exact name of registrant as specified in its charter)
District of Columbia 33-0662435
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1101 30th Street, NW
Suite 500
Washington, D.C. 20007-3772
(Address of principal executive offices)
(202) 625-4382
(Issuer's telephone number)
--------------------
(Former name, former address and former fiscal year
if changed since last report)
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 18,971,836 shares of Common
Stock, $0.00025 par value, were outstanding as of March 31, 1998.
Transitional Small Business Disclosure Forms (check one):
Yes [ ] No [ X ]
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<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
INDEX TO FORM 10-Q
March 31, 1998
Page Nos.
---------
PART I - FINANCIAL INFORMATION: 1
ITEM I - FINANCIAL STATEMENTS 1
BALANCE SHEETS 1
At December 31, 1997 and March 31, 1998
STATEMENTS OF OPERATIONS 2
For the Three Months Ended March 31, 1997
For the Three Months Ended March 31, 1998
For the Period from Inception (May 26, 1995)
to March 31, 1998
STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY 3 - 5
For the Period from Inception (May 26, 1995) to
December 31, 1997
For the Three Months Ended March 31, 1998
STATEMENTS OF CASH FLOWS 6
For the Three Months Ended March 31, 1997
For the Three Months Ended March 31, 1998
For the Period from Inception (May 26, 1995) to
March 31, 1998
NOTES TO FINANCIAL STATEMENTS 7 - 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 13 - 17
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION 18
ITEM 6 - Exhibits and Reports on Form 8-K 18 - 19
(a) Exhibits 18 - 19
(b) Reports on Form 8-K 19
SIGNATURES 19
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
EUROTECH, LTD.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(Note 2)
At December 31, 1997 At March 31, 1998
-------------------- -----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 617,756 $ 533,744
Receivable from related parties 5,918 5,918
Prepaid expenses and other current assets 21,539 27,192
------------ ------------
TOTAL CURRENT ASSETS 645,213 566,864
PROPERTY AND EQUIPMENT - net of accumulated
depreciation 14,050 26,201
OTHER ASSETS:
Organization and patent costs - net of accumulated
amortization 28,651 28,135
Deferred financing costs 261,178 286,872
Other assets 3,151 3,151
------------ ------------
TOTAL ASSETS $ 952,243 $ 911,223
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Notes payable $ 2,000,000 $ --
Accrued liabilities 576,966 852,970
Deferred revenue 225,000 225,000
------------ ------------
TOTAL CURRENT LIABILITIES 2,801,966 1,077,970
------------ ------------
CONVERTIBLE DEBENTURES 3,000,000 6,000,000
------------ ------------
COMMITMENTS AND OTHER MATTERS (Notes 1, 2, 5 and 6)
STOCKHOLDERS' DEFICIENCY:
Preferred stock - $0.01 par value; 1,000,000 shares
authorized; -0- shares issued and outstanding -- --
Common stock - $0.00025 par value; 50,000,000 shares
authorized; 18,928,836 and 18,971,836 shares issued and
outstanding at December 31, 1997 and March 31, 1998,
respectively 4,732 4,743
Additional paid-in capital 12,892,313 14,103,243
Unearned financing costs (1,315,317) (1,378,395)
Deficit accumulated during the development stage (16,431,451) (18,896,338)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY (4,849,723) (6,166,747)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 952,243 $ 911,223
============ ============
</TABLE>
See notes to financial statements.
1
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Period
For the Three Months Ended March 31, from Inception
(May 26, 1995) to
March 31, 1998
1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES $ -- $ -- $ --
------------ ------------ ------------
OPERATING EXPENSES: 258,732 307,671 2,698,185
Research and development 325,916 220,982 3,367,557
Consulting fees 318,022 559,381 2,403,160
Other general and administrative expenses ------------ ------------ ------------
902,670 1,088,034 8,468,902
------------ ------------ ------------
TOTAL OPERATING EXPENSES
(902,670) (1,088,034) (8,468,902)
------------ ------------ ------------
OPERATING LOSS
OTHER EXPENSES: 61,022 130,625 444,787
Interest expense
Amortization of deferred and unearned financing 685,506 1,246,228 9,982,649
costs ------------ ------------ ------------
746,528 1,376,853 10,427,436
------------ ------------ ------------
TOTAL OTHER EXPENSES
$ (1,649,198) $ (2,464,887) $(18,896,338)
============ ============ ============
NET LOSS
NET LOSS PER COMMON SHARE $ (.07) $ (.13)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 17,983,000 18,950,336
============ ============
</TABLE>
See notes to financial statements.
2
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Additional Unearned
Date of Common Stock Paid-in Due from Financing
Period Ended December 31, 1995: Transaction Shares Amount Capital Stockholders Costs
----------- ---------- -------- ---------- ------------ -----------
(1)
<S> <C> <C> <C> <C> <C> <C>
Founder shares issued ($0.00025 per share) 05/26/95 4,380,800 $ 1,095 $ (1,095) $ - $ -
Issuance of stock for offering consulting fees
($0.0625 per share) 08/31/95 440,000 110 27,390 - -
Issuance of stock ($0.0625 and $0.25
per share) Various 4,080,000 1,020 523,980 (3,000) -
Issuance of stock for license ($0.0625 per
share) 08/31/95 600,000 150 37,350 - -
Issuance of stock options for offering legal
and consulting fees - - 75,000 - -
Offering expenses - - (105,398) - -
Net loss - - - - -
---------- -------- ---------- --------- -----------
Balance - December 31, 1995 9,500,800 2,375 557,227 (3,000) -
Year Ended December 31, 1996:
Issuance of stock ($0.25 per share) Various 1,278,000 320 319,180 - -
Exercise of stock options 01/18/96 600,000 150 - - -
Issuance of stock for consulting fees
($0.34375 per share) 03/22/96 160,000 40 54,960 - -
Issuance of stock for consulting fees
($0.0625 per share) 05/15/96 2,628,000 657 163,593 - -
Issuance of stock for consulting fees
($0.590625 per share) 06/19/96 1,500,000 375 885,563 - -
Issuance of stock for consulting fees
($1.82 per share) 11/12/96 57,036 14 104,275 - -
Issuance of stock pursuant to bridge financing
($1.81325 per share) 12/96 1,500,000 375 2,719,500 - (2,719,875)
Amortization of unearned financing costs - - - - 226,656
Repayment by stockholders - - - 3,000 -
Net loss - - - - -
---------- -------- ---------- --------- -----------
Balance - December 31, 1996 17,223,836 $ 4,306 $4,804,298 $ - $(2,493,219)
========== ======== ========== ========= ===========
</TABLE>
Deficit
Accumulated
During the
Development
Period Ended December 31, 1995: Stage Total
----------- -----------
Founder shares issued ($0.00025 per share) $ - $ -
Issuance of stock for offering consulting fees
($0.0625 per share) - 27,500
Issuance of stock ($0.0625 and $0.25
per share) - 522,000
Issuance of stock for license ($0.0625 per
share) - 37,500
Issuance of stock options for offering legal
and consulting fees - 75,000
Offering expenses - (105,398)
Net loss (513,226) (513,226)
----------- -----------
Balance - December 31, 1995 (513,226) 43,376
Year Ended December 31, 1996:
Issuance of stock ($0.25 per share) - 319,500
Exercise of stock options - 150
Issuance of stock for consulting fees
($0.34375 per share) - 55,000
Issuance of stock for consulting fees
($0.0625 per share) - 164,250
Issuance of stock for consulting fees
($0.590625 per share) - 885,938
Issuance of stock for consulting fees
($1.82 per share) - 104,289
Issuance of stock pursuant to bridge financing
($1.81325 per share) - -
Amortization of unearned financing costs - 226,656
Repayment by stockholders - 3,000
Net loss (3,476,983) (3,476,983)
----------- -----------
Balance - December 31, 1996 $(3,990,209) $(1,674,824)
=========== ===========
(1) Share amounts have been restated to reflect the 4 for 1 stock split on
June 1, 1996.
See notes to financial statements.
3
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Additional Unearned
Date of Common Stock Paid-in Due from Financing
Year Ended December 31, 1997 Transaction Shares Amount Capital Stockholders Costs
----------- ---------- -------- ---------- ------------ -----------
(1)
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 17,223,836 $ 4,306 $ 4,804,298 $ - $(2,493,219)
Issuance of stock for consulting fees
($2.50 per share) 03/97 64,000 16 159,984 - -
Issuance of stock for consulting fees
($5.45 per share) 06/97 39,000 9 212,540 - -
Issuance of stock for consulting fees
($5.00 per share) 09/97 59,000 15 294,986 - -
Issuance of stock pursuant to penalty
provision of bridge financing
($5.45 per share) 06/97 500,000 125 2,724,875 - (2,725,000)
Value assigned to conversion feature of
Convertible Debentures 11/97 - - 1,337,143 - (1,337,143)
Value assigned to issuance of 127,500 warrants
in consideration for interest and
placement fees in connection with Convertible -
Debentures 11/97 - - 284,480 (284,480)
Value assigned to issuance of 35,000 warrants -
to shareholder for consulting services 11/97 - - 39,588 (39,588)
Value assigned to issuance of 364,000 warrants
to shareholder as additional consideration
for financing activities 11/97 - - 862,680 - (862,680)
Issuance of stock for consulting fees
($4.00 per share) 12/97 43,000 11 171,989 - -
Accrual of stock issued January 1998 pursuant
to penalty provision of bridge financing
($2.00 per share) 12/97 1,000,000 250 1,999,750 - (2,000,000)
Amortization of unearned financing costs - - - - 8,426,793
Net loss - - - - -
---------- -------- ----------- -------- -----------
Balance - December 31, 1997 18,928,836 $ 4,732 $12,892,313 $ - $(1,315,317)
========== ======== =========== ======== ===========
</TABLE>
Deficit
Accumulated
During the
Development
Year Ended December 31, 1997 Stage Total
----------- -----------
Balance - December 31, 1996 $ (3,990,209) $(1,674,824)
Issuance of stock for consulting fees
($2.50 per share) - 160,000
Issuance of stock for consulting fees
($5.45 per share) - 212,549
Issuance of stock for consulting fees
($5.00 per share) - 295,001
Issuance of stock pursuant to penalty
provision of bridge financing
($5.45 per share) - -
Value assigned to conversion feature of
Convertible Debentures - -
Value assigned to issuance of 127,500 warrants
in consideration for interest and
placement fees in connection with Convertible -
Debentures -
Value assigned to issuance of 35,000 warrants -
to shareholder for consulting services -
Value assigned to issuance of 364,000 warrants
to shareholder as additional consideration
for financing activities - -
Issuance of stock for consulting fees
($4.00 per share) - 172,000
Accrual of stock issued January 1998 pursuant
to penalty provision of bridge financing
($2.00 per share) - -
Amortization of unearned financing costs 8,426,793
Net loss (12,441,242) (12,441,242)
------------ -----------
Balance - December 31, 1997 $(16,431,451) $(4,849,723)
============ ===========
(1) Share amounts have been restated to reflect the 4 for 1 stock split on
June 1, 1996.
See notes to financial statements.
4
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Additional Unearned
Date of Common Stock Paid-in Due from Financing
Transaction Shares Amount Capital Stockholders Costs
----------- ---------- -------- ---------- ------------ -----------
(1)
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended March 31, 1998:
Balance - December 31, 1997 18,928,836 $ 4,732 $12,892,313 $ - $(1,315,317)
Issuance of stock for consulting fees
($2.58 per share) 03/98 43,000 11 110,930 - -
Value assigned to conversion feature of
Convertible Debentures and 60,000 warrants
issued as additional interest - - 1,100,000 - (1,100,000)
Amortization of unearned financing costs - - - - 1,036,922
Net loss - - - - -
---------- -------- ----------- -------- -----------
Balance - March 31, 1998 18,971,836 $ 4,743 $14,103,243 $ - $(1,378,395)
========== ======== =========== ======== ===========
</TABLE>
Deficit
Accumulated
During the
Development
Stage Total
----------- -----------
Three Months Ended March 31, 1998:
Balance - December 31, 1997 $(16,431,451) $(4,849,723)
Issuance of stock for consulting fees
($2.58 per share) - 110,941
Value assigned to conversion feature of
Convertible Debentures and 60,000 warrants
issued as additional interest - -
Amortization of unearned financing costs - 1,036,922
Net loss (2,464,887) (2,464,887)
------------ -----------
Balance - March 31, 1998 $(18,896,338) $(6,166,747)
============ ===========
(1) Share amounts have been restated to reflect the 4 for 1 stock split on
June 1, 1996.
See notes to financial statements.
5
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Period
March 31, from Inception
---------------------------- (May 26, 1995) to
1997 1998 March 31, 1998
------------ ------------ ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash used in $ (1,649,198) $ (2,464,887) $(18,896,338)
operating activities:
Depreciation and amortization
Amortization of deferred and unearned financing costs 1,136 2,349 8,350
Accrued interest 685,506 1,246,228 9,982,649
Stock issued for license 61,022 91,175 91,175
Consulting fees satisfied by stock issuances -- -- 37,500
160,000 110,940 2,159,967
------------ ------------ ------------
Sub-total
(741,534) (1,014,195) (6,616,697)
Cash provided by (used in) the change in assets and
liabilities:
(Decrease) increase in advances to related parties
Increase in prepaid expenses 84,000 -- (5,918)
Increase in other assets (4,634) (5,653) (27,192)
Increase in accrued liabilities -- -- (3,151)
Increase in deferred revenue 173,358 184,830 761,795
-- -- 225,000
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES
(488,810) (835,018) (5,666,163)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Organization and patent costs
Capital expenditures -- -- (31,358)
(3,391) (13,984) (31,328)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES
(3,391) (13,984) (62,686)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options
Proceeds from issuance of common stock -- -- 150
Offering costs -- -- 841,500
Repayment by stockholders -- -- (2,898)
Proceeds from Convertible Debentures -- -- 3,000
Proceeds from bridge notes -- 3,000,000 6,000,000
Repayments of bridge notes -- -- 2,000,000
Borrowings from stockholders -- (2,000,000) (2,000,000)
Repayment to stockholders 126,000 -- 561,140
Deferred financing costs -- -- (561,140)
-- (235,000) (579,150)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES
126,000 765,000 6,262,602
------------ ------------ ------------
INCREASE (DECREASE) IN CASH
(366,201) (84,002) 533,754
CASH - BEGINNING
380,183 617,756 --
------------ ------------ ------------
CASH - ENDING
$ 13,982 $ 533,754 $ 533,754
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ -- $ 36,630 $ 315,561
============ ============ ============
Income taxes $ -- $ -- $ --
============ ============ ============
See notes to financial statements.
</TABLE>
6
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements are unaudited. These
statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission ( the
"SEC"). Certain information and footnote disclosures normally
included in the financial statements prepared in accordance
with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the financial statements reflect
all adjustments (which include only normal recurring
adjustments) necessary to state fairly the financial position
and results of operations as of and for the periods indicated.
These financial statements should be read in conjunction with
the Company's financial statements and notes thereto for year
ended December 31, 1997, included in the Company's Form 10 and
Form S-1 as filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with
general accepted accounting principles requires management to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statement
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
NOTE 2- BUSINESS AND CONTINUED OPERATIONS
Eurotech, Ltd. (the "Company") was incorporated under the laws
of the District of Columbia on May 26, 1995. The Company is a
development-stage, technology transfer, holding and management
company, formed to commercialize new, existing but previously
unrecognized, and previously "classified" technologies, with a
particular current emphasis on technologies developed by
prominent research institutes and individual researchers in
the former Soviet Union and in Israel, and to license those
and other Western technologies for business and other
commercial applications principally in Western and Central
Europe, Ukraine, Russia and North America. Since the Company's
formation, it has acquired development and marketing rights to
a number of technologies by purchase, assignments, and
licensing arrangements. The Company intends to operate its
business by licensing its technologies to end-users and
through development and operating joint ventures and strategic
alliances. To date, the Company has not generated any revenues
from operations.
7
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 2 - BUSINESS AND CONTINUED OPERATIONS (Continued)
The accompanying unaudited financial statements have been
prepared in conformity with generally accepted accounting
principles, which contemplate continuation of the Company as a
going concern. However, as shown in the accompanying financial
statements, the Company has incurred losses from operations
from inception. As of March 31, 1998, the Company has a
stockholders' deficiency of $6,166,747, a working capital
deficiency of $511,106 and an accumulated deficit since
inception of $18,896,338. The Company requires additional
funds to commercialize its technologies and continue research
and development efforts. Until the commencement of sales, the
Company will have no operating revenues, but will continue to
incur substantial expenses and operating losses. No assurances
can be given that the Company can complete development of any
technology, not yet completely developed, or that with respect
to any technology that is fully developed, it can be
manufactured on a large scale basis or at a feasible cost.
Further, no assurance can be given that any technology will
receive market acceptance. Being a start-up stage entity, the
Company is subject to all the risks inherent in the
establishment of a new enterprise and the marketing and
manufacturing of a new product, many of which risks are beyond
the control of the Company. These factors raise substantial
doubt about the Company's ability to continue as a going
concern.
Since inception, the Company has financed its operations
through sale of its securities, shareholder loans, a bridge
financing totalling $2,000,000 completed in December of 1996,
a Convertible Debenture financing of $3,000,000 completed in
November of 1997 and a Convertible Debenture financing of
$3,000,000 completed in February of 1998. The Company is
exploring additional sources of working capital, which include
a private offering of common stock, private borrowings and
joint ventures.
The December 1996 $2,000,000 bridge financing was retired from
proceeds of the February 1998 Convertible Debenture financing.
While no assurance can be given, management believes the
Company can raise adequate capital to keep the Company
functioning during 1998. No assurance can be given that the
Company can successfully obtain any working capital or
complete any proposed offerings or, if obtained, that such
funding will not cause substantial dilution to shareholders of
the Company. Further, no assurance can be given as to the
completion of research and development and the successful
marketing of the technologies.
These financial statements do not include any adjustments
relating to the recoverability of recorded asset amounts that
might be necessary as a result of the above uncertainty.
8
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 3 - NOTES PAYABLE
Convertible Debenture Offering
On February 23, 1998, the Company sold through a private
placement $3,000,000, 8% Convertible Debenture notes, due
February 23, 2001. As additional consideration, the Company
issued separate warrants to purchase 60,000 shares of the
Company's common stock at $2.30 per share. The warrants are
exercisable over two years.
The debenture agreements permit the holders of the debentures
to convert the debt into shares of common stock at beneficial
conversion rates based on the timing of the conversion. The
notes conversion feature commences at the earlier of: (i) the
date the underlying shares to the Convertible Debenture notes
are registered and declared effected by the SEC; (ii) 90 days
after February 23, 1998. Shares of common stock to be issued
at the conversion date shall be equal to the outstanding
principal and accrued interest at the conversion date, divided
by the conversion price. The conversion price is the lower of
$2.62 or the average bid price per share of the Company's
common stock for five trading days immediately preceding the
conversion date, multiplied by (i) 80% for any conversion
honored prior to the 180th day after February 23, 1998, (ii)
75% for any conversion honored on or after the 180th day and
prior to the 360th after February 23, 1998, and (iii) 70% for
any conversion honored after the 360th day after February 23,
1998. Furthermore, the conversion price may not be less than a
specified "floor" initially set at $1.625. Commencing on
February 23, 2000, all or any portion of the remaining debt
due under this financing at the option of Eurotech is
convertible into shares of common stock at the 70% conversion
rate.
Furthermore, the Company has agreed that if a Registration
Statement covering the underlying shares of the convertible
note is either not filed with the SEC on or prior to March 2,
1998 or, if filed, is not declared effective by the SEC on or
prior to March 15, 1998, the Company will be obligated to pay
to the debenture holders liquidated damages equal to 1% of the
aggregate principal amount of the then outstanding notes on
the first day of each month until such filing or effectiveness
deficiency is cured. As of March 14, 1998, the Company has
filed a Registration Statement with the SEC, which has not
been declared effective.
The Company has assigned a value to the debentures' beneficial
conversion feature and warrants amounting to $1,100,000, and
is being amortized over 180 days commencing February 23, 1998.
Proceeds from the sale of the 3,000,000, 8% Convertible
Debenture notes amounted to $2,765,000 net of costs which were
comprised of: (i) legal and professional fees amounting to
$10,000, (ii) a placement fee to an unrelated party amounting
to $225,000. The legal and placement fees of $235,000 has been
recorded as deferred financing costs and is being amortized
over 180 days commencing February 23, 1998.
9
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 3 - NOTES PAYABLE (Continued)
Repayment of $2,000,000 Bridge Notes
On March 6, 1998, the Company repaid all of the $2,000,000
principal due to the holders of the bridge notes from proceeds
of the February 1998 Convertible Debenture offering.
NOTE 4 - TECHNOLOGY TRANSFER AGREEMENT
Technologies Acquired
Pursuant to three Technology Purchase Agreements each dated
January 1, 1998, the Company has acquired from Oleg L.
Figovsky, Ph.D. , a consultant to the Company, all right,
title and interest in and to the following three unpatented
technologies developed by him, inclusive of future
improvements thereto: (i) a group of related technologies
collectively known as "Interpenetrated Network Polymers"
("INPs"), (ii) "Liquid Ebonite Material" ("LEM") and (iii)
"Rubber Concrete" ("RubCon") for purchase prices of $75,000,
$15,000 and $35,000, respectively (each, a "Purchase Price").
Pursuant to each such Technology Purchase Agreement, during
15-year period commencing on January 1, 1998, the Company is
obligated to pay to Dr. Figovsky royalties equal to 49% of the
Company's net revenues from the sale or licensing of any
products incorporating the applicable technology, subject to
the Company's right to deduct from the first royalties payable
under each agreement an aggregate sum equal to the Purchase
Price paid thereunder.
The Company has accounted for this technology license fee as
acquired research and development and, in accordance with FASB
Interpretation No. 4, has charged the license fee of $125,000
to research and development expenses for the three months
ended March 31, 1998.
NOTE 5 - CONTINGENCIES AND OTHER MATTERS
International Operations
The Company has strategic alliances, collaboration agreements
and licensing agreements with entities which are based in
Russia and Ukraine. Both of these countries have experienced
volatile and frequently unfavorable economic, political and
social conditions. The Russian economy and the Ukraine economy
are characterized by declining gross domestic production,
significant inflation, increasing rates of unemployment and
underemployment, unstable currencies, and high levels of
governmental debt as compared to gross domestic production.
The prospects of wide-spread insolvencies and the collapse of
various economic sectors exist in both countries.
10
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 5 - CONTINGENCIES AND OTHER MATTERS (Continued)
In view of the foregoing, the Company's business, earnings,
asset values and prospects may be materially and adversely
affected by developments with respect to inflation, interest
rates, currency fluctuations, government policies, price and
wage controls, exchange control regulations, taxation,
expropriation, social instability, and other political,
economic or diplomatic developments in or affecting Russia and
Ukraine. The Company has no control over such conditions and
developments, and can provide no assurance that such
conditions and developments will not adversely affect the
Company's operations.
Risk of Environmental Liability; Present Lack of Environmental
Liability Insurance
The Company's radioactive contaminant technology is subject to
numerous national and local laws and regulations relating to
the storage, handling, emission, transportation and discharge
of such materials, and the use of specialized technical
equipment in the processing of such materials. There is always
the risk that such materials might be mishandled, or that
there might be equipment or technology failures, which could
result in significant claims for personal injury, property
damage, and clean-up or remediation. Any such claims against
the Company could have a material adverse effect on the
Company. The Company does not presently carry any
environmental liability insurance, and may be required to
obtain such insurance in the future in amounts that are not
presently predictable. There can be no assurance that such
insurance will provide coverage against all claims, and claims
may be made against the Company (even if covered by insurance
policies) for amounts substantially in excess of applicable
policy limits. Any such event could have a material adverse
effect on the Company.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash which
is at one bank. Future concentration of credit risk may arise
from trade accounts receivable. Ongoing credit evaluations of
customers' financial condition will be performed and,
generally, no collateral will be required.
11
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 5 - CONTINGENCIES AND OTHER MATTERS (Continued)
Litigation
In December 1997, Raymond Dirks, Jessy Dirks, Robert Brisotti
and David Morris filed an action in the Supreme Court for the
State of New York, County of New York, against Eurotech, Ltd.
for breach of contract, seeking injunctive relief, specific
performance and monetary damages of nearly $5 million (the
"Dirks Litigation"). The Dirks Litigation arises solely from
an agreement between Eurotech and National Securities
Corporation ("National") relating to financial advisory
services to be performed by National Securities Corporation, a
broker/dealer with which the plaintiffs were affiliated and of
which Raymond Dirks Research was a division. Eurotech granted
National a warrant certificate for 470,000 shares at $1.00 per
share as a retainer for general financial advisory services.
In conjunction with the separation of the plaintiffs and
Raymond Dirks Research from National Securities Corporation,
National assigned a significant portion of the warrant
certificate to the plaintiffs. It is Eurotech's position that
the warrant certificate is voidable.
The plaintiffs allege, among other things, that they are
entitled to damages composed of both the value of the stock on
the date of their purported exercise of an alleged assignment
of the warrant certificate, and the decrease in value of the
price of the stock since the date of their purported exercise.
Eurotech believes that the plaintiffs have significantly
overstated their monetary damage claim and that, having sought
monetary damages, the plaintiffs are not entitled to any type
of equitable relief.
Process was served upon Eurotech at its California office in
late January 1998. Based on the advice of its outside counsel,
Eurotech believes that the plaintiffs' claims will be resolved
favorably to the Company. However, it is possible that the
Company will be adjudged liable in the Dirks Litigation, and
if so, the resolution of the litigation could have a material
adverse effect on the Company.
NOTE 6 - EARNINGS PER SHARE
Securities that could potentially dilute basic earnings per
share ("EPS") in the future that were not included in the
computation of diluted EPS because to do so would have been
anti-dilutive for the periods presented consist of the
following:
Warrants to purchase common stock 1,426,500
Convertible Debentures (assumed conversion at initial
floor price and at largest discount) 2,142,857
Convertible Debentures issued February 1998 (assumed
conversion at initial floor price and at largest discount) 2,900,000
Options to purchase common stock 75,000
Total as of March 31, 1998 6,544,357
=========
12
<PAGE>
Item 2. Management's Discussion and Analysis and Plan of Operation
General
The following is a discussion and analysis of the results of operations of
the Company, and should be read in conjunction with the financial statements and
related notes contained in this Form 10-Q.
Certain information contained in this Form 10-Q may contain
forward-looking statements. The forward-looking statements are subject to
certain risks and uncertainties. Actual results could differ materially from
current expectations. Among the factors that could affect the Company's actual
results and could cause results to differ from those contained in the
forward-looking statements contained herein is the Company's ability to
commercialize its technologies successfully, which will be dependent on
business, financial and other factors beyond the Company's control, including,
among others, market acceptance, ability to manufacture on a large scale basis
and at feasible costs, together with all the risks inherent in the establishment
of a new enterprise and the marketing and manufacturing of new products.
Overview
The Company, incorporated in May, 1995, is a development stage, technology
transfer, holding and management company formed to commercialize new, existing
but previously unrecognized, and previously "classified" technologies, with a
particular current emphasis on technologies developed by prominent research
institutes and individual researchers in the former Soviet Union and in Israel,
and to commercialize those and other Western technologies for business and other
commercial applications principally in Central Europe, Ukraine, Russia and North
America.
Until recently, the Company had been principally engaged in identifying,
monitoring, reviewing and assessing technologies for their commercial
applicability and potential, and in acquiring selected technologies by equity
investment, purchase, assignment and licensing arrangements. Although the
Company intends to continue identifying, monitoring, reviewing and assessing new
technologies, its primary emphasis will be focused on commercializing four of
its present technologies ("Principal Technologies").
The Company's Principal Technologies include: (i) Silicon-organic compound
technology ("EKOR") (a silicon-based elastomer which may be used to contain
radioactive dust and waste materials); (ii) Non-isocyanate Polyurethane ("NIPU")
(a modified polyurethane that does not contain the toxic isocyanates used in the
production of conventional polyurethanes); (iii) Liquid Ebonite Material ("LEM")
(a synthetic liquid rubber); and (iv) Rubcon (a rubber based concrete).
The Company believes that the Principal Technologies are presently ready
for commercialization and marketing. To that end, the Company has decided to
devote its business activities and resources principally to the marketing and
sale of the Principal Technologies. The Company recently has initiated a
marketing and sales program for the Principal Technologies, and also has
initiated discussions with a number of prominent, potential users of the
technologies, with a view towards the future negotiation and execution of
licensing and/or joint venture marketing and sales agreements. The Company is
proceeding with the marketing and potential application of its EKOR compound in
connection with nuclear contamination projects at Reactor 4
13
<PAGE>
of the Chernobyl Nuclear Power Plant ("ChNPP") (which experienced a catastrophic
near-meltdown in 1986), and in the U.S., Russia and Germany. The Company intends
to operate its business by licensing its technologies to end-users and through
development and operating joint ventures and strategic alliances. To date, the
Company has not generated any revenues from operations.
The Company has not been profitable since inception and expects to incur
substantial operating losses over the next twelve months. For the period from
inception to March 31, 1998, the Company incurred a cumulative net loss of
$18,896,000. The Company expects that it will generate losses until at least
such time as it can commercialize its technologies, if ever. No assurances can
be given that any of the Company's technologies can be manufactured on a large
scale basis or at a feasible cost. Further, no assurance can be given that any
technology will receive market acceptance. Being a start-up stage entity, the
Company is subject to all the risks inherent in the establishment of a new
enterprise and the marketing and manufacturing of a new product, many of which
risks are beyond the control of the Company.
PLAN OF OPERATION
The Company's plan of operation for the next twelve months will consist of
activities principally aimed at:
-- negotiating and executing license and/or joint venture agreements
with end-users for the marketing and sale of coatings based on its
NIPU technology, Rubcon and LEM
-- continuing its work with the I.V. Kurchatov Institute ("Kurchatov")
in Moscow, Russia, the Euro-Asian Physical Society ("EAPS") with a
view towards using the EKOR compound in the remediation of ChNPP
Reactor 4
-- jointly bidding, through an agreement entered into in April, 1997
with Duke Engineering and Services ("DES"), a business unit of Duke
Power Company, with DES on U.S. nuclear waste transportation,
remediation and like projects utilizing the EKOR compound
-- to a lesser extent, the Company also intends to continue its efforts
in connection with the contemplated introduction of its
waste-to-energy technology, in Ukraine, and the further development
(in conjunction with Kurchatov and EAPS) of a silicon carbide
"wafer" technology with potential application in manufacturing
integrated circuit computer chips
Results of Operations
For the three months ended March 31, 1998 vs. the three months ended March
31, 1997.
The Company has had no revenues since inception. Consulting and other
general and administrative expenses increased from $644,000 for the three months
ended March 31, 1997 to $780,000 for the three months ended March 31, 1998. The
increase is principally a result of $150,000 paid by the Company as interest and
penalties to holders of its 8% Convertible Debentures due November 27, 2000 and
February 23, 2001, and increased legal and accounting expenses related to
developing the Company's Principal Technologies. This overall increase was
partially offset by a decrease in consulting expenses attributable to a
reduction in the number of consultants engaged by the Company during the period.
Research and development expenses increased in the three months ended
March 31, 1998 to $308,000 from $259,000 for the three months ended March 31,
1997, principally attributable to amounts paid by the Company to Professor Oleg
L. Figovsky, Ph.D in connection with the three technology purchase agreements
each dated January 1, 1998 between the company and Professor Figovsky for three
technologies.
14
<PAGE>
For the three months ended March 31, 1998 and the three months ended March
31, 1997, the Company incurred operating losses of $1,088,000 and $903,000,
respectively. The losses are principally due to expenses incurred in the
acquisition and development of its technologies, including an overall increase
in general and administrative expenses.
Interest expenses and amortization of deferred and unearned finance costs
increased from $747,0000 for the three months ended March 31, 1997 to $1,377,000
for the three months ended March 31, 1998. This increase was attributable to an
increase in the amount of debt outstanding, including the Company's 8%
Convertible Debentures.
The Company expects to incur significant losses during 1998. The Company
anticipates that any revenue recognized in 1998 will be substantially offset by
expenses incurred by the Company in its efforts to commercialize, sell and
market its Principal Technologies.
Liquidity and Capital Resources
The Company's working capital deficiency at March 31, 1998 and December
31, 1997 was $511,106 and $2,156,753, respectively, or a net favorable reduction
of $1,645,647. The net favorable reduction in the working capital deficiency was
the result of the December 1996 $2,000,000 bridge note loan being liquidated
from the proceeds of the February 23, 1998 $3,000,000 8% Convertible Debenture
debt obligation, as discussed below.
The Company's principal sources of working capital from inception have
been net proceeds of $842,000 from the offering of common stock under Rule 504
of Regulation D, shareholder advances aggregating $761,440, the bridge financing
discussed below, completed in December 1996 of $2,000,000, and from the private
placements of $3,000,000 principal amount of 8% Convertible Debentures completed
in November 1997, and $3,000,000 principal amount of 8% Convertible Debentures
completed in February 1998.
In December 1996, the Company entered into a purchase agreement for an
offering of up to an aggregate of 40 units to certain accredited investors as
defined by Rule 501 of Regulation D under the Act in reliance on an exemption
from registration under Rule 506 of Regulation D (the "Bridge Financing"). Each
unit consists of one promissory note (a "Bridge Note") issued by the Company in
the principal amount of $50,000 bearing interest at the rate of 12% per annum
and 25,000 shares of the Company's Common Stock. Holders of the shares of common
stock issued pursuant to this agreement have, among other things, demand and
mandatory registration rights, including penalties, which require the Company to
issue to the unit holders up to 1,000,000 additional shares of common stock if
such shares were not registered under the Securities Act of 1933 (the "Act")
within the specified time frames. The Company did not meet either filing
deadline and, accordingly the 1,000,000 additional common shares were issued to
such holders during 1997. As of their maturity in December 1997, the Company had
insufficient funds to repay such notes. In consideration of the agreement of the
noteholders to extend the maturity of such notes, the Company issued 1,000,000
shares of the Company's Common Stock. The Company has agreed to register such
shares of Common Stock under the Act. The Bridge Notes and all accrued interest
thereon were repaid by the Company on February 26, 1998.
In November 1997 and February 1998, the Company completed two private
placements, each of $3,000,000 principal amount of its 8% Convertible Debentures
due November 27, 2000 and February 23, 2001, respectively (the "Debentures"). In
each such private placement, warrants (the "Warrants") to purchase up to 60,000
shares of Common Stock (the Debentures and Warrants, collectively, the
"Securities," each offering of the Securities a "Debenture Offering," and the
offering of the Securities
15
<PAGE>
the "Debenture Offerings")were also issued. The Securities were offered and sold
only to accredited investors as defined by Rule 501 of Regulation D under the
Act, in reliance on an exemption from registration under Rule 506 of Regulation
D.
The terms and conditions under which the Debentures may be converted into
shares of the Company's common stock and the manner in which the Warrants may be
exercised are set forth in the Company's Annual Report on Form 10-K.
Pursuant to the Debenture Offerings the Company agreed that if a
Registration Statement under the Act covering the Underlying Shares were either
not filed with the SEC on or prior to January 15, 1998 or, if filed, not
declared effective by the SEC on or prior to February 16, 1998, the Company will
be obligated to pay to the Debenture Holders liquidated damages equal to 1% of
the aggregate principle amount of the then outstanding Debentures, on the first
day of each month until such filing or effectiveness deficiency is cured.
Neither deadline was met, and the Company was obligated to make monthly
payments of $30,000 to the Debenture Holders until the Registration
Statement was declared effective.
During the first quarter of 1998 the Company's principal source of cash
was the February Debenture Offering from which it derived net proceeds of
approximately $2,750,000, of this amount $2,000,000 was used to satisfy the
Bridge Notes and $125,000 was applied to the acquisition of three technologies.
The remaining funds were applied to the Company's working capital.
The Company has agreed to fund the commercialization of certain
technologies developed in the former Soviet Union by scientists and researchers
at Kurchatov, other institutes associated therewith, and EAPS, collectively the
"Scientists". Kurchatov will provide the materials, facilities and personnel to
16
<PAGE>
complete the necessary work to commercialize such technologies. The Company also
has agreed to provide funding in connection with the marketing and sale of three
of its principal technologies. Total planned expenditures under these programs,
including related general and administrative expenses, are expected to
approximate $800,000 during fiscal year 1998. The Company's principal
source of funding for these expenditures during fiscal year 1998 will be the
remaining proceeds of the Debenture Offerings.
The Company will require additional financing to continue to fund research
and development efforts, operating costs and complete necessary work to
commercialize its technologies. The report of the Company's independent
certified public accountants contain an explanatory paragraph which expresses
substantial doubt as to the Company's ability to continue as a going concern.
No assurance can be given that the Company can successfully obtain any
additional financing or, if obtained, that such funding will not cause dilution
to shareholders of the Company. Further, no assurance can be given as to the
completion of research and development and the successful marketing of the
Company's technologies.
The Company had a working capital deficiency and Stockholders' deficiency
of $511,000 and $6,167,000, respectively, as of March 31, 1998.
17
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.1 Certificate of Incorporation of the Company(1)
3.2 By-Laws of the Company(1)
4.1 Form of Common Stock Certificate(1)
10.1 Material Contracts
10.2 Technology Purchase Agreement between the Company and Oleg L.
Figovsky(1)
10.3 Technology Purchase Agreement between the Company and Oleg L.
Figovsky(1)
10.4 Technology Purchase Agreement between the Company and Oleg L.
Figovsky(1)
10.5 Teaming Agreement between the Company and Duke Engineering & Services,
Inc.(1)
10.6 Form of Agreement between the Company, V. Rosenband and C. Sokolinsky,
and Ofek Le-Oleh Foundation(1)
10.6.2 Equity Sharing Agreement between the Company, V. Rosenband and C.
Sokolinsky(1)
10.6.3 Voting Agreement between the Company, V. Rosenband and C. Sokolinsky(1)
10.7.1 Investment Agreement between the Company and Chemonol, Ltd.(1)
10.7.2 Equity Sharing Agreement between the Company and Leonid Shapovalov(1)
10.7.3 Voting Agreement between the Company and Leonid Shapovalov(1)
10.8.1 Agreement between the Company and Separator, Ltd.(1)
10.8.2 Equity Sharing Agreement between the Company and Efim Broide(1)
10.8.3 Voting Agreement between the Company and Efim Broide(1)
10.9.1 Form of Agreement between the Company, Ofek Le-Oleh Foundation and Y.
Kopit(1)
10.9.2 Equity Sharing Agreement between the Company, Y. Kopit and V.
Rosenband(1)
10.9.3 Voting Agreement between the Company, Y. Kopit and V. Rosenband(1)
10.10 Form of License Agreement between the Company and ERBC Holdings,
Ltd.(1)
10.11 Cooperation Agreement between the Company and Forschungszentrum Julich
GmbH(1)
10.12.1 Convertible Debenture Purchase Agreement among the Company, JNC
Opportunity Fund, Ltd. and Diversified Strategies Fund, L.P.(1)
10.12.2 Escrow Agreement among the Company, Inc. opportunity Fund, Ltd., and
Diversified Strategies Fund, L.P. and Robinson, Silverman, Pearce,
Aronsohn & Berman, LLP(1)
10.12.3 Registration rights Agreement among the Company the Company, JNC
Opportunity Fund, Ltd., and Diversified Strategies Fund, L.P.(1)
10.12.4 Form of 8% Convertible Debenture Due November 27, 2000 between the
Company and JNC Opportunity Fund, Ltd.(1)
10.12.5 Form of 8% Convertible Debenture Due November 27, 2000 between the
Company and Diversified Strategies Fund, L.P.(1)
10.12.6 Warrant No. 1 between the Company and JNC Opportunity Fund, Ltd.(1)
10.12.7 Warrant No. 2 between the Company and Diversified Strategies Fund,
L.P.(1)
10.12.8 Warrant No. 3 between the Company and Diversified Strategies Fund,
L.P.(1)
10.13.1 Convertible Debenture Purchase Agreement between the Company and JNC
Opportunity Fund, Ltd.(1)
10.13.2 Escrow Agreement among the Company, JNC Opportunity Fund, Ltd. and
Robinson, Silverman, Pearce, Aronshohn and Berman, LLP(1)
- ----------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, and amendments thereto, under the Securities Exchange Act of 1934, on
file with the Commission, file number 333-26673.
18
<PAGE>
10.13.3 Registration Rights Agreement between the Company and JNC Opportunity
Fund, Ltd.(1)
10.13.4 Form of 8% Convertible Debenture Due February 23, 2001 between the
Company and JNC Opportunity Fund, Ltd.(1)
10.13.5 Warrant No. 3 between the Company and JNC Opportunity Fund(1)
27 Financial Data Schedule(2)
(b) Reports on Form 8-K
None
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.
Dated: May 15, 1998
EUROTECH, LTD.
(Registrant)
/s/ Peter Gulko
---------------------------
President, Secretary and
Principal Financial Officer
- ----------
(2) Filed herewith
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Eurotech,
Ltd's. Balance sheet as of March 31, 1998, and Statement of Operations for the
three months ended March 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 533
<SECURITIES> 0
<RECEIVABLES> 6
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 566
<PP&E> 26
<DEPRECIATION> 0
<TOTAL-ASSETS> 911
<CURRENT-LIABILITIES> 1,078
<BONDS> 6,000
0
0
<COMMON> 4
<OTHER-SE> (6,166)
<TOTAL-LIABILITY-AND-EQUITY> 911
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,088
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,377
<INCOME-PRETAX> (2,465)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,465)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,465)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
