FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2000
OR
[ ] 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: 000-29329
BIOFILTRATION SYSTEMS, INC.
---------------------------
(Exact Name of Registrant as Specified in its Charter)
Florida 65-0382549
------- ----------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
2341 Porter Lake Drive, Suite 109, Sarasota, Florida 34240
------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(941) 343-9300
--------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of registrant's Common Stock, $.00001 par value,
outstanding as of June 30, 2000 was 512,890,716 shares.
<PAGE>
BIOFILTRATION SYSTEMS, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Certified Public Accountant's Review Report 1
Consolidated Balance Sheet - June 30, 2000 2
Consolidated Statements of Operations For the
Six Months and Three Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows - For the
Six Months Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submissions of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
<PAGE>
BIOFILTRATION SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
[GRAPHIC OMITED]
To the Board of Directors
Biofiltration Systems, Inc.
Sarasota, Florida
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
We have reviewed the accompanying consolidated balance sheet of Biofiltration
Systems, Inc. as of June 30, 2000, and the related consolidated statements of
operations and cash flows for the three and six months ended June 30,2000.
These financial statements are the representation of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on information furnished to us by management, we believe certain
disclosures required under generally accepted accounting principles have been
omitted as permitted under Rule 10-01(a) of Regulation S-X of the Securities and
Exchange Commission for financial statements filed with form 10-QSB. These
regulations presume the users of interim financial statements have read the
latest Form 10-KSB which include all disclosures required by generally accepted
accounting principles. The accompanying interim financial statements disclose
only material transactions, uncertainties, commitments, contingencies or
subsequent events.
The Company has omitted the statement of stockholders' equity, which is a
required statement under generally accepted accounting principles. This
statement is not required under Rule 10-01(a) of Regulation S-X of the
Securities and Exchange Commission.
Based on our review, with the exceptions of the matters described in the
preceding paragraphs, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
The accompanying statement of operations and cash flows of Biofiltration
Systems, Inc. for the three months and six months ended June 30, 1999, were not
audited or reviewed by us and, accordingly, we do not express an opinion on
them.
/s/ Semago & Company, P.A.
------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
Tampa, Florida
August 10, 2000
Semago & Company, P.A.
102 W. Whiting Street Suite 600 Tampa, Florida 33602
<PAGE>
BIOFILTRATION SYSTEMS, INC.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
JUNE 30, 2000
---------------
ASSETS
------
CURRENT ASSETS
Cash $ 860,099
Accounts receivable 107,022
Inventory 59,704
Purchased customer accounts, net 112,400
------------
TOTAL CURRENT ASSETS 1,139,225
------------
FIXED ASSETS
Computer equipment 183,821
Other 28,440
------------
212,261
Accumulated depreciation ( 12,958)
------------
199,303
------------
OTHER ASSETS
Patent, net 40,163
Prepaid sales commissions 575,910
Goodwill, net 378,957
Other 3,878
------------
998,908
------------
$ 2,337,436
============
The accompanying notes to consolidated financial
statements are an integral part of this financial statement.
-2-
<PAGE>
BIOFILTRATION SYSTEMS, INC.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
JUNE 30, 2000
---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
CURRENT LIABILITIES
Current portion of related party
notes payable $ 34,973
Accounts payable and accrued expenses 152,097
Provision for loss on disposal of
business segments 149,040
-------------
TOTAL CURRENT LIABILITIES 336,110
-------------
OTHER LIABILITIES
Stockholder notes payable 348,900
Related party notes payable, less
current portion 61,073
-------------
409,973
-------------
COMMITMENTS AND CONTINGENCIES -
-------------
STOCKHOLDERS' EQUITY
Common stock $.00001 par value,
800,000,000 shares authorized,
512,890,716 shares issued and
outstanding 5,129
Additional paid-in capital 4,559,021
Accumulated deficit (2,837,797)
-------------
1,726,353
Less treasury stock ( 135,000)
-------------
1,591,353
-------------
$ 2,337,436
=============
The accompanying notes to consolidated financial
statements are an integral part of this financial statement.
-3-
<PAGE>
BIOFILTRATION SYSTEMS, INC.
----------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------
FOR THE SIX MONTHS AND THREE MONTHS ENDED
JUNE 30, 2000 AND 1999
----------------------------------------
Six-months ended
--------------------------
2000 1999
------------ ------------
(Unaudited) (Unaudited)
REVENUES $ 166,432 $ -
COST OF REVENUES 52,640 -
------------ ------------
GROSS PROFIT 113,792 -
------------ ------------
OTHER EXPENSES
General and administrative 879,441 125,418
Depreciation and amortization 44,589 2,042
Stock promotion expenses - 812,500
Interest 22,001 20,443
------------ ------------
946,031 960,403
------------ ------------
LOSS FROM CONTINUING OPERATIONS ( 832,239) ( 960,403)
------------ ------------
DISCONTINUED OPERATIONS
Loss from discontinued operations ( 230,720) -
Loss on disposal of discontinued
operations ( 149,040) -
------------ ------------
( 379,760) -
------------ ------------
NET LOSS $(1,211,999) $( 960,403)
============ ============
LOSS PER COMMON SHARE
Loss from continuing operations $( .0018) $( .0024)
============ ============
Loss from discontinued operations $( .0005) $ -
============ ============
Loss from disposal of discontinued
operations $( .0003) $ -
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (IN HUNDREDS) 4,654,152 3,959,100
============ ============
The accompanying notes to consolidated financial
statements are an integral part of these financial statements.
-4-
<PAGE>
BIOFILTRATION SYSTEMS, INC.
---------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE SIX MONTHS AND THREE MONTHS ENDED
-----------------------------------------
JUNE 30, 2000 AND 1999
----------------------
(Continued)
Three-months ended
--------------------------
2000 1999
------------ ------------
(Unaudited) (Unaudited)
REVENUES $ 166,432 $ -
COST OF REVENUES 52,640 -
------------ ------------
GROSS PROFIT 113,792 -
------------ ------------
OTHER EXPENSES
General and administrative 832,080 112,465
Depreciation and amortization 43,298 1,021
Stock promotion expenses - 812,500
Interest 10,861 10,286
------------ ------------
886,239 936,272
------------ ------------
LOSS FROM CONTINUING OPERATIONS ( 772,447) ( 936,272)
------------ ------------
DISCONTINUED OPERATIONS
Loss from discontinued operations ( 230,720) -
Loss on disposal of discontinued
operations ( 149,040) -
------------ ------------
( 379,760) -
------------ ------------
NET LOSS $(1,152,207) $( 936,272)
============ ============
LOSS PER COMMON SHARE
Loss from continuing operations $( .0015) $( .0024)
============ ============
Loss from discontinued operations $( .0005) $ ( -)
============ ============
Loss from disposal of discontinued
operations $( .0003) $ ( -)
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (IN HUNDREDS) 5,098,012 3,959,100
============ ============
-5-
<PAGE>
BIOFILTRATION SYSTEMS, INC.
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2000 AND 1999
----------------------
Six months ended
------------------------
2000 1999
------------ ----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 59,410 $ -
Cash paid for continuing operating
expenses ( 195,869) (126,351)
Cash paid for discontinued operations - -
Interest ( 2,570) ( 4,198)
------------ ----------
Net cash used by operating activities ( 139,029) (130,549)
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances (to) from related company ( 110,000) 3,184
Purchase of fixed assets - -
------------ ----------
Net cash used by investing activities ( 110,000) 3,184
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock 1,125,362 -
Collections on stock subscriptions
receivable - 122,000
Repayment of related party notes
payable ( 16,241) -
------------ ----------
Net cash provided by financing activities 1,109,121 122,000
------------ ----------
INCREASE (DECREASE) IN CASH 860,092 ( 5,365)
CASH, BEGINNING OF PERIOD 6 9,120
------------ ----------
CASH, END OF PERIOD $ 860,098 $ 3,755
============ ==========
The accompanying notes to consolidated financial
statements are an integral part of these financial statements.
-6-
<PAGE>
BIOFILTRATION SYSTEMS, INC.
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE SIX MONTHS ENDED
------------------------
JUNE 30, 2000 AND 1999
----------------------
Six months ended
------------------------
2000 1999
------------ ----------
(Unaudited) (Unaudited)
RECONCILIATION OF NET LOSS TO
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
NET LOSS $(1,211,999) $(960,403)
RECONCILING ADJUSTMENTS
Depreciation and amortization 44,589 2,042
Loss on disposal of discontinued
operations 379,760 -
Increase in accounts receivable ( 107,022) -
Increase in inventory ( 59,704) -
Increase in accounts payable and
accrued expenses 112,259 ( 2,824)
Decrease in other assets 8,657 -
Stock issued in lieu of compensation 675,000 -
Treasury stock acquired by way of
reduction of expenses - 812,500
Contribution of accrued interest
to paid-in capital 19,431 18,136
------------ ----------
CASH FLOWS FROM OPERATING $( 139,029) $(130,549)
============ ==========
NONCASH INVESTING AND FINANCING ACTIVITIES
------------------------------------------
DECREASE IN ACCRUED INTEREST
PAYABLE THROUGH CONTRIBUTION
TO PAID-IN CAPITAL $ 19,431 $ 18,136
============ ==========
ACQUISITION OF AND INVESTMENT IN
SUBSIDIARY COMPANY BY ISSUANCE
OF COMMON STOCK $ 1,657,257 $ -
============ ==========
The accompanying notes to consolidated financial
statements are an integral part of these financial statements.
-7-
<PAGE>
BIOFILTRATION SYSTEMS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 2000
-------------
The information presented herein as of June 30, 2000, and for the six and
three-months ended June 30, 2000 and 1999, is unaudited.
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Biofiltration Systems,
Inc. (the Company) have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to the Securities and Exchange Commission's Form 10-QSB and item
310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal required adjustments) considered necessary for
a fair presentation have been included.
Operating results for the six and three-month periods ended June 30, 2000, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to the December 31,
1999 financial statements and footnotes included in the Company's initial
registration statement with the Securities and Exchange Commission.
As of April 1, 2000, the Company commenced operations and is no longer a
development stage company.
NOTE B - BUSINESS ACQUISITIONS
Effective April 1, 2000, the Company purchased all of the outstanding stock of
Beach Access.Net, Inc., an internet service provider located in South Carolina.
The purchase price was 1,750,000 unrestricted shares of the Company's common
stock.
In connection with this purchase, the Company recorded $226,010 of goodwill
which is being amortized over five years. For the six months ended June 30,
2000, $11,300 was recorded as goodwill amortization.
In connection with the initial acquisition of Beach Access.Net, Inc. the Company
invested 8,600,000 shares of restricted common stock in Beach Access.Net, Inc.
to acquire other related business assets and operations. In connection with
these acquisitions, goodwill of $279,896, was recorded by Beach Access.Net, Inc.
For the six months ended June 30, 2000, $13,995 was recorded as goodwill
amortization.
In connection with this acquisition, the Company issued to the former owner and
certain employees of Beach Access.Net, Inc. 8,000,000 shares of unrestricted and
restricted common stock as a signing bonus and additional compensation.
Further, a five year employment agreement was signed with the former owner
providing for the following:
- annual salary of $60,000;
- options to purchase additional shares of restricted common stock for $.001
per share as follows (contingent upon certain performance criteria being
met):
- 3,250,000 shares at any time
- 4,000,000 shares beginning January 1, 2001
- 4,000,000 shares beginning January 1, 2002
- 4,000,000 shares beginning January 1, 2003
- a covenant not to compete for a two year period in certain, as
defined, businesses.
-8-
<PAGE>
BIOFILTRATION SYSTEMS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 2000
-------------
NOTE B - BUSINESS ACQUISITIONS (continued)
The stock issued as a signing bonus and additional employee compensation have
been recorded at the stock's fair market value as of April 1, 2000, less a 50%
discount on certain shares because of their restricted nature. In the
accompanying statement of operations for the six months ended June 30, 2000,
employee compensation of $675,000 has been recorded to reflect the issuance of
these shares.
In May 2000, Beach Access.Net, Inc. acquired all of the common stock of Revcon
Technologies, Inc. and the business assets of Alliance Computer Systems, LLC.
Both of these companies provide networking, programming and wireless
connectivity services. The purchase price for both was 1,000,000 shares of
restricted common stock. In connection with these purchases, Beach Access.Net,
Inc. recorded assets in excess of the purchase price of $102,479, which is being
amortized over five years. Amortization will commence July 1, 2000. Neither of
these operations had significant operations during the six months ended June 30,
2000.
In connection with the Revcon Technologies, Inc. and Alliance Computer Systems,
LLC acquisitions, the former owners signed five year employment agreements with
Beach Access.Net, Inc. These agreements provide for the following:
- annual salaries aggregating $110,000;
- options to purchase additional shares of restricted shares of common
stock for $.001 per share as follows:
- 1,000,000 restricted shares contingent upon certain performance
criteria associated with mobile wireless internet operation
being met;
- 1,000,000 restricted shares contingent upon certain further
performance criteria associated with mobile wireless internet
operation being met;
- a covenant not to compete for a two year period in certain, as
defined, businesses.
Through June 30, 2000, the performance criteria associated with the above stock
options had not been met.
In April 2000, Beach Access.Net, Inc. acquired the rights to provide internet
access for twelve months to approximately 1,300 customers. The cost for these
rights was 3,200,000 shares of restricted common stock. Terms of the agreements
provide for monthly service fees of $20,000.
In the accompanying financial statements, the purchase of these customers has
been recorded at the fair market value of stock issued, less a 50% discount
because of the restricted nature of the stock. The cost of the purchase is
being amortized over twelve months. For the six months ended June 30,2000,
amortization of the purchase price amounted to $15,600.
On August 1, 2000, certain of the above agreements were modified. The
modification provided for an additional 180,000 shares of restricted stock to be
issued for the right to provide internet services to the same customers.
NOTE C - STOCK SPLIT
In March 2000, effective April 15, 2000, the Company's Board of Directors
approved a 100:1 stock split. In conjunction with this stock split, the par
value of the Company's stock was changed to $.00001.
All shares disclosed in the accompanying financial statements reflect the effect
of the 100:1 stock split.
-9-
<PAGE>
BIOFILTRATION SYSTEMS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 2000
-------------
NOTE D - NET LOSS PER COMMON SHARE
Net loss per common share is computed in accordance with the requirements of
Statement of Financial Accounting Standards No. 128.
NOTE E - SEGMENTS
The Company operates in two business segments, pollution treatment systems and
internet technology. Currently, the only operating segment is the internet
technology group. For the six months ended June 30, 2000 and 1999, information
on reportable segments is as follows:
Pollution Internet
treatment technology Total
----------- ------------- ------------
Six months ended June 30, 2000
External revenue $ - $ 166,432 $ 166,432
=========== ============= ============
Intersegment revenue $ - $ - $ -
=========== ============= ============
Loss from continuing
operations $ (80,762) $ ( 751,477) $( 832,239)
Loss from discontinued
operation - ( 379,760) ( 379,760)
----------- ------------- ------------
$ (80,762) $ (1,131,237) $(1,211,999)
=========== ============= ============
For the six months ended June 30, 1999, the Company only operated as a pollution
treatment company.
Since December 31, 1999, the Company has added the operations and assets of the
internet technology segment. This segment was added on April 1, 2000. As of
June 30, 2000, total assets of the internet technology segment were $654,654.
NOTE F - DISCONTINUED OPERATIONS
In early July 2000, Company management decided to discontinue and dispose of
certain measurable portions of its internet technology segment. Management
estimates that by August 15, 2000, all of these operations will be discontinued
and assets will be disposed of. The results of operations for the periods
presented are reported as a component of discontinued operation in the
statements of operation. Additionally, management's estimate of the loss on
disposal is presented as a separate component of discontinued operations. The
estimated loss on the disposal of discontinued operations represents the
estimated loss on disposal of the segment's assets and operation through August
15, 2000.
Summarized results of the disposed segment portions for the six months ended
June 30, 2000, are as follows:
Net sales $ 296,043
==========
Operating loss $(230,720)
==========
Loss from discontinued
operations $(149,040)
==========
For the six months ended June 30, 1999, the Company did not operate in the above
segment.
-10-
<PAGE>
BIOFILTRATION SYSTEMS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 2000
-------------
NOTE G - FINANCIAL STATEMENTS ISSUED IN PRIOR PERIODS
The accompanying financial statements reflect certain accounting changes that
will be made to previously issued financial statements. These previously issued
financial statements are pending change subject to addressing other technical
questions raised by the Securities and Exchange Commission.
A summary of accounting changes reflected in the accompanying June 30, 2000,
financial statements that will be restated in previously issued financial
statements are as follows:
- The Company had previously recorded the cost of the patent at
$470,000. This reflected the purchase price from a related company. This
cost has been reduced to $61,073, which reflects the related company's
amortized cost, and is being amortized over its useful life. The
difference in recorded value and is cost has been charged to additional
paid-in capital.
- The $470,000 note payable associated with the purchase of the patent
has been reduced to the patent's amortized cost. The difference between
the original recorded value and revised value has been credited to paid-in
capital. Interest expense previously recorded has been adjusted.
- Stockholder notes payable do not bear interest. Interest on these
notes has been revised to reflect interest at average prime plus 1%, which
has been contributed to paid-in capital.
The effect of the above adjustment on the December 31, 1999, financial
statements are as follows:
As previously
reported Adjustments Restated
-------------- ------------- ---------
Assets $ 941,346 $ (427,795) $ 513,551
============== ============= =========
Liabilities $ 910,147 $ (409,122) $ 501,025
============== ============= =========
Stockholders' equity $ 31,199 $ ( 18,673) $ 12,526
============== ============= =========
-11-
<PAGE>
FORWARD LOOKING STATEMENTS
When used in this report, the words "may, will, expect, anticipate,
continue, estimate, project or intend" and similar expressions identify
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E Securities Exchange Act of 1934 regarding events,
conditions and financial trends that may effect our future plan of operation,
business strategy, operating results and financial position. Current
stockholders and prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the forward-looking statements as a result of various factors. Such
factors are described under the headings "Business-Certain Considerations,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the financial statements and their associates notes.
Important factors that may cause actual results to differ from projections
include, for example:
- the success or failure of management's efforts to implement their
business strategy;
- our ability to protect our intellectual property rights;
- our ability to compete with major established companies;
- our ability to attract and retain qualified employees; and
- other risks which may be described in future filings
with the SEC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of its operations for the six-month periods ended June 30, 2000 and
1999 should be read in conjunction with the Company's financial statements
included elsewhere herein. When used in the following discussions, the words
"believes", "anticipates", "intends, "expects", and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties, which could cause results to differ materially
from those projected.
PLAN OF OPERATION
Liquidity and Capital Resources
----------------------------------
During the second quarter, the Company sold 4,930,716 shares of restricted
stock for cash. The average share price was $.16, generating $789,000 for the
Company. The current cash balance is $860,099. The Company believes that this
cash will be adequate to fund operations and capital programs for the remainder
of the year.
The Company, at June 30, 2000, had $2,337,436 in assets. The increase in
assets from the prior period is due primarily to the issue of stock for cash
and acquisition, for stock, of Beach Access.Net, Inc. and related entities.
Liabilities consisting of certain accrued expenses totaled $746,083.
The Company has reduced the value of its Patent from $470,000 to $61,073,
less accrued amortization. The Company has made this change to reflect the
actual costs related to the Patent, in accordance with regulatory requirements.
The Company has also reduced the offsetting Note Payable to related entities,
with the entity's approval. The resulting adjustment to interest expense is
reflected in Additional Paid-In Capital.
The Company has also recorded revised accrued interest on Shareholder Notes
of $348,900. The Notes had previously been recorded as zero interest notes. In
lieu of interest, shareholders received additional stock certificates. Interest
equal to the par value of the shares had been recorded. In accordance with
regulatory requirements, interest, at the rate of Prime + 1% during the term of
the notes, has been accrued, with the adjustment reflected in Paid-In Capital.
Since inception, the Company has financed its operations primarily through
cash provided through various short- and long-term credit facilities and through
the private sale of its common stock. The Company's management believes the
need for additional capital going forward will be derived from internal revenues
and earnings generated from the sale of its products and services. If the
Company is unable to generate sufficient revenues from its products and
services, management believes the Company will need to raise additional funds to
meet its cash requirements.
Inflation
---------
Inflation has not been a major factor in the Company's business since
inception. There can be no assurances that this will continue if or when the
Company completes an acquisition or merger.
Pollution Treatment Systems Group
------------------------------------
The Company continues to aggressively market its pollution treatment
technology to the airports of America - there are 415. The Company believes
that the environmental, governmental and economic factors related to the
treatment and disposal of wastewater are more favorable to the Company than at
any time in the past. Enforcement of the regulations regarding the Clean Water
Act is becoming more aggressive. Managers of Publicly Owned Treatment Works
(POTW), more commonly known as the "sewer company", are looking for ways to
reduce the Chemical Oxygen Demand (COD) or the Biochemical Oxygen Demand (BOD)
entering their facilities from local area wastewater collection.
The industry trend appears to be toward pre-treatment of wastewater by the
originator before release into public systems.
A major focus of Company's marketing efforts has been on the treatment of
wastewater runoff from deicing of aircraft at airports. Because this wastewater
contains a high COD from the primary deicing component, glycol, traditional
methods of disposal or treatment are becoming obsolete and/or no longer cost
effective. In an effort to reduce costs through application of technology,
airport managers are seeking companies with pollution treatment technology. The
Company has seen an increase in the number of airport managers contacting the
Company to learn more about our solution.
Significant factors affecting the sales cycle for the Company's product are
the budgetary and approval process of municipal airports. Major capital
investments usually take many months or sometimes years to approve. Over the
last few years, the Company has developed significant relationships within the
airport management system and expertise in the specific needs for wastewater
systems on airport complexes.
The Company has also developed a pricing model which is tailored to the
needs of the individual airport budgeting system. This approach has been
favorably received.
The Company expects to market two airport systems during the remainder of
this year. The expected annual revenues are $550,000 for these contracts. The
contract terms are for five years with two five-year renewal options. The cost
of treatment is competitive with the POTW, making the Company's solution viable
for the user.
The size of system depends on the amount of wastewater volume and the
COD/BOD concentrations to be treated. The Company's system would be located on
the airport grounds and would involve pre-treatment of wastewater prior to
discharge.
The handling of wastewater is a major consideration by county
commissioners, land use specialists and other local authorities in the granting
of zoning and building permits. With pre-treatment, zoning officials can
approve more residential customers with existing capacity.
Therefore, this pre-treatment process is valuable to the POTW manager as
well. The POTW plant's primarily mission is to serve the residential customer.
As more industrial waste is added to their system, they must either expand plant
capacity or restrict the industrial customer who is usually the larger
contributor of COD/BOD's to the system albeit the larger revenue producer as
well. With pre-treatment, the POTW manager can service more residential
customers without plant expansion.
An emerging market for the Company is agricultural wastewater from sources
such as feedlots, processing plants and facilities where there is a high organic
component in the wastewater. Traditionally, in feedlot operations, large
lagoons have been used for treatment of wastewater. Due to population growth,
many of these facilities are facing local opposition to the smell generated by
the decomposition of this organic component. In addition, the operator has
usually committed significant land resources to the lagoons. Both operator and
resident would like to see the size of lagoons reduced. With the Company
solution, the operator can process the same or greater amount of wastewater with
less land and the same or lower cost.
The Company expects to market one agricultural system this year with
annualized contract revenues of $220,000. The contract would be similar to
those mentioned above.
The total expected revenue from the Pollution Treatment Systems Group for
systems sold this year is expected to be $765,000 on an annualized basis. The
commission payable to the national marketing company related to these sales is
expected to significantly reduce the outstanding Prepaid Sales Commissions of
$575,910.
Since 1992, the Company has been party to an agreement whereby a related
company, owned by the Company's majority stockholder, provides exclusive
national sales services. Under the terms of the agreement, the related company
is entitled to receive 30% of the Company's pollution treatment systems sales.
In addition, under the terms of the agreement, the marketing company is to pay
for all pollution treatment systems marketing expenses from the commissions
received from the Company.
The agreement also provided that the related company may be paid
commissions in advance by the Company.
The Company expects that the sales results of the Pollution Treatment
Systems Group will continue to expand in the coming years. The Company sees the
market forces and Company sales efforts combining to make the Company's product
a cost effective, viable solution to the wastewater treatment and disposal
issue.
Technology Group
-----------------
In April of this year, the Company completed a major goal of expanding its
technology capability through the acquisition of Beach Access.Net, Inc. (Beach
Access). Beach Access subsequently acquired additional companies and assets,
expanding its Internet Service Provider (ISP) capacity, wireless systems
technology, network and computer installation and repair and software and
database development capability. The acquisition of Beach Access brought with
it the technology for a wireless Internet access capability.
Beach Access is marketing this technology under the trade name of
"SWOMI(TM)", Seamless Wireless Omni-directional Mobile Internet (the Company is
in the process of applying for the Trade Mark). SWOMI(TM) offers the user true
roaming capability within the SWOMI(TM) system with access speeds of 2mb. The
SWOMI(TM) system incorporates Beach Access ISP assets and allows customers to
link their computers, at T-1 access speeds, for video, audio or data
transmission on the Internet using a patented roaming technology.
Beach Access is installing a prototype system covering over six contiguous
miles of the Myrtle Beach, South Carolina area. Using the SWOMI(TM) equipment,
a user will be able to move within the SWOMI(TM) network area with no loss of
service or degradation of speed.
Applications for the product are numerous, but a few are listed here:
Hotels and motels, convention centers, RV parks, etc. Within the Myrtle Beach
market area, the Chamber of Commerce estimates that there are over 13 million
visitors per year. Generally, visits are for a one-week period, which would be
250,000 visitors per week. Beach Access's research and resort manager comments
indicate that at least 10,000 of these 250,000 weekly visitors would be
interested in a high-speed wireless Internet access capability during their
stay.
Beach Access anticipates charging a weekly usage fee of $40 for each of
these customers. This would equal a weekly revenue stream of $400,000 or an
annualized revenue stream of over $20 million.
The Company has committed at least $150,000 of its cash reserves to
complete the Beach Access prototype. Subsequent to quarter end, Beach Access
successfully completed the testing of the system and began development of the
prototype system. The prototype is expected to be complete and operational by
the end of August.
Subsequent to quarter end, Beach Access began negotiations with several resort
and convention facilities in the Myrtle Beach area for the implementation of
SWOMI(TM) in their operations.
The Company expects to market the SWOMI(TM) system in other areas of the
country after completion of the Myrtle Beach project.
RESULTS OF OPERATIONS
Acquisitions
------------
During April 2000, the Company finalized the acquisition of Beach
Access.Net, Inc. (Beach Access). The acquisition was funded with 1,750,000
free-trading shares of Company stock. This acquisition completed the Company's
goal of providing a means for remote monitoring of pollution treatment sites and
expanding its internal technology capability. Beach Access is operated and
managed as a wholly owned subsidiary and is charged with the mission to be the
technology group of the Company and a leader in the wireless Internet access
market.
Beach Access is located in Myrtle Beach, South Carolina and is one of two
Internet Service Providers (ISP) in the local market. As part of the operating
plan for expansion, Beach Access made the following acquisitions in the second
quarter: 1) in April, acquired the Internet service equipment and Internet
subscriber customers from three local competitors and also the assets of a
computer wholesale company, 2) in May, acquired the Internet servicing rights to
approximately 1,300 resort customers, acquired Revcon, Inc., a company in the
wireless systems industry and acquired the assets of Alliance Computers, LLC, a
company in the computer networking, programming and wireless connectivity
industry. These assets were purchased with 12,800,000 shares of Company stock.
As part of the acquisition, the Company negotiated employment agreements
with the key managers. Jay Knabb remains as CEO of Beach Access. As part of
his five-year employment contract, he was awarded 4,000,000 shares of stock,
half of which are free trading, as a signing bonus. Additionally, he will
receive options, upon signing, of 3,250,000 shares and options of 4,000,000
shares of stock on January 1 of each year for 3 years, beginning on January 1,
2001. In addition, as part of the acquisition, the Company awarded 4,000,000
shares of stock as signing bonuses to various Beach Access employees.
Ken Borge, President, Revcon, has been hired as Vice President, Research
and Development of Beach Access. Revcon was purchased for 293,333 shares of
Company stock. The Company negotiated a five-year employment contract with Ken,
which provided two options, each for 293,333 shares of Company stock. The
Company expects the criteria for award of the options to be met in the third
quarter.
The Company completed negotiations with Paul Aubin, President, Alliance
Computers, LLC for the purchase of their assets for 706,667 shares of Company
stock. Paul was hired under a five-year employment contract as the Vice
President, Operations for Beach Access. The employment agreement provides two
options, each for 706,667 shares of Company stock. The Company expects the
criteria for award of the options to be met in the third quarter.
Operations
----------
The Company has shown a current quarter loss of <$1,211,999>, of which
$<1,131,237> resulted from Beach Access acquisition and operations. This loss
is due primarily to the employment agreement compensation for Jay Knabb and the
losses on discontinuance and disposition of companies.
The Company pollution treatment and corporate activities has generated a
loss of <$80,762>. The pollution treatment group did not have any revenues
during the quarter. Expenses were primarily related to accounting and
professional fees, interest expense and travel.
The most significant entity loss is for PC Wholesale (PCW). PCW is a
company in the wholesale computer parts and repair business. PCW also had a
significant pager service business. This company, along with Knight Design, an
ISP, was purchased to develop a market presence in Fayetteville, NC. The
operational plan was to expand the ISP business through the PCW facility,
focusing initially on converting the pager customers to ISP customers. PCW was
purchased for 2,500,000 shares and Knight Design for 1,800,000 shares.
Due to phone company delays, Beach Access was unable to install, timely, a
T-1 line for its ISP operations into the PC Wholesale facility. As a result,
the Knight Design customers were lost. Since the primary focus of Beach Access
is ISP and wireless operations, not computer wholesale parts sales, the decision
was make to discontinue PC Wholesale operations. This decision was made in
early July.
For Knight Design, Beach Access is renegotiating the sale terms with the
expectation to reduce the loss on disposition from 1,800,000 shares of Company
stock to only 400,000. However, until the agreement is signed, the Company is
recognizing the full impact of the loss on disposition equivalent to 1,800,000
shares of stock. When the agreement is signed, the Company will recognize the
recovery. The resulting losses from PC Wholesale and Knight Design
discontinuance and dispositions are reflected in the accompanying financial
statements.
Beach Access's ongoing ISP operations are self-funding.
On or about April 15, 2000, the Company stock was split 100:1. The
accompanying financial statements reflect this split. Because of the split, the
stock's par value was changed from $.001 to $.00001.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings or litigation, and the
officers and directors are aware of no other pending litigation.
Item 2. CHANGES IN SECURITIES.
In March, 2000, the Company's Board of Directors approved a 100:1 stock
split with an effective date of April 15, 2000. In conjunction with this stock
split, the par value of the Company's stock was amended to $.00001.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER EVENTS
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) There were no reports on Form 8-K filed by the registrant for the
quarter ending June 30, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BIOFILTRATION SYSTEMS, INC.
Date: August 9, 2000 By: /s/ Alpha J. Keyser
----------------------------------
Alpha J. Keyser, President and CEO
(Principal Executive Officer)
<PAGE>
