<PAGE>
U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 02-99110
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VITRISEAL, INC.
------------------------------------
(Name of Small Business Issuer in its Charter)
NEVADA 91-1499978
------ ----------
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
12226 South 1000 East, Suite 9
Draper, Utah 84020
--------------------------------
(Address of Principal Executive Offices)
Issuer's Telephone Number: (801) 553-8785
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Company was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
(1) Yes X No (2) Yes X No
--- --- --- ---
(APPLICABLE ONLY TO CORPORATE ISSUERS)
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date:
March 31, 2000: Common Stock - 23,146,571 shares
DOCUMENTS INCORPORATED BY REFERENCE
A description of any "Documents Incorporated by Reference" is contained in
Item 6 of this Report.
Transitional Small Business Issuer Format Yes No X
--- ---
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VITRISEAL, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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Page
<S> <C>
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements: 3
Balance Sheets as of March 31, 2000 and 4
December 31, 1999
Statements of Operations for the Three Months ended March 31, 2000 and March 31, 1999 5
Statements of Cash Flows for the Three Months ended March 31, 2000 and March 31, 1999 6
Statements of Stockholders' Equity for the Three Months ended March 31, 2000 7
Notes to Financial Statements for the Three Months ended March 31, 2000 and 8
March 31, 1999
Item 2. Management's Discussion and 13
Analysis of Financial Condition and Results of Operations
PART II. OTHER INFORMATION 15
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
</TABLE>
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2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The Financial Statements of the Company required to be filed with this Form
10-QSB Quarterly Report were prepared by management and commence on the
following page, together with related Notes. In the opinion of management,
these Financial Statements fairly present the financial condition of the
Company, but should be read in conjunction with the Financial Statements of
the Company for the year ended December 31, 1999 previously filed with the
Securities and Exchange Commission.
3
<PAGE>
VITRISEAL, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
(UNAUDITED) (AUDITED)
------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
CASH $ 5,086,173 $ 366,566
PREPAID EXPENSES 4,649 26,023
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TOTAL CURRENT ASSETS 5,090,822 392,589
ADVANCES TO COMPANIES BEING ACQUIRED 749,316 -
FURNITURE, FIXTURES AND EQUIPMENT, NET 141,864 64,249
PATENTS, NET OF ACCUMULATED AMORTIZATION OF: 156,859 151,392
03/31/2000 $ 10,388
12/31/1999 $ 9,164
DEFERRED TAX ASSET, NET OF VALUATION ALLOWANCE - -
OTHER ASSETS 1,396 946
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TOTAL ASSETS $ 6,140,257 $ 609,176
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES - ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 235,671 $ 55,207
STOCKHOLDERS' EQUITY
COMMON STOCK, PAR VALUE $.001 PER SHARE 23,146 20,839
03/31/00: 100,000,000 shares authorized, 31,361,639
shares issued and 23,146,571 shares outstanding
12/31/99: 100,000,000 shares authorized, 31,361,639
shares issued and 20,839,191 shares outstanding
ADDITIONAL PAID-IN CAPITAL 12,525,629 5,799,936
STOCK OPTIONS OUTSTANDING 1,725,000 225,000
DEFERRED COMPENSATION STOCK OPTIONS (1,500,000) -
ACCUMULATED DEFICIT DURING THE DEVELOPMENT STAGE (6,869,189) (5,491,806)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 5,904,586 553,969
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,140,257 $ 609,176
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
<PAGE>
VITRISEAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 AND
FOR THE PERIOD APRIL 16, 1992 (INCEPTION) THROUGH MARCH 31, 2000
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS APRIL 16, 1992
ENDED MARCH 31, ENDED MARCH 31, (INCEPTION) THROUGH
2000 1999 MARCH 31, 2000
------------- ------------- --------------
<S> <C> <C> <C>
REVENUES
LICENSING FEES $ - $ - $ 25,000
EXPENSES
RESEARCH AND DEVELOPMENT 136,136 157,518 2,279,615
OPERATING EXPENSES 1,267,860 120,134 4,500,191
INTEREST (INCOME) EXPENSE, NET (26,612) (3,405) 9,318
------------- ------------- -------------
LOSS BEFORE INCOME TAX BENEFIT (1,377,384) (274,247) (6,764,124)
INCOME TAX BENEFIT
CURRENT - - -
DEFERRED 510,000 104,000 2,310,000
LESS VALUATION ALLOWANCE (510,000) (104,000) (2,310,000)
------------- ------------- -------------
NET (LOSS) $ (1,377,384) $ (274,247) $ (6,764,124)
============= ============= =============
BASIC AND DILUTED LOSS PER SHARE $ (0.06) $ (0.01) $ (0.36)
============= ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
5
<PAGE>
VITRISEAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 AND FOR THE
PERIOD APRIL 16, 1992 (INCEPTION) THROUGH MARCH 31, 2000
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS APRIL 16, 1992
ENDED MARCH 31, ENDED MARCH 31, (INCEPTION) THROUGH
2000 1999 MARCH 31, 2000
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (1,377,384) $ (274,247) $ (6,764,124)
Adjustments to reconcile net (loss) to net cash used
by operating activities:
Depreciation and amortization 5,814 4,367 52,007
Abandonment of patents pending - - 50,627
Stock options outstanding - - 225,000
Expenses paid by related party - - 169,000
Changes in current assets and liabilities:
Other assets (228,392) - (255,362)
Accounts payable and accrued expenses 187,376 20,031 242,584
------------ ------------ ------------
NET CASH (USED) BY OPERATING ACTIVITIES (1,412,586) (249,849) (6,280,268)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (82,206) (2,300) (183,483)
Patent costs (6,689) (5,632) (217,873)
------------ ------------ ------------
NET CASH (USED) BY INVESTING ACTIVITIES (88,895) (7,932) (401,356)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on note payable - - 450,000
Advances from related parties (6,912) (331,000) 2,743,797
Proceeds from issuance of common stock 6,728,000 1,540,000 9,540,000
Repurchases of common stock - - (538,000)
Capital contributions - - 72,000
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,721,088 1,209,000 12,267,797
------------ ------------ ------------
NET INCREASE IN CASH 5,219,607 951,219 5,586,173
CASH AT BEGINNING OF PERIOD 366,566 28,900 -
------------ ------------ ------------
CASH AT END OF PERIOD $ 5,586,173 $ 980,119 $ 5,586,173
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non-cash transactions:
Conversion of note payable to common stock $ - $ - $ 450,000
============ ============ ============
Conversion of interest payable to common stock $ - $ - $ 72,000
============ ============ ============
Conversion of advances from related parties to common stock $ - $ 169,000 $ 2,919,709
============ ============ ============
Merger with AXR Development Corporation, Inc. $ - $ 105,066 $ 105,066
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
6
<PAGE>
VITRISEAL, INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three-month Period Ended March 31, 2000 and
For the Period April 16, 1992 (Inception) through March 31, 2000
UNAUDITED
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN
SHARES AMOUNT CAPITAL
----------- --------- -------------
<S> <C> <C> <C>
Net loss for the period April 16, 1992 (inception) through
December 31, 1997 - $ - $ -
----------- --------- -------------
BALANCE -- DECEMBER 31, 1997 6,043,150 6,043 1,831,629
Common stock issued at $10.00 per share for cash 18,000 18 179,982
Common stock issued at $6.85 per share to settle
advances from related parties 214,231 214 1,466,823
Common stock issued on conversion of note payable 150,000 150 521,850
Net loss - - -
----------- --------- -------------
BALANCE -- DECEMBER 31, 1998 6,425,381 6,425 4,000,284
Common stock issued at $10.00 per share for cash 154,000 154 1,539,846
Common stock issued at $6.00 per share to settle
advances from related parties 28,167 28 168,972
Effect of merger with AXR Development Corporation, Inc. 14,231,643 14,232 90,834
Stock options granted - - -
Net loss - - -
----------- --------- -------------
BALANCE -- DECEMBER 31, 1999 20,839,191 20,839 5,799,936
Common stock issued at $3.08 per share for cash 2,021,666 2,022 6,225,978
Common stock issued at $1.75 per share to settle
advances from related parties 285,714 285 499,715
Stock options granted - - -
Net loss - - -
Rounding difference - - -
----------- --------- -------------
BALANCE -- MARCH 31, 2000 23,146,571 $ 23,146 $ 12,525,629
=========== ========= =============
<CAPTION>
ACCUMULATED
DEFERRED DEFICIT
STOCK COMPENSATION DURING
OPTIONS STOCK DEVELOPMENT
OUTSTANDING OPTIONS STAGE TOTAL
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net loss for the period April 16, 1992 (inception) through
December 31, 1997 $ - $ - $(2,583,878) $(2,583,878)
------------ ------------- ------------ -------------
BALANCE -- DECEMBER 31, 1997 - - (2,583,878) (746,206)
Common stock issued at $10.00 per share for cash - - - 180,000
Common stock issued at $6.85 per share to settle
advances from related parties - - - 1,467,037
Common stock issued on conversion of note payable - - - 522,000
Net loss - - (1,208,498) (1,208,498)
------------ ------------- ------------ -------------
BALANCE -- DECEMBER 31, 1998 - - (3,792,376) 214,333
Common stock issued at $10.00 per share for cash - - - 1,540,000
Common stock issued at $6.00 per share to settle
advances from related parties - - - 169,000
Effect of merger with AXR Development Corporation, Inc. - - (105,066) -
Stock options granted 225,000 - - 225,000
Net loss - - (1,594,364) (1,594,364)
------------ ------------- ------------ -------------
BALANCE -- DECEMBER 31, 1999 225,000 - (5,491,806) 553,969
Common stock issued at $3.08 per share for cash - - - 6,228,000
Common stock issued at $1.75 per share to settle
advances from related parties - - - 500,000
Stock options granted 1,500,000 (1,500,000) - -
Net loss - - (1,377,384) (1,377,384)
Rounding difference - - 1 1
------------ ------------- ------------ -------------
BALANCE -- MARCH 31, 2000 $ 1,725,000 $(1,500,000) $(6,869,189) $ 5,904,586
============ ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
VITRISEAL, INC.
Notes to the Financial Statements
For the Three Months Ended March 31, 2000 and March 31, 1999.
1. NATURE OF BUSINESS, REORGANIZATION AND BASIS OF PRESENTATION
NATURE OF BUSINESS
VitriSeal, Inc. (the "Company") owns the right to a process called
"VitriSeal," which is based on inorganic silicate chemistry that produces a
waterborne corrosion-protective coating for metal surfaces. The Company is in
the research and development stage with respect to its application to
particular industries. The Company is classified as a development stage
enterprise under accounting principles generally accepted in the United
States ("GAAP"), and has not commenced its planned principal operations to
generate revenues.
AGREEMENTS WITH THERMOFLOW AND LIQUITEK
With an intent to diversify its operations, the Company has engaged in due
diligence proceedings over the past quarter toward the acquisition of two
related companies, Thermoflow Corporation and Liquitek Corporation. See Note 6
for additional information.
REORGANIZATION
In March, 1999, the Company completed a reverse acquisition with a publicly
traded company; such merger is hereinafter referred to as the
"Reorganization."
8
<PAGE>
1. NATURE OF BUSINESS, REORGANIZATION AND BASIS OF PRESENTATION (continued)
BASIS OF PRESENTATION
The Company has prepared its financial statements for the quarters ended March
31, 2000 and 1999 without audit by the Company's independent auditors. In the
opinion of management, all adjustments necessary to present fairly the financial
position, results of operations, and cash flows of the Company as of March 31,
2000, for the quarters ended March 31, 2000 and 1999, and for the period from
inception (April 16, 1992) through March 31, 2000 have been made. Such
adjustments consist only of normal recurring adjustments.
Certain note disclosures normally included in the Company's annual financial
statements prepared in accordance with GAAP have been condensed or omitted. The
accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-KSB
annual report for 1999 filed with the Securities and Exchange Commission.
The results of operations for the quarter ended March 31, 2000 is not
necessarily indicative of the results to be expected for the full year.
RECLASSIFICATIONS
Certain amounts in the 1999 financials statements have been reclassified to
conform to the 2000 presentation.
2. STOCK OPTIONS
On May 12, 1999, the Company granted non-statutory options to purchase
1,225,000 post-Reorganization shares of its common stock to certain
employees, directors and outside consultants at an exercise price of $1.75
per share. Such options, which expire on June 30, 2009, became exercisable on
the grant date. As of May 11, 2000, the Company had not adopted a formal
stock option plan. During 1999 and quarter ended March 31, 2000, no options
were exercised, forfeited or expired.
On January 11, 2000, the Company authorized non-statutory options for certain
individuals contingent upon the closing of the Thermoflow and Liquitek
acquisitions. Effective February 1, 2000, the Company granted options for
500,000 shares to Paul Kokx, a new employee. See notes 4 and 6 for additional
information. At March 31, 2000, there were 1,725,000 options outstanding.
3. INCOME TAXES
The Company files its income tax returns using the cash basis of accounting. For
the period April 16, 1992 (inception) through March 31, 2000, the Company is
considered a start-up entity
9
<PAGE>
3. INCOME TAXES (continued)
for federal and state income tax purposes. As a result, research/development and
start-up expenses are capitalized for tax purposes while such costs are expensed
as incurred for financial reporting purposes. This is the only significant
temporary difference at March 31, 2000.
The reported income tax benefit differs from the amount that would result
from applying the federal statutory rate to the pre-tax loss because of the
state income tax effect at a rate of approximately 5%.
4. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT, RESEARCH AND CONSULTING CONTRACTS
The Company has agreed to allocate a portion of its revenues from all sources to
a deferred compensation plan. The terms of such deferred compensation plan are
set forth below under "Royalty Agreements."
Effective February 1, 2000, the Company entered into an employment agreement
(the "Agreement") with Paul Kokx ("Kokx") to hire Kokx as executive
vice-president at a minimum annual salary of $175,000 plus certain benefits. The
Agreement prohibits Kokx from competing with the Company in any country where
the Company has protected business interests for the period beginning February
1, 2000 and ending two years after the termination of his employment. Unless the
Agreement is terminated early, the employment of Kokx will continue until
January 31, 2004.
The Company has granted Kokx a non-statutory option to purchase 500,000 shares
of its common stock at $2.00 per share. The grant date closing market price of
the Company's stock approximated $5.00 per share. Such option expires on January
31, 2010 and, except as described in the following paragraph, vests as follows:
<TABLE>
<CAPTION>
Number of
Shares
----------------
<S> <C>
December 31, 2000 50,000
December 31, 2001 100,000
December 31, 2002 150,000
December 31, 2003 200,000
</TABLE>
Accelerated vesting is available based on executed wheel-coating process license
agreements and royalty revenue received by the Company under such agreements.
Any unvested options immediately vest and become exercisable upon a change in
control of the Company.
ROYALTY AGREEMENTS
In February, 1997, the Company entered into separate royalty agreements with
Dennis Repp ("Repp") and Daniel Corbin ("Corbin") whereby Repp and Corbin
each receive a 2% royalty on all revenues or other proceeds earned by the
Company resulting from the VitriSeal process, including licensing fees.
10
<PAGE>
4. COMMITMENTS AND CONTINGENCIES (continued)
ROYALTY AGREEMENTS (continued)
product and technology sales, royalty income, and asset sales. The royalty
agreements provide that such payments will continue until the termination of the
recipient's services to the Company in connection with the development and
commercialization of the VitriSeal process.
Upon the termination of such services, Repp and Corbin and their
heirs/successors shall receive post-termination royalties equal to 2% of defined
revenues earned by the Company from (1) existing customers at the termination
date and (2) prospects who were contacted prior to such date and later became
customers of the Company. Such payments will continue until the customers
described in the preceding sentence no longer generate any revenue.
Repp and Corbin have each provided a covenant not to compete prohibiting them
from engaging in any activities that are competitive with or adverse to the
Company's business during the term of the royalty agreements. Violation of this
covenant will discharge the Company from any future obligation to make royalty
payments.
In February 1997, the Company also entered into an agreement with Hamlin
Jennings, the principal consultant for research and development, identical to
those described above. On July 15, 1998, the Jennings royalty agreement was
amended to provide for a 3% royalty; all other provisions of such agreement
remain in effect.
On November 23, 1998, the Company entered into a royalty agreement with Culley
W. Davis ("Davis") whereby Davis would receive a 2% royalty on all revenues or
other proceeds earned by the Company resulting from the VitriSeal process,
including licensing fees, product and technology sales, royalty income, and
asset sales. On June 24, 1999, the Davis royalty agreement was mutually canceled
as additional consideration for the 164,548 shares of common stock issued in
settlement of 1998 and 1999 advances payable to Pinnacle Enterprises, Inc.
("PEI"), a company wholly owned by Davis.
5. GOING CONCERN/LIQUIDITY CONSIDERATIONS
As discussed in Note 1, the Company is a development stage enterprise developing
a metal coating process known as "VitriSeal." There have been no product sales
or significant royalty revenues to date, and management projects that the
Company will require significant additional capital to advance the development
of its sole product to the point at which it may become commercially viable.
However, with the capital raised during the first quarter of 2000 and a March
31, 2000, cash balance in excess of $5.5 million, management believes that the
Company will have sufficient cash to meet its obligations for the year ending
December 31, 2000.
11
<PAGE>
6. PROPOSED ACQUISITIONS
On December 30, 1999, the Company entered into a letter of intent (the "LOI")
with Thermoflow Corporation ("Thermoflow") and Liquitek Corporation
("Liquitek") to acquire substantially all of the outstanding shares of
Thermoflow and Liquitek in exchange for 16,060,000 shares of the Company's
common stock. The LOI was subsequently amended to reduce the shares to be
exchanged to 15,060,000. The parties intend to execute definitive tax-free
reorganization agreements to accomplish these transactions. One of the
conditions for closing this acquisition is that the Company receives
agreements to participate in such reorganization from the stockholders
representing 90% of Liquitek's outstanding shares and at least 80% of
Thermoflow's outstanding shares. As of May 11, 2000, this transaction had not
closed.
On January 11, 2000, in connection with the proposed acquisition, the Company
authorized non-statutory options to purchase a total of 775,000 shares of its
common stock to the following related parties: Culley Davis (275,000 shares);
Bruce Haglund (250,000 shares); and Allen Kirschbaum, a director of
Thermoflow (250,000 shares). The granting of such options is contingent upon
closing the proposed acquisition. The options, which have an exercise price
of $2.00 per share and expire on March 31, 2010, vest when and if the
proposed acquisition closes. The closing market price of the Company's common
stock on January 11, 2000, approximated $2.30.
Under the LOI, the Company is obligated to make certain interest-bearing loans
to Thermoflow and Liquitek in an aggregate amount of approximately $2.3 million.
The Company intends to finance such loans through the sale of a maximum of $17.5
million of restricted common stock in private placement offerings (less legal
fees, finder's fees, and other issuance costs).
As of May 11, 2000, the Company has received gross proceeds of approximately
$6.2 million from such offerings, advanced a total of $500,000 to Thermoflow and
Liquitek, and paid approximately $782,000 in fees related to the offerings,
including approximately $469,000 paid to related parties.
The Company borrowed the $500,000 advanced to Thermoflow and Liquitek from
Culley Davis and PEI. On January 11, 2000, the Board of Directors authorized the
Company to issue 285,715 shares of its common stock to Culley Davis as
consideration for such borrowing and forgiveness of the debt.
7. LOSS PER SHARE
Loss per common and common equivalent share is based on the weighted average
number of shares of common stock and potential common stock (as retroactively
adjusted for the effect of the Reorganization) outstanding during the period
in accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share." Because the Company has experienced losses from
inception, the stock options described in Note 2 are antidilutive.
The weighted average number of common shares outstanding for the indicated
periods is approximately as follows:
<TABLE>
<S> <C>
Quarter ended March 31, 2000 22,196,000
Quarter ended March 31, 1999 19,784,000
Period from April 16, 1992 (inception) through March 31, 2000 18,669,000
</TABLE>
12
<PAGE>
Item 2. Plan of Operation.
REORGANIZATION
On March 18, 1999, we acquired Dancor, Inc., a development stage company
incorporated in Delaware on April 16, 1992, in a "reverse acquisition"
accomplished through a tax-free, stock-for-stock reorganization. At the time of
the acquisition, we were a dormant entity with no assets, and had no significant
operations during 1997 or 1998, and no revenues since 1989.
The reverse acquisition was the result of an Agreement and Plan of
Reorganization (the "Plan") structured to result in the acquisition by VitriSeal
of all of the issued and outstanding shares of restricted common stock of
Dancor. Under the terms of the Plan, the former stockholders of Dancor received
three shares of VitriSeal common stock for each one share of Dancor common stock
owned and acquired approximately 95% of the issued and outstanding common stock
of VitriSeal.
PLAN OF OPERATION.
Our operations currently focus on the VitriSeal process, a patented process
based on inorganic silicate chemistry that makes bright, clear,
corrosion-protective coatings on metal surfaces at a lower cost than other clear
coatings. VitriSeal, a waterborne coating, has little or no organic vapor
emissions and creates minimal waste during the normal process operation. We
believe that existing products in the market are inferior in terms of
performance, cost, and environmental impacts, giving VitriSeal a significant
competitive advantage.
Our long-term goal is to exploit the VitriSeal technology through licensing,
joint venture agreements, and sales to strategically selected manufacturers. We
believe there is a large, growing market for our proprietary silicate product.
The focus of current efforts for the VitriSeal process is to establish a pilot
production facility wherein automotive wheels and other aluminum products would
be coated. Toward this end, we have entered into an agreement with an automotive
after-market wheel manufacturer that is a leading producer of bright, polished
aluminum wheels. The agreement calls for cooperative development of the
application of the VitriSeal process to coating wheels and for licensing the
technology to the manufacturer once it is proven. We are working with the
manufacturer and an independent engineering consulting firm on the mechanics of
the production line. We believe that this engineering work will lead to a
commercially viable application process featuring uniform quality of the product
and competitive economics. After proving the pilot line operations, we plan to
make the process available to other wheel manufacturers and explore the
viability of coating other aluminum products.
Because of the improvements and refinements in the VitriSeal process
resulting from our on-going laboratory research, we are preparing to file
additional patent applications that would include both process and
state-of-matter claims that will incorporate what has been learned during the
research process.
13
<PAGE>
ACQUISITIONS OF THERMOFLOW AND LIQUITEK
On December 30, 1999, we entered into a letter of intent ("LOI") for the
acquisition of two companies: Thermoflow Corporation, a Nevada corporation
with offices in Las Vegas, Nevada ("Thermoflow"), and Liquitek Corporation, a
Nevada corporation with offices in Knoxville, Tennessee ("Liquitek"). We
intend to acquire all of the shares of stock of both Thermoflow and Liquitek.
Under a subsequent revision of the LOI, we plan to issue 10,060,000 shares of
VitriSeal for all of the shares of Thermoflow and 5,000,000 shares for all of
the shares of Liquitek. Both companies will then be wholly-owned subsidiaries
of VitriSeal.
Thermoflow owns and operates a proprietary antifreeze recycling facility in Las
Vegas, Nevada with a three million gallon per year capacity. Thermoflow receives
waste antifreeze and produces fully reformulated antifreeze indistinguishable
from antifreeze made from virgin materials. The process is able to recover 100%
of the waste materials for reuse. Thermoflow was recently awarded a U.S. General
Services Administration contract permitting it to receive waste antifreeze and
provide recycled, reformulated antifreeze to all U.S. federal government
agencies. The Thermoflow technology is capable of economically
treating/recycling many other contaminated liquids, including wastewater.
Thermoflow has licensed the technology to Liquitek under an exclusive license
agreement.
Liquitek refined the Thermoflow technology and has licensed and leased an oily
wastewater treatment system to the largest recycler in Hawaii. Liquitek, in
conjunction with Thermoflow, developed a proprietary system for recycling car
wash wastewater and installed its first system in Hiroshima, Japan. Liquitek has
also secured a 20,000 square foot facility in Oak Ridge, Tennessee, under an
18-year lease agreement. The Tennessee facility is expected to be used to build
a three to six million gallon antifreeze recycling operation, similar to
Thermoflow's Las Vegas operation, by year-end 2000. Liquitek's business plan
includes designing and manufacturing advanced wastewater treatment systems, as
well as systems for profitably recycling other contaminated liquids, such as
antifreeze, for domestic and international customers.
Pursuant to the terms of the LOI, in January 2000 we advanced Thermoflow
$300,000 and Liquitek $200,000. We are obligated to raise an additional
$1,300,000 of working capital for Thermoflow and $450,000 for Liquitek as a
condition to completing the acquisitions. The proceeds of the January 2000
Common Stock Offering (see below) will enable us to complete the funding of
the obligations required by the LOI and consummate the acquisitions.
Through the acquisition of Thermoflow and Liquitek, we intend to own and
operate regional facilities for recycling antifreeze and treating oily
wastewater, license and lease systems to domestic oily wastewater treatment
providers, and design and build both types of facilities for international
markets. Our primary focus for Thermoflow and Liquitek will be to develop and
commercialize high-performance liquid recycling technologies.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2000, we undertook a private offering, the "January
2000 Common Stock Offering," of up to 2,500,000 restricted shares of our common
stock at a price of at least $3.00 per share. The offering was made pursuant
to a claimed exemption under Rule 506 of Regulation D of the Securities Act of
1933 based upon our offering of the securities to only "accredited investors,"
all of whom were provided a Private Placement Memorandum which included
financial information. No general solicitation of investors was undertaken, and
all investors were required to verify investment intent. The January 2000 Common
Stock Offering was fully subscribed.
Additionally, we undertook another private offering, the "February 2000
Common Stock Offering," of up to 2,500,000 restricted shares of our common
stock at a price of at least $4.00 per share. The offering was made pursuant
to a claimed exemption under Rule 506 of Regulation D of the Securities Act
of 1933 based upon our offering of the securities to only "accredited
investors," all of whom were provided a Private Placement Memorandum which
included financial information. No general solicitation of investors was
undertaken, and all investors were required to verify investment intent. The
February 2000 Common Stock Offering has not yet been completed.
Both of the offerings in 2000 were undertaken in anticipation of the
acquisitions we expect to be completing within the next several months.
We anticipate that proceeds received from the January and February 2000 Common
Stock Offerings will provide sufficient working capital for us to continue with
VitriSeal research and development, complete the acquisitions of Thermoflow and
Liquitek, and continue operations through 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None; not applicable.
Item 2. Changes in Securities.
None; not applicable.
Item 3. Defaults Upon Senior Securities.
None; not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None; not applicable.
15
<PAGE>
Item 5. Other Information.
None: not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
Number
(a) Exhibits.*
None.
(b) Reports on Form 8-K.
None.
* A summary of any Exhibit is modified in its entirety by
reference to the actual Exhibit.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
VITRISEAL, INC.
Date: 5/12/00 BY: /s/ Culley W. Davis
--------------------------------
Chief Executive Officer
Date: 5/12/00 BY: /s/ John W. Nagel
--------------------------------
Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR VITRISEAL, INC., A DEVELOPMENT STAGE
COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,586,173
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,090,822
<PP&E> 183,483<F1>
<DEPRECIATION> 41,619
<TOTAL-ASSETS> 6,140,257
<CURRENT-LIABILITIES> 235,671
<BONDS> 0
0
0
<COMMON> 23,146
<OTHER-SE> 5,881,440
<TOTAL-LIABILITY-AND-EQUITY> 6,140,257
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,403,996<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (26,612)
<INCOME-PRETAX> (1,377,384)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,377,384)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,377,384)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
<FN>
<F1>GROSS INVESTMENT IN PP&E, I.E., BEFORE DEPRECIATION DEDUCTION
<F2>OPERATING EXPENSE 1,267,860; R&D 136,136
</FN>
</TABLE>
