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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
( ) 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 0-20701
COMPOSITECH LTD.
(Exact Name of Registrant as specified in its charter)
Delaware 11-2710467
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
710 Koehler Avenue, Ronkonkoma, New York 11779
(Address of principal executive offices)
Registrant's telephone number, including area code: (631) 585-7710
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 requirement for the past 90 days. Yes |X| No ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of November 14, 2000:
Common Stock $.01 par value 22,002,345
--------------------------- ----------------
Class Number of shares
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<PAGE>
COMPOSITECH LTD.
Index
<TABLE>
<CAPTION>
Part I - Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999........2
Statements of Operations (unaudited) for the three-month and nine-month
periods ended September 30, 2000 and 1999......................................3
Statements of Cash Flows (unaudited) for the nine months
ended September 30, 2000 and 1999..............................................4
Notes to Financial Statements (unaudited)........................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................11
Part II - Other Information
Item 1. Legal Proceedings...............................................................14
Item 2. Changes in Securities...........................................................14
Item 6. Exhibits and Reports on Form 8-K................................................15
Signature................................................................................15
</TABLE>
<PAGE>
COMPOSITCH LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 66,959 $ 73,197
Accounts receivable trade - net 82,783
Inventories 15,000
Prepaid expenses and other 94,125 48,412
------------ ------------
Total current assets 161,084 219,392
Property and equipment held for sale 1,900,000 2,000,000
Investment in joint venture 466,000
Deferred debt expense - net of accumulated amortization of $461,078 49,163
Other assets and other deferred charges, net of accumulated amortization
of $1,304,673 (2000) and $658,375 (1999) 705,574 401,894
------------ ------------
Total assets $ 2,766,658 $ 3,136,449
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
Current liabilities:
Accounts payable $ 1,925,156 $ 1,814,421
Deferred salaries 141,711 158,362
Accrued interest - $167,918 (2000) and $44,276 (1999) to stockholders 315,942 104,423
Other accrued liabilities 568,323 642,762
Loans and notes payable 1,672,373 2,976,935
Notes payable to directors/stockholders 158,333 158,333
------------ ------------
Total current liabilities 4,781,838 5,855,236
Non-current liabilities:
Notes payable to directors/stockholders 1,420,000 1,420,000
Deferred salaries - officers / directors 963,866 907,135
Accrued interest - directors/stockholders 366,476 366,476
Deferred licensing income 643,840
Advances received 500,000
------------ ------------
Total non-current liabilities 2,750,342 3,837,451
Commitments
Stockholders' (deficiency) :
Undesignated preferred stock; authorized 3,799,780 shares, none issued and
outstanding.
Series A convertible preferred stock, par value $3.00 per share;
authorized shares - 714,161, issued and outstanding shares -
326,665 (2000) and 393,997 (1999) 979,995 1,181,991
Series C 8% convertible preferred stock, par value $0.01 per share;
authorized shares - 200,000 issued and outstanding shares - 54,000 540,000 540,000
Series D 8% convertible preferred stock, par value $0.01 per share;
authorized shares - 500 issued and outstanding shares - 500 500,000
Common stock, par value $.01 per share; authorized shares - 50,000,000,
issued and outstanding shares - 20,983,790 (2000) and 18,023,613 (1999) 228,479 180,236
Additional paid-in capital 48,192,364 44,449,398
Deficit (52,650,148) (50,349,052)
------------ ------------
(2,209,310) (3,997,427)
Less treasury shares to be received - 949,585 (2000) and 951,000 (1999) (1,744,388) (1,746,987)
Less non-recourse notes receivable received for issuance of common stock (811,824) (811,824)
------------ ------------
Total stockholders' (deficiency) (4,765,522) (6,556,238)
------------ ------------
Total liabilities and stockholders' (deficiency) $ 2,766,658 $ 3,136,449
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
COMPOSITCH LTD.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ -- $ 291,692 $ -- $ 507,657
Licensing 14,105 -- 42,556
------------ ------------ ------------ ------------
Total revenues 305,797 -- 550,213
Costs and expenses:
Manufacturing -- 1,820,349 -- 4,393,656
Selling, general and administrative 375,453 409,328 1,385,977 1,197,831
Research and development -- 74,842 -- 222,649
------------ ------------ ------------ ------------
Total operating expenses 375,453 2,304,519 1,385,977 5,814,136
(Loss) from operations (375,453) (1,998,722) (1,385,977) (5,263,923)
Other income (expenses):
Interest income 16,236 13,207 49,137 33,786
Interest expense, net of interest capitalized (129,930) (95,730) (327,394) (213,250)
Amortization of debt discount and expenses (373,006) (461,661) (632,875) (698,963)
Other income (expense) (337) (5,587) (3,987) (91,465)
------------ ------------ ------------ ------------
(487,037) (549,771) (915,119) (969,892)
------------ ------------ ------------ ------------
(Loss) from operations before equity in operations of joint venture (862,490) (2,548,493) (2,301,096) (6,233,815)
Equity in operations of joint venture (53,828) -- (101,042)
------------ ------------ ------------ ------------
Net (loss) (862,490) (2,602,321) (2,301,096) (6,334,857)
Preferred stock dividends 197,598 197,598 15,692
------------ ------------ ------------ ------------
(Loss) attributable to common stockholders ($ 1,060,088) ($ 2,602,321) ($ 2,498,694) ($ 6,350,549)
============ ============ ============ ============
(Loss) per common share - basic and diluted ($ 0.05) ($ 0.16) ($ 0.13) ($ 0.40)
============ ============ ============ ============
Shares used in computing (loss) per common share 20,120,305 16,608,458 19,376,324 15,681,582
============ ============ ============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
COMPOSITCH LTD.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) ....................................................................... ($2,301,096) ($6,334,857)
Adjustments to reconcile net (loss) to net cash and
cash equivalents used in operating activities:
Depreciation and amortization, including capital leases ...................... 13,228 856,630
Amortization of debt discount and expenses ................................... 291,677 698,963
Amortization of deferred charges ............................................. 695,034
Issuance of common stock as compensation to directors ........................ 55,500 24,502
Issuance of common stock in exchange for consulting services ................. 36,000
Equity in net loss of joint venture .......................................... 101,042
Changes in operating assets and liabilities:
Accounts receivable trade - net ........................................... 82,783 (155,256)
Accounts receivable from joint venture .................................... 50,186
Inventories ............................................................... 15,000 6,268
Prepaid expenses and other ................................................ (45,713) (6,136)
Other assets and other deferred charges ................................... 12,875 40,568
Accounts payable .......................................................... 110,735 923,387
Deferred salaries ......................................................... 40,080 49,627
Accrued interest .......................................................... 308,415 168,295
Deferred licensing income ................................................. (114,866)
Other accrued liabilities ................................................. 28,160 248,314
----------- -----------
Net cash and cash equivalents (used) in operating activities ........... (657,322) (3,443,333)
Cash Flows from Investing Activities
Purchase of property and equipment - net ......................................... (331,792)
Patent costs deferred ............................................................ 3,409 (18,866)
----------- -----------
Net cash and cash equivalents provided by (used in) investing activities 3,409 (350,658)
Cash Flows from Financing Activities
Net proceeds from issuance of common stock ....................................... 157,582 2,277,535
Net proceeds from issuance of Series D convertible preferred stock ............... 318,243
Net proceeds from exercise of warrants ........................................... 157,864 1,282
Net proceeds from loans and notes payable ........................................ 45,686 1,679,682
Payment of capital lease obligations ............................................. (23,983)
Payment of loans and notes payable ............................................... (31,700) (212,500)
----------- -----------
Net cash and cash equivalents provided by financing activities ........... 647,675 3,722,016
----------- -----------
Increase (decrease) in cash and cash equivalents ......................... (6,238) (71,975)
Cash and cash equivalents at beginning of period ......................... 73,197 102,286
----------- -----------
Cash and cash equivalents at end of period ............................... $ 66,959 $ 30,311
=========== ===========
Supplemental disclosures of cash flow information
Noncash financing activities:
Dividends on 7% Series B convertible preferred stock ........................... $ 15,692
Issuance of common stock in repayment of promissory notes
including accrued interest ................................................. $ 1,174,248
Issuance of common stock as compensation for bridge financing .................. $ 30,000
Issuance of common stock as compensation to directors .......................... $ 55,500 24,502
Noncash investing activities:
Liquidation of liabilities through the sale of property and equipment .......... $ 100,000
Cash paid for:
Interest ....................................................................... $ 18,904 $ 60,742
</TABLE>
See accompanying notes.
4
<PAGE>
COMPOSITECH LTD.
Notes to Financial Statements
(Unaudited)
September 30, 2000
Note 1 - Basis of Presentation and Significant Accounting Policies
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Annual Report on
Form 10-KSB for the year ended December 31, 1999 of Compositech Ltd. (the
"Company"). In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month and nine-month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000.
Valuation of Options, Warrants and certain Common Stock issuances for services
rendered
The valuation of options, warrants and certain common stock issuances for
services rendered issued by the Company in non-capital transactions is
calculated using a Black-Scholes valuation model and the Company's historical
stock price volatility. The gross calculated fair market value is then
discounted if the options or warrants are exercisable into shares of restricted
common stock and/or if the quantity issued constitutes a large "block-size"
issuance. The discounted valuation is then amortized over the appropriate life
of the option or warrant, according to each specific agreement.
Note 2 - Common Stock Issuances and Stock Options
During January 2000, pursuant to the Company's Amended and Restated Stock
Award Plan (the "Award Plan"), the Company issued to its non-employee directors
stock awards of 36,365 shares of its common stock, vesting on a quarterly basis
over a one-year period, as payment of the annual $10,000 per year, per director,
retainer for the year 2000 and 13,094 shares of its common stock, as
compensation for the 1999 meeting attendance of the Board of Directors and
related subcommittees.
During February 2000, pursuant to the Award Plan, the Company granted
incentive options to its employees to purchase 600,000 shares of common stock at
$0.01 per share. These options are exercisable only in the event of a successful
transfer of the Company's technology or financing to restart production, while
still employed by the Company.
During February 2000, the Compensation Committee approved the repricing of
stock options held by current employees, to an exercise price of $1.4375 per
share, the market price on
5
<PAGE>
the date approved by the Committee, for all stock options with exercise prices
in excess of $1.4375 per share. The authorization covered options to purchase
584,544 shares of common stock, of which 575,271 shares are exercisable as of
the current date. At September 30, 2000, the market price of the Company's
common stock was lower than the repriced exercise price and, therefore, there
was no charge to earnings. In the event the market price of the Company's common
stock increases to a level in excess of $1.4375 per share, the Company will
record a non-cash charge to earnings.
In the nine months ended September 30, 2000, 67,332 shares of the Series A
convertible preferred stock were converted at the existing conversion rate into
33,665 shares of common stock, resulting in a decrease in stockholders' equity
relating to Series A convertible preferred stock of $201,996, an increase in
stockholders' equity relating to common stock of $337 and an increase in
additional paid-in capital of $201,322, net of expenses of $337.
During January 2000, in connection with an agreement to provide financial
public relations and investor relations services, the Company issued 500,000
shares of its common stock to a non-affiliated consultant. The Company has
estimated the value of the stock at $323,500, which is being amortized over the
twelve-month life of the agreement. This issuance resulted in an increase in
stockholders' equity relating to common stock of $5,000 and an increase in
additional paid-in capital of $313,500, net of expenses of $5,000.
During February 2000, in connection with the settlement agreement which
terminated the Taiwan joint venture agreement, the Company issued 587,372 shares
of its common stock to its former joint venture partner, resulting in an
increase in stockholders' equity relating to common stock of $5,874 and an
increase in additional paid-in capital of $666,092, net of expenses of $5,874
(see Note 3).
On March 31, 2000, the Company issued 789,563 shares of its common stock in
connection with the conversion of the first tranche of a term note series which
totaled $898,128, including accrued interest, resulting in an increase in
stockholders' equity relating to common stock of $7,896 and an increase in
additional paid-in capital of $882,336, net of expenses of $7,896.
During the six months ended June 30, 2000, the Company sold 395,319 shares
of its common stock, in a private placement, realizing $172,319, net of
expenses, resulting in an increase in stockholders' equity relating to common
stock of $3,953 and an increase in additional paid-in capital of $168,366.
During the six months ended June 30, 2000, the Company sold 141,583 shares
of its common stock in connection with the exercise of warrants, realizing
$159,280, resulting in an increase in stockholders' equity relating to common
stock of $1,415 and an increase in additional paid-in capital of $156,449, net
of expenses of $1,416.
During the six months ended June 30, 2000, the Company issued 456,000
shares of its common stock in connection with the repayment of certain
promissory notes payable totaling $276,120, including accrued interest and
$20,000 which was borrowed during January 2000, resulting in an increase in
stockholders' equity relating to common stock of $4,560 and an increase in
additional paid-in capital of $267,001, net of expenses of $4,559.
6
<PAGE>
On September 25, 2000, the Company issued 353,472 shares of its common
stock in connection with the conversion of a portion of the second tranche of a
term note series which totaled $402,074, including accrued interest and
registration penalties, resulting in an increase in stockholders' equity
relating to common stock of $3,535 and an increase in additional paid-in capital
of $398,539.
On September 28, 2000, in connection with the cashless exercise of some of
the repricing warrants which were issued in connection with the first tranche of
a term note series, the Company issued 1,455,629 shares of common stock,
resulting in an increase of $14,556 in stockholders' equity relating to common
stock and a decrease in additional paid-in-capital of the same amount.
During the nine months ended September 30, 2000, in connection with the
six-month term of an agreement to provide consulting services in connection with
the Company's licensing efforts, the Company issued 71,346 shares of common
stock, resulting in an increase in stockholders' equity relating to common stock
of $713 and an increase in additional paid-in capital of $35,033, net of
expenses of $254.
Note 3 - Loans and Notes Payable
The components of loans and notes payable are as follows:
September 30, December 31,
2000 1999
---------- ----------
Term note series payable $1,215,956 $2,271,351
Loan payable - Credit Bancorp 456,417 456,417
Short term convertible notes payable -- 249,167
---------- ----------
Total $1,672,373 $2,976,935
========== ==========
As of September 25, 2000, the holders of certain terms notes payable,
totaling approximately $1,330,000, including accrued interest as of September
30, 2000, agreed to an extension of the due date on such notes to December 25,
2000.
In connection with the term note series, during the three months ended
September 30, 2000, the Company recorded an additional debt discount in the
amount of $511,797, representing the value of repricing warrants issued in
connection with the October 1999 exchange of the old notes for new notes, with a
credit to stockholders' equity relating to additional paid-in-capital. The
discount is being amortized over the period from October 1999 to December 2000,
the life of the notes.
7
<PAGE>
Note 4 - Merger Discussions
As of June 2, 2000, the Company signed a letter of intent with the Aeon
Group, Inc., regarding a potential merger of the two companies. On August 14,
2000, the parties terminated their merger discussions.
On October 23, 2000, the Company announced that it had signed a letter of
intent with farmbid.com, Inc., a privately-owned e-commerce company devoted to
the needs of the agricultural community, regarding a potential merger of the two
companies. Definitive agreements are being drafted and the Company is planning
to close the transaction, which is subject to stockholder approval, around the
end of 2000.
Note 5 - Series C 8% Convertible Preferred Stock
In connection with the Series C 8% Convertible Preferred Stock, during the
three months ended September 30, 2000, the Company recorded an amount of
$116,884, as an additional discount, due to the beneficial conversion feature of
the Series C 8% Convertible Preferred Stock, with a credit to stockholders'
equity relating to additional paid-in-capital. The Company had earlier recorded
a lower amount based on guidance from a SEC pronouncement which has been
modified by the release of Emerging Issues Task Force 98-5 "Accounting for
Convertible Securities with Beneficial Conversion or Continently Adjustable
Conversion Ratios". The additional discount is being amortized over the twelve
months ending November 2, 2000 and has been recorded as a dividend. (See Note 9
- Subsequent Events.)
Note 6 - Series D 8% Convertible Preferred Stock
On July 12, 2000, the Company sold 500 shares of Series D 8% Convertible
Preferred Stock (the "Series D stock") in a private placement to a
non-affiliated accredited investor, for a total of $500,000, which after
expenses netted approximately $418,000. The purchase agreement required the
Company to lend $100,000 of the net proceeds to the Aeon Group, Inc., a company
with which the Company was having merger discussions since terminated. The
$100,000 which is included in Other Assets in the accompanying Balance Sheet is
held in escrow and will be used to retire 100 shares of the Series D stock. The
sale of the Series D stock was intended to be a bridge financing to be redeemed
from future financings to be received in connection with the proposed merger.
In connection with the sale of the Series D stock, the Company issued
three-year warrants to the investor, to purchase 709,849 shares of its common
stock at $0.7326 per share, of which number one-half is exercisable immediately,
three-quarters is exercisable if the Series D stock is not redeemed within 120
days of issuance and the balance is exercisable if the Series D stock is not
redeemed within 180 days of issuance.
The Series D stock is convertible into shares of common stock at the lower
of $1.00 per share or 75% of the contractual market price ("Market Price")
commencing on the 120th day following the date of issuance (November 9, 2000),
but in any event, no later than December 31, 2001. The definition of "Market
Price" in this agreement is the average of the three lowest closing bid prices
within the thirty trading days preceding a conversion. In the event the Company
is
8
<PAGE>
delisted from Nasdaq, the conversion price is reduced to 50% of the contractual
market price. (See Note 9 - Subsequent Events.)
The Company has recorded the beneficial conversion feature applicable to
the 400 shares of Series D stock, using the above Market Price, totaling
$133,333, with a credit to stockholders' equity relating to additional
paid-in-capital. The conversion feature amount is being amortized over the 120
days ending November 2, 2000 and is recorded as an additional dividend on its
Statement of Operations.
Note 7 - Joint Venture
As of February 17, 2000, the Company reached a settlement agreement with
its joint venture partner/licensee in Taiwan, which terminated the joint venture
agreement and the license for use of the Company's proprietary technology in
Taiwan. Under the terms of the settlement, in exchange for the issuance of
587,372 shares of its common stock to the licensee, the Company retained the $1
million license down payment it received in 1998. Additionally, in exchange for
returning the equity held by the Company in the Taiwanese joint venture, the
Company retained the $500,000 advance it received to make the investment. The
Company has recorded the value of the shares issued in connection with this
settlement at $677,840, representing the net balance of the accounts on its
balance sheet as of the agreement date, relating to the investment in the joint
venture, the deferred licensing income and the advances received on the sale of
common stock.
On April 25, 2000, the Board of Directors for the Company's Canadian joint
venture approved the dissolution and liquidation of the joint venture. In
accordance with that action, the Company will receive back 949,585 shares of its
common stock, which is adjusted from the 951,000 shares which were recorded as
treasury shares to be received in the Company's financial statements as of
December 31, 1999.
Note 8 - Restructuring Provision
As part of the restructuring charges recorded at December 31, 1999, the
Company set up a restructuring provision in the amount of $100,000 related to
future lease costs of its idled manufacturing facility. Activity in the
provision was as follows:
Description Amount
----------- ---------
Balance, December 31, 1999 $ 100,000
Utilization during the 6 months ended June 30, 2000 100,000
---------
Balance, September 30, 2000 $ -0-
=========
9
<PAGE>
Note 9- Subsequent Events
On November 1, 2000, the Company's securities were delisted from the Nasdaq
Stock Market, due to not meeting Nasdaq's minimum listing requirements as to
market price of its stock and net tangible assets. The Company's securities are
now traded on the OTC Bulletin Board.
As a result of the delisting, the conversion discount applicable to the
Series C 8% Convertible Preferred Stock increased from 30% to 50% and the
conversion discount applicable to the Series D 8% Convertible Preferred Stock
increased from 25% to 50%. The Company's accounting for these additional
discounts will be included in its financial statement for the fourth quarter of
2000.
10
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of important factors. For a discussion of important factors that could affect
the Company's results, in addition to the discussions below, please refer to the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999 and
the risk factors listed therein.
Overview
Compositech Ltd. (the "Company"), a Delaware corporation, has developed a
proprietary technology for the manufacture of innovative and superior
copper-clad fiberglass epoxy laminates used to make printed circuit boards.
In the last half of 1999, we experienced a demand for product that was
greater than our production capability. In addition, we were unable to obtain
adequate financing to maintain or expand our manufacturing capabilities. On
December 3, 1999, we suspended our manufacturing operations and refocused our
resources on locating suitable licensees, joint venture partners or purchasers
for our technology. As a result, we reduced our staff from 124 employees to six.
We are also exploring potential mergers and acquisitions or other strategic
transactions.
In March 2000, we formally launched our licensing program by sending
proposals to a limited number of select candidates supported by our
recommendation letters from several original equipment manufacturers ("OEM's")
and printed circuit board customers. At the current date, we are having
licensing discussions with five potential licensees. These include two laminate
manufacturers and two suppliers to the industry.
On June 30, 2000, the Company moved from its former manufacturing facility
to smaller quarters, more suitable for our present licensing activities,
following an agreement between the Company and its former landlord to terminate
its lease as of that date. In connection with its former lease, the Company made
the final payment of a stipulation agreement on July 5, 2000.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. In addition to the matters discussed
above, the Company has incurred recurring operating losses and has a working
capital deficiency. The Company requires, and is negotiating for, additional
funding from financing or other sources to satisfy its existing liabilities and
cover future operating expenses until sufficient revenues are generated. Since
December 31, 1999, the Company has received private placement funding from the
sales of its common stock and Series D 8% Convertible Preferred Stock. In
addition, the Company has initiated discussions with certain creditors to
provide accommodations with regard to outstanding liabilities. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
11
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Results of Operations
In light of the Company's decision to suspend its manufacturing operations
on December 3, 1999 and refocus its resources on locating suitable licensees,
joint venture partners or purchasers for its patented technology and equipment
design, management's comparative analysis is limited to those areas for which
data is available for both periods. During the first nine months of 2000, the
Company did not record any sales, manufacturing or research and development
expenses. Lease related obligations of the idled manufacturing facility,
totaling $100,000 were charged to the restructuring provision recorded as of
December 31, 1999.
Selling, general and administrative expenses decreased to $375,453 for the
three months ended September 30, 2000 from $409,328 for the three months ended
September 30, 1999 and increased to $1,385,977 for the nine months ended
September 30, 2000 from $1,197,831 for the nine months ended September 30, 1999.
Decreases in payroll related, travel and promotion expenses were more than
offset by an increase in non-cash charges of approximately $327,000 due to
amortization of the value of warrants and common stock issued in exchange for
professional services and $55,000 for directors' compensation, paid in common
stock. For the nine months ended September 30, 2000, there was an increase of
approximately $62,000 in legal and professional fees related to creditor
activities and the pursuit of licensing and financings. In addition, expenses
for the 1999 period reflected a reduction of approximately $393,000 of expenses
that were charged to the Company's Canadian joint venture, in accordance with
the joint venture agreements.
Interest expense increased to $129,930 for the three months ended September
30, 2000 from $95,730 for the three months ended September 30, 1999 and to
$327,394 for the nine months ended September 30, 2000 from $213,250 for the nine
months ended September 30, 1999. The increase is related to the borrowing cost
of the term note series, as well as the increases in the prime lending rate,
which affects the interest expense of some of the stockholder loans and notes
payable.
The foregoing resulted in the Company having a net loss of $862,490 for the
three months ended September 30, 2000 compared with $2,602,321 for the three
months ended September 30, 1999 and a net loss of $2,301,096 for the nine months
ended September 30, 2000 compared with $6,334,857 for the nine months ended
September 30, 1999. The decreased loss was attributable to the lower operating
costs, due to the redirection of the Company's operations from manufacturing to
licensing activities, offset partially by an increase in the amortization of the
fair market value of common stock and warrants and other non-cash items.
Liquidity and Capital Resources
The Company has incurred significant losses and has substantial negative
cash flow since its inception. The Company's independent auditors have included
an explanatory paragraph in their report covering the December 31, 1999
financial statements, which expresses substantial doubt about the Company's
ability to continue as a going concern. The Company expects operating losses to
continue in 2000. On July 12, 2000, the Company sold 500 shares of Series D
Stock in a private placement to a non-affiliated accredited investor, for an
total of $500,000, which after expenses netted approximately $418,000, as part
of a bridge financing. The purchase agreement required the Company to lend
$100,000 of the net proceeds to the Aeon Group, Inc., a
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company with which the Company was having merger discussions since terminated.
The $100,000 is held in escrow and will be used to retire 100 shares of the
Series D stock. The sale of the Series D stock was intended to be a bridge
financing to be redeemed from future financings to be received in connection
with the proposed merger. As of September 30, 2000, the Company had
approximately $67,000 of available cash resources. However, the Company will
require additional funding to cover current operations, which require less than
$70,000 a month based on current levels of operations, until revenues from
licensing, joint ventures or technology sales are sufficient.
Current liabilities include approximately $1,216,000 of convertible term
notes, which the Company anticipates will be converted into shares of its common
stock. Non-current liabilities include approximately $964,000 in deferred
salaries due to officers and directors, accrued interest of approximately
$511,000 due to stockholders and notes payable of $1,420,000 due to
officers/directors, whose due dates have historically been extended because the
Company did not have the available cash resources to repay on the scheduled due
dates.
The Company is negotiating for additional funding. Such additional funding
may be raised through sources including license fees, sales of equipment in
connection with licensing operations, joint ventures or other collaborative
relationships, as well as equity or debt financing. No assurance can be given
that funding will be sufficient and available or, if it is available, that it
will be available on acceptable terms. If additional funds are not available to
satisfy our past due accounts payable and our short-term or long-term capital
requirements, we may not be able to continue as a going concern.
Nine months Ended September 30, 2000 Compared with Nine months Ended September
30, 1999
Net cash and cash equivalents used in operating activities decreased to
$657,322 for the nine months ended September 30, 2000 from $3,443,333 for the
nine months ended September 30, 1999. The decreased level of activities and
continued deferral of salaries, accrued interest and other accrued liabilities
contributed to the lower use of cash during the first nine months of 2000.
Net cash and cash equivalents provided by investing activity totaled $3,409
for the nine months ended September 30, 2000, compared with a use of $350,658
for the nine months ended September 30, 1999. During the first nine months of
2000, there were no expenditures for property and equipment, which totaled
$331,792 during the nine months ended September 30, 1999.
Cash flows from financing activities decreased to $647,675 for the nine
months ended September 30, 2000, from $3,722,016 for the nine months ended
September 30, 1999. The primary sources of the funds, net of expenses, provided
by financing activities in the first nine months of 2000 were the sale of the
Series D Stock, the private placement of the Company's common stock and the sale
of the Company's common stock through the exercise of warrants. The primary
sources of the funds, net of expenses, provided by financing activities in the
first nine months of 1999 were the private placement of the Company's common
stock, totaling $2,277,535 and the closing of the tranches of the term notes
series, totaling approximately $1,680,000, net of expenses.
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Part II - Other Information
Item 1. Legal Proceedings
The Company is a party to the following legal proceedings :
1. On March 28, 2000, the Company filed a verified answer in regard to an
action commenced on January 11, 2000 in the Supreme Court of State of New
York by Yates Foil USA, Inc., which seeks damages of approximately $140,000
for goods sold and delivered. The amount of the claim is accrued on the
books of the Company as at December 31, 1999.
2. The Company is also a party to several legal proceedings relating to
creditors which are not material.
Item 2. Changes in Securities
(c) Recent Sales of Unregistered Securities.
During the three months ended September 30, 2000, the Company sold 500
shares of its Series D 8% Convertible Preferred Stock to a certain
non-affiliated accredited investor in a private placement, for an aggregate
offering of $500,000.
The sales of the shares of preferred stock in the private placement were
made in reliance upon the exemption from registration under the Securities Act
of 1933, as amended (the "Securities Act"), provided by Section 4(2) of the
Securities Act.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
10.84 Letter Agreement between Compositech and SovCap Equity Partners,
Ltd., Sovereign Capital Advisors LLC, Arab Commerce Bank, Ltd.,
Correllus International Ltd. and Bronia GmbH dated September 25,
2000, to extend the due dates on certain Bridge Financing Notes.
10.85 Letter Agreement, dated September 25, 2000, between Compositech
and Sovereign Capital Advisors, LLC, to extend the due date on a
certain Secured Convertible Bridge Financing Note.
27 Financial Data Schedules (Edgar version only)
* Previously filed
(b) Reports on Form 8-K
NONE
All other items required in Part II have been filed previously or are not
applicable for the quarter ended September 30, 2000.
Signature
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.
COMPOSITECH LTD.
Dated: November 14, 2000 /s/ Samuel S. Gross
------------------------------------
Executive Vice President and
Treasurer (Principal Accounting
Officer and officer duly authorized
to sign this report on behalf of
the registrant)
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