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, 1996
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 No. 33-21842-C
NORTECH FOREST TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer as Specified in Charter)
DELAWARE 06-1342912
(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
7600 WEST 27TH STREET, NO. B11
ST. LOUIS PARK, MINNESOTA 55426
(Address of Principal Executive Offices, Including Zip Code)
(612) 922-2520
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer: (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___
As of October 1, 1996, the Registrant had 1,096,208 shares of $.01 par value
Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes ___ No_X_.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Nortech Forest Technologies, Inc., a Delaware corporation (the "Registrant" or
"Company") files herewith balance sheets as of December 31, 1995 and September
30, 1996 and the related statements of operations and cash flows for the nine
months ended September 30, 1996 and 1995, respectively. In the opinion of
management of the Registrant, the unaudited financial statements reflect all
adjustments, all of which are normal recurring adjustments necessary to fairly
present the financial condition of the Registrant for the interim period
presented. The unaudited financial statements included in this report on Form
10-QSB should be read in conjunction with the audited financial statements of
the Registrant and the notes thereto included in the Annual Report filed on Form
10-KSB for the year ended December 31, 1995.
At the Company's 1995 Annual Meeting of Stockholders held on June 21, 1995, the
Company's stockholders approved, among other items, a proposal to change the
corporate domicile of the Company from Colorado to Delaware. One result of this
change in corporate domicile was that the Company's capital structure changed
from no par to $.01 par value preferred and common stock. All references in the
accompanying unaudited financial statements have been restated to reflect this
change in par value.
In October 1995, the Company merged the business and operations of its sole
wholly owned subsidiary, Nortech Forest Products (NFP) with and into Nortech
Forest Technologies, Inc. This merger was effected to simplify administrative,
record-keeping and accounting matters. Management of the Company believes
various operating and administrative efficiencies should be derived from this
corporate consolidation.
At the Company's 1996 Annual Meeting of Stockholders held on April 30, 1996, the
Company's stockholders approved, among other proposals, a proposal to effect a
one-for-four reverse stock split of the Company's issued and outstanding Common
Stock and an amendment to the Company's Certificate of Incorporation to reduce
the post-split authorized shares of Common Stock from 15,000,000 to 3,750,000
and the Preferred Stock from 2,000,000 to 500,000. The effective date of the
one-for-four reverse split of the Company's Common Stock was May 24, 1996, and
the unaudited financial statements enclosed herewith reflect said adjustment for
the number of shares of outstanding Common Stock.
NORTECH FOREST TECHNOLOGIES, INC.
BALANCE SHEETS
September 30, December 31,
1996 1995 (1)
--------- ---------
(Unaudited)
ASSETS
- ------
Current assets
Cash $ 3,010 $ 30,919
Accounts receivable -0- 3,104
Inventories
Finished goods 4,595 16,711
Raw materials 1,700 9,014
Prepaid expenses 17,130 6,500
--------- ---------
Total current assets 26,435 66,248
--------- ---------
Long-term assets:
Equipment 78,615 78,155
Accumulated depreciation (33,005) (23,513)
--------- ---------
45,610 54,642
--------- ---------
Other assets
Organizational costs, net of accumulated
amortization of $544 and $460 during
1996 and 1995, respectively 84 168
Patent costs, net of accumulated
amortization of $874 and $700 during
1996 and 1995, respectively 51,244 48,358
Other assets 3,250 3,250
--------- ---------
54,578 51,776
--------- ---------
$ 126,623 $ 172,666
========= =========
(1) The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date but does not include the
information and notes required by generally accepted accounting
principles for complete financial statements.
SEE NOTES TO FINANCIAL STATEMENTS
September 30, December 31,
1996 1995
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS
EQUITY
Current liabilities:
Bank line-of-credit $ 65,000 $ 97,000
Accounts payable - trade 192,228 160,968
Accounts payable - related party 14,001 14,001
Notes payable - related party 262,500 106,000
Note payable - other 90,000 25,000
Accrued expenses 25,473 20,909
Current portion of long-term debt 1,342 3,228
----------- -----------
Total current liabilities 650,544 427,106
----------- -----------
Long-term liabilities:
Long-term debt 3,408 3,947
----------- -----------
Stockholders' equity:
Preferred Stock, par value $.01 per share;
500,000 shares authorized, none issued -- --
Common Stock, par value $.01 per share;
3,750,000 shares authorized; issued and
outstanding, 1,096,208 shares at September
30, 1996 and 1,065,375 shares at December
31, 1995 10,962 10,654
Paid in capital 982,218 982,526
Accumulated deficit (1,520,510) (1,251,567)
----------- -----------
Total stockholders' equity (527,329) 258,387
----------- -----------
$ 126,623 $ 172,666
=========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NORTECH FOREST TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ende
------------------ ----------------
September 30, September 30,
------------- -------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 103,343 $ 24,108 $ 173,627 $ 99,196
Cost of sales 39,277 10,531 72,675 35,085
----------- ----------- ----------- -----------
Gross profit 64,066 13,577 100,952 64,111
Operating expenses:
Administrative 56,149 114,137 193,894 366,538
Sales and marketing 27,606 354 110,812 38,737
Research and development 5,594 1,884 35,980 7,721
----------- ----------- ----------- -----------
89,349 116,375 340,686 412,996
----------- ----------- ----------- -----------
Net operating loss (25,283) (102,798) (239,734) (348,885)
Miscellaneous income 7,200 -- 7,200 --
Interest expense (14,517) (2,933) (36,409) (3,550)
----------- ----------- ----------- -----------
Net loss $ (32,600) $ (105,731) $ (268,943) $ (352,435)
=========== =========== =========== ===========
Net loss per common share $ (.03) $ (.10) $ (.25) $ (.33)
=========== =========== =========== ===========
Outstanding shares of
common stock 1,096,208 1,059,966 1,096,208 1,060,295
=========== =========== =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
NORTECH FOREST TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash
Nine months ended September 30,
-------------------------------
1996 1995
--------- ---------
Cash flows from operating activities:
Net loss $(268,943) $(352,435)
Adjustments to reconcile net loss to
net cash flows from operating activities
Amortization 395 94
Depreciation 9,646 8,972
Accounts receivable (3,646) (9,073)
Inventories 26,630 3,158
Accounts payable 30,717 38,013
Accounts payable-related party -- 15,486
Accrued expenses 4,565 921
Other (11,648) 1,174
--------- ---------
Net cash flows from operating activities (212,284) (293,690)
--------- ---------
Cash flows from investing activities:
Purchase of long-term assets (460) (5,314)
Patent costs (3,240) (20,800)
Receivable - related party -0- 16,295
--------- ---------
Net cash flows from investing activities (3,700) (9,819)
--------- ---------
Cash flows from financing activities:
Bank line-of-credit (31,000) 97,000
Sale of stock for cash -0- 38,943
Proceeds from long-term debt -0- 9,700
Payment of long-term debt (2,425) (1,718)
Note payable - related party 186,500 26,000
Note payable - other 35,000 -0-
--------- ---------
Net cash flows from financing activities 188,075 169,925
--------- ---------
Net increase (decrease) in cash (27,909) (133,584)
Cash, beginning of period 30,919 140,944
--------- ---------
Cash, end of period $ 3,010 $ 7,360
========= =========
SEE NOTES TO FINANCIAL STATEMENTS
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Three Months Ended September 30, 1996 (Unaudited)
1. CONDENSED FINANCIAL STATEMENTS
The financial statements included herein have been prepared by Nortech
Forest Technologies, Inc., a Delaware corporation, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted as allowed by such rules and
regulations. Nortech Forest Technologies, Inc. believes that the
disclosures are adequate to make the information presented not misleading.
It is suggested that these unaudited financial statements be read in
conjunction with the December 31, 1995 audited financial statements and the
accompanying notes thereto. Although management believes the procedures
followed in preparing these financial statements are reasonable, the
accuracy of the amounts are in some respects dependent upon the facts that
will exist and procedures that will be accomplished by Nortech Forest
Technologies, Inc. later in the year.
Management of Nortech Forest Technologies, Inc. believes that the
accompanying unaudited condensed financial statements contain all
adjustments (including normal recurring adjustments) necessary to present
fairly the operations and cash flows for the periods presented.
2. ORGANIZATION AND HISTORY; PREDECESSOR TRANSACTIONS
At the Company's 1996 Annual Meeting of Stockholders held on April 30,
1996, the Company's stockholders approved, among other proposals, a
proposal to effect a one-for-four reverse stock split of the Company's
issued and outstanding Common Stock and an amendment to the Company's
Certificate of Incorporation to reduce the post-split authorized shares of
Common Stock from 15,000,000 to 3,750,000 and the Preferred Stock from
2,000,000 shares to 500,000 shares. The effective date of the one-for-four
reverse split of the Company's Common Stock was May 24, 1996, and the
unaudited financial statements enclosed herewith reflect said adjustment
for the number of shares of outstanding Common Stock.
In October 1995, the Company merged the business and operations of its
former wholly owned subsidiary, Nortech Forest Products (NFP) with and into
Nortech Forest Technologies, Inc. This merger was effected to simplify
administration, record-keeping and accounting matters. Management of the
Company believes various operating and administrative efficiencies should
result from this corporate consolidation.
At the Company's 1995 Annual Meeting of Stockholders held on June 21, 1995,
the Company's stockholders approved, among other items, a proposal to
change the corporate domicile of the Company from Colorado to Delaware. One
result of this change in corporate domicile was that the Company's capital
structure changed from no par to $.01 par value per share preferred and
common stock.
On June 11, 1993, the Company (then known as Emerald Eagle Corp.) acquired
all of the issued and outstanding shares of NFP in exchange for 2,800,000
post-split shares of the Company's Common Stock. The Company was originally
organized under the laws of Colorado in January 1986 under the name Service
Finders, Inc. The name of the Company was changed to Emerald Eagle Corp. in
September 1987 and its business was changed to that of a blank-check
company seeking business opportunities. Immediately following the tax-free
reorganization between the Company and NFP, approximately 77.8% of the
Company's Common Stock was held by the former shareholders of NFP.
For financial statement purposes, the acquisition of NFP was accounted for
as a "reverse acquisition," and thus, treated as if NFP had acquired the
Company. As a result, the financial statements of the Company have
presented the operations of NFP from inception and include the Company's
operations from the date of the consummation of such tax-free
reorganization. Historical combined pro forma financial information for the
`Company and for NFP for the periods prior to the reorganization are not
provided by the Company because such information is not material to an
understanding of the current or future operations of the Company. The
historical results of operations of the Company include transactions and
activities that are not expected to recur subsequent to such
reorganization.
3. NOTES PAYABLE - BANK
Effective March 10, 1995, the Company secured a $100,000 revolving line of
credit with Norwest Bank, Minnesota N.A. ("Norwest"). This line of credit
was secured by the Company's accounts receivable, inventories and
substantially all assets of the Company. The note was also personally
guaranteed by Robert H. Gilbertson, the Chairman of the Board of the
Company. This line of credit accrued interest at 5% over the prime rate and
interest was payable monthly. On June 28, 1996, this line of credit was
renewed, and the due date was extended from May 31, 1996 to August 31,
1996. At September 30, 1996, there was $65,000 outstanding under this line
of credit. As is more fully described in Note 9 ("Subsequent Events") to
the financial statements enclosed herewith, the Company repaid the entire
balance of its obligations to Norwest Bank under this line of credit on
October 21, 1996, and Norwest released its security interest in the
Company's assets. The Company repaid its obligations to Norwest using part
of the proceeds of an initial closing of its private equity placement.
On March 10, 1995, the Company entered into an agreement with Norwest for
a $9,700 equipment note. The note established principal payments due in 35
monthly installments of $269 from April 1, 1995 through February 1, 1998.
Interest was payable monthly under this obligation at the prime rate, plus
1.5%. As more fully described in Note 9 ("Subsequent Events") to the
financial statements enclosed herewith the Company repaid the entire
balance of its obligation under this equipment note to Norwest on October
21, 1996, utilizing part of the proceeds of an initial closing of its
private equity placement.
4. RELATED PARTY TRANSACTIONS
Effective June 30, 1995, the Company acquired from Nordic National Group
("Nordic") all of the assets and proprietary rights with respect to three
product formulas and product lines for $14,001. Nordic is controlled by the
Chairman of the Board of the Company.
Between March 10, 1995, and February 2, 1996, three directors of the
Company and a fourth director loaned the Company a total of $262,500. Of
the $262,500 loaned by current or former directors, $110,000 was
convertible to Common Stock under the terms of 12% unsecured convertible
subordinated promissory notes. As more fully described in Note 9 to the
Company's financial statements ("Subsequent Events"), holders of
convertible promissory notes, including the $110,000 loaned by officers and
directors, agreed to convert a total of $190,000 in principal from debt to
common stock.
Of the $262,500 loaned by officers and directors, $150,000 was loaned by a
director on February 2, 1996, pursuant to a 12% Secured Promissory Note,
with the principal due on September 30, 1996. Interest has accrued at a
rate of 12% per annum and was payable monthly. In connection with this
loan, the Company issued the director five-year warrants to purchase 3,750
shares of Common Stock at an exercise price of $4.00 per share, and granted
the director a security interest in the Company's assets. Also, in
connection therewith, the Company's Chairman agreed to pledge his shares of
the Company's Common Stock as collateral in the event the Company failed to
pay the director on or before September 30, 1996. On July 3, 1996, the same
director advanced the Company $6,000 under the terms of an agreement,
payable on demand, with interest at 12% per annum, which has subsequently
been repaid. On September 16, 1996, the director resigned his position on
the Company's Board. Prior to September 30, 1996, the Company had been in
default on the $150,000 secured promissory note due to its failure to pay
interest payments when due. The Company further defaulted on its obligation
to repay the former director in full upon the September 30, 1996 due date
of the promissory note. As more fully described in Note 9 to the financial
statements ("Subsequent Events") enclosed herewith, the Company repaid in
full its $150,000 obligation to the former director.
5. EQUITY
On June 20, 1995, the Company issued a Notice of Redemption to redeem all
outstanding warrants to acquire 326,000 pre-split shares of the Company's
Common Stock. On August 4, 1995, the Company redeemed warrants to acquire
pre-split 307,000 shares of Common Stock at a cost to the Company of $307
or $.001 per share. Prior to such redemption, five warrantholders elected
to exercise their warrants to purchase 19,000 pre-split shares of the
Company's Common Stock for gross proceeds to the Company of $14,250.
On December 11, 1995, the Company closed on an unsecured debt financing
with six accredited investors, including three then-current directors of
the Company. The Company issued a total of $180,000 of twelve percent (12%)
unsecured convertible subordinated promissory notes. Directors of the
Company, including Robert H. Gilbertson, Ronald R. Runck and David B.
Clinton, purchased $110,000 of such notes. Interest on the unpaid principal
balance of the notes is 12% per annum until paid in full by the Company, or
otherwise converted by the holder. The notes are due in full, on May 31,
1996. In addition, all investors were issued warrants to purchase, in the
aggregate, 4,750 shares of Common Stock at a price of $4.00 per share
during a period of five years from the date of issuance of the warrants. Of
such warrants, directors of the Company received warrants to purchase a
total of 2,750 shares of Common Stock as follows: Robert H. Gilbertson,
warrants to purchase 875 shares; Ronald R. Runck, warrants to purchase 875
shares; and David B. Clinton, warrants to purchase 1,000 shares. Mr. Runck
is no longer a director of the Company. As of September 30, 1996, such
notes were in default under the terms of their May 31, 1996 maturity date,
as well as the fact that the Company has defaulted on interest payments. As
more fully described in Note 9 ("Subsequent Events") to the Company's
unaudited financial statements, holders of convertible promissory notes
converted $190,000 in principal from debt to common stock.
On July 12, 1996, an investor loaned the Company $10,000 under a six-month
12% unsecured convertible promissory note. All other terms of this
unsecured promissory note were the same as those granted to other
investors, as described above.
On May 30, 1996, the Company issued an aggregate of 30,834 shares of Common
Stock to 10 shareholders who were previous warrantholders. The Company
issued said shares in order to match the lower exercise price of other
warrantholders who had subsequently exercised their warrants.
6. MANUFACTURING AND PACKAGING AGREEMENT
In April 1994, the Company entered into a manufacturing and packaging
agreement with Dyno Minnesota of Virginia, Minnesota ("Dyno"). During
January, the Company requested release from the manufacturing and packaging
contract when Dyno was sold to Georgia-Pacific. Management of Georgia
Pacific has verbally agreed to release the Company from the agreement.
Under the agreement, Dyno had exclusive worldwide manufacturing and
packaging rights. The Company is currently using an alternative source of
manufacturing.
7. SEASONAL NATURE OF SALES
Although the Company has insignificant sales history, management believes
that, under normal circumstances, the Company will experience seasonal
demand for its products. The Company's best estimates are that peak sales
are most likely to occur just prior to customers' applications of the
Company's Tree Guard during the Spring and Fall. Other factors likely to
influence seasonality are weather conditions in areas which freeze, the
unique needs of commercial customers, and long lead-times for orders in
certain distribution channels.
8. GOING CONCERN
As stated in Note 13 of the Company`s audited financial statements for the
year ended December 31, 1995, such audited financial statements were
prepared on a going concern basis which contemplated the realization of
assets and satisfaction of liabilities in the normal course of business.
The Company incurred losses of $542,950 in 1995 and $510,062 in 1994. As of
September 30, 1996, the Company has accumulated losses of $1,520,510.
9. SUBSEQUENT EVENTS
Subsequent to September 30, 1996, the following events occurred:
Initial Closing of Private Placement. The Company completed an initial
closing on its pending private equity placement, receiving cash proceeds
of $340,000 in exchange for 284,615 shares of its common stock. The
Company's private placement, seeking to raise a total of $1,500,000, is
continuing.
Repayment of Secured Bank Debt. Part of the proceeds of the initial
closing of the Company's pending private equity placement was used to
repay, in full, all its obligations to Norwest Bank under both a
revolving loan agreement and an equipment note which were secured by
substantially all the assets of the Company. Such security interests
have been released by Norwest Bank. Obligations to Norwest Bank had been
in default on September 30, 1996, and at various times prior to that
date.
Conversion of Promissory Notes. Holders of convertible promissory notes
converted such notes (principal of $190,000) to common stock at a
conversion price of $1.30 per share. On September 30, 1996, and for the
period from May 31, 1996 until the effective dates of said holders'
agreements to convert, the Company had been in default under its
obligations to holders of these 12% unsecured convertible promissory
notes. The Company paid all accrued interest due at the time of
conversion.
European License Agreement. Subsequent to September 30, 1996, the
Company completed negotiations with a U. K. based entity in connection
with the grant of a ten-year distribution and manufacturing license
agreement for the Company's Tree Guard product in Europe. Terms of the
agreement include a lump-sum payment of $150,000 that has been paid to
the Company, as well as a 7% royalty on European sales of the Tree Guard
product. Because sales of Tree Guard in Europe cannot commence until the
appropriate regulatory approvals have been obtained, the Company does
not anticipate royalty revenue from this agreement for several years.
Repayment of Outstanding Secured Note. Subsequent to September 30, 1996,
the Company repaid in full the $150,000 in principal, plus accrued
interest that was due under the terms of a February 2, 1996, 12%
promissory note held by a shareholder and former director. The
promissory note was secured by substantially all the assets of the
Company. Such security interest has been released. Prior to September
30, 1996, the Company had been in default on the $150,000 secured
promissory note due to its failure to pay interest payments when due, as
well as its failure to repay the former director in full upon the
September 30, 1996 due date of the promissory note.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis provides information that management of
the Company believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the unaudited financial statements and footnotes
presented herewith and the audited financial statements for the year ended
December 31, 1995.
Certain statements contained herein are forward-looking statements within the
meaning of the Securities Act of 1933 and the Securities and Exchange Act of
1934 that involve a number of risks and uncertainties. Such forward-looking
information may be indicated by words such as will, may be, expects or
anticipates. In addition to the factors discussed herein, among the other
factors that could cause the Company's actual results to differ materially from
current expectations are the following: business conditions and growth in the
plant protection industry and the general economy; competitive factors such as
rival manufacturers and sellers of plant and tree protection products and price
pressures; availability of product component chemicals at reasonable prices;
inventory risks due to shifts in market demand; and risks presented from time to
time in reports filed by the Company with the Securities and Exchange
Commission, including, but not limited to the Company's annual report on Form
10-KSB for the year ended December 31, 1995.
GENERAL
The Company manufactures and markets Tree Guard(R), a proprietary, ready-to-use
product that the Company developed to deter deer, rabbits, and other forest
animals and wildlife from browsing and destroying value-added trees, shrubs and
other landscape and forest resources. The Company manufactures substantially the
same product as Tree Guard, which is packaged and sold under the Ferti-lome
brand labeled as "THIS 1 WORKS" DEER REPELLENT.
In February 1995, the Company filed an application with the EPA to secure
federal registration for the sale and marketing of Tree Guard on a national
basis. This application followed an earlier, unsuccessful attempt to secure EPA
registration, which commenced during 1993. On January 30, 1996, the Company was
granted federal EPA registration number 66676-1. Although such registration has
been granted for Tree Guard, the Company must comply with all requirements of
the EPA on an ongoing basis, including, but not limited to: (i) the registration
of its EPA registration number with all state agencies throughout the United
States; and, (ii) the future possibility of incurring costs that may be required
in connection with re-registering denatonium benzoate (Bitrex(TM)) the active
ingredient in Tree Guard. In the future, if the Company fails to comply with
federal EPA regulations, it may be penalized, fined, or may have its EPA
registration revoked. There can be no assurance that the Company will comply
with such requirements or that the Company will not incur significant costs for
failing to do so. To supplement the Company's EPA registration, the Company, in
July 1995, submitted a similar application to secure registration for the sale
and marketing of Tree Guard in Canada. Such application was submitted to Ag
Canada (the Canadian counterpart of the United States EPA). The Company had
anticipated that Canadian registration would be granted during the first half of
1996, but no such registration has yet been granted. The Company believes it
will be granted Canadian registration of Tree Guard during the fourth quarter of
1996 or the first quarter of 1997. However, there can be to assurance that such
registration will be granted or if granted, will be within the period
anticipated by the Company.
While it was awaiting federal EPA registration of Tree Guard, the Company
applied for, and was issued, state registrations based on Special Local Needs
(SLNs) in 12 states. In July 1994, the Company commenced limited sales and
marketing activities in Minnesota under SLN provisions. Prior to July 1994, the
Company's activities consisted primarily of research and development, completing
the acquisition of Nortech Forest Products (NFP), its sole wholly owned
subsidiary, preparing and monitoring its EPA application, filing and pursuing
domestic and foreign patent applications and special use permits, conducting
market evaluation, and evaluating suppliers.
Effective October 1, 1994, the Company entered into an exclusive sales agreement
with a locally-based exclusive sales agent to market Tree Guard. In the second
quarter of 1995, this agent abandoned this contract and ceased doing business.
This resulted in an adverse effect on the Company's sales and marketing efforts
during the second and third quarters of 1995.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 VS. THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1995
Sales:
Sales for the third quarter and six month ended September 30, 1996 were $103,343
and $173,627, respectively, compared to $24,108 and $99,196 for the respective
periods last year. Although sales during the third quarter and nine months ended
September 30, 1996 reflect improved performance compared to the same periods
last year, the Company's progress in expanding sales was curtailed by inadequate
working capital. To a lesser degree, year-to-date sales have been adversely
impacted by insignificant historical sales activity, resulting in a small
customer base, and delays with the EPA registration of Tree Guard and a
resulting delay in successfully launching Tree Guard into the Spring 1996
season. As a result, the Company's distribution of Tree Guard remains limited
primarily to the midwest, east coast and pacific northwestern states.
In January 1996, the Company hired a Director of Sales. In April 1996, the
Director of Sales was replaced by a salesperson with 19 years experience in the
markets the Company serves. In May 1996, the Company announced that it has
reached agreements in principle with two key customers for the purchase of Tree
Guard. One such arrangement involves the bulk sale of the Company's deer
repellent to Voluntary Purchasing Groups (VPG), a Texas-based cooperative, under
the terms of a three-year sub-registration and private label agreement. VPG
distributes the Company's product under the Ferti-lome brand labeled as "THIS 1
WORKS" DEER REPELLENT. Although VPG sells products to approximately 8,000
independent lawn and garden stores and approximately 200 independent
distributors throughout the country, the Company anticipates that sales of its
deer repellent under this recent private label agreement will take additional
time to expand nationally. There can be no assurance that any such expansion
will occur within a period of time acceptable to the Company, if at all.
Under a second purchase agreement, Nortech sells Tree Guard to LESCO, Inc., the
nation's largest supplier of supplies and equipment to commercial customers such
as lawn care operators, landscape maintenance companies, and golf courses.
Distribution of Tree Guard by LESCO has occurred primarily in the north eastern
United States.
The degree to which sales can be expanded during 1997 will be largely subject to
the Company's ability to raise additional capital and more specifically, to fund
sales and marketing activities to further expand its customer base and sales
volume. The Company is attempting to raise additional capital through the sale
of private equity (see Note 9 to the Company's unaudited financial statements).
There can be no assurance that the Company will be able to raise any additional
capital or that the acquisition of such capital will be on terms acceptable to
the Company. Moreover, there can also be no assurance that the Company will be
able to expand its customer base and sales volume if the Company's current
capital needs are met.
Gross Profit and Gross Profit Margin:
For the third quarter and nine months ended September 30, 1996, gross profit was
$64,066 (62.0% of sales) and $100,952 (58.1% of sales), respectively, compared
to $13,577 (56.3% of sales) and $64,111 (64.6% of sales) during the same periods
last year. For the third quarter ended September 30, 1996, the increase in gross
profit, as a percentage of sales, was primarily due to increased efficiencies
associated with higher manufacturing volume and the use of a new outside
contract formulator. For the nine months ended September 30, 1996, the decrease
in gross profit, as a percentage of sales, was primarily due to a change in
record-keeping that, during the first two quarters of 1996, allocated a portion
of salary expense to cost of sales. During the first two quarters of 1996 and
prior to the time the Company began using a new outside contract formulator, the
Company performed its formulation activities in-house. During the third quarter
ended September 30, 1996, the Company received a $7,200 concession from a
primary supplier of raw materials. In the future, it is unlikely that the
Company will receive similar concessions.
Operating Expenses:
Administrative Expense. During the third quarter ended September 30, 1996,
administrative expense was $56,149 compared to $114,137 during the third quarter
last year. During the nine months ended September 30, 1996, administrative
expense was $193,894 compared to $366,538 during the same period last year. The
decrease in administrative expense was primarily due to a change in
record-keeping that, during the third quarter and nine months ended September
30, 1996, allocated a portion of salary expense to cost of sales, research and
development expense and sales and marketing expense, rather than to
administrative expense. Accordingly, administrative expense decreased, cost of
sales increased, and research and development expense and sales and marketing
expense increased during the third quarter and nine months of ended September
30, 1996 compared to the comparable periods last year.
Sales and Marketing Expense. During the third quarter ended September 30, 1996,
sales and marketing expense was $27,606 compared to $354 during the third
quarter last year. During the nine months ended September 30, 1996, sales and
marketing expense was $110,812 compared to $38,737 during the same period last
year. The increase in sales and marketing expense during both periods was
primarily due to a change in record-keeping that, during the third quarter and
nine months ended September 30, 1996, allocated a portion of salary expense to
sales and marketing, rather than to administrative expense.
Research and Development Expense During the third quarter ended September 30,
1996, research and development expense was $5,594 compared to $1,884 for the
third quarter last year. During the nine months ended September 30, 1996,
research and development expense was $35,980 compared to $7,721 during the same
period last year. The increase in research and development expense during the
third quarter and nine months ended September 30, 1996 was primarily due to a
change in record-keeping that allocated a portion of salary expense to research
and development rather than to administrative expense. During the third quarter
of 1995, no record-keeping system was in place to accurately charge such
expenses to research and development.
Interest Expense. During the third quarter ended September 30, 1996, interest
expense was $14,517 compared to $2,933 during the third quarter last year.
During the nine months ended September 30, 1996, interest expense was $36,409
compared to $3,550 during the same period last year. Interest expense during the
quarter and nine months ended September 30, 1996 was primarily due to the
Company's use of its bank line of credit, as well as that fact that the Company
received interest bearing loans from certain directors and stockholders and
others. As more fully described in Note 9 ("Subsequent Events") to the
accompanying unaudited financial statements, the Company repaid substantially
all of its interest-bearing obligations to its bank and other creditors.
Net Loss. For the reasons discussed above, the Company incurred a net loss of
$32,600, or $.03 per share, for the third quarter ended September 30, 1996,
compared to a net loss of $105,731, or $.10 per share, during the third quarter
last year. For the nine months ended September 30, 1996, the Company incurred a
net loss of $268,943, or $.25 per share, compared to a net loss of $352,435, or
$.33 per share for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996 the Company had current assets of $26,435, current
liabilities of $650,544, and negative working capital of $624,109 compared to
current assets of $66,248, current liabilities of $427,106 and negative working
capital of $360,858 on December 31, 1995. The increase in negative working
capital was primarily due to increases in notes payable and accounts payable,
and decreases in cash, accounts receivable and inventories, offset in part by a
decrease in bank line-of-credit payable.
Effective March 10, 1995, the Company secured a $100,000 revolving line of
credit with Norwest Bank, Minnesota N.A. This line of credit was secured by the
Company's accounts receivable, inventories and substantially all assets of the
Company. The note was also personally guaranteed by Robert H. Gilbertson, the
Chairman of the Board of the Company. This line of credit accrued interest at 5%
over the prime rate and interest was payable monthly. On June 28, 1996, this
line of credit was renewed, and the due date was extended from May 31, 1996 to
August 31, 1996. At September 30, 1996, there was $65,000 outstanding under this
line of credit. In addition, on March 10, 1995, the Company entered into an
agreement with Norwest Bank, Minnesota N.A. for a $9,700 equipment note. The
note established principal payments due in 35 monthly installments of $269 from
April 1, 1995 through February 1, 1998. Interest was payable monthly under this
obligation at the prime rate, plus 1.5%. As more fully described in Note 9
("Subsequent Events") to the attached unaudited financial statements, the
Company repaid all amounts owed to Norwest on October 21, 1996, and Norwest
released its security interest in the Company's assets.
On February 2, 1996, a director loaned the Company $150,000 pursuant to a 12%
Promissory Note, with the principal due on September 30, 1996. Interest accrued
at a rate of 12% per annum and is payable monthly. In connection with this loan,
the Company issued the director five-year warrants to purchase 3,750 shares of
Common Stock at an exercise price of $4.00 per share, and granted the director a
security interest in the Company's assets. Also, in connection therewith, the
Company's Chairman agreed to pledge his shares of the Company's Common Stock as
collateral in the event the Company failed to pay the director on or before
September 30, 1996. On July 3, 1996, the same director advanced the Company
$6,000 under an unsecured promissory note, payable on demand, with interest at
12% per annum, which has subsequently been repaid. On September 16, 1996, the
director resigned his position on the Company's Board. Prior to September 30,
1996, the Company had been in default on the $150,000 secured promissory note
due to its failure to pay interest payments when due. The Company further
defaulted on its obligation to repay the former director in full upon the
September 30, 1996 due date of the promissory note. As more fully described in
Note 9 ("Subsequent Events") to the unaudited financial statements enclosed
herewith, the Company repaid in full its $150,000 obligation to the former
director.
On December 11, 1995, the Company closed on an unsecured debt financing with six
accredited investors, including three then-current directors of the Company. The
Company issued a total of $190,000 of twelve percent (12%) unsecured convertible
subordinated promissory notes. Directors of the Company, including Robert H.
Gilbertson, Ronald R. Runck and David B. Clinton, purchased $110,000 of such
notes. Interest on the unpaid principal balance of the notes is 12% per annum
until paid in full by the Company, or otherwise converted by the holder. The
notes were due in full, on May 31, 1996. In addition, all investors were issued
warrants to purchase, in the aggregate, 4,750 shares of Common Stock at a price
of $4.00 per share during a period of five years from the date of issuance of
the warrants. Of such warrants, directors of the Company received warrants to
purchase a total of 2,750 shares of Common Stock as follows: Robert H.
Gilbertson, warrants to purchase 875 shares; Ronald R. Runck, warrants to
purchase 875 shares; and David B. Clinton, warrants to purchase 1,000 shares.
Mr. Runck is no longer a director of the Company. As of September 30, 1996, such
notes were in default under the terms of their May 31, 1996 maturity date, as
well as the fact that the Company has defaulted on interest payments. As more
fully described in Note 9 ("Subsequent Events") to the Company's unaudited
financial statements, holders of convertible promissory notes converted $190,000
in principal from debt to common stock.
On June 20, 1995, the Company issued a Notice of Redemption to redeem all
outstanding warrants to acquire 326,000 pre-split shares of the Company's Common
Stock. On August 4, 1995, the Company redeemed warrants to acquire 307,000
pre-split shares of Common Stock at a cost to the Company of $307 or $.001 per
share. Prior to such redemption, five warrantholders elected to exercise their
warrants to purchase 19,000 pre-split shares of the Company's Common Stock for
gross proceeds to the Company of $14,250.
Although the Company has had limited success in its attempt to raise additional
capital through a pending private offering of its Common Stock, (see Note 9 -
"Subsequent Events"), completion of the full $1.5 million sought in the pending
private equity offering has taken significantly longer than was anticipated.
There is no assurance that the full $1.5 million can be secured on a timely
basis, if at all, or that if additional capital is raised, it will be under
terms that will be attractive to the Company. Furthermore, even if the Company
is successful in raising additional capital in the near future, management
believes that, in order to achieve aggressive market penetration objectives, it
may be required to raise additional capital during 1997 or 1998.
Although the Company has established new customer relationships that it believes
are strategically important in the long term, and has increased its level of
sales experience significantly, no assurances can be given that the Company's
sales results will be sufficient to enable the Company to achieve its financing
requirements or to operate profitably.
ITEM 1. LEGAL PROCEEDINGS.
On August 2, 1996, a creditor acting as plaintiff filed with the Fourth Judicial
District, Hennepin County, Minnesota against the Company, as defendant, (i) a
Notice of Motion and Motion for Confirmation of Arbitration Award; (ii) a
Memorandum in Support of Motion for Confirmation of Arbitration Award; (iii) an
Affidavit; (iv) an Order; and (v) an Affidavit of Service by Mail. The action
against the Company is in connection with an Arbitration Award in the amount of
$21,500.02 granted on July 19, 1996 in favor of Petersen, Tews and Squires, a
Professional Corporation, who is former legal counsel for the Company.
Subsequent to July 19, the creditor filed a judgment against the Company. The
Arbitration arose due to the Company's dispute of the amount of billings for
legal services provided by its former legal counsel. Prior to the Company's
dispute, the amount claimed by the former legal counsel was $31,899.52.
Therefore, the $21,500.02 Arbitration Award reduced the Company's obligation by
$10,399.50. Subsequent to September 30, 1996, the Company paid $15,000 toward
the remaining balance and agreed to issue 6,000 shares of Common Stock as full
settlement with the creditor.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
Exhibit 27. Financial Data Schedule (filed with electronic version only)
b) Form 8-K
For the quarter ended September 30, 1996, the Company did not file any
reports on Form 8-K.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORTECH FOREST TECHNOLOGIES, INC.
(the "Registrant" or "Company")
Dated: November 18, 1996 By:___________________________________________
Thomas J. de Petra, Chief Executive
Officer, Principal Executive Officer and
Principal Financial and Accounting Officer
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