UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-27240
ECOTYRE TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 11-3234026
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
895 Waverly Avenue, Holtsville, New York 11742
(Address of principal executive offices)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 of 15 (d) of the Exchange Act
during the past 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 February 13, 1997, 5,115,000 shares of $.001 par value Common Stock of the
registrant were outstanding.
Index schedule found on Page No. 2
Page 1 of 12 pages
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<PAGE>
ECOTYRE TECHNOLOGIES, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets - December 31, 1996 and March 31, 1996 3
Condensed Statements of Operations - Nine Months and Three Months
Ended December 31, 1996 and 1995 4
Condensed Statements of Cash Flows - Nine Months Ended December
31, 1996 and 1995 5
Notes to Condensed Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 10
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ECOTYRE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
As of As of
December 31, 1996 March 31, 1996
----------------- --------------
( Unaudited )
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 832,576 $ 2,782,952
Accounts receivable, net of allowance for
doubtful accounts of $17,000 and $11,000 610,351 65,174
Inventories (Note 2) 486,564 340,449
Prepaid expenses and other current assets 185,174 160,806
----------- ------------
Total current assets 2,114,665 3,349,381
----------- ------------
Property, plant and equipment, less
accumulated depreciation 1,661,010 1,258,008
Other assets 117,816 97,471
----------- ------------
$ 3,893,491 $ 4,704,860
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable - bank $ 396,333 $ 200,000
Current maturities of long term debt 225,000 150,000
Accounts payable and accrued expenses 1,013,404 500,946
Current maturity of capitalized leases
and equipment loans 116,713 106,771
----------- ------------
Total current liabilities 1,751,450 957,717
Long-term debt - 75,000
Capitalized leases and equipment loans,
less current maturities 58,270 146,782
Deferred rent credits 302,917 272,160
----------- ------------
Total liabilities 2,112,637 1,451,659
----------- ------------
Class A Redeemable Convertible Preferred
Stock, 2,000,000 shares authorized;
issued and outstanding - 1,202,775
(redemption amount of $1,202,775) 1,191,590 1,125,182
----------- ------------
Stockholders' Equity (Note 4)
Preferred Stock, $.001 par value
2,000,000 shares authorized; none issued - -
Common Stock, $.001 par value 20,000,000
shares authorized, issued and
outstanding - 5,115,000 and 3,115,000 5,115 3,115
Paid in capital 7,189,700 5,820,031
Deficit (6,605,551) (3,695,127)
----------- ------------
Total stockholders' equity 589,264 2,128,019
----------- ------------
$ 3,893,491 $ 4,704,860
=========== ============
</TABLE>
See accompanying notes to financial statements
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<PAGE>
ECOTYRE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
December 31, December 31,
-------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $1,598,351 $ 218,583 $ 797,013 $ 58,402
Cost of sales 3,121,370 237,827 1,432,992 85,100
---------- ---------- ---------- ----------
Gross profit (loss) (1,523,019) (19,244) (635,979) (26,698)
---------- ---------- ---------- ----------
Operating and other expenses:
Selling, shipping and
general and administrative 1,365,421 1,138,180 479,183 466,169
---------- ---------- ---------- ----------
Interest, net of interest
income 17,741 403,152 5,766 213,609
Private placement
financing costs - 389,216 - 389,216
---------- ---------- ---------- ----------
Total operating and other
expenses 1,383,162 1,930,548 484,949 1,068,994
---------- ---------- ---------- ----------
Loss before taxes (2,906,181) (1,949,792) (1,120,928) (1,095,692)
Provision for taxes
(Note 5) 4,243 22,231 1,046 12,052
---------- ---------- ---------- ----------
Net loss $(2,910,424) $(1,972,023) $(1,121,974) $(1,107,744)
---------- ---------- ---------- ----------
Preferred stock dividends 186,686 127,422 61,609 60,379
(Note 3)
Net loss attributable to
common shareholders $(3,097,110) $(2,099,445) $(1,183,583) $(1,168,123)
=========== =========== ============ ============
Net loss per share (Note 3) $(.83) $(1.39) $(.24) $(.67)
See accompanying notes to financial statements
</TABLE>
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<PAGE>
ECOTYRE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1996 1995
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,910,424) $(1,972,023)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 168,799 9,130
Deferred rent 30,757 177,443
Allowance for possible losses on
accounts receivable 6,000 8,000
Amortization of original issue discount - 672,544
Decrease (increase) in assets:
Accounts receivable (551,177) 170,907
Inventory (146,115) 62,953
Other assets (44,713) 23,556
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 392,181 (135,809)
----------- -----------
Net cash used in operating activities: (3,054,692) (983,299)
----------- -----------
Cash flows from investing activities:
Capital expenditures - net (571,801) (341,819)
----------- -----------
Net cash used in investing activities (571,801) (341,819)
----------- -----------
Cash flow from financing activities:
Proceeds from sale of stock 1,558,354 5,329,404
Proceeds from bank loan 396,333 -
Repayment of bank loan (200,000) -
Proceeds from working capital loans - 100,000
Repayment of working capital loans - (100,000)
Proceeds from long term notes - 225,000
Net proceeds from bridge financing - 807,940
Repayment of bridge financing - (1,075,000)
Repayment of capitalized lease obligations
and equipment loans (78,570) (73,059)
Dividends paid - (60,000)
----------- -----------
Net cash provided by financing activities 1,676,117 5,154,285
----------- -----------
Net increase (decrease) in cash (1,950,376) 3,829,167
Cash and cash equivalents, beginning
of period 2,782,952 49,386
----------- -----------
Cash and cash equivalents, end of period $ 832,576 $ 3,878,553
=========== ===========
See accompanying notes to financial statements
</TABLE>
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<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed financial statements included herein have
been prepared in accordance with generally accepted accounting principles for
interim period reporting in conjunction with the instructions to Form 10-QSB.
Accordingly, these statements do not include all of the information required by
generally accepted accounting principles for annual financial statements, and
are subject to year-end adjustments. In the opinion of management, all known
adjustments (consisting of normal accruals and reserves) necessary to present
fairly the interim financial results for the period have been included. It is
suggested that these interim statements be read in conjunction with the
financial statements and related notes included in the Company's 10-KSB for the
year ended March 31, 1996.
The operating results for the nine and three months ended December 31, 1996
are not necessarily indicative of the results to be expected for the year ended
March 31, 1997.
Note 2. Inventories
Inventories have been valued at the lower of cost or market. The components
of inventory at December 31, 1996 and March 31, 1996 consist of:
<TABLE>
<CAPTION>
December 30, March 31,
1996 1996
------------- -------------
<S> <C> <C>
Raw materials $ 242,336 $ 207,280
Work in process 18,508 4,052
Finished goods 225,720 129,117
----------- -----------
$ 486,564 $ 340,449
=========== ===========
</TABLE>
Note 3. Net Loss Per Share
Net loss per share is based on the weighted average number of Common Stock
outstanding during each period. Common Stock equivalents and other potentially
dilutive securities are antidilutive. Net loss has been adjusted for accretion
of and preferred dividends.
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<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4. Initial Public Offering
In December, 1995, the Company completed an initial public offering of
1,725,000 units. Each unit consisted of one share of Common Stock and one
redeemable Common Stock purchase warrant. Following the initial public offering,
3,115,000 shares of Common Stock and warrants to purchase 1,725,000 shares of
Common Stock were outstanding. The warrants are exercisable at $5.00 per share,
subject to adjustment, and expire on December 12, 1998. The Company has the
right to redeem any or all of the warrants at a price of $.01 per warrant, upon
giving 30 to 60 days' notice, after a period during which the closing bid price
for the Company's Common Stock for a period of twenty consecutive trading days
ending three days prior to the date of the notice of redemption has equaled or
exceeded $6.50 per share.
Note 5. Income Taxes
Income taxes are based on annualized statutory federal and state income tax
rates. The provision for income taxes exclude a benefit for net operating loss
carryforwards.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
General
The Company had operated as a wholesale distributor of remolded automobile
tires since its inception in April, 1993 through December, 1995. In accordance
with its business plan, the Company substantially curtailed distribution
operations concentrating its efforts on commencing manufacturing operations. In
its distribution operations, the Company resold its product primarily to retail
tire replacement centers and tire distributors. In the Company's manufacturing
operations, remolded tires are created by remanufacturing a previously used
high-quality passenger automobile tire casing and attaching rubber from sidewall
to sidewall.
93.5% of the Company's revenues for the nine months ended December 31, 1996
was derived from the Company's limited manufacturing operations. 100% of the
revenues for the nine months ended December 31, 1995 was derived from the
distribution of remolded tires manufactured by third parties.
Results of Operations
Nine Months Ended December 31, 1996 Compared to Nine Months Ended December 31,
1995.
Net Sales. The Company's net sales of $1,598,351 for the nine months ended
December 31, 1996 represent an increase of $1,379,768 compared to net sales for
the nine months ended December 31, 1995. The increase resulted from the Company
commencing the manufacture of its own tires and curtailing the distribution of
tires manufactured by third parties.
Cost of Sales. The Company's cost of sales for the nine months ended December
31, 1996 was $3,121,370 as compared to $237,827, representing an increase of
$2,883,543. This increase was primarily due to substantial costs incurred to
operate its manufacturing facility at an increased capacity as well as in the
third quarter, to prepare to operate at maximum capacity, which costs become
disproportionate to net sales until such time as full capacity is achieved. The
Company's manufacturing facility is currently operating at approximately 40% of
its full capacity. For the nine month period, the Company operated at an average
plant capacity of approximately 30%, after taking into account limited
production for the first few months of this period. Such limited production
resulted, in part, from unanticipated repair and maintenance and a higher than
anticipated turn-over rate for factory trained employees, which rate the Company
believes is now stabilizing. The Company anticipates that certain fixed costs
and expenses (approximating $600,000), such as rent, utilities, insurance and
depreciation, will substantially decrease on a per unit basis as production
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<PAGE>
increases, as will the per unit cost of labor. The increased cost of sales
was also attributable to the incurrence of certain non-recurring expenses
necessary to commence manufacturing operations, including personnel training
(approx. $200,000), raw material product testing (approx. $200,000), consulting
expenses (approx. $60,000) and electrical repairs (approx. $50,000).
Gross Profit (Loss). The Company's gross loss for the nine months ended
December 31, 1996 was ($1,523,019) as compared to a gross loss of ($19,244) for
the nine months ended December 31, 1995, an increase of $1,503,775. This
increase was directly caused by the manufacturing and training costs associated
with the initial commencement of its own manufacturing of remolded tires as
compared to no manufacturing and training costs in the prior period. The
Company's direct overhead expenses also increased due to the initial start-up of
its manufacturing operations in 1996. The Company's gross loss also increased
due to substantially reduced selling prices to a large customer (accounting for
approximately $125,000 of Net Sales) to replace third party manufactured
unacceptable tires previously delivered to the customer by the Company when the
Company was solely a distributor. The Company anticipates an increase in profit
margins upon the sale of higher margin light truck tires.
Operating and Other Expenses. The Company incurred selling, shipping, general
and administrative expenses of $1,365,421, and interest expense of $17,741 in
the nine months ended December 31, 1996 as compared to $1,138,180 of selling,
shipping, general and administrative expenses and $403,152 of interest expense
and $389,216 of private placement financing costs in the nine months ended
December 31, 1995. The increases in selling, shipping, general and
administrative expenses were primarily attributable to increased salaries
(approx. $300,000). The decrease in interest expense is primarily attributable
to interest on long term notes during the nine months ended December 31, 1995
that were paid by the end of fiscal 1996. In addition, private placement costs
were incurred during the nine months ended December 31, 1995 (and paid by the
end of fiscal 1996) and no such costs were incurred during fiscal 1997.
Net loss. The Company sustained a net loss of ($2,910,424) in the nine months
ended December 31, 1996 as compared to a net loss of ($1,972,023) in the nine
months ended December 31, 1995, an increased loss of $938,401. The increase was
primarily attributable to the diverting of its resources from the distribution
business to the commencement of manufacturing. The net loss was also
attributable to the increased rent expense ($163,643 or 198%) at the new
manufacturing facility, consulting expenses ($109,778 or 515%), non-recurring
initial start-up expenses and marketing and sales expenses, all relating to its
manufacturing operations.
Three Months Ended December 31, 1996 Compared to Three Months Ended December
31, 1995.
Net Sales. The Company's net sales of $797,013 for the three months ended
December 31, 1996 represent an increase of $738,611 compared to net sales for
the three months ended December 31, 1995. The increase was due to the Company
commencing the manufacture of its own tires and curtailing the distribution of
tires manufactured by third parties.
Cost of Sales. The Company's cost of sales for the three months ended December
31, 1996 was $1,432,992 as compared to $85,100, representing an increase of
$1,347,892. This increase was primarily due to substantial costs incurred to
prepare to operate the facility at maximum capacity, which costs become
disproportionate to net sales until such time as full capacity is achieved. The
Company's manufacturing facility is currently operating at approximately 40% of
its full capacity. The Company anticipates that certain fixed costs and
expenses, such as rent, utilities, insurance and depreciation will substantially
decrease on a per unit basis as production increases, as will the per unit cost
of labor. The increase cost of sales for the quarter ended December 31, 1996 was
also attributable to the incurrence of certain non-recurring expenses necessary
to commence manufacturing operations, including personnel training (approx.
$75,000), raw material product testing (approx. $75,000), consulting expenses
(approx. $10,000) and electrical repairs (approx. $25,000).
Gross Profit (Loss). The Company's gross loss for the three months ended
December 31, 1996 was ($635,979) as compared to a gross loss of ($26,698) for
the three months ended December 31, 1995, an increase of $609,281. This increase
was directly caused by the manufacturing and training costs associated with the
initial commencement of its own manufacturing of remolded tires as compared to
no manufacturing costs in the prior period. The Company's direct overhead
expenses also increased due to the initial start-up of its manufacturing
operations. The Company anticipates an increase in profit margins upon the sale
of higher margin light truck tires.
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<PAGE>
Operating and Other Expenses. The Company incurred selling, shipping, general
and administrative expenses of $479,183, and interest expense of $5,766 in the
three months ended December 31, 1996 as compared to $466,169 of selling,
shipping, general and administrative expenses and $213,609 of interest expense
and $389,216 in private placement financing costs in the three months ended
December 31, 1995. Selling, shipping, general and administrative expense
remained basically steady for the periods. The decrease in interest expense is
primarily attributable to interest on long term notes during the three months
ended December 31, 1995 that were paid by the end of fiscal 1996. In addition,
private placement costs were incurred during the three months ended December 31,
1995 (and paid by the end of fiscal 1996) and no such costs were incurred during
fiscal 1997.
Net loss. The Company sustained a net loss of ($1,121,974) in the three months
ended December 31, 1996 as compared to a net loss of ($1,107,744) in the three
months ended December 31, 1995, an increased loss of $14,230. The increase was
primarily attributable to the diverting of its resources from the distribution
business to the commencement of manufacturing.
Liquidity and Capital Resources
The Company used cash in operating activities in the amount of $3,054,692 for
the nine months ended December 31, 1996 and $983,299 for the nine months ended
December 31, 1995 which was primarily related to the loss from operations. Cash
used in investing activities in the amounts of $571,801 and $341,819 for the
nine months ended December 31, 1996 and 1995, respectively, was principally for
the purchase of machinery and equipment to commence operations of its
manufacturing facility. Financing provided to fund operating and investing
activities for the nine months ended December 31, 1996 was provided by a bank
line of credit of $396,333 and proceeds of $1,558,354 from the sale of stock.
Financing used to fund operating and investing activities for the nine months
ended December 31, 1995 was received from bridge financing and long term debt in
the amounts of $1,000,000 and $225,000, respectively and $5,329,404 from the
Company's Initial Public Offering.
In October, 1996, the Company received gross proceeds of $2,000,000 from the
private sale of its common stock. 2,000,000 shares were sold at $1.00 per share
to an aggregate of 10 foreign investors. The sales were made pursuant to an
exemption from the registration requirements of the Securities Act of 1933, as
amended, under Regulation S promulgated thereunder. The net proceeds of
approximately $1,558,354 received from this sale have been utilized for working
capital.
In June, 1995, the holders of $1,092,929 principal amount of loans, notes and
debentures, together with other purchasers of similar notes and debentures,
exchanged them, together with accrued and unpaid interest thereon, for an
aggregate of 1,202,755 shares of Class A Redeemable Convertible Preferred Stock
of the Company. The Company may redeem the Class A Redeemable Convertible
Preferred Stock at a redemption price of $1.00 per share on 60 days notice at
any time, provided, that prior to January, 1997, the Company may redeem the
Class A Redeemable Convertible Preferred Stock only if the Common Stock has
closed above $7.50 per share for 20 consecutive trading days, whereupon a holder
can either convert the Class A Redeemable Convertible Preferred Stock or receive
the redemption price for his Class A Redeemable Convertible Preferred Stock.
Pursuant to the terms thereof, the holders of these shares can require the
Company to redeem these shares on or after December 18, 1997 at a redemption
price of $1.00 per share and, in any event, these shares are redeemable on or
after December 18, 1997 at the same redemption price. Accordingly, the Company
could be required to pay up to $1,202,775 in cash upon such redemption.
The Company may need financing to redeem its Class A Redeemable Convertible
Preferred Stock and to expand its manufacturing operations, if required.
In May, 1995, the Company purchased 20 mold presses, molds, an extruder, a
building machine, a buffing machine and related ancillary equipment for use in
its new manufacturing facility for an aggregate purchase price of approximately
$530,000 from a financial institution which had foreclosed on such equipment.
After paying a portion of this purchase price, the Company has agreed with this
financial institution to pay the remaining $300,000 balance in equal monthly
installments of approximately $10,000 per month over a three-year period at an
interest rate of 13.25% per annum. This financial institution has a first
priority security interest in such equipment collaterizing this loan.
- 9 -
<PAGE>
The Company has entered into a 10-year, 9-month lease with one five year
renewal option for approximately 65,000 square feet of manufacturing, warehouse
and office space in Holtsville, New York during fiscal 1995, which provides for
minimum annual rental obligations of approximately $282,750, plus utilities and
maintenance, subject to 5% annual increases. Commencing October 1, 1995, so long
as the Company is in substantial compliance with its obligations under this
Lease, the Company will have an option to purchase these premises for
$2,500,000. If this option has not been exercised by October 1, 1997, the
purchase price will increase by 5% at that date and on each anniversary thereof
up to and including October 1, 2004. If the Company elects to purchase these
premises, it will be required to tender a deposit equal to 10% of the purchase
price and consummate the purchase within sixty (60) days thereafter, whereupon
the balance of the purchase price will be due. The Company utilizes this
facility for its manufacturing operations, as well as for warehousing its
inventory and as its corporate offices. The Company's capital requirements may
change depending upon numerous factors and the Company may require additional
financing from time to time, particularly in order to effectuate expansion
activities.
Seasonality
While there is a year round demand for automobile tires, automobile tire sales
in the Northeastern United States are generally strongest during the second and
third calendar quarters of the year. Seasonality may have an impact on the
Company's operations including cash flow, insofar as the Company is required to
control inventory levels to reflect projected quarterly sales. However, since
the Company anticipates that approximately 50% of its sales will be in the
Western United States and other regions where all purpose automobile tires are
used year round, it does not believe that seasonality will have a material
adverse impact on its operations.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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<PAGE>
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.
Dated: February 18, 1997 ECOTYRE TECHNOLOGIES, INC.
(Registrant)
By: /s/ Vito F. Alongi
Vito F. Alongi,
President, Treasurer and Principal
Financial Officer
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<PAGE>
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.
Dated: February 18, 1997 ECOTYRE TECHNOLOGIES, INC.
(Registrant)
By: __________________________________
Vito F. Alongi,
President, Treasurer and Principal
Financial Officer
- 12 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
financial statements for the nine months ended December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 832,576
<SECURITIES> 0
<RECEIVABLES> 627,351
<ALLOWANCES> 17,000
<INVENTORY> 486,564
<CURRENT-ASSETS> 2,114,665
<PP&E> 1,661,010
<DEPRECIATION> 168,799
<TOTAL-ASSETS> 3,893,491
<CURRENT-LIABILITIES> 1,751,450
<BONDS> 0
1,191,590
0
<COMMON> 5,115
<OTHER-SE> 584,149
<TOTAL-LIABILITY-AND-EQUITY> 3,893,491
<SALES> 1,598,351
<TOTAL-REVENUES> 1,598,351
<CGS> 3,121,370
<TOTAL-COSTS> 3,121,370
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,741
<INCOME-PRETAX> (2,906,181)
<INCOME-TAX> 4,243
<INCOME-CONTINUING> (2,910,424)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,910,424)
<EPS-PRIMARY> (.83)
<EPS-DILUTED> (.83)
</TABLE>
