Urecoast 10-KA 12-31-2003
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2003
Commission File No. 0-20101
Urecoats Industries Inc.
(Exact name of Registrant as Specified in its Charter)
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Delaware |
13-3545304 |
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(State of Incorporation) |
(I.R.S. Employer Identification No.) |
| Quorum Business Center |
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718 South Military Trail |
33442 |
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Deerfield Beach, Florida 33442 |
(Zip Code) |
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(Address of principal executive offices) |
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(954) 428-8686
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which each class registered |
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Common Stock, $0.01 par value |
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American Stock Exchange |
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, and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): Yes o No x
The aggregate market value of the registrant's common equity held by non-affiliates based on the price at which the common equity was last sold as of the last business day of the registrant's most recently completed second fiscal quarter was $11,367,754.
Common Stock outstanding as of April 26, 2004 – 28,561,158 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant's proxy statement for the annual meeting of stockholders scheduled to be held on June 22, 2004, which proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the close of the registrant's fiscal year ended December 31, 2003.
TABLE OF CONTENTS
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Page |
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PART I |
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Item 1. |
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Business |
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3 |
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Item 2. |
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Properties |
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7 |
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Item 3. |
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Legal Proceedings |
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8 |
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
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8 |
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Item 4A. |
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Executive Officers |
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8 |
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PART II |
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Item 5. |
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Market for Company's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
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9 |
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Item 6. |
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Selected Financial Data |
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10 |
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Item 7. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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10 |
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Item 7A. |
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Quantitative and Qualitative Disclosures About Market Risk |
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14 |
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Item 8. |
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Financial Statements and Supplementary Data |
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14 |
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Item 9. |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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14 |
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Item 9A. |
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Controls and Procedures |
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14 |
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PART III |
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Item 10. |
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Directors and Executive Officers of the Company |
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15 |
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Item 11. |
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Executive Compensation |
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15 |
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Item 12. |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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15 |
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Item 13. |
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Certain Relationships and Related Transactions |
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15 |
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Item 14. |
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Principal Accountant Fees and Services |
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15 |
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PART IV |
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Item 15. |
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Exhibits, Financial Statement Schedules and Reports on Form 8-K |
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16 |
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SIGNATURES |
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17 |
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INDEX OF EXHIBITS |
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18 |
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EXHIBIT 31.1 |
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EXHIBIT 31.2 |
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EXHIBIT 32 |
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ITEMS AMENDED HEREBY
As used in this amended report, "Urecoats" and the "Company" or "Us" or "We" refer to Urecoats Industries Inc. and its subsidiaries, unless the context otherwise requires. This amendment essentially amends and brings up to date certain changes involving legal proceedings and executive officers of our Company. In addition, we moved the Securities Authorized for Issuance under Equity Compensation Plans to our 2004 Proxy Statement. A new subdivision of Business entitled Seasonality has been included herein. The Financial Statements and related Notes have been updated in the form of additional tables and explanatory information. There were various other minor changes made to the manner in which information was previously presented without affecting its substance for the purpose of increasing transparency to our stockholders. We also expanded our Index of Exhibits.
PART I
Overview
We are an emerging growth company, operating two wholly-owned subsidiaries, RSM Technologies, Inc. (f/k/a Urecoats Manufacturing, Inc.) and Infiniti Products, Inc. (f/k/a Infiniti Paint Company, Inc.). RSM Technologies, Inc. acquires, develops, markets, and sells spray applied elastomeric coatings, to the roofing, waterproofing, weatherproofing, corrosion, and construction industries (“RSM Technologies”). Infiniti Products, Inc. develops, manufactures, markets, sells, and distributes coatings, paints, and sealants to the construction, paint, roofing, and waterproofing industries (“Infiniti”).
Our Internet website address is http://www.urecoats.com. We make our periodic and current reports, together with amendments to these reports, available on our website, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Our Code of Business Ethics and Conduct, applicable to all officers, directors, and employees, as well as Audit, Compensation and Corporate Governance Committee charters are posted on our website.
We have not earned profits to date, incurred recurring losses and negative cash flows from operations, and at December 31, 2003 have an accumulated deficit, net of dividends, of $(55,576,831), and our current liabilities exceeded our current assets by $3,901,372 and our total liabilities exceeded our total assets by $2,569,668. Our operations have been funded primarily by Richard J. Kurtz, the Chairman of the Board, over the past 5 five years. See Part II, Item 8 – Financial Statements and Supplementary Data and Notes to Consolidated Financial Statements, Note 2. Going-Concern Issues Arising from Recurring Losses and Cash Flow Problems, for more information.
A strategic organizational initiative was initiated in the second quarter of 2003 which was designed to reduce our operating expenses and costs on an annualized basis, increase our effectiveness in delivering products to existing and potential new customers, and set the stage for us to achieve profitability in the near future. The latter half of 2003 up to the date of this amended report begins to reflect the results of our strategic organizational initiative.
In the fourth quarter of 2001, after a four year period largely characterized by research and development, RSM Technologies introduced its first RSM™ brand products, the RSM Hundred Series™, comprised of the RSM-100™ coating and BlueMAX™ spray equipment ("Flagship Products"), in the Eastern United States primarily to roofing contractors. In February 2004, RSM Technologies acquired the rights to market certain spray applied polyurethane products, referred to as the “Spectrum Series™, on a non-exclusive basis, which are manufactured and distributed by a non-affiliated California corporation. With our acquisition of Infiniti in September 2001, we acquired additional products referred to as our Infiniti™ brand, Infiniti Series™ products, consisting of coatings, paints, and sealants, which are being sold to construction, paint, roofing, and waterproofing contractors. During the third quarter of 2003, we addressed certain problems encountered in the field with our RSM Hundred Series™ products, which resulted in a near term decline in revenue for the annual period. See Research and Product Developments below.
The following table sets forth, for the periods indicated, selected financial data from our continuing operations:
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Year Ended December 31 |
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2003 |
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2002 |
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2001 |
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Revenue |
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$ |
3,976,856 |
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$ |
5,015,645 |
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$ |
1,255,292 |
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Cost of Sales |
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$ |
4,463,054 |
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$ |
4,182,220 |
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$ |
1,060,980 |
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Gross Profit (Loss) |
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$ |
(486,198 |
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$ |
833,425 |
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$ |
194,402 |
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Operating Expenses |
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$ |
10,786,886 |
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$ |
12,276,761 |
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$ |
6,636,750 |
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Operating Loss |
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$ |
(11,273,084 |
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$ |
(11,443,336 |
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$ |
(6,442,348 |
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Net Loss |
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$ |
(11,273,084 |
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$ |
(10,843,735 |
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$ |
(7,915,985 |
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Net Loss Per Common Share – Basic and Diluted |
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$ |
(0.771 |
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$ |
(0.816 |
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$ |
(0.687 |
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Products
We offer three series of products: RSM Series™, Spectrum Series™ and Infiniti Series™.
RSM Series™ products consist of the RSM™ brands made from our RSM Technologies™, Spectrum Series™ products consist of Spectrum™ brands marketed by us, and Infiniti Series™ products consist of the Infiniti™ brands made from our Infiniti Technologies™. We sometimes refer to these series of products collectively as our “Comprehensive Product Line”.
RSM Series™
The RSM Series™ is comprised of two series of products. The RSM Hundred Series™ products consist of coatings made from a patented three component RSM™ formula (i.e. “RSM-100™”) and patented spray equipment required for their application (“BlueMAX™”). The three components of the RSM™ formula are processed through the spray equipment to make and apply the coating at a job site. The RSM Thousand Series™ products consist of coatings made from a patent pending two component RSM™ formula (i.e. “RSM-2000™”) and patent pending spray equipment required for their application (“BlueWARRIOR™” and “BlueCHIEF™”). The two components of the RSM™ formula are processed through the spray equipment to make and apply the coating at a job site. Like its RSM Hundred Series™ predecessor, the RSM Thousand Series™ utilizes crumb rubber from recycled tires in its formula.
Spectrum Series™
The Spectrum Series™ is comprised of high performance Primers, Urethanes, Acrylics, Hybrids, and Polyureas suitable for use for a variety of industrial and commercial applications.
Infiniti Series™
The Infiniti Series™ is comprised of roof coatings, paints, and sealants.
Sales and Marketing
Our growing sales force consists of inside and outside sales personnel. We attend select trade shows, advertise in trade publications, market using direct mail, and use other various media to target the high performance coating, roofing, waterproofing, weatherproofing, corrosion, construction, and urethane markets. Sales have primarily been in the Eastern United States and limited international markets to date. Our target customers are primarily coating applicators with plural component spray experience.
We introduced our new RSM Thousand Series™ and Spectrum Series™ products to the spray polyurethane, waterproofing, and roofing markets in the first quarter of 2004.
The RSM Series™ is marketed using a numbering system to differentiate between the industries in which our RSM™ formulae has application (e.g. RSM-100™ or RSM-110 HP™ or RSM-1000™ for roofing markets, RSM-2000™ for waterproofing markets, etc.).
We sell Infiniti Series™ products to local coating and paint contractors and spray polyurethane foam applicators, through our distribution location in South Florida. Infiniti also is a registered vendor with and sells its roof paints and coatings to North America’s largest manufacturer and seller of paints.
Competition
The United States adhesives, sealants and coatings industry is highly fragmented with over 500 manufacturing companies. Future growth is expected to result from the trend of the industry to create new design and manufacture, lower costs, improve product characteristics, reduce weight and corrosion in new applications. Additional industry growth is expected to occur as a result of the increased use of adhesives, sealants and coatings in international markets. Competition is generally regional and is based on product quality, technical service for specialized customer requirements, breadth of product line, brand name recognition, price, service, and warranty. Due to the uniqueness of certain of our technologies, ease of application, cost savings, and the environmental marketing component, we believe we can achieve significant market share in the industries which we are targeting. Our RSM™ coating membranes can only be created through our patented and patent pending spray equipment. Nonetheless, we face strong indirect competition. Numerous companies are engaged in the development, manufacture and marketing of sealant and coating products that compete with us. These competitors have equivalent or, in most cases, greater availability to resources than we do. In marketing our products, we compete primarily on the basis of product technology, value-added services, product performance, and installed price. Our future success will depend on our ability to successfully market our products and create awareness in industry and the public regarding the value of our products as with any new product. We are facing increased competition as we penetrate our existing target markets and build greater brand identity through our sales and marketing efforts.
Manufacturing
We use toll blenders, vendors, and suppliers, under private label agreements, to manufacture most of our Comprehensive Product Line’s needs. There is no known shortage of raw material availability or supply for our products with these sources. Our RSM Hundred Series™ formula is comprised of three components (A, B and C), which are manufactured by outside toll blenders, and an equipment vendor for the spray equipment, for distribution by us to our customers. The RSM Thousand Series™ formula is comprised of two components (A and B), of which the A component is manufactured by an outside toll blender. We have identified and have available outside toll blenders for manufacturing our new B component. As part of our strategic organizational initiative, we have begun to design and will be establishing our own pilot manufacturing operations in our existing facilities for our RSM Series™ and most of the Infiniti Series™ products. We are moving towards developing an ability to custom manufacture formulations to serve a wider variety of industries. Most of these efforts will focus on providing the customer with specialized products to meet exact specifications, and despite relatively low volume, we expect to achieve a higher gross profit margin serving these niche markets. In addition, we have entered into a strategic alliance with a newly formed, non-affiliated corporation, for the manufacturing, technical support, service, and training of the RSM Thousand Series™ spray equipment (“BlueWARRIOR™” and “BlueCHIEF™”).
Distribution
In 2002, we entered into an exclusive distribution agreement with Bradco Supply Corp. (“Bradco”), a roofing materials supplier serving the Eastern United States. During 2002 and after establishing this distribution channel with Bradco, we reduced the RSM-100™ and BlueMAX™ selling prices for competitive reasons, which resulted in a decreased margin not only for us but also Bradco. As part of our recent strategic organizational initiative, we are decreasing our reliance on Bradco’s distribution channel because we need to increase our margins to achieve profitability in the near future. We are now primarily selling our RSM Series™ products direct to our certified applicators, and Spectrum Series™ products throughout the Eastern United States. The Infiniti Series™ products are distributed throughout the Southeastern United States by Infiniti.
International
We are committed to limited international expansion with our RSM Technologies™ under distribution, license, and/or purchase agreements. In the fourth quarter of 2003, we executed a confidential purchase agreement, which becomes effective upon placement of an initial order, with a local non-affiliated Florida based company to purchase our RSM Hundred Series™ products, for export only, exclusively to Turkey and the Middle East, for a term of five (5) years including an option to extend the term for a second five (5) year term. Pursuant to the purchase agreement, the buyer is obligated to purchase a certain amount of RSM Series™ products for each year of the agreement or we have the right to convert the agreement into a non-exclusive agreement. The purchase agreement also includes a supplemental license agreement that can be activated by the buyer after a certain amount of our RSM Hundred Series™ products are purchased by the buyer. The license agreement, if and when activated, forms a joint venture between RSM Technologies (as licensor) and the buyer (as licensee) whereby RSM Technologies contributes its RSM Technologies™ (with the right at all times to maintain secrecy) and the buyer contributes all of the capital necessary to design, set up, and operate, a manufacturing plant in Turkey only.
Training
Based on the technical nature of our RSM Series™ products, we are required to place a high priority on training. Sales, operations, and technical personnel undergo specialized training relating to specifications, mechanical, repair, maintenance, and spray application techniques to ensure proper customer support to our certified applicators for our RSM Series™ products. We require contractors/end-users/spray applicators who purchase our RSM Series™ products to become certified in their use and application. On-site technical support and refresher courses on a regular basis are available for customer service purposes for a fee.
Research and Product Developments
We place a high priority on research and new product and process development. During 2002, we increased research and development on our RSM Technologies™ and developed a two component RSM™ formula and smaller, less expensive, equipment for its spray application (“BlueWARRIOR™” and “BlueCHIEF™”). Refer to Products, RSM Series™, RSM Thousand Series™ above (we recently introduced these new RSM Technologies™ to the marketplace). During 2003, we encountered problems in the field with our RSM Hundred Series™ products. The only valid way that we could make accurate assessments of the sensitivities of our products (e.g. RSM-100™ and BlueMAX™ ) to raw material variation, substrate preparation, operator technique, and ambient weather, was through the commercialization process. These factors were difficult, if not impossible, for us to simulate in the laboratory or from limited commercial distribution because they are very much dependent upon scale - multiple lots of raw materials, the amount of material processed and the number of projects completed and projects spanning the seasons. We have applied these field assessments and have reengineered our RSM Hundred Series™ technologies™ to address them. Specifically, we identified the sensitive components of our technology and replaced them with components which perform at least as well as the originals under optimum conditions but with less sensitivity to the factors noted above. Using this methodology, we are assured of more reliable performance. The continuing introduction of new products supplied by our research and development efforts are important to our success. There are intrinsic uncertainties associated with research and development efforts. We cannot assure you that any of our research projects will result in new products that we can commercialize. For the years ended December 31, 2003, 2002, and 2001, we spent $509,020, $820,533, and $1,250,213, respectively for research and development.
New Markets
We believe our RSM Technologies™ have applicability in many cross-over industry markets, such as corrosion and pipeline, and continue to explore these and other suitable potential markets. See also Products, Spectrum Series™ above.
Patents and Trademarks
We own two patents relating to our RSM Hundred Series™ products. Our patents are important to our business, but no one patent is currently of material importance in relation to our overall sales.
RSM Hundred Series™
We have an issued patent for the RSM Hundred Series™ formula, namely, U.S. Patent No. 6,271,305, issued August 7, 2001, entitled: "Bituminous Polyurethane Interpenetrating Elastomeric Network Composition and Method of Manufacturing the Same". A continuation application seeking broader coverage for the composition was filed in the United States Patent and Trademark Office on June 27, 2001 and was issued, U.S. Patent No. 6,538,060. We filed corresponding international applications in Europe, Brazil, Canada, and Mexico, which are pending.
We have an issued patent for our RSM Hundred Series™ spray equipment (“BlueMAX™”), namely, U.S. Patent No. 6,663,016, issued December 16, 2003, entitled: "Applicator Assembly for Application of Adhesives, Sealants and Coatings". We filed corresponding international applications in Canada, China, and an international PCT Application, which are pending.
Our success with our products will depend, in part, on our ability to obtain, and successfully defend if challenged, patent or other proprietary protection. However, the issuance of a patent is not conclusive as to its validity or as to the enforceable scope of the claims of the patent. Accordingly, our patents may not prevent other companies from developing similar or functionally equivalent products or from successfully challenging the validity of our patents. Hence, if our patent applications are not approved or, even if approved, such patents are circumvented or not upheld in a legal proceeding, our ability to competitively exploit our patented products and technologies may be significantly reduced. Also, such patents may or may not provide competitive advantages for their respective products or they may be challenged or circumvented by competitors, in which case our ability to commercially exploit these products may be diminished.
We also rely on trade secrets and proprietary know-how that we seek to protect, in part, through confidentiality agreements with our partners, customers, employees and consultants. It is possible that these agreements will be breached or will not be enforceable in every instance, and that we will not have adequate remedies for any such breach. It is also possible that our trade secrets will otherwise become known or independently developed by competitors. We may find it necessary to initiate litigation to enforce our patent rights, to protect our trade secrets or know-how or to determine the scope and validity of the proprietary rights of others. Litigation involving patents, trademarks, copyrights and proprietary technologies can often be protracted and expensive and, as with litigation generally, the outcome is inherently uncertain.
We market our products under various trademarks, for which we have both registered and unregistered trademark protection in the United States and certain countries outside the United States. We consider these trademarks to be valuable because of their contribution to the market identification of our products.
Employees
At December 31, 2003, we employed 25 people. None of our employees are currently represented by a union. We believe that our relations with our employees are generally very good.
Environmental Matters
We are subject to federal, state, local and foreign environmental laws and regulations. We believe that our operations comply in all material respects with applicable environmental laws and regulations where we have a business presence. We do not anticipate any significant expenditure in order to comply with environmental laws and regulations that would have a material impact on our Company. We are not aware of any pending litigation or significant financial obligations arising from current or past environmental practices that are likely to have a material adverse effect on our financial position. We cannot assure you, however, that environmental problems relating to properties operated by us will not develop in the future, and we cannot predict whether any such problems, if they were to develop, could require significant expenditures on our part. In addition, we are unable to predict what legislation or regulations may be adopted or enacted in the future with respect to environmental protection and waste disposal.
Seasonality
Our business, taken as a whole, is materially affected by seasonal factors at this time. Specifically, sales of our products tend to be lowest during the first and fourth fiscal quarter, with sales during the second and third fiscal quarters being comparable and marginally higher than sales during the first and fourth fiscal quarter.
Historical Information
We were incorporated in the state of Delaware on October 20, 1989 as Natural Child Collection, Inc. and changed our name to Natural Child Care, Inc., on January 14, 1991. In 1993, we underwent a recapitalization, reverse merger, discontinued our pre-merger Natural Child Care operations, changed our name to Winners All International, Inc., and began post-merger random lottery operations. We were operationally inactive from August 1, 1995 to January 26, 1997, and began holding regular Board meetings to restructure our operations and transact business to rebuild shareholder value in January 1997. On January 29, 1997, a Special Meeting of the Board of Directors, recognized and resolved, that as a result of the permanent impairment of operational assets a measurement date of January 29, 1997 was established, to abandon our former random lottery operations effective for year ended July 31, 1995. On January 28, 1997, we acquired Urecoats International, Inc. (f/k/a Perma Seal International, Inc.) and began our current sealant and coating operations. We changed our name to Urecoats Industries Inc. on February 8, 1999. We divested Urecoats International, Inc. upon completion of our sealant and coating development stage in 2000 and acquired Rainguard Roofing Corporation, a Florida corporation, which had minimal assets and liabilities, effective January 1, 2001, to commercialize our RSM Series™ products and generate revenues in the roofing and waterproofing contracting business. We divested Rainguard Roofing Corporation, effective December 31, 2001, and began selling our RSM Series™ products direct to contractors through RSM Technologies, Inc. (f/k/a Urecoats Manufacturing, Inc.). Infiniti Products, Inc. (f/k/a Infiniti Paint Company, Inc.) was acquired in September 2001 to, among other things, diversify our product offerings.
Forward Looking Statements
Statements made by us in this amended report and in other reports and statements released by us that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21 of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are necessarily estimates reflecting the best judgment of senior management and express our opinions about trends and factors which may impact future operating results. You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. Such statements rely on a number of assumptions concerning future events, many of which are outside of our control, and involve risks and uncertainties that could cause actual results to differ materially from opinions and expectations. Any such forward-looking statements, whether made in this amended report or elsewhere, should be considered in context with the various disclosures made by us about our businesses including, without limitation, the risk factors discussed below. Although we believe our expectations are based on reasonable assumptions, judgments, and estimates, forward-looking statements involve known and unknown risks, uncertainties, contingencies, and other factors that could cause our or our industry's actual results, level of activity, performance or achievement to differ materially from those discussed in or implied by any forward-looking statements made by or on the Company and could cause our financial condition, results of operations, or cash flows to be materially adversely affected. In evaluating these statements, some of the factors that you should consider include the following: (a) Financial position and results of operations, including general and administrative expense targets and effects on income from continuing operations; (b) Cash position and cash requirements, including the sufficiency of our cash requirements for the next twelve months; (c) Sales and margins; (d) Sources, amounts, and concentration of revenue; (e) Costs and expenses; (f) Accounting estimates, including treatment of goodwill and intangible assets, doubtful accounts, inventory, restructuring, and warranty, and product returns; (g) Operations, including international, supply chain, quality control, and manufacturing supply, capacity, and facilities, including the anticipated opening of our manufacturing operations; (h) Products and services, price of products, product lines, and product and sales channel mix; (i) Relationship with customers, suppliers and strategic partners, including increased reliance on strategic partners; (j) Raw material variations, substrate preparation, application specifications, operator techniques, and ambient weather fluctuations; (k) Acquisition and disposition activity; (l) Credit facility and ability to raise capital; (m) Real estate lease arrangements; (n) Global economic, social, and geopolitical conditions; (o) Industry trends and our response to these trends; (p) Tax position and audits; (q) Strategic organizational initiatives, cost-reduction efforts, including workforce reductions, and the effect on employees; (r) Sources of competition; (s) Protection of intellectual property; (t) Outcome and effect of current and potential future litigation; (u) Research and development efforts, including our investment in new technologies; (v) Future lease obligations and other commitments and liabilities; (w) Common stock, including trading price; (x) Security of computer systems; and (y) Changes in accounting policies and practices, as may be adopted by regulatory agencies, and the Financial Accounting Standards Board.
We do not plan to update any such forward-looking statements and expressly disclaim any duty to update the information contained in this filing except as required by law.
Item 2. Properties.
Our headquarters, administrative, manufacturing, distribution, and research facilities are located in leased facilities in Deerfield Beach, Florida. Although we believe our present facilities are adequate for our current needs, we anticipate needing additional space for future full scale manufacturing operations for both of our subsidiaries.
Item 3. Legal Proceedings.
We are involved in various lawsuits and claims arising in the ordinary course of business.
Ponswamy Rajalingam and Uma Umarani, Plaintiffs v. Urecoats International, Inc., Urecoats Industries Inc., et. al., Defendants.
On May 15, 2002, in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida, Plaintiffs filed a complaint against Urecoats International, Inc., Urecoats Industries Inc., Urecoats Technologies, Inc., and Richard J. Kurtz, Michael T. Adams, and two former officers of the Company, individually, (“Defendants”) and on November 12, 2002, in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida, Plaintiffs filed a second complaint against Urecoats International, Inc. and Urecoats Industries Inc., alleging breach of contract, conversion, and other claims under various common law and statutory theories. The Defendants filed an answer denying the allegations and counterclaimed against the Plaintiffs. This matter was settled pursuant to a confidential settlement agreement between the parties on April 21, 2004 prior to trial.
Raymond T. Hyer, Jr. and Sun Coatings, Inc., Plaintiffs v. Urecoats Industries Inc., et. al, Defendants
On October 3, 2003, in the Hillsborough County State Court, Division H, Plaintiffs filed a complaint against Urecoats Industries Inc. and Michael T. Adams, John G. Barbar, and a former officer of the Company, individually, alleging common law fraud and rescission in connection with their purchase of common stock in the Company. Plaintiff Hyer purchased $100,000 worth of common stock in June 2003 and Plaintiff Sun Coatings purchased $250,000 worth of common stock in July 2003. Plaintiffs allege that the Company and certain present and former officers failed to disclose the current financial condition of the Company and its subsidiaries (notwithstanding that Plaintiffs signed subscription agreements admitting that they were provided all relevant and requested financial information). The Defendants’ motion to dismiss was denied by Order dated January 20, 2004. The Defendants answered the complaint on February 13, 2004 and asserted, among others, the affirmative defense that Plaintiffs’ claims are barred by their signed subscription agreements. Discovery has not yet commenced and no trial date is set. The Company will vigorously defend this case and the outcome cannot be determined at this time.
Item 4. Submission of Matters to a Vote of Security Holders.
We did not submit any matter during the fourth quarter of the fiscal year covered by this amended report to a vote of security holders, through the solicitation of proxies or otherwise.
Item 4(A). Executive Officers of Our Company.
A brief summary of our executive officers and their ages as of April 1, 2004 are as follows:
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Name and Position |
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Age |
|
Business Experience During the Past 5 Years and Period Served as Officer |
|
|
|
|
|
|
|
Michael T. Adams
President |
|
38 |
|
President since August 1, 2003. Mr. Adams was Executive Vice President and Corporate Secretary from March 1, 1999 to September 30, 2003. Prior thereto, he held various officer capacities in the Company's subsidiaries and was instrumental in the restructuring and establishment of operations for the Company beginning in January 1997. He earned his Bachelor of Science degree in Business Administration in 1989, Master of Science degree in Business Administration in 1990 and Juris Doctor Degree in 1995, from Nova Southeastern University, located in Fort Lauderdale, Florida.
|
|
Dennis Dolnick
Chief Financial
Officer, and
Corporate Treasurer |
|
40 |
|
Chief Financial Officer and Corporate Treasurer since March 16, 2004. Prior to joining Urecoats, Mr. Dolnick was the Chief Financial Officer of Rx Medical Services Corp., a publicly traded holding company, which operated various lines of business in the healthcare industry, from October 1997 to March 2004; the Controller of SII Pak-Tek, Ltd. and SII Cassettes, Ltd. manufacturers of plastic injected molding supplies used primarily by the entertainment industry, from October 1996 to October 1997; and a manager in the audit department of Grant Thornton LLP, from November 1992 to October 1996. He is a Certified Public Accountant, licensed in the State of Florida and a member of both the Florida Institute of Certified Public Accountants and the American Institute of Certified Public Accountants.
|
|
Matthew R. Simring
General Counsel
and Corporate
Secretary |
|
35 |
|
General Counsel and Corporate Secretary since August 1, 2003. Mr. Simring has been practicing in the area of business and corporate law since obtaining his law license in 1999. He graduated from Nova Southeastern University Law School, in Fort Lauderdale, Florida in August 1999. Mr. Simring received a Bachelor of Arts in Liberal Studies from Nova Southeastern University in August 1994. He has been a member in good standing with the Florida Bar since September 1999.
|
Timothy M. Kardok, our former CEO and President, resigned on August 1, 2003.
John G. Barbar, our former Senior Vice President of Finance, Chief Financial Officer, and Treasurer, was terminated on March 16, 2004 for title purposes and March 31, 2004 for entitlement purposes under his written employment agreement.
Officers are appointed by and hold office at the pleasure of the Board of Directors.
PART II
Item 5. Market for the Company’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the American Stock Exchange as of June 18, 2002 under the ticker "URT". Prior to that time, our common stock traded on the over-the-counter bulletin board under the symbol "UREC" until May 30, 2002 and "URCO" from June 3, 2002 through June 17, 2002. The following table sets forth, for the calendar quarters during the past two years, the closing prices on the American Stock Exchange and the high and low closing bid information for our common stock. For the shares trading on the over-the-counter bulletin board, the quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
|
|
|
|
2003 |
|
|
2002 |
|
|
Calendar Quarter |
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
|
|
First |
|
$ |
.62 |
|
$ |
.61 |
|
$ |
.67 |
|
$ |
.63 |
|
|
Second |
|
$ |
1.12 |
|
$ |
1.12 |
|
$ |
.32 |
|
$ |
.32 |
|
|
Third |
|
$ |
.57 |
|
$ |
.57 |
|
$ |
.15 |
|
$ |
.14 |
|
|
Fourth |
|
$ |
.50 |
|
$ |
.45 |
|
$ |
.09 |
|
$ |
.08 |
|
Holders and Dividends
As of April 26, 2004, there were approximately 6,500 holders of record of our common stock. We did not declare any dividends during the past two years and do not anticipate declaring any common stock dividends in the near future.
Recent Sales of Unregistered Securities
During the quarterly period ended December 31, 2003, the Company issued securities, for certain private transactions, in reliance on Section 4(2) of the Act, as described below:
Common Stock
(1) On November 19, 2003, we issued an aggregate of 43,125 shares of restricted common stock pursuant to conversion of 6,250 shares of our Series C Convertible Preferred Stock, which Series C Convertible Preferred Stock was previously recorded at $125,000.
(2) On December 31, 2003, we issued an aggregate of 7,000 shares of restricted common stock to officers, as other compensation pursuant to employment agreements, valued and recorded in the aggregate at $1,750.
Preferred Stock
On December 31, 2003, we issued 71,752 shares of our Series C Convertible Preferred Stock to Richard J. Kurtz, our Chairman of the Board and principal stockholder, in exchange for his cancellation of $1,435,040 of our indebtedness to him for short-term loans, bearing interest at 9% per annum, advanced to us during the fourth quarter of 2003. This transaction represents a partial and the final exercise by him under his Second Series C Preferred Stock Option Agreement. As previously reported, we entered into a Second Series C Preferred Stock Option Agreement with our Chairman on March 21, 2003, which granted to him, the right and option to purchase all or any part of an aggregate of 250,000 of our Series C Convertible Preferred Stock at $20.00 per share to fund our operations up to $5,000,000 during the 2003 year. The Series C Convertible Preferred Stock purchased thereby is convertible into restricted shares of common stock according to a conversion formula based on a price of $.50 per share of common stock. See also Notes to Consolidated Financial Statements.
Securities Authorized for Issuance under Equity Compensation Plans
The information included under Item 12 of Part III of this report is hereby incorporated by reference into this Item 5 of Part II of this report.
Issuer Purchases of Equity Securities
None.
Item 6.Selected Financial Data.
|
|
|
Year Ended December 31, |
| |
|
|
|
|
|
|
|
|
Development Stage |
Development Stage |
|
|
|
|
|
|
Operations |
Operations |
|
|
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
2000 |
|
|
1999 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,976,856 |
|
$ |
5,015,645 |
|
$ |
1,255,292 |
|
$ |
--- |
|
$ |
--- |
|
|
Loss from Continuing Operations |
|
$ |
(11,273,084 |
) |
$ |
(11,443,336 |
) |
$ |
(6,442,348 |
) |
$ |
(4,207,332 |
) |
$ |
(2,381,026 |
) |
|
Net Loss |
|
$ |
(11,273,084 |
) |
$ |
(10,843,735 |
) |
$ |
(7,915,985 |
) |
$ |
(4,521,354 |
) |
$ |
(2,532,273 |
) |
|
Net Loss Per Common Share – Basic and Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
$ |
(0.771 |
) |
$ |
(0.860 |
) |
$ |
(0.560 |
) |
$ |
(0.438 |
) |
$ |
(0.314 |
) |
|
Net Loss |
|
$ |
(0.771 |
) |
$ |
(0.816 |
) |
$ |
(0.687 |
) |
$ |
(0.470 |
) |
$ |
(0.333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,699,196 |
) |
$ |
6,148,784 |
|
$ |
5,185,163 |
|
$ |
2,149,305 |
|
$ |
1,589,739 |
|
|
Working Capital (Deficit) |
|
$ |
(3,901,372 |
) |
$ |
(1,834,068 |
) |
$ |
137,421 |
|
$ |
(604,400 |
) |
$ |
(903,190 |
) |
|
Long-Term Debt |
|
$ |
112,349 |
) |
$ |
45,427 |
|
$ |
219,296 |
|
$ |
131,920 |
|
$ |
34,327 |
|
|
Total Stockholders’ Equity (Deficit) |
|
$ |
(2,569,668 |
) |
$ |
2,001,624 |
|
$ |
2,359,119 |
|
$ |
(1,942,221 |
) |
$ |
(59,651 |
) |
The financial data above has been recast to reflect the results of operations and financial positions of our Rainguard Roofing Corporation business as a discontinued operation. The results of operations for our discontinued operations includes allocations of certain Urecoats expenses to those operations. Rainguard Roofing Corporation was divested, effective December 31, 2001, as the Company began selling its RSM Series™ products direct to contractors. These amounts have been allocated on the basis that is considered to reflect most fairly or reasonably the utilization of the services provided to, or the benefit obtained by, those operations.
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three-Year Period Ended December 31, 2003
Overview
This financial review presents our operating results for each of the three years in the period ended December 31, 2003, and our financial condition at December 31, 2003. Except for the historical information contained herein, the following discussion contains forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements.
We discuss such risks, uncertainties and other factors throughout this amended report and specifically under the caption “Forward Looking Statements” in Item 1 of Part I of this amended report. In addition, the following review should be read in connection with the information presented in our consolidated financial statements and the related notes to our consolidated financial statements.
Results of Operations
Year Ended December 31, 2003 as Compared to Year Ended December 31, 2002
Revenues
The following is a summary of revenues for the years ending December 31,
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
Application Systems |
|
$ |
492,700 |
|
$ |
1,314,515 |
|
$ |
490,000 |
|
|
Coatings, Sealants and Other Products |
|
|
3,484,156 |
|
|
3,701,130 |
|
|
765,292 |
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
3,976,856 |
|
$ |
5,015,645 |
|
$ |
1,255,292 |
|
|
|
|
|
|
|
|
|
|
We reported revenue for the year ended December 31, 2003 of $3,976,856 as compared to $5,015,645 for the year ended December 31, 2002. The revenue generated from sales of our Application Systems was $492,700, which represented 12% of our revenue, as compared to $1,314,515 in 2002, which was 26% of our revenue, while sales from Coatings, Sealants and Other Products was $3,484,156, which represented 88% of our revenue, as compared to $3,701,130 in 2002, which was 74% of our revenue.
The decrease of $821,815 from Application Systems was due to: 1) a new pricing strategy which reduced our average price per unit by $10,981; 2) an increase in warranty costs relating to product application specifications, contractor practices, and other product issues, which are discussed in Part I, Item 1, Research and Product Developments section, and as a result, curtailed sales effort in the third and fourth quarter of 2003; and 3) more stringent requirements for potential applicators to qualify for the purchase of an Application System. As a result, we sold nine (9) Application Systems in 2003 as compared to twenty (20) in 2002.
The decrease of $216,974 from Coatings, Sealants and Other Products is a result of a decrease in sales of our RSM Series™ of $179,120 and a decrease of the Infiniti Series™ of $37,854.
Cost and Expenses
Our total cost and expenses are comprised of cost of sales, selling, general and administrative expenses, professional fees, depreciation and amortization, research and development, consulting fees, and interest expense. These total costs and expenses decreased from $16,458,981 for the year ended December 31, 2002 to $15,249,940 for the year ended December 31, 2003 for a decrease of $1,209,041. The decrease is comprised of a reduction in selling, general and administrative expenses, research and development expenses, consulting fees, and cost of sales, which were offset by an increase in impairment of assets, loss on disposal and valuation of assets, depreciation and amortization, and interest.
Cost of Sales: Our cost of sales for the year ended December 31, 2003 was $4,463,054 and is comprised of $2,948,935 of direct product costs and $1,514,119 of warranty costs, freight and other cost of sales. Direct cost for Application Systems was $431,550 or 88% of related revenue, and $2,517,385 for Coatings, Sealants and Other Products or 72% of related revenue. The warranty costs, freight and other cost of sales includes an adjustment to net realizable value of $555,700 to the value of Application Systems, and $571,601 of costs relating to the warranty reserve. This is compared to $4,182,220 for the year ended December 31, 2002 and is comprised of $3,958,828 of direct product costs, which includes introductory offers and customer service, support, and training costs, and $223,392 of warranty costs, freight and other costs of sales. Direct cost for the Application Systems was $1,324,948, which includes an $117,000 adjustment to inventory relating to the new pricing strategy for 2003, and $2,633,880 for Coatings, Sealants and Other Products. The cost of sales as a percent of revenue for the Application Systems, excluding the inventory adjustment, is 92% and 71% for the Coatings, Sealants and Other Products.
Selling, General and Administrative Expenses: Our selling, general and administrative expenses for the year ended December 31, 2002 was $9,770,869 as compared to $7,155,729 for the year ended December 31, 2003. The decrease of $2,615,140 is attributable to the strategic organizational initiative undertaken in the second half of 2003. The majority of the reductions are reflected in the following areas: personnel and personnel related costs decreased by $1,032,674; marketing, advertising, travel, and conventions resulted in savings of $1,006,629 and shareholder relations, communications, insurance, bad debt, customer relations and other administrative expenses were reduced by $575,837.
Professional Fees: Our professional fees increased $108,872 from $581,414 for the year ended December 31, 2002 to $690,286 for the year ended December 31, 2003. This increase related to additional legal fees relating to litigation.
Depreciation and Amortization: Our depreciation and amortization expense for the year ended December 31, 2002 was $389,809 as compared to $671,567 for the year ended December 31, 2003 for an increase of $281,758. This change is attributable to an increase in the amortization of formula and patent costs, which was determined to be fully amortizable at December 31, 2003, and resulted in an increase in amortization expense of 274,698 and an increase in depreciation of $7,060.
Research and Development: Our research and development costs decreased $311,513 from $820,533 for the year ended December 31, 2002 to $509,020 for the year ended December 31, 2003. This reflects our transition to full sales and production and reallocation of resources for the entire calendar year. We remain committed to the continual development of new products and technology.
Consulting Fees: Our consulting fees for the year ended December 31, 2002 was $554,025 as compared to $192,206 for the year ended December 31, 2003 for a decrease of $361,819. There was a reduction in fees paid for professional advice and services.
Interest Expense: Our interest expense increased $53,863 from $63,814 for the year ended December 31, 2002 to $117,677 for the year ended December 31, 2003. The increase is due to additional short term loans from the Chairman of the Board which were later converted to equity.
Loss on Disposal of and Asset Impairment: We had Goodwill relating to the acquisition of a subsidiary, Infiniti Products, Inc., in 2001. Management evaluated the fair market value of this asset as required and determined that there was impairment at December 31, 2003. We consider relevant cash flow and profitability information, including estimated future operating results, trends, and other available information, in assessing whether the carrying value of the intangible assets can be recovered. As a result, a charge of $837,011 for the impairment of the asset was recorded and is reflected on the Consolidated Statement of Operations. We also had a loss on the disposal of obsolete machinery and equipment in the amount of $96,297 in 2002 and $290,749 in 2003. In addition, the net book value of certain fixed assets was reduced by $322,641.
Discontinued Operations: During 2002, the Company evaluated all circumstances and that a period of five years had passed since any material communication relating to commitments and contingencies of our discontinued operations. Accordingly, the Company decided that a commitments and contingency reserve was no longer required for these discontinued operations. Therefore, the Income (Loss) From Discontinued Operations reflected on the Consolidated Statement of Operations are $0 and $599,601 for December 31, 2003 and 2002 respectively.
Liquidity and Capital Resources
We had $42,718 of cash on hand at December 31, 2003 reflecting an increase of $1,198 when compared to the $41,520 of cash on hand at December 31, 2002. The cash on hand at December 31, 2001 was $519,225.
The cash required by operations for 2003 was $6,974,725 which was attributable to our net loss for the year, which was offset by increases in accounts payable and accrued expenses, decreases in accounts receivable, inventory, the offset of non-cash related operating expenses, and the elimination of non-cash expenses for consulting, legal fees, settlements and employee compensation. The cash required by operations for 2002 and 2001 was $9,462,026 and $5,437,184, respectively, and was a result of our net loss and increase in inventory which was partially offset by non-cash expenses for consulting, legal fees, settlements, and employee compensation.
The cash used in investing activities was $75,029 for the year ended December 31, 2003 as compared to $996,430 for the year ended December 31, 2002 reflecting a decrease of $921,401. The net cash required for capital expenditures in the current year was $85,947 for the purchase of machinery and equipment for new product development, demonstrations, support of our customers, and leasehold improvements made in order to consolidate our operations. The net capital expenditures were $794,632 in 2002 and $652,645 in 2001.
We also used $728,903 of cash in the acquisition of our wholly owned subsidiary, Infiniti Products, Inc. in 2001. This acquisition expanded our product line to include a broader base of proprietary products and other products in addition to providing an initial internal distribution source for our RSM Series™ Flagship Products.
The cash provided from financing activities was $7,050,952 for the year ended December 31, 2003 as compared to $9,980,751 for the year ended December 31, 2002 and $7,378,142 for 2001. The primary source of cash for each year is attributable to the issuance of common and preferred stock, and proceeds of loans from the Chairman of the Board.
We currently do not have the liquidity or capital resources to fund our operations without raising capital either from borrowing or from the sale of additional shares of stock. Further financing through short-term loans and/or the private sale of our common and preferred stock to accredited sophisticated investors is anticipated. If adequate funds are not available when needed, our business, operations, financial condition and future prospects will be materially adversely affected. We estimate that approximately $4.25 million will be required for us to continue our operations in 2004.
Although no formal commitment has been received from the Chairman of the Board to fund the Company’s operating requirements for the 2004 year, we have received for the period beginning as of January 1, 2004 through March 4, 2004, loans amounting to $920,000 from the Chairman of the Board, which are bearing interest at 9% per annum. In addition, the Company is seeking to raise cash proceeds of at least $4,000,000 privately, on a best efforts basis, pursuant to a private placement offering, however, there can be no assurance as to the availability or terms upon which such financing and capital might be available. The Company’s ability to continue as a going concern will be dependent on management’s ability to successfully execute its business plan including an increase in revenue, decrease in operating costs and expenses, and seeking additional forms of debt and/or equity financing. See Part II, Item 8 – Financial Statements and Supplementary Data and Notes to Consolidated Financial Statements, Note 2. Going-Concern Issues Arising from Recurring Losses and Cash Flow Problems, for more information.
Year Ended December 31, 2002 as Compared to Year Ended December 31, 2001
Revenues
The following is a summary of revenues for the years ending December 31,
|
|
|
|
|
|
|
Development Stage
Operations |
|
|
|
|
2002 |
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
Application Systems |
|
$ |
1,314,515 |
|
$ |
490,000 |
|
$ |
--- |
|
|
Coatings, Sealants and Other Products |
|
|
3,701,130 |
|
|
765,292 |
|
|
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,015,645 |
|
$ |
1,255,292 |
* |
$ |
--- |
|
|
|
|
|
|
|
|
|
|
* During the year we acquired a roofing contracting company, Rainguard Roofing, primarily to field-test our Flagship Products, and to generate revenue. The revenue generated by this subsidiary was $1,352,463. The revenue earned by this subsidiary was previously reported as part of our total revenue. This amount does not include revenue from our contracting services of $1,352,463, which was discontinued, effective December 31, 2001. The combined revenue of Application Systems, Coatings, Sealants and Other Products, and contracting services totaled $2,607,755. As a result of successfully field testing our products and in response to our future customers, who are roofing contractors, management decided to discontinue operations of Rainguard Roofing effective for the year ended December 31, 2001. The total net activity of these discontinued operations is reflected in the (Loss) From Discontinued Operations on the Consolidated Statement of Operations.
We reported revenue for the year ended December 31, 2002 of $5,015,645 as compared to $1,255,292 for the year ended December 31, 2001. The revenue generated from sales of our Application Systems was $1,314,515, which represented 26% of our revenue, as compared to $490,000 in 2001, which was 39% of our revenue, while sales from Coatings, Sealants and Other Products was $3,701,130, which represented 74% of our revenue, as compared to $765,292 in 2001, which was 61% of our revenue.
The increase of $824,515 from Application Systems was primarily due to having a full year of selling this product as compared to a partial year in 2001. The increase of $2,935,838 from Coatings, Sealants and Other Products is broken out as follows: a) $1,764,869 is related to a full year of revenue being reflected from our acquisition of Infiniti Products, Inc. as compared to four months in 2001 (See Note 4. Acquisition, in the Notes to Consolidated Financial Statements, for pro forma information); and b) $1,170,969 is related to a full year of selling our RSM-100™ as compared to a few months in 2001. In response to certain market and economic conditions we refined our pricing strategy for our Flagship Products for 2003.
This impacted our revenue per unit and gross profit for these products, but we anticipate that new products to be introduced in 2003 will provide additional revenue and improved margins. During the fourth quarter, we sold five (5) new Application Systems for a total of $357,500. This amount was offset by $280,000 for Application Systems returned, $70,000 for an Application System that was originally recorded as a sale, but due to additional commitments made to the customer, this sale had to be deferred, and additional selling adjustments for $33,936.
As a result of successfully field testing our RSM Series™ Flagship Products and in response to our future customers, who are roofing contractors, we decided to discontinue providing roof contracting services through our Rainguard Roofing Corporation subsidiary and divested these operations, effective for the year ended December 31, 2001. The total net activity of these discontinued operations is reflected in the (Loss) From Discontinued Operations on the Consolidated Statement of Operations.
Cost and Expenses
Our total cost and expenses are comprised of cost of sales, selling, general and administrative expenses, professional fees, depreciation and amortization, research and development, consulting fees, and interest expense. These total costs and expenses increased from $7,697,640 for the year ended December 31, 2001 to $16,458,981 for the year ended December 31, 2002 for an increase of $8,761,341. The increase is due to the Company having a full year of sales and distribution of its Application Systems and Coatings, Sealants and Other Products.
Cost of Sales: Our cost of sales for the year ended December 31, 2001 was $1,060,890 and is comprised of $1,035,311 of direct product costs and $25,579 of warranty costs, freight and other cost of sales. Direct cost for Application Systems was $426,606 or 87% as a percent of related revenue, and $608,705 for Coatings, Sealants and Other Products or 80% of related revenue. This is compared to $4,182,220 for the year ended December 31, 2002 and is comprised of $3,958,828 of direct product costs, which includes introductory offers and customer service, support, and training costs, and $223,392 of warranty costs, freight and other costs of sales. Direct cost for the Application Systems was $1,324,948, which includes an $117,000 adjustment to inventory relating to the new pricing strategy for 2003, and $2,633,880 for Coatings, Sealants and Other Products. The cost of sales as a percent of revenue for the Application Systems, excluding the inventory adjustment, is 92% and 71% for the Coatings, Sealants and Other Products.
Selling, General and Administrative Expenses: Our selling, general and administrative expenses for the year ended December 31, 2002 were $9,770,869 as compared to $2,899,297 for the year ended December 31, 2001. The increase of $6,871,572 is attributable to us introducing our RSM Series™ Flagship Products to the marketplace. This required an increase of personnel and personnel related costs of $2,849,446 for production, testing, technical support, and sales; $862,823 for insurance, communications, shareholder relations, and listing fees; $883,421 for products provided to complete key projects, reserve against notes issued on internally financed Application Systems, and bad debt reserve and expense; $772,784 for other overhead expenses; and $1,503,098 for marketing, advertising, travel, conventions, show booth and related materials required to build brand awareness, and distribution. In addition, we updated our comprehensive sales and marketing program, including our web site, product brochures, literature pieces, and corporate video.
Professional Fees: Our professional fees increased $313,385 from $268,029 for the year ended December 31, 2001 to $581,414 for the year ended December 31, 2002. This increase related to services that were outsourced during the year that had previously been handled internally. Additional legal, including litigation, accounting and professional services were also required for major issues we dealt with during the year such as private placement documentation.
Depreciation and Amortization: Our depreciation and amortization expense for the year ended December 31, 2002 was $389,809 as compared to $402,240 for the year ended December 31, 2001 for a decrease of $12,431. The decrease is attributable to the disposal of certain property and equipment which was partially offset by amortization of patent development costs.
Research and Development: Our research and development costs decreased $429,680 from $1,250,213 for the year ended December 31, 2001 to $820,533 for the year ended December 31, 2002. This reflects our transition to full sales and production and reallocation of resources for the entire calendar year. We remain committed to the continual development of new products and technology.
Consulting Fees: Our consulting fees for the year ended December 31, 2001 was $734,273 as compared to $554,025 for the year ended December 31, 2002 for a decrease of $180,248. This includes fees paid to related parties for professional advice and services.
Interest Expense: Our interest expense decreased $105,394 from $169,208 for the year ended December 31, 2001 to $63,814 for the year ended December 31, 2002. The decrease is due to the reduction of total liabilities over the year.
Loss on Disposal of and Asset Impairment: We had Goodwill relating to the acquisition of a subsidiary, Urecoats International, Inc., in 1997. Management evaluated the fair market value of this asset as required and determined that there was no value at December 31, 2001. Therefore, a charge of $913,490 for the impairment of the asset was recorded and is reflected on the Consolidated Statement of Operations. We also had a loss on the disposal of obsolete property and equipment in the amount of $96,297 in 2002.
Discontinued Operations: During 2001, we acquired a roofing contracting company, Rainguard Roofing Corporation, primarily to field-test our RSM Series™ Flagship Products, and to generate revenues. As a result of the successful field testing of these products and in response to our future customers who are roofing contractors, management decided to discontinue these operations, effective for the year ended December 31, 2001. The total net activity is reflected in the (Loss) From Discontinued Operations on the Consolidated Statement of Operations in the amount of $(1,662,183).
Contractual Obligations
|
|
|
Payments Due By Period |
|
|
|
|
|
|
|
Contractual Obligations |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt Obligations |
|
$ |
42,080 |
|
$ |
52,349 |
|
$ |
--- |
|
$ |
--- |
|
$ |
94,429 |
|
|
Operating Lease Obligations |
|
|
173,427 |
|
|
188,871 |
|
|
--- |
|
|
--- |
|
|
362,298 |
|
|
Purchase Obligations |
|
|
192,835 |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
408,342 |
|
$ |
|
|
$ |
--- |
|
$ |
--- |
|
$ |
649,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification
Our Restated Certificate of Incorporation, as amended, provides that we will indemnify, to the fullest extent permitted by the Delaware General Corporation Law, each person that is involved in or is, or is threatened to be, made a party to any action, suit or proceeding by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of Urecoats or was serving at our request as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise. We have purchased insurance policies covering personal injury, property damage and general liability intended to reduce our exposure for indemnification and to enable us to recover a portion of any future amounts paid.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
We do not issue or invest in financial instruments or their derivatives for trading or speculative purposes. Our operations are conducted presently in the United States, and, as such, we are not subject to foreign currency exchange risks. Although we have outstanding debt and related interest expense, market risk in interest rate exposure in the United States is currently not material to our operations.
Item 8.Financial Statements and Supplementary Data.
The information required by this Item is incorporated herein by reference to the financial statements set forth in Item 15(a) of Part IV of this amended report.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our management, including our Principal Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2003, the end of the annual period covered by this amended report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this amended report. In the course of our evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken.
Based on the foregoing, our Principal Executive Officer and our Chief Financial Officer concluded that, as of the period covered by this amended report, our disclosure controls and procedures were effective and were operating at the reasonable assurance level. There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.
PART III
Item 10. Directors and Executive Officers of our Company.
The information in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2004 Proxy Statement is incorporated herein by reference.
The information in the section entitled “Code of Business Conduct and Ethics” in the 2004 Proxy Statement is incorporated herein by reference.
The information with respect to our executive officers is included in Item 4(A) on page 8 of this report.
Item 11. Executive Compensation.
The information to be included in the sections entitled “Executive Compensation” and “Director Compensation” in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information to be included in the section entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in the 2004 Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information to be included in the sections entitled “Certain Relationships and Related Transactions” and “Compensation Committee Interlocks and Insider Participation” in the 2004 Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information to be included in the section entitled “Independent Auditor Fees” in the 2004 Proxy Statement is incorporated herein by reference.
PART IV
Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)Index to Financial Statements
1.Financial Statements included in Part II of this amended report:
|
|
|
Page |
|
|
|
|
|
|
Consolidated Balance Sheets at December 31, 2003 and December 31, 2002 |
|
F-1 to F-2 |
|
|
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001 |
|
F-3 |
|
|
Consolidated Statements of Stockholders' Equity(Deficit) for the years ended December 31, 2003, 2002, and 2001 |
|
F-4 to F-6 |
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001 |
|
F-7 to F-8 |
|
|
Notes to Consolidated Financial Statements |
|
F-9 to F-27 |
|
|
Report of Management |
|
F-28 |
|
|
Independent Auditors' Report |
|
F-29 |
|
All other schedules have been omitted for the reason that the required information is presented in financial statements or notes thereto, the amounts involved are not significant or the schedules are not applicable.
(b)Reports on Form 8-K
None.
(c)Item 601 Exhibits
Reference is made to the Index of Exhibits beginning at page 18 of this amended report.
(d)Other Financial Statements
There are no financial statements required to be filed by Regulation S-X which are excluded from this amended report by Rule 14 a-3(b)(1).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Date: April 26, 2004 |
URECOATS INDUSTRIES INC. |
|
|
|
|
|
|
|
|
By: |
|
| |
|
|
|
Michael T. Adams |
|
|
President |
|
Date: April 26, 2004 |
URECOATS INDUSTRIES INC. |
|
|
|
|
|
|
|
|
By: |
|
| |
|
|
|
Dennis A. Dolnick |
|
|
Chief Financial Officer and Treasurer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Date: April 26, 2004 |
By: |
/s/ Richard J. Kurtz |
|
|
|
|
|
Richard J. Kurtz |
|
|
Chairman of the Board |
|
Date: April 26, 2004 |
By: |
/s/ Arthur J. Gregg |
|
|
|
|
|
Arthur J. Gregg |
|
|
Director |
|
Date: April 27, 2004 |
By: |
/s/ Steven Mendelow |
|
|
|
|
|
Steven Mendelow |
|
|
Director |
|
Date: April 26, 2004 |
By: |
/s/ Jerold L. Zaro |
|
|
|
|
|
Jerold L. Zaro |
|
|
Director |
|
Date: April 26, 2004 |
By: |
/s/ Mark A. Reichenbaum |
|
|
|
|
|
Mark A. Reichenbaum |
|
|
Director |
INDEX OF EXHIBITS
|
Exhibit Number |
|
Description |
|
|
|
|
|
3.1 |
|
Restated Certificate of Incorporation of the Company as filed with the State of Delaware on June 16, 1994 (incorporated by reference to Exhibit 3.1 to Form 10-KSB for the year ended December 31, 1998, filed April 16, 1999). |
|
3.2 |
|
Certificate of Amendment of Certificate of Incorporation dated February 12, 1999 of the Company as filed with the State of Delaware on February 12, 1999 (incorporated by reference to Exhibit 3.2 to Form 10-KSB for the year ended December 31, 1998, filed April 16, 1999). |
|
3.3 |
|
Certificate of Amendment of Certificate of Incorporation dated May 28, 2002 of the Company as filed with the State of Delaware on May 28, 2002 (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended June 30, 2002, filed August 19, 2002). |
|
3.4 |
|
Proforma Restated Certificate of Incorporation, as amended, and currently in effect, of the Company (incorporated by reference to Exhibit 3.4 to Form 10-K/A for the year ended December 31, 2002, filed April 30, 2003). |
|
3.5 |
|
By-laws of the Company (incorporated by reference to Exhibit 3(ii) to Form 10-KSB for the year ended December 31, 2000, filed March 30, 2001). |
|
3.6 |
|
Amendments to By-laws of the Company (incorporated by reference to Item 5. Other Information, Amendments to By-laws, to Form 10-Q for the quarter ended September 30, 2001, filed November 14, 2001). |
|
3.7 |
|
By-laws, as amended July 31, 2003, and currently in effect, of the Company (incorporated by reference to Exhibit 3(ii) to Form 10-Q for the quarter ended June 30, 2003, filed August 14, 2003). |
|
4.1 |
|
Certificate of Designation of Preferences of Series B Convertible Preferred Stock dated September 30, 2001 as filed with the State of Delaware on November 2, 2001 (incorporated by reference to Exhibit 3.1 to Form 8-K dated September 30, 2001, filed October 25, 2001). |
|
4.2 |
|
Amendment to Certificate of Designation of Preferences of Series B Convertible Preferred Stock dated December 31, 2001 (incorporated by reference to Exhibit 3.1.1 to Form 8-K dated December 31, 2001, filed January 31, 2002). |
|
4.3 |
|
Certificate of Designation of Preferences of Series C Convertible Preferred Stock dated January 8, 2002 as filed with the State of Delaware on February 28, 2002 (incorporated by reference to Exhibit 3.2 to Form 8-K dated January 8, 2002, filed January 31, 2002). |
|
10.1 |
|
1998 Employee and Consultant Stock Option Plan (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8 No. 333-44971, filed January 27, 1998). |
|
10.2 |
|
1999 Consultant and Employee Stock Purchase and Option Plan (incorporated by reference to Exhibit 99.1 to Form 10-KSB for the year ended December 31, 1998, filed April 16, 1999). |
|
10.3 |
|
1999 Consultant and Employee Stock Purchase and Option Plan, as amended (incorporated by reference to Exhibit 99.2 to Form 10-KSB for the year ended December 31, 1998, filed April 16, 1999). |
|
10.4 |
|
2000 Stock Purchase and Option Plan (incorporated by reference to Exhibit (10) to Registration Statement on Form S-8 No. 333-51026, filed November 30, 2000). |
|
10.5 |
|
2002 Stock Option Plan (incorporated by reference to Annex D to Definitive Proxy Statement, filed April 30, 2002). |
|
10.6 |
|
2002 Executive Incentive Plan (incorporated by reference to Annex E to Definitive Proxy Statement, filed April 30, 2002). |
|
10.7 |
|
2002 Management Incentive Plan (incorporate by reference to Annex F to Definitive Proxy Statement, filed April 30, 2002). |
|
10.8 |
|
2002 Non-Employee Director Restricted Stock Plan (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2002, filed August 19, 2002). |
|
10.9 |
|
Securities Purchase Agreement dated September 30, 2001 between the Company and Richard J. Kurtz (incorporated by reference to Exhibit 10.1 to Form 8-K dated September 30, 2001, filed October 25, 2001). |
|
10.10 |
|
Amendment to Securities Purchase Agreement dated September 30, 2001 between the Company and Richard J. Kurtz dated January 4, 2002 (incorporated by reference to Exhibit 10.1.1 to Form 8-K date December 31, 2001, filed January 31, 2002). |
|
10.11 |
|
Securities Purchase Agreement dated December 31, 2001 between the Company and Richard J. Kurtz (incorporated by reference to Exhibit 10.2 to Form 8-K dated December 31, 2001, filed January 31, 2002). |
|
10.12 |
|
Employment Agreement, effective January 1, 2002, between Timothy M. Kardok and the Company (incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
|
10.13 |
|
Employment Agreement, effective January 1, 2002, between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
|
10.14 |
|
Employment Agreement, effective January 1, 2002, between John G. Barbar and the Company (incorporated by reference to Exhibit 10.6 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
|
10.15 |
|
Employment Agreement, effective January 1, 2002, between Arthur K. Guyton and the Company (incorporated by reference to Exhibit 10.7 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
|
10.16 |
|
Employment Agreement, effective January 1, 2002, between Ronald E. Clark and the Company (incorporated by reference to Exhibit 10.8 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
|
10.17 |
|
Employment Agreement, effective September 1, 2002 between Dale L. Epperson and the Company (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2002, filed November 14, 2002). |
|
10.18 |
|
Series C Preferred Stock Option Agreement dated January 8, 2002 between Richard J. Kurtz and the Company (incorporated by reference to Exhibit 10.3 to Form 8-K dated January 8, 2002, filed January 31, 2002). |
|
10.19 |
|
Restricted Stock Option Agreement, effective January 1, 2003 between Timothy M. Kardok and the Company (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2003, filed May 15, 2003). |
|
10.20 |
|
Restricted Stock Option Agreement, effective January 1, 2003 between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2003, filed May 15, 2003). |
|
10.21 |
|
Restricted Stock Option Agreement, effective January 1, 2003 between John G. Barbar and the Company (incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2003, filed May 15, 2003). |
|
10.22 |
|
Restricted Stock Option Agreement, effective January 1, 2003 between Arthur K. Guyton and the Company (incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2003, filed May 15, 2003). |
|
10.23 |
|
Restricted Stock Option Agreement, effective January 1, 2003 between Ronald E. Clark and the Company (incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended March 31, 2003, filed May 15, 2003). |
|
10.24 |
|
Series C Preferred Stock Option Agreement dated March 21, 2003 between Richard J. Kurtz and the Company (incorporated by reference to Exhibit 10.6 to Form 10-Q for the quarter ended March 31, 2003, filed May 15, 2003). |
|
14.1 |
|
Code of Ethics adopted by the Company on March 28, 2003 (incorporated by reference to Exhibit 14.1 to Form 10-K for the year ended December 31, 2003, filed March 31, 2003). |
|
21 |
|
List of Subsidiaries of the Company (incorporated by reference to Exhibit 21 to Form 10-K for the year ended December 31, 2003, filed March 12, 2004). |
|
23 |
|
Consent of Baum & Company, P.A. to the incorporation of their Independent Auditors’ Report herein. |
|
31.1 |
|
|
|
31.2 |
|
|
|
32 |
|
|
URECOATS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
As of December 31, |
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
42,718 |
|
$ |
41,520 |
|
|
|
Accounts Receivable |
|
|
438,822 |
|
|
604,945 |
|
|
|
Inventory (Note 5) |
|
|
743,104 |
|
|
1,416,674 |
|
|
|
Prepaid Expenses and Other Current Assets |
|
|
30,499 |
|
|
204,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
1,255,143 |
|
|
2,267,665 |
|
|
|
|
|
|
|
|
|
|
|
|
Machinery & Equipment, Net (Note 6) |
|
|
600,414 |
|
|
1,514,063 |
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
|
Intangibles, Net (Note 7) |
|
|
774,000 |
|
|
1,879,433 |
|
|
|
Notes Receivable |
|
|
22,693 |
|
|
348,412 |
|
|
|
Deposits and Other Non-Current Assets |
|
|
46,946 |
|
|
139,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets |
|
|
843,639 |
|
|
2,367,056 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,699,196 |
|
$ |
6,148,784 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
URECOATS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
|
|
|
|
As of December 31, |
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity (Deficit) |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
Accounts Payable and Accrued Expenses (Note 8) |
|
$ |
4,309,888 |
|
$ |
3,187,449 |
|
|
|
Current Maturities of Long-Term Debt (Note 9) |
|
|
42,080 |
|
|
105,257 |
|
|
|
Lines of Credit (Note 10) |
|
|
797,047 |
|
|
739,027 |
|
|
|
Deferred Income (Note 12) |
|
|
7,500 |
|
|
70,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
5,156,515 |
|
|
4,101,733 |
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt (Note 9) |
|
|
52,349 |
|
|
45,427 |
|
|
Due to Related Party |
|
|
60,000 |
|
|
--- |
|
|
Commitments and Contingencies (Notes 3, 13) |
|
|
--- |
|
|
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
5,268,864 |
|
|
4,147,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity (Deficit): |
|
|
|
|
|
|
|
|
|
Preferred Stock, $1.00 Par Value; 2,000,000 Shares Authorized, of |
|
|
|
|
|
|
|
|
|
|
which Designations: (Notes 11, 15, 17, 19) |
|
|
|
|
|
|
|
|
|
Series A Convertible, 750,000 Shares Authorized; 62,500 Issued and Outstanding |
|
|
|
|
|
|
|
|
|
|
at December 31, 2003 and 2002; aggregate liquidation preference at December 31, 2003 and 2002 of $62,500 |
|
|
55,035 |
|
|
55,035 |
|
|
|
Series B Convertible, 500,000 Shares Authorized; 500,000 Issued and Outstanding |
|
|
|
|
|
|
|
|
|
|
at December 31, 2002; aggregate liquidation preference of $2,618,916 at December 31, 2002 |
|
|
--- |
|
|
500,000 |
|
|
|
Series C Convertible, 750,000 Shares Authorized; 673,145 and 414,781 Issued and |
|
|
|
|
|
|
|
| |
|
Outstanding at December 31, 2003 and 2002, respectively; aggregate liquidation of |
|
|
|
|
|
|
|
|
|
|
$14,026,309 and $8,455,472 at December 31, 2003 and 2002, respectively |
|
|
673,145 |
|
|
414,781 |
|
|
|
Common Stock, $.01 Par Value; 40,000,000 Shares Authorized, 16,458,375 and |
|
|
|
|
|
|
|
|
|
|
14,071,254 Issued and outstanding at December 31, 2003 and 2002, respectively |
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital |
|
|
52,114,399 |
|
|
44,696,841 |
|
|
|
Accumulated Deficit |
|
|
|
) |
|
(43,805,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity (Deficit) |
|
|
(2,569,668 |
) |
|
2,001,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity (Deficit) |
|
$ |
2,699,196 |
|
$ |
6,148,784 |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
URECOATS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
Year Ended December 31 |
|
| |
|
|
|
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
Application Systems |
|
$ |
492,700 |
|
$ |
1,314,515 |
|
$ |
490,000 |
|
|
|
Coatings, Sealants and Other Products |
|
|
3,484,156 |
|
|
3,701,130 |
|
|
765,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
3,976,856 |
|
|
5,015,645 |
|
|
1,255,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales: |
|
|
|
|
Application Systems |
|
|
431,550 |
|
|
1,324,948 |
|
|
426,606 |
|
|
|
Coatings, Sealants and Other Products |
|
|
2,517,385 |
|
|
2,633,880 |
|
|
608,705 |
|
|
|
Warranty Costs, Freight and Other Cost of Sales |
|
|
1,514,119 |
|
|
223,392 |
|
|
25,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales |
|
|
4,463,054 |
|
|
4,182,220 |
|
|
1,060,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss) |
|
|
(486,198 |
) |
|
833,425 |
|
|
194,402 |
|
|
|
|
Operating Expenses: |
|
|
|
|
Selling, General and Administrative |
|
|
7,155,729 |
|
|
9,770,869 |
|
|
2,899,297 |
|
|
|
Professional Fees |
|
|
690,286 |
|
|
581,414 |
|
|
268,029 |
|
|
|
Depreciation and Amortization |
|
|
671,567 |
|
|
389,809 |
|
|
402,240 |
|
|
|
Research and Development |
|
|
509,020 |
|
|
820,533 |
|
|
1,250,213 |
|
|
|
Consulting Fees |
|
|
192,206 |
|
|
554,025 |
|
|
734,273 |
|
|
|
Interest Expense |
|
|
117,677 |
|
|
63,814 |
|
|
169,208 |
|
|
|
Impairment of Assets |
|
|
837,011 |
|
|
--- |
|
|
913,490 |
|
|
|
Loss on Disposal of and Reduction in Value of Machinery and Equipment |
|
|
613,390 |
|
|
96,297 |
|
|
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
10,786,886 |
|
|
12,276,761 |
|
|
6,636,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
|
(11,273,084 |
) |
|
(11,443,336 |
) |
|
(6,442,348 |
) |
|
|
|
Income (Loss) From Discontinued Operations (Note 3) |
|
|
--- |
|
|
599,601 |
|
|
(1,473,637 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(11,273,084 |
) |
$ |
(10,843,735 |
) |
$ |
(7,915,985 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Per Common Share-Basic and Diluted |
|
|
|
|
Continuing Operations |
|
$ |
(0.771 |
) |
|
(0.860 |
) |
$ |
(0.560 |
) |
|
|
Discontinued Operations |
|
|
--- |
|
|
0.044 |
|
|
(0.127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(0.771 |
) |
|
(0.816 |
) |
$ |
(0.687 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
15,264,815 |
|
|
13,605,769 |
|
|
15,536,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
URECOATS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
Preferred Stock Amounts |
|
|
|
|
|
|
|
|
|
Series A |
|
Series B |
|
Series C |
|
Par Value |
|
|
As of the Year Ended |
|
Shares |
|
Shares |
|
Shares |
|
$1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2001 |
|
|
62,500 |
|
|
500,000 |
|
|
--- |
|
$ |
555,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock |
|
|
--- |
|
|
--- |
|
|
--- |
|
$ |
--- |
|
|
Issuance of Common Stock |
|
|
--- |
|
|
--- |
|
|
--- |
|
$ |
--- |
|
|
Issuance of Preferred Stock |
|
|
--- |
|
|
--- |
|
|
423,281 |
|
$ |
423,281 |
|
|
Conversion of Preferred Stock to Common Stock |
|
|
--- |
|
|
--- |
|
|
(8,500 |
) |
$ |
(8,500 |
) |
|
Net Loss |
|
|
--- |
|
|
--- |
|
|
--- |
|
$ |
--- |
|
|
Accrued Dividend on Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other Adjustments |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2002 |
|
|
62,500 |
|
|
500,000 |
|
|
414,781 |
|
$ |
969,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
Issuance of Preferred Stock |
|
|
--- |
|
|
--- |
|
|
264,614 |
|
|
264,614 |
|
|
Conversion of Prefer red Stock to Common Stock |
|
|
--- |
|
|
(500,000 |
) |
|
(6,250 |
) |
|
(506,250 |
) |
|
Net Loss |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
Accrued Dividend on Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other Adjustments |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003 |
|
|
62,500 |
|
|
--- |
|
|
673,145 |
|
|
728,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
URECOATS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
|
|
|
Common Stock Amounts |
|
Additional |
|
|
|
|
|
|
|
|
|
|
Subscriptions |
|
|
As of the Year Ended |
|
Shares |
|
Par Value$.01 |
|
|
|
Receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2001 |
|
|
13,140,283 |
|
$ |
131,403 |
|
$ |
35,575,058 |
|
$ |
(1,200,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock |
|
|
869,521 |
|
$ |
8,695 |
|
$ |
1,071,559 |
|
$ |
--- |
|
|
Issuance of Common Stock |
|
|
--- |
|
$ |
--- |
|
$ |
--- |
|
$ |
1,200,000 |
|
|
Issuance of Preferred Stock |
|
|
--- |
|
$ |
--- |
|
$ |
8,042,339 |
|
$ |
--- |
|
|
Conversion of Preferred Stock to Common Stock |
|
|
61,450 |
|
|
615 |
|
|
7,885 |
|
$ |
--- |
|
|
Net Loss |
|
|
--- |
|
$ |
--- |
|
$ |
--- |
|
$ |
--- |
|
|
Accrued Dividend on Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other Adjustments |
|
|
--- |
|
$ |
--- |
|
$ |
--- |
|
$ |
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2002 |
|
|
14,071,254 |
|
$ |
140,713 |
|
$ |
44,696,841 |
|
$ |
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock |
|
|
1,593,996 |
|
$ |
15,940 |
|
$ |
1,891,787 |
|
|
--- |
|
|
Issuance of Preferred Stock |
|
|
--- |
|
$ |
--- |
|
$ |
5,027,666 |
|
|
--- |
|
|
Conversion of Preferred Stock to Common Stock |
|
|
793,125 |
|
$ |
7,931 |
|
$ |
498,319 |
|
|
--- |
|
|
Net Loss |
|
|
--- |
|
$ |
--- |
|
$ |
--- |
|
|
--- |
|
|
Accrued Dividend on Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other Adjustments |
|
|
--- |
|
$ |
--- |
|
$ |
(214 |
) |
|
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003 |
|
|
16,458,375 |
|
$ |
164,584 |
|
$ |
52,114,399 |
|
$ |
--- |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
URECOATS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
As of the Year Ended |
|
Deficit |
|
Total |
|
|
|
|
|
|
|
|
|
December 31, 2001 |
|
$ |
(32,702,377 |
) |
$ |
2,359,119 |
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock |
|
|
--- |
|
|
1,080,254 |
|
|
Issuance of Common Stock |
|
|
--- |
|
|
1,200,000 |
|
|
Issuance of Preferred Stock |
|
|
--- |
|
|
8,465,620 |
|
| Conversion of Preferred Stock to Common Stock |
|
|
--- |
|
|
--- |
|
|
Net Loss |
|
|
(10,843,735 |
) |
|
(10,843,735 |
) |
|
Accrued Dividend on Preferred Stock |
|
|
|
|
|
|
|
|
|
and Other Adjustments |
|
|
(259,634 |
) |
|
(259,634 |
) |
|
|
|
|
|
|
|
|
|
December 31, 2002 |
|
$ |
(43,805,746 |
) |
$ |
2,001,624 |
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock |
|
|
--- |
|
|
1,907,727 |
|
|
Issuance of Preferred Stock |
|
|
--- |
|
|
5,292,280 |
|
|
Conversion of Preferred Stock to Common Stock |
|
|
--- |
|
|
--- |
|
|
Net Loss |
|
|
(11,273,084 |
) |
|
(11,273,084) |
|
|
Accrued Dividend on Preferred Stock |
|
|
|
|
|
|
|
|
|
and Other Adjustments |
|
|
(498,001 |
) |
|
(498,215 |
) |
|
|
|
|
|
|
|
|
|
December 31, 2003 |
|
$ |
(55,576,831 |
) |
$ |
(2,569,668 |
) |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
URECOATS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
|
) |
$ |
|
) |
$ |
|
) |
|
|
Adjustments to Reconcile Net Loss to Net Cash Used In |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
671,567 |
|
|
389,809 |
|
|
402,240 |
|
|
|
|
Impairment of Goodwill |
|
|
837,011 |
|
|
--- |
|
|
913,490 |
|
|
|
|
Commitments and Contingencies |
|
|
--- |
|
|
(600,622 |
) |
|
--- |
|
|
|
|
Disposition and Reduction in Value of Machinery and Equipment |
|
|
613,390 |
|
|
217,787 |
|
|
--- |
|
|
|
|
Purchases of Cost of Goods Sold |
|
|
640,688 |
|
|
--- |
|
|
--- |
|
|
|
Non-Cash Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Board of Director Fees |
|
|
174,000 |
|
|
23,625 |
|
|
78,750 |
|
|
|
|
Interest |
|
|
65,913 |
|
|
37,620 |
|
|
80,839 |
|
|
|
|
Legal Fees, Settlements and Other Services |
|
|
6,000 |
|
|
54,750 |
|
|
416,493 |
|
|
|
|
Consultant Fees |
|
|
--- |
|
|
160,575 |
|
|
487,136 |
|
|
|
|
Other Compensation |
|
|
42,094 |
|
|
270,690 |
|
|
643,106 |
|
|
|
Changes in Assets and Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) Decrease in Prepaid Expenses |
|
|
110,423 |
|
|
57,281 |
|
|
(132,777 |
) |
|
|
|
(Increase) Decrease in Accounts and Loans Receivable |
|
|
166,124 |
|
|
449,647 |
|
|
(534,299 |
) |
|
|
|
(Increase) Decrease in Inventory |
|
|
325,943 |
|
|
(1,073,228 |
) |
|
(187,007 |
) |
|
|
|
(Increase) Decrease in Other Current Assets |
|
|
1,484 |
|
|
(36,542 |
) |
|
(52,241 |
) |
|
|
|
Increase in Accounts Payable and Accrued Expenses |
|
|
636,222 |
|
|
1,360,317 |
|
|
483,388 |
|
|
|
|
(Increase) Decrease in Deferred Income |
|
|
7,500 |
|
|
70,000 |
|
|
(50,000 |
) |
|
|
|
Decrease in Commitments and Contingencies |
|
|
--- |
|
|
--- |
|
|
(70,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities |
|
|
(6,974,725 |
) |
|
(9,462,026 |
) |
|
(5,437,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Machinery and Equipment |
|
|
(85,947 |
) |
|
(794,632 |
) |
|
(980,871 |
) |
|
|
Disposition of Machinery and Equipment |
|
|
--- |
|
|
--- |
|
|
328,226 |
|
|
|
Acquisition of Intangibles |
|
|
(16,939 |
) |
|
(91,962 |
) |
|
(784,362 |
) |
|
|
(Increase) Decrease of Deposits and Other Non-Current Assets |
|
|
27,857 |
|
|
(109,836 |
) |
|
(1,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities |
|
$ |
(75,029 |
) |
$ |
(996,430 |
) |
$ |
(1,438,731 |
) |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
URECOATS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the Issuance of Stock |
|
$ |
350,000 |
|
$ |
6,223,000 |
|
$ |
1,853,230 |
|
|
|
Proceeds from Notes and Lines of Credit |
|
|
1,649,938 |
|
|
2,846,753 |
|
|
1,079,797 |
|
|
|
Payments on Notes and Lines of Credit |
|
|
(1,648,173 |
) |
|
(2,615,590 |
) |
|
(899,502 |
) |
|
|
Proceeds from Loans from Related Parties |
|
|
6,610,000 |
|
|
3,875,000 |
|
|
5,344,617 |
|
|
|
Proceeds from (Issuance of) Notes Receivable |
|
|
89,187 |
|
|
(348,412 |
) |
|
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by F inancing Activities |
|
|
7,050,952 |
|
|
9,980,751 |
|
|
7,378,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) In Cash |
|
|
1,198 |
|
|
(477,705 |
) |
|
502,227 |
|
|
|
|
|
|
|
|
|
|
|
Cash at Beginning of Year |
|
|
41,520 |
|
|
519,225 |
|
|
16,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at End of Year |
|
$ |
42,718 |
|
$ |
41,520 |
|
$ |
519,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments for Income Taxes |
|
$ |
--- |
|
$ |
--- |
|
$ |
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments for Interest |
|
$ |
51,764 |
|
$ |
26,193 |
|
$ |
56,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
$ |
--- |
|
$ |
(100,000 |
) |
$ |
--- |
|
|
|
|
Acquisition of Subsidiaries |
|
|
--- |
|
|
--- |
|
|
(805,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non - Cash Investing Activities |
|
$ |
--- |
|
$ |
(100,000 |
) |
$ |
(805,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities |
|
$ |
288,007 |
|
$ |
547,260 |
|
$ |
1,706,324 |
|
|
|
|
Repayment of Debts |
|
|
6,550,000 |
|
|
3,875,000 |
|
|
7,872,747 |
|
|
|
|
Acquisition of Subsidiaries |
|
|
--- |
|
|
--- |
|
|
805,000 |
|
|
|
|
Capital Expenditures |
|
|
--- |
|
|
100,000 |
|
|
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Cash Financing Activities |
|
$ |
6,838,007 |
|
$ |
4,522,260 |
|
$ |
10,384,071 |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
URECOATS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies.
This summary of significant accounting policies is presented to assist in understanding these consolidated financial statements. The consolidated financial statements and notes are representations of management who is responsible for their integrity and objectivity. The accounting policies used conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of these consolidated financial statements.
Organization
The Company was incorporated in the state of Delaware on October 20, 1989 as Natural Child Collection, Inc. and changed its name to Natural Child Care, Inc. on January 14, 1991. In 1993, the Company underwent a recapitalization, reverse merger, discontinued its pre-merger Natural Child Care operations, changed its name to Winners All International, Inc. (October 27, 1993), and began post-merger random lottery operations. On January 29, 1997, a Special Meeting of the Board of Directors, recognized and resolved, that as a result of the permanent impairment of operational assets a measurement date of January 29, 1997 was established, to abandon the random lottery operations effective for the year ended July 31, 1995. On January 28, 1997, the Company acquired Urecoats International, Inc. (f/k/a Perma Seal International, Inc.) and began its current sealant and coating operations. On February 17, 1997, the Company changed its former fiscal year of July 31, to December 31. On February 8, 1999, the legal name of the Company was changed to Urecoats Industries Inc. The Company divested Urecoats International, Inc. upon completion of its sealant and coating development stage in 2000 and acquired Rainguard Roofing Corporation, a Florida corporation, which had minimal assets and liabilities, effective January 1, 2001, to commercialize its RSM Series™ products and generate revenues in the roofing and waterproofing contracting business. Rainguard Roofing Corporation was divested, effective December 31, 2001, as the Company began selling its RSM Series™ products direct to contractors. The Company currently operates two wholly-owned subsidiaries, RSM Technologies, Inc. (f/k/a Urecoats Manufacturing, Inc.) and Infiniti Products, Inc. (f/k/a Infiniti Paint Company, Inc.).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material inter-company items and transactions have been eliminated.
Business
The Company, through its subsidiaries, acquires, develops, markets, sells, manufactures, and distributes coatings, paints, sealants, and urethanes utilized in the waterproofing, corrosion, roofing and construction industries.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of accounts and notes receivable. The Company’s customers consist of contractors in the roofing industry and government agencies/municipalities. The Company performs credit evaluations of its customers’ financial condition and generally requires no collateral to secure accounts and notes receivable. The Company maintains a reserve for potentially uncollectible accounts and notes receivable based on its assessment of their collectibility.
Fair Value of Financial Instruments
The Company has adopted Statement of Financial Accounting Standards No. 107 "Disclosure About Fair Value of Financial Instruments", which requires the disclosure of the fair value of off-and-on balance sheet financial instruments. Unless otherwise indicated, the fair values of all reported assets and liabilities, which represent financial instruments (none of which are held for trading purposes), approximate the carrying values of such amounts.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Cash and Equivalents
The Company considers cash deposited with financial institutions and marketable securities with a maturity of three months or less at the date of acquisition to be cash and cash equivalents.
Inventories
Inventories are valued at the lower of cost (Application Systems) or average cost (all other inventory) versus market (net realizable value). Cost is determined by the first-in, first-out (FIFO) method.
Long-Lived Assets
Property, plant and equipment are stated at cost. Additions, major renewals and improvements are capitalized, while maintenance and repairs are expensed. Upon disposition, the net book value of assets is relieved and resulting gains or losses are reflected in earnings. For financial reporting purposes, depreciation is generally provided on the straight-line method over the useful life of the related asset. The useful lives for additions and betterments, range from three (3) years to five (5) years. Accelerated depreciation methods are generally used for income tax purposes. All long-lived assets are reviewed for impairment in value when changes in circumstances dictate, based upon undiscounted future operating cash flows, and appropriate losses are recognized and reflected in current earnings, to the extent the carrying amount of an asset exceeds its estimated fair value determined by the use of appraisals, discounted cash flow analyses or comparable fair values of similar assets.
Goodwill and Purchased Intangible Assets
Goodwill represents the excess of acquisition cost over the fair value of the assets of acquired businesses. Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") requires goodwill to be tested for impairment, on an annual basis and between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated lives to their estimated residual values, and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”, unless these lives are determined to be indefinite. Intangible assets include trademarks, core technology and product marketing and other rights which are being amortized over their estimated useful lives. The Company considers relevant cash flow and profitability information, including estimated future operating results, trends, and other available information, in assessing whether the carrying value of the intangible assets can be recovered. Based upon the impairment tests performed, there was an impairment of goodwill for the period ended December 31, 2003 of $837,011. There can be no assurance that future goodwill impairment tests will not result in additional charges to earnings.
Revenue Recognition
The Company recognizes revenue from sales of Application Systems upon shipment of product and title and risk of loss transfers to the customer. Revenue from the sale of Coatings, Sealants and Other Products is recognized when the goods are shipped to the customer. Allowances for returns of Coatings, Sealants and Other Products are provided for based upon an analysis of the Company's historical patterns of returns matched against the sales from which they originated.
Research and Development
Research and development costs related to both future and present products are charged to operations as incurred.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires the establishment of a deferred tax asset or liability for the recognition of future deductions or taxable amounts, and operating loss and tax credit carry-forwards. Deferred tax expense or benefit is recognized as a result of the change in the deferred asset or liability during the year. If necessary, the Company will establish a valuation allowance to reduce any deferred tax asset to an amount which will more likely than not be realized.
Stock-Based Compensation
As allowed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company has elected to continue to apply the intrinsic-value-based method of accounting. Under this method, the Company measures stock based compensation for option grants to employees assuming that options granted at market price at the date of grant have no intrinsic value. Restricted stock awards are valued based on a discounted market price of a share of nonrestricted stock on the grant date. No compensation expense has been recognized for stock-based incentive compensation plans other than for the restricted stock awards under the 2002 Executive Incentive Plan (when earned), 2002 Non-Employee Director Restricted Stock (when vested), and certain executive employment agreements. (See Notes 17, 21, 22, and 23 for more information on these plans).
Net Loss Per Common Share – Basic and Diluted
Statement of Financial Accounting Standard 128 ("SFAS 128") "Earnings Per Share" requires public companies to present basic earnings (net loss) per share and, if applicable, diluted earnings (net loss) per share for all periods that statements of operations are presented.
Basic and diluted net loss per common share are the same since (a) the Company has reflected net losses from continuing operations for all periods presented and (b) the potential common shares of the Company would be anti-dilutive.
Warranty Reserves
The Company established a warranty reserve policy, calculated at 3% of revenue, and an allowance for doubtful accounts reserve. The amount reserved for warranties is $608,034 and allowance for doubtful accounts is $358,607 through December 31, 2003. During the second quarter, the Company began to experience an increase in warranty costs relating to product application specifications, contractor practices, and other product issues which are discussed in Part I, Item 1, Research and Product Developments section, of this report. The Company’s technical department evaluated the exposure on a per project basis, which resulted in an increased June 30, 2003 warranty reserve. The warranty reserve was evaluated again at December 31, 2003 and it was determined that claims had been settled and certain outstanding exposure were being mitigated by other sources; therefore, the reserve was reduced by $250,000 to its current balance.
Reclassifications
Certain amounts in the prior years have been reclassified to conform to the 2003 consolidated financial statement presentation. In addition, the common stockholders of the Company approved a 1-for-10 reverse split and share consolidation on May 28, 2002, which was effectuated at the close of business on May 30, 2002 and thus all share and per-share amounts have been restated for all periods presented.
Development Stage
The Company exited its development-stage and began operations on January 1, 2001.
Recently Adopted Accounting Standards
In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which supersedes No. 101, “Revenue Recognition in Financial Statements.” SAB No. 104 rescinds accounting guidance on SAB No. 101 related to multiple-element arrangements as this guidance has been superseded as a result of the issuance of EITF 00-21. The Company adopted the provisions of SAB No. 104 in the fourth quarter of 2003. The adoption did not have a material effect on the Company’s consolidated financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires an issuer to classify certain instruments as liabilities (or assets in some circumstances) which may have previously been classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The provisions of SFAS No. 150 are to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The Company adopted the provisions of SFAS No. 150 in the fourth quarter of 2003. The adoption did not have a material effect on the Comp any’s consolidated financial statements.
In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities . The provisions of SFAS No. 149 are generally effective for contracts entered into or modified after June 30, 2003 and are to be applied prospectively. The Company adopted the provisions of SFAS No. 149 in the fourth quarter of 2003. The adoption did not have a material effect on the Company’s consolidated financial statements.
In December 2002, Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation, (SFAS No. 148) was issued and is effective for fiscal years beginning after December 15, 2002. SFAS No. 148 amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123) to require prominent disclosures in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 also amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. We have decided not to voluntarily adopt the SFAS No. 123 fair value method of accounting for stock-based employee compensation. Therefore, the new transition alternatives allowed in SFAS No. 148 will not affect our consolidated financial statements. The Company adopted the provisions of SFAS No. 148 in the fourth quarter of 2003. The adoption did not have a material effect on the Company’s consolidated financial statements.
In July 2002, Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, (SFAS No. 146) was issued and is effective for periods beginning after December 31, 2002. SFAS No. 146 requires, among other things, that costs associated with an exit activity (including restructuring and employee and contract termination costs) or with a disposal of long-lived assets be recognized when the liability has been incurred and can be measured at fair value. Companies must record in earnings from continuing operations costs associated with an exit or disposal activity that does not involve a discontinued operation. Costs associated with an activity that involves a discontinued operation would be included in the results of discontinued operations. The Company adopted the provisions of SFAS No. 146 in the fourth quarter of 2003. The adoption did not have a material effect on the Company’s consolidated financial statements.
In June 2001, Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, (SFAS No. 143) was issued and is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company adopted the provisions of SFAS No. 143 in the fourth quarter of 2003. The adoption did not have a material effect on the Company’s consolidated financial statements.
Note 2. Going-Concern Issues Arising from Recurring Losses and Cash Flow Problems.
While the accompanying audited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities during the normal course of operations, certain adverse conditions and events cast substantial doubt upon the validity of this assumption. The Company has not earned profits to date, has incurred recurring losses and negative cash flows from operations, and at December 31, 2003 has an accumulated deficit, net of dividends, of $(55,576,831) and its current liabilities exceeded its current assets by $3,901,372 and its total liabilities exceeded its total assets by $2,569,668. These factors raise doubt about the Company’s ability to continue as a going concern. The Company has relied principally on non-operational sources of financing mainly from Richard J. Kurtz, the Chairman of the Board, to fund its operations over the past 5 five years. A strategic organizational initiative was initiated in the second quarter of 2003 which was designed to reduce the Company’s operating expenses and costs on an annualized basis, increase its effectiveness in delivering products to existing and potential new customers, and set the stage for the Company to achieve profitability in the near future. The latter half of 2003 up to the date of this report begins to reflect the results of our strategic organizational initiative.
Additionally, during the third quarter of 2003, the Company addressed certain problems encountered in the field with its RSM Series™ products, which resulted in a near term decline in revenue for the annual period. See Note 1, Warranty Reserves . The Company estimates that approximately $4.25 million will be required for continuing operations in 2004.
Although no formal commitment has been received from the Chairman of the Board to fund the Company’s operating requirements for the 2004 year, the Company has received for the period beginning as of January 1, 2004 through March 4, 2004, loans amounting to $920,000 from the Chairman of the Board, which are bearing interest at 9% per annum. In addition, the Company is seeking to raise cash proceeds of at least $4,000,000 privately, on a best efforts basis, pursuant to a private placement offering. The Company expects to seek to obtain additional funding through private debt and/or equity; however, there can be no assurance as to the availability or terms upon which such financing and capital might be available. Although no assurances can be given, the Company anticipates, based on currently proposed plans and assumptions relating to its operations, that the cash proceeds goal of at least $4,000,000 will be sufficient to satisfy its capital requirements for the 2004 year. The Company’s ability to continue as a going concern will be dependent on management’s ability to successfully execute its business plan including an increase in revenue, decrease in operating costs and expenses, and seeking additional forms of debt and/or equity financing. These financial statements do not include adjustments or disclosures that may result from the Company’s inability to continue as a going concern. If the going concern assumption were not appropriate for these financial statements, then adjustments would be necessary in the carrying value of assets and liabilities, and the reported net losses and balance sheet classification used.
Note 3. Discontinued Operations.
On April 14, 1999, the Board of Directors passed a unanimous resolution to discontinue the activities of Designer Wear, Inc. ("DWI") and ROK International, Inc. ("ROK"), retroactive for the year ended December 31, 1998. DWI and ROK were engaged in the acquisition of license agreements for the design, contract manufacturing, sale, and worldwide distribution of Branded Merchandise products. Rainguard Roofing Corporation (“Rainguard”) was acquired, effective January 1, 2001, primarily for the Company to field test its RSM Series™ flagship products, RSM-100™ and BlueMAX™, and generate revenue. The Company divested its Rainguard roof contracting business, effective December 31, 2001, which is reflected in Loss from Discontinued Operations. The consolidated financial statements and related notes contained herein have been recast to reflect the financial position, results of operations and cash flows of the Company for these discontinued operations. The financial information for the Company’s discontinued operations includes allocations of certain Urecoats expenses to those operations.
A summary of the income (loss) from discontinued operations for the years ended December 31,
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
--- |
|
$ |
--- |
|
$ |
1,352,463 |
|
|
Cost of Sales |
|
|
--- |
|
|
--- |
|
|
1,949,212 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss) |
|
|
--- |
|
|
--- |
|
|
(596,749 |
) |
|
Operating Expenses |
|
|
--- |
|
|
1,021 |
|
|
1,065,434 |
|
|
Other Income |
|
|
--- |
|
|
600,622 |
|
|
188,546 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Discontinued Operations |
|
$ |
--- |
|
|
599,601 |
|
|
(1,473,637 |
) |
|
|
|
|
|
|
|
|
|
|
During 2002, the Company evaluated all circumstances and that a period of five years had passed since any material communication relating to DWI and ROK commitments and contingencies, and decided that a commitments and contingency related reserve was no longer required.
Note 4. Acquisition.
The Company completed the acquisition of Infiniti Paint Company, Inc. (n/k/a Infiniti Products, Inc.), effective September 1, 2001, for $1,611,010. The purchase price was paid in cash and stock: $775,000 cash and 1,550,000 shares of Common Stock valued at $775,000 and miscellaneous expenses related to the acquisition of $61,010. The purchase accounting method was used to account for the transaction and the results have been included since the date of acquisition. The following proforma summary presents the consolidated results of operations of Urecoats as if the acquisition of Infiniti had occurred January 1, 2000.
|
|
|
Year Ended December 31,
(UNAUDITED PRO FORMA) |
|
|
|
|
|
|
|
|
|
2001 |
|
|
|
|
|
|
|
|
Revenue |
|
$ |
2,883,166 |
|
|
Cost of Sales |
|
|
2,129,696 |
|
|
|
|
|
|
|
|
Gross Profit |
|
|
753,470 |
|
|
Operating Expenses |
|
|
7,177,433 |
|
|
|
|
|
|
|
|
Operating Loss |
|
|
(6,423,963 |
) |
|
Loss From Discontinued Operations |
|
|
(1,473,637 |
) |
|
|
|
|
|
|
|
Net Loss |
|
$ |
(7,897,600 |
) |
|
|
|
|
|
|
Note 5. Inventory.
The following is a summary of inventories for the years ending December 31,
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Raw Materials |
|
$ |
--- |
|
$ |
177,695 |
|
|
Finished Goods |
|
|
743,104 |
|
|
1,238,979 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
743,104 |
|
$ |
1,416,674 |
|
|
|
|
|
|
|
|
During 2003 the value of the application systems held in finished goods inventory were reduced by $555,700, to their net realizable value.
Note 6. Machinery and Equipment.
The following is a summary of machinery and equipment for the years ending December 31,
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
2003 |
|
2002 |
|
Useful Life |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicles |
|
$ |
249,272 |
|
$ |
414,011 |
|
|
5 Years |
|
|
|
Leasehold Improvements |
|
|
388,478 |
|
|
694,827 |
|
|
3 Years |
|
|
|
Office Equipment |
|
|
267,398 |
|
|
549,232 |
|
|
5 Years |
|
|
|
Machinery and Equipment |
|
|
229,706 |
|
|
628,397 |
|
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Machinery and Equipment |
|
|
1,134,854 |
|
|
2,286,467 |
|
|
|
|
|
|
|
Less: Accumulated Depreciation |
|
|
(534,440 |
) |
|
(772,404 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Machinery and Equipment, Net |
|
$ |
600,414 |
|
$ |
1,514,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2003, 2002 and 2001, was $386,206, $379,146, and $401,929, respectively. There was a Loss on Disposal of Assets of $290,749, which relates to the disposition of obsolete machinery and equipment, and leasehold improvements relating to space that was vacated in 2003. The reduction in value of machinery and equipments of $322,641 relates to a reduction in the net book value of the Application Systems held by the company to their fair market value at December 31, 2003.
Note 7. Intangibles and Goodwill.
The following is a summary of intangibles and goodwill for the years ending December 31,
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
774,000 |
|
$ |
1,611,011 |
|
|
|
Patent Costs |
|
|
216,024 |
|
|
199,085 |
|
|
|
Proprietary Formula Acquisition Costs |
|
|
80,000 |
|
|
80,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangibles |
|
|
1,070,024 |
|
|
1,890,096 |
|
|
|
Less: Accumulated Amortization |
|
|
(296,024 |
) |
|
(10,663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangibles, Net |
|
$ |
774,000 |
|
$ |
1,879,433 |
|
|
|
|
|
|
|
|
|
|
Amortization of intangible costs for the years ended December 31, 2003, 2002 and 2001, were $285,361, $10,663, and $-0-, respectively.
Goodwill arising from the cost, in excess of fair market value of tangible assets and liabilities acquired, results from the Company's 2001 acquisition of Infiniti Products, Inc. After evaluation by management, as described in Note 1, Goodwill and Purchased Intangible Assets , the asset was impaired by $837,011, leaving a balance of Goodwill in the amount of $774,000.
The Company evaluates the amortization period of intangibles on an ongoing basis, in light of any changes in business conditions, events or circumstances, which may indicate the potential impairment of intangible assets. In 2003, the patent costs and formula acquisition costs relating to its RSM Series™ flagship products were deemed to have no intangible value and were fully amortized.
Note 8. Accounts Payable and Accrued Expenses.
The following is a summary of accounts payable for the years ending December 31,
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
Accounts Payable |
|
$ |
1,690,555 |
|
$ |
2,615,127 |
|
|
Accrued Payroll Taxes |
|
|
--- |
|
|
358 |
|
|
Accrued Severance |
|
|
143,898 |
|
|
--- |
|
|
Accrued Expenses |
|
|
55,708 |
|
|
--- |
|
|
Accrued Sales Taxes |
|
|
12,095 |
|
|
39,188 |
|
|
Accrued Other |
|
|
93,524 |
|
|
124,046 |
|
|
Accrued Warranty Reserve |
|
|
608,034 |
|
|
129,962 |
|
|
Accrued Dividend Payable |
|
|
776,983 |
|
|
278,768 |
|
|
Accrued Litigation |
|
|
929,091 |
|
|
--- |
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable and Accrued Expenses |
|
$ |
| |
