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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
--------- ---------
Commission File Number 0-19260
RENTECH, INC.
(Exact name of registrant in its charter)
Colorado 84-0957421
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1331 17th Street, Suite 720
Denver, Colorado 80202
(Address of principal executive offices)
Issuer's telephone number, including area code:
(303) 298-8008
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports); and (2) has been subject to such filing requirements for the past
90 days. Yes X . No .
--- ---
The number of shares outstanding of each of the issuer's classes of
common equity, as of July 31, 2002: common stock - 71,000,198.
RENTECH, INC.
FORM 10-Q QUARTERLY REPORT
THIRD QUARTER OF FISCAL 2002
Table of Contents
PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2002
and September 30, 2001 (audited)....................................4
Consolidated Statements of Operations for the three and
nine months ended June 30, 2002 and 2001............................6
Consolidated Statement of Stockholders' Equity for
the nine months ended June 30, 2002.................................7
Consolidated Statements of Cash Flows for the nine
months ended June 30, 2002 and 2001.................................9
Notes to the Consolidated Financial Statements.....................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................22
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................31
Item 2. Changes in Securities and Use of Proceeds............................32
Item 3. Defaults Upon Senior Securities - None...............................33
Item 4. Submission of Matters to a Vote of Security Holders..................33
Item 5. Other Information - None.............................................33
Item 6. Exhibits and Reports on Form 8-K.....................................33
(a) Exhibits
(b) Form 8-K
Signatures....................................................................37
2
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
the federal securities laws, as well as historical and current facts. These
forward-looking statements include those relating to the Rentech GTL Technology;
the continued development of the Rentech GTL Technology to increase its economic
efficiency and use; market acceptance of the technology; ability to obtain
financing for plants using the Rentech GTL Technology; ability to economically
construct or retrofit these plants; the timing by which plants may be
constructed and begin production; ability to obtain low-cost feedstocks and to
economically operate the plants; successful operation of the plants; the market
value and acceptance of the liquid hydrocarbon products; revenues from the
Rentech GTL Technology; market acceptance of and the anticipated revenues from
the stains and sealers produced by OKON, Inc. (OKON); the market demand and
anticipated revenues from the mud logging services provided by Petroleum Mud
Logging, Inc. (PML); the ability of REN Corporation (REN) to complete its sales
orders; ability to obtain needed capital; and statements about business
strategies, future growth, operations and financial results. These statements
often can be identified by the use of terms such as "may," "will," "should,"
"expect," "believe," "anticipate," "estimate," "intend," "plan," "project,"
"approximate" or "continue," or the negative thereof. Although we believe that
the expectations reflected in these forward-looking statements are reasonable,
we caution readers not to place undue reliance on any forward-looking
statements. Those statements represent our best judgment as to what may occur in
the future. Forward-looking statements, however, are subject to risks,
uncertainties and important factors beyond our control that could cause actual
results and events to differ materially from historical results of operations
and events and those presently anticipated or projected. Important factors that
could cause actual results to differ from those reflected in the forward-looking
statements include the risks of overruns in costs of constructing, retrofitting
and operating commercial plants using the Rentech GTL Technology, problems with
mechanical systems in the plants that are not directly related to the Rentech
GTL Technology, dangers associated with construction and operation of gas
processing plants like those using the Rentech GTL Technology, risks inherent in
making investments and conducting business in foreign countries, protection of
intellectual property rights, competition, difficulties in implementing our
business strategies, and other risks described in this report.
As used in this Quarterly Report on Form 10-Q, the terms "we," "our"
and "us" mean Rentech, Inc., a Colorado corporation and its subsidiaries, unless
the context indicates otherwise.
3
RENTECH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
2002 September 30,
(Unaudited) 2001
- ------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 318,627 $ 893,452
Restricted cash 500,000 --
Accounts receivable, net of $12,000 and $7,325
allowance for doubtful accounts 1,428,744 1,745,838
Costs and estimated earnings in excess of billings 926,600 73,020
Stock subscription receivable -- 250,000
Note receivable -- 191,779
Other receivables 44,173 52,706
Receivable from related party 17,968 69,293
Inventories 794,677 738,238
Prepaid expenses and other current assets 305,248 309,064
- ------------------------------------------------------------------------------------------
Total current assets 4,336,037 4,323,390
- ------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation
and amortization of $1,196,433 and $931,330 4,224,607 4,388,776
- ------------------------------------------------------------------------------------------
Other assets
Licensed technology, net of accumulated
amortization of $2,020,333 and $1,848,747 1,410,816 1,582,402
Capitalized software costs, net of accumulated
amortization of $449,376 and $236,429 474,296 711,263
Goodwill, net of accumulated amortization
of $400,599 1,511,368 1,511,368
Production backlog, net of accumulated amortization
of $166,117 and $27,762 -- 138,355
Non-compete agreement, net of accumulated amortization
of $30,233 and $5,432 132,268 157,069
Investment in INICA, Inc. 3,079,107 3,079,107
Investment in Sand Creek 8,663 --
Technology rights, net of accumulated
amortization of $136,679 and $115,098 151,067 172,648
Deposits and other assets 172,265 51,077
- ------------------------------------------------------------------------------------------
Total other assets 6,939,850 7,403,289
- ------------------------------------------------------------------------------------------
Total assets $15,500,494 $16,115,455
==========================================================================================
See notes to the consolidated financial statements.
4
RENTECH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
June 30,
2002 September 30,
(Unaudited) 2001
- ------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 517,748 $ 883,255
Billings in excess of costs and estimated earnings 44,980 130,930
Payable to related party -- 30,600
Accrued payroll 537,414 536,530
Accrued liabilities 416,290 436,017
Contract liability -- 750,000
Line of credit payable 877,066 --
Current portion of long-term debt 134,183 143,863
Current portion of long-term convertible debt 46,062 --
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 2,573,743 2,911,195
- ------------------------------------------------------------------------------------------------------------
Long-term liabilities
Long-term debt, net of current portion 1,096,204 1,147,773
Long-term convertible debt, net of current portion 2,189,430 --
Lessee deposits 7,485 7,485
Investment in Sand Creek -- 2,669
- ------------------------------------------------------------------------------------------------------------
Total long-term liabilities 3,293,119 1,157,927
- ------------------------------------------------------------------------------------------------------------
Total liabilities 5,866,862 4,069,122
- ------------------------------------------------------------------------------------------------------------
Minority interest 344,716 309,632
Commitments and contingencies
Stockholders' equity
Series B convertible preferred stock - $10 par value; 800,000 shares
authorized; 691,664 shares issued and 27,778 outstanding and converted -- 277,780
Series C participating preferred stock - $10 par value; 500,000
shares authorized; no shares issued or outstanding -- --
Common stock - $.01 par value; 100,000,000 shares authorized;
70,950,198 and 66,665,631 shares issued and outstanding 709,502 666,653
Additional paid-in capital 38,249,964 36,384,562
Unearned compensation (2,580) (21,266)
Accumulated deficit (29,667,970) (25,571,028)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,288,916 11,736,701
------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 15,500,494 $ 16,115,455
============================================================================================================
See notes to the consolidated financial statements.
5
RENTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Revenues:
Product sales $ 575,710 $ 758,959 $ 1,384,909 $ 1,736,114
Service revenues 1,867,238 1,589,857 5,810,598 3,858,969
Royalty income 60,000 60,000 180,000 180,000
- -----------------------------------------------------------------------------------------------------------
Total revenues 2,502,948 2,408,816 7,375,507 5,775,083
- -----------------------------------------------------------------------------------------------------------
Cost of sales:
Product costs 237,815 429,582 657,152 826,393
Service costs 1,188,199 1,326,836 3,336,998 2,978,140
Research and development contract costs 3,000 -- 128,000 --
- -----------------------------------------------------------------------------------------------------------
Total costs of sales 1,429,014 1,756,418 4,122,150 3,804,533
- -----------------------------------------------------------------------------------------------------------
Gross profit 1,073,934 652,398 3,253,357 1,970,550
Operating expenses:
General and administrative expense 1,446,306 945,304 5,709,968 3,704,526
Depreciation and amortization 206,953 198,884 680,237 534,932
Research and development 370,805 99,787 579,143 147,816
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 2,024,064 1,243,975 6,969,348 4,387,274
- -----------------------------------------------------------------------------------------------------------
Loss from operations (950,130) (591,577) (3,715,991) (2,416,724)
Other income (expense):
Equity in loss of investee (46,512) (113,758) (196,668) (290,803)
Interest income 6,365 34,692 14,573 101,938
Interest expense (87,925) (22,230) (163,960) (71,449)
Gain on disposal of fixed assets 2,944 -- 189 --
- -----------------------------------------------------------------------------------------------------------
Total other income (expense) (125,128) (101,296) (345,866) (260,314)
- -----------------------------------------------------------------------------------------------------------
Minority interest in subsidiary's net income (16,761) -- (35,085) --
- -----------------------------------------------------------------------------------------------------------
Net loss $ (1,092,019) $ (692,873) $ (4,096,942) $ (2,677,038)
- -----------------------------------------------------------------------------------------------------------
Dividends on preferred stock -- -- 136,932 466,180
- -----------------------------------------------------------------------------------------------------------
Loss applicable to common stock $ (1,092,019) $ (692,873) $ (4,233,874) $ (3,143,218)
-----------------------------------------------------------------------------------------------------------
Basic and diluted weighted average
number of common shares outstanding 70,950,198 65,467,127 69,536,582 64,180,873
- -----------------------------------------------------------------------------------------------------------
Per share loss:
Basic and diluted $ (0.02) $ (0.01) $ (0.06) $ (0.05)
===========================================================================================================
See notes to consolidated financial statements.
6
RENTECH, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended June 30, 2002 (Unaudited)
Convertible
Preferred Stock Common Stock Additional
Series B Par Paid-in
Shares Amount Shares Value Capital
- --------------------------------------------------------------------------------------------------------------------
Balance, October 1, 2001 27,778 $ 277,780 66,665,631 $ 666,653 $ 36,384,562
Common stock issued for cash, net of
offering costs of $85,009 -- -- 2,126,500 21,267 956,974
Common stock issued for options
and warrants exercised -- -- 566,474 5,665 119,738
Preferred stock issued for cash, net of
offering costs of $25,000 50,000 500,000 -- -- (25,000)
Common stock issued for conversion of
preferred stock (77,778) (777,780) 1,591,593 15,917 761,863
Deemed dividends on convertible
preferred stock of $136,932 -- -- -- -- --
Options granted/earned for services -- -- -- -- 51,827
Net loss for the nine months ended
June 30, 2002 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 (unaudited) -- $ -- 70,950,198 $ 709,502 $ 38,249,964
==============================================================================================================------
See notes to the consolidated financial statements.
7
RENTECH, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity Continued
For the Nine Months Ended June 30, 2002 (Unaudited)
Total
Unearned Accumulated Stockholders
Compensation Deficit Equity
- ----------------------------------------------------------------------------------------
Balance, October 1, 2001 $ (21,266) $(25,571,028) $ 11,736,701
Common stock issued for cash, net of
offering costs of $85,010 -- -- 978,241
Common stock issued for options
and warrants exercised -- -- 125,403
Preferred stock issued for cash, net of
offering costs of $25,000 -- -- 475,000
Common stock issued for conversion of
preferred stock -- -- --
Deemed dividends on convertible
preferred stock of $136,932 -- -- --
Options granted/earned for services 18,686 -- 70,513
Net loss for the nine months ended
June 30, 2002 -- (4,096,942) (4,096,942)
- ----------------------------------------------------------------------------------------
Balance, June 30, 2002 (unaudited) $ (2,580) $(29,667,970) $ 9,288,916
========================================================================================
8
RENTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended June 30, 2002 2001
- ----------------------------------------------------------------------------------------------------
Operating activities:
Net loss $(4,096,942) $(2,677,038)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 380,595 402,355
Amortization 593,290 262,264
Increase in allowance for doubtful accounts 4,675 1,729
Bad debt expense 191,779 --
Stock options and warrants issued for services 70,514 153,546
Equity in loss of investee 196,668 290,803
Gain on disposal of fixed assets 189 --
Minority interest in net loss of subsidiary 35,084 --
Revenue recognized from contract liability (750,000) --
Changes in operating assets and liabilities:
Accounts receivable 312,419 (829,281)
Costs and estimated earnings in excess of billings (853,580) --
Other receivables and receivable from related party 59,858 (19,568)
Inventories (56,439) (96,992)
Prepaid expenses and other current assets 250,569 (47,963)
Interest receivable -- (63,278)
Accounts payable (365,507) 47,429
Billings in excess of costs and estimated earnings (85,950) --
Accrued liabilities and accrued payroll 36,901 327,893
Lessee deposits -- (2,145)
- ----------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,075,877) (2,250,246)
- ----------------------------------------------------------------------------------------------------
Investing activities:
Purchase of property and equipment (226,605) (467,252)
Payment for capitalized software costs -- (419,743)
Proceeds from disposal of fixed assets 9,990 --
Cash used in purchase of investments (208,000) (302,194)
Deposits and other assets (121,188) (49,763)
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (545,803) (1,238,952)
- ----------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of convertible preferred stock 500,000 779,175
Proceeds from issuance of common stock 1,132,909 2,396,192
Proceeds from stock subscription receivable 250,000 --
Purchase of restricted cash (500,000) --
Payment of offering costs (110,010) (185,954)
Redemption of preferred stock and warrants to purchase common stock -- (2,084)
Proceeds from line of credit, net 877,066 --
Payments on related party payable (30,600) --
Proceeds from long-term debt and notes payable 2,250,000 --
Proceeds from contract liability -- 750,000
Payments on long-term debt and notes payable (322,510) (255,570)
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,046,855 3,481,759
- ----------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (574,825) (7,439)
Cash and cash equivalents,
beginning of period 893,452 1,516,815
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 318,627 $ 1,509,376
====================================================================================================
See notes to consolidated financial statements.
9
RENTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2002 (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. The accompanying statements should be read in conjunction with the
audited financial statements included in the Company's September 30, 2001 annual
report on Form 10-K. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended June
30, 2002 are not necessarily indicative of the results that may be realized for
the full fiscal year ending September 30, 2002.
2. Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned and majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash Equivalents - The Company considers highly liquid investments
purchased with original maturities of three months or less and money market
accounts to be cash equivalents.
Inventories - Inventories consist of raw materials, work-in-process and
finished goods and are valued at the lower of cost (first-in, first-out) or
market.
Capitalized Software - Capitalized software represents amounts paid for
software development, which are being amortized over a three-year period using
the straight-line method.
Licensed Technology - Licensed technology represents costs incurred by
the Company primarily for the retrofit of a plant used for the purpose of
demonstrating the Company's proprietary technology to prospective licensees,
which it licenses to third parties under various fee arrangements. These
capitalized costs are carried at the lower of amortized cost or realizable value
and are being amortized over fifteen years.
Goodwill - Goodwill, which relates to the acquisition of OKON in 1997,
the acquisition of PML in 1999 and the acquisition of REN in 2001, is no longer
being amortized, but will be tested annually for impairment in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets.
Production Backlog - In connection with the acquisition of REN in 2001,
the Company acquired certain production backlog arising from existing sales
contracts. The production backlog is being amortized over one year, the term of
the contracts.
Non-Compete Agreement - In connection with the acquisition of REN in
2001, the Company entered into non-compete agreements with certain employees of
REN. The non-compete agreements are being amortized over the term of the
non-compete agreements of five years.
10
Property, Equipment, Depreciation and Amortization - Property and
equipment is stated at cost. Depreciation and amortization expense are computed
using the straight-line method over the estimated useful lives of the assets,
which range from three to thirty years, except for leasehold improvements, which
are amortized over the shorter of the useful life or the remaining lease term.
Maintenance and repairs are expensed as incurred. Major renewals and
improvements are capitalized. When property and equipment is retired or
otherwise disposed of, the asset and accumulated depreciation or amortization is
removed from the accounts and the resulting profit or loss is reflected in
operations.
Investment in INICA, Inc. - The Company has a 10% investment in INICA,
Inc. (formerly ITN Energy Systems, Inc.). The investment is stated at cost. The
investment is evaluated periodically for impairment and is carried at the lower
of cost or estimated net realizable value.
Investment in Sand Creek - The Company has a 50% investment in Sand
Creek Energy, LLC. The investment is accounted for using the equity method of
accounting. Under such method, the Company's proportionate share of net income
(loss) is included as a separate item in the statement of operations.
Technology Rights - Technology rights are recorded at cost and are
being amortized on a straight-line method over a ten-year estimated life.
Long-Lived Assets - Long-lived assets and identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the expected future cash
flow from the use of the asset and its eventual disposition is less than the
carrying amount of the asset, an impairment loss is recognized and measured
using the asset's fair value.
Accrued Liabilities - The Company accrues significant expenses that
occur during the year in order to match expenses to the appropriate period.
These include audit and legal fees, as well as payroll expenses such as bonuses
and vacation.
Revenue Recognition - Sales of water-based stains, sealers and coatings
are recognized when the goods are shipped to the customers, as all goods are
shipped FOB shipping point. Revenues from oil and gas field services are
recognized at the completion of the service. Laboratory research revenues are
recognized as the services are provided. Rental income is recognized monthly as
per the lease agreement, and is included in the alternative fuels segment as a
part of service revenues. Royalty fees are recognized when the revenue earning
activities that are to be provided by the Company have been performed and no
future obligation to perform services exist. Revenue from the manufacture of
industrial automation systems is recognized based upon the percentage of
completion method of accounting and per the terms of customer contracts.
Accounting for Fixed Price Contracts - Revenues from fixed price
contracts are recognized on the percentage-of-completion method for projects in
which reliable estimates of the degree of completion are possible. If reliable
estimates are not available, the completed contract method is used. For
contracts accounted for under the percentage-of-completion method, the amount of
revenue recognized is the percentage of the total contract price that the cost
expended to date bears to the anticipated final total cost, based upon current
estimates of the cost to complete the contract. Contract cost includes all labor
and benefits, materials unique to or installed in the project, subcontract costs
and allocations of indirect costs. General and administrative costs are charged
to expense. Provisions for estimated losses on uncompleted contracts are
provided for when determined, regardless of the completion percentage. As
contracts can extend over one or more accounting periods, revisions in costs and
earnings estimated during the course of the work are reflected during the
accounting period in which the facts that require such revisions become known.
Project managers make significant assumptions concerning cost estimates for
labor hours, consultant hours and other project costs. Due to the uncertainties
inherent in the estimation process, and the potential changes in customer needs
as projects progress, it is at least reasonably possible that completion costs
for some uncompleted projects may be further revised in the near-term and that
such revisions could be material.
11
Cost of Sales Expenses - Cost of sales expenses include direct
materials, direct labor, indirect labor, employee fringe benefits and other
miscellaneous costs to produce water-based stains, sealers and coatings, to
manufacture industrial automation systems and to complete oil and gas field
services and technical services.
General and Administrative Expenses - General and administrative
expenses include employee's salaries and fringe benefits, travel, consulting,
occupancy, public relations and other costs incurred in each operating segment.
Research and Development Expenses - Research and development expenses
include direct materials, direct labor, indirect labor, employee fringe benefits
and other miscellaneous costs incurred to develop and refine certain
technologies employed in the respective operating segment. These costs are
expensed as incurred.
Advertising Costs - The Company recognizes advertising expense when
incurred.
Income Taxes - The Company accounts for income taxes under the
liability method, which requires an entity to recognize deferred tax assets and
liabilities. Temporary differences are differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements
that will result in taxable or deductible amounts in future years.
Net Loss Per Common Share - SFAS No. 128, "Earnings Per Share" provides
for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings
per share includes no dilution and is computed by dividing income (loss)
applicable to common stock by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. For the three and nine months ended June 30,
2002 and 2001, total stock options of 4,837,766 and 8,074,300, total stock
warrants of 3,846,867 and 3,992,977 and total convertible debt of 4,470,984 and
0 were not included in the computation of diluted loss per share because their
effect was anti-dilutive.
Concentrations of Credit Risk - The Company's financial instruments
that are exposed to concentrations of credit risk consist primarily of cash and
accounts receivable. The Company's cash is in demand deposit accounts placed
with federally insured financial institutions. Such deposit accounts at times
may exceed federally insured limits. The Company has not experienced any losses
on such accounts. Concentrations of credit risk with respect to accounts
receivable are higher due to a few customers dispersed across geographic areas.
The Company reviews a customer's credit history before extending credit and
establishes an allowance for doubtful accounts based upon the credit risk of
specific customers, historical trends and other information. Generally, the
Company does not require collateral from its customers.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments - The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value: Accounts
Receivable, Other Current Assets, Accounts Payable, Accrued Liabilities and
Other Current Liabilities - fair values are assumed to approximate carrying
values for these financial instruments since they are short term in nature and
their carrying amounts approximate fair value or they are receivable or payable
on demand. Mortgages and Notes Payable - substantially all of these mortgages
and notes bear interest at rates of interest, which approximate current lending
rates. These interest rates are between 5.9% and 9.5%.
12
Stock Option Plan - The Company applies Accounting Principles Board
("APB") Opinion 25, "Accounting for Stock Issued to Employees", and related
Interpretations in accounting for all stock option plans. Under APB Opinion 25,
compensation cost is recognized for stock options issued to employees when the
exercise price of the Company's stock options granted is less than the market
price of the underlying common stock on the date of grant. SFAS No. 123,
"Accounting for Stock-Based Compensation," requires the Company to provide pro
forma information regarding net loss as if compensation cost for the Company's
stock option plans had been determined in accordance with the fair value based
method prescribed in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model. The Company applies
Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation" ("FIN 44"). FIN 44
clarifies the application of APB Opinion 25 for certain issues related to stock
issued to employees.
Comprehensive Loss - Comprehensive loss is comprised of net loss and
all changes to the consolidated statement of stockholders' equity, except those
changes made due to investments by stockholders, changes in paid-in capital and
distributions to stockholders. For the three and nine months ended June 30, 2002
and 2001, the Company had no items of comprehensive loss other than net loss;
therefore, a separate statement of comprehensive loss has not been presented for
these periods.
Recent Accounting Pronouncements - In June 2001, the FASB issued SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires the use of the purchase method of
accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS No. 141
also requires that companies recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria and, upon
adoption of SFAS No. 142, that companies reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS No. 141. SFAS No.
142 requires, among other things, that companies no longer amortize goodwill,
but instead test goodwill for impairment at least annually. In addition, SFAS
No. 142 requires that companies identify reporting units for the purpose of
assessing potential future impairments of goodwill, reassessing the useful lives
of other existing recognized intangible assets and ceasing amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS No. 142. This Statement was effective October 1, 2001 for the
Company as the Company decided to early adopt this statement. The Company's
previous business combinations were accounted for using the purchase method.
Effective October 1, 2001, the Company ceased amortizing goodwill for its
previous business combinations. In accordance with the provisions of SFAS No.
142, the Company has not amortized goodwill for the August 2001 acquisition of
REN Corporation. The Company has determined that its reportable units are also
its four business segments as discussed at Note 5. The Company completed the
transitional impairment test of goodwill in March 2002 and determined that
goodwill is not impaired. In accordance with SFAS No. 142, the Company is no
longer amortizing goodwill. For the nine months ended June 30, 2002, the Company
had a decrease in amortization expense of $70,358, compared to the same period
of fiscal 2001.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective June 30, 2003 for the Company. The
Company believes the adoption of this statement will have no material impact on
its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value,
less cost to sell, whether reported in continuing operations or in discontinued
13
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally, are to be applied
prospectively. The Company believes the adoption of this statement will have no
material impact on its consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4,
44 and 64, Amendment of FASB No. 13, and Technical Corrections." SFAS rescinds
FASB No. 4 "Reporting Gains and Losses from Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." This statement also rescinds SFAS No. 44
"Accounting for Intangible Assets of Motor Carriers" and amends SFAS No. 13,
"Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. This
statement is effective for fiscal years beginning after May 15, 2002. The
Company does not expect the adoption of this statement to have a material effect
on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value when the liability is incurred.
SFAS No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The Company does not
expect the adoption of this statement to have a material effect on the Company's
financial statements.
Reclassifications - Certain reclassifications have been made to the
2001 financial statements in order for them to conform to the 2002 presentation.
Such reclassifications have no impact on the Company's financial position or
results of operations.
3. Inventories
Inventories consist of the following:
June 30, 2002 September 30, 2001
(Unaudited)
---------------------------------------------------------
Finished goods $ 85,013 $ 86,647
Work in process 394,098 384,563
Raw materials 315,566 267,028
---------------------------------------------------------
$ 794,677 $ 738,238
=========================================================
4. Stockholders' Equity
Common Stock - During the nine months ended June 30, 2002, the Company
offered for sale its common stock in a private placement memorandum for the
purpose of raising up to $2,250,000. The Company granted non-exclusive rights to
several placement agents to sell the shares under the memorandum. The Company
offered for sale shares of its $.01 par value common stock at a purchase price
of $0.50 per share. In addition, the Company offered to the brokers a warrant to
14
purchase one share of the Company's common stock for every three shares of the
Company's common stock sold, at an exercise price of $1.00, exercisable for a
period of five years from the date of the memorandum. During the nine-month
period, the Company issued 2,126,500 shares of its common stock for $978,241,
net of $85,010 in offering costs. The Company also issued nine warrants to
purchase 708,834 shares of the Company's common stock to brokers related to the
memorandum. In addition, during the nine months ended June 30, 2002, the Company
issued 292,508 shares of its common stock upon the exercise of stock options for
cash proceeds of $69,659. The Company also issued 273,966 shares of its common
stock upon the exercise of stock options in partial settlement of accrued
payroll of $55,744.
Preferred Stock - During the nine months ended June 30, 2002, the
Company issued for cash 50,000 shares of Series B convertible preferred stock
("preferred stock") for $475,000, net of $25,000 in offering costs. The Company
recorded a deemed dividend of $136,932 when it issued the preferred stock as the
preferred stock was convertible at a discount into common stock of the Company.
During the nine-month period, the holders converted all of their preferred stock
into 1,591,593 shares of common stock.
Stock Options - During the nine months ended June 30, 2002, the Company
recorded $51,827 in consulting expense from the issuance of stock options.
5. Segment Information
The Company operates in four business segments as follows:
o Alternative fuels - The Company develops and markets processes
for conversion of low-value, carbon-bearing solids or gases
into valuable liquid hydrocarbons.
o Paints - The Company manufactures and distributes water-based
stains, sealers and coatings.
o Oil and gas field services - The Company is in the business of
logging the progress of drilling operations for the oil and
gas industry.
o Industrial automation systems - The Company is in the business
of manufacturing complex microprocessor controlled industrial
automation systems primarily for the fluid power industry.
The Company's reportable operating segments have been determined in
accordance with the Company's internal management structure, which is organized
based on operating activities. The accounting policies of the operating segments
are the same as those described in the summary of accounting policies. The
Company evaluates performance based upon several factors, of which the primary
financial measure is segment-operating income.
15
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------------------
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Revenues:
Alternative fuels $ 649,815 $ 852,795 $ 2,137,797 $ 2,035,603
Paints 575,710 758,959 1,384,909 1,736,114
Oil and gas field services 417,189 797,062 1,564,388 2,003,366
Industrial automation systems 860,234 -- 2,288,413 --
- ---------------------------------------------------------------------------------------------------------------
$ 2,502,948 $ 2,408,816 $ 7,375,507 $ 5,775,083
===============================================================================================================
Income (loss) from operations:
Alternative fuels $ (878,183) $ (726,303) $ (3,298,275) $ (2,717,842)
Paints 30,981 45,997 (185,744) 117,923
Oil and gas field services (98,326) 88,729 (155,845) 183,195
Industrial automation systems (4,602) -- (76,127) --
- ---------------------------------------------------------------------------------------------------------------
$ (950,130) $ (591,577) $ (3,715,991) $ (2,416,724)
===============================================================================================================
Depreciation and amortization:
Alternative fuels $ 194,301 $ 186,902 $ 600,512 $ 495,107
Paints 20,610 27,757 53,418 83,269
Oil and gas field services 33,347 29,454 98,933 86,243
Industrial automation systems 73,011 -- 221,022 --
- ---------------------------------------------------------------------------------------------------------------
$ 321,269 $ 244,113 $ 973,885 $ 664,619
===============================================================================================================
Equity in net loss of investees:
Alternative fuels $ (46,512) $ (113,758) $ (196,668) $ (290,803)
===============================================================================================================
Expenditures for additions of long-lived assets:
Alternative fuels $ 14,567 $ 371,084 $ 126,423 $ 747,018
Paints 1,684 -- 21,342 --
Oil and gas field services 3,900 136,771 60,090 235,829
Industrial automation systems 3,327 -- 18,750 --
- ---------------------------------------------------------------------------------------------------------------
$ 23,478 $ 507,855 $ 226,605 $ 982,847
===============================================================================================================
Investment in equity method investees:
Alternative fuels $ 8,663 $ 21,975 $ 8,663 $ 21,975
===============================================================================================================
Total assets:
Alternative fuels $ 8,885,185 $ 14,621,504 $ 8,885,185 $ 14,621,504
Paints 1,529,407 1,625,458 1,529,407 1,625,458
Oil and gas field services 1,943,620 2,072,880 1,943,620 2,072,880
Industrial automation systems 3,142,282 -- 3,142,282 --
- ---------------------------------------------------------------------------------------------------------------
$ 15,500,494 $ 18,319,842 $ 15,500,494 $ 18,319,842
===============================================================================================================
16
6. Investment in Sand Creek
On January 7, 2000, the Company and Republic Financial Corporation
("Republic") through Sand Creek Energy, LLC (SCE) purchased the "Sand Creek"
methanol facility and all the supporting infrastructure, buildings and the
underlying 17 acre site. The Company and Republic do not expect to use the Sand
Creek plant for commercial production of liquid hydrocarbons. Instead, the
Company may use it as a large pilot plant for continuing work with the Rentech
GTL Technology, or the Company may sell some or all of the assets of SCE. The
Company has two letters of continued interest under which certain real estate,
equipment and systems of the facility would be sold for up to $3,100,000.
The owner of the facility is SCE which is 50 percent owned by Rentech
Development Corporation, a wholly-owned subsidiary of Rentech, Inc., and 50
percent owned by RFC-Sand Creek Development, LLC, a wholly-owned subsidiary of
Republic Financial Corporation. Republic Financial Corporation is headquartered
in Aurora, Colorado. In connection with the acquisition of the facility, SCE
assumed certain commitments with third parties. The Company and Republic
guaranty the full and punctual performance and payment by SCE of all SCE's
obligations with respect to this facility. SCE received an unconditional release
from Public Service Company of Colorado and Conoco on October 16, 2001 for
certain natural gas purchase obligations of the facility. As a result, the
aggregate liability of the Company under this guaranty was reduced from
$4,000,000 to $1,000,000. However, there are no active contracts to which this
guaranty relates.
During the nine months ended June 30, 2002 and 2001, the Company
contributed $208,000 and $302,194 to SCE and recognized $196,668 and $290,803
related to its equity in SCE's loss. As of June 30, 2002, the Company had a
$17,968 receivable due from SCE.
7. Contract Liability
On January 18, 2001, the Company was granted a services contract by the
Wyoming Business Council, Energy Section, Investment Ready Communities Division
("WBC"). Under the contract, Rentech received $800,000 to finance a
Gas-to-Liquids ("GTL") feasibility study within the State. On February 9, 2001,
the Company received the first $750,000 payment as per the terms of the
contract. The WBC funding was used to evaluate two potential GTL projects
utilizing Rentech's patented and proprietary Fischer-Tropsch Gas-to-Liquids
technology. Phase I involved studying the feasibility of retrofitting a portion
of an existing methanol facility in Wyoming. Phase II involved the study of the
feasibility of constructing a separate greenfield plant at the same site. The
Company delivered the feasibility study in December 2001 and recognized $800,000
in revenue under the contract. The Company determined that it was not feasible
to proceed with the conversion of the Wyoming facility as well as conversions of
methanol facilities worldwide. Therefore, since the Company has fulfilled its
oblications, the Company has recognized $800,000 as revenue under the contract
during the six months ended March 31, 2002 in accordance with SFAS No. 68
"Research and Development Arrangements". If in fact the Company chooses to
proceed with the conversion of a methanol facility worldwide at any time in the
future, the Company would be required to repay to the WBC the grant at the rate
of 120% of the original $800,000 for a total amount not to exceed $960,000, over
a period of time not to exceed six years. The repayment would only be from a 5%
share of royalties from the conversion of methanol facilities to the Rentech GTL
Technology worldwide. Based on the conclusions reached in the study, the Company
does not intend to proceed with an application of its technology in a methanol
facility.
17
8. Supplemental Data to Statements of Cash Flows
For the nine months ended June 30, 2002 and 2001, the Company made cash
interest payments of $163,960 and $71,203. Excluded from the statements of cash
flows for the nine months ended June 30, 2002 and 2001 were the effects of
certain non-cash investing and financing activities as follows:
Nine Months Ended June 30, 2002 2001
-----------------------------------------------------------------------------------------
Issuance of common stock for conversion of convertible
preferred stock and dividends $777,780 $888,888
Issuance of common stock for exercise of stock options $ 55,744 $ --
Purchase of annual insurance financed with a note payable $246,753 $ --
Issuance of common stock for deposit on potential business
acquisition $ -- $244,000
Purchase of equipment financed with a capital lease obligation $ -- $ 95,852
9. Costs and Estimated Earnings on Uncompleted Contracts
The costs and estimated earnings related to uncompleted contracts are
summarized as follows:
--------------------------------------------------------------------------------
June 30, 2002 September 30, 2001
(Unaudited)
--------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $ 1,330,959 $ 484,065
Estimated earnings 710,710 164,488
--------------------------------------------------------------------------------
Total costs incurred and estimated earnings 2,041,669 648,553
Less billings to date 1,160,049 706,463
--------------------------------------------------------------------------------
$ 881,620 $ (57,910)
================================================================================
Included in the accompanying balance sheet under the following
captions:
--------------------------------------------------------------------------------
June 30, 2002 September 30, 2001
(Unaudited)
--------------------------------------------------------------------------------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 926,600 $ 73,020
Billings in excess of costs and estimated
earnings on uncompleted contracts (44,980) (130,930)
----------- -----------
$ 881,620 $ (57,910)
There were no amounts included in accounts receivable at June 30, 2002 or
September 30, 2001 for amounts billed but not collected in accordance with
retainage provisions of contracts.
18
10. Goodwill and Other Intangibles
Effective October 1, 2001, the Company elected early adoption of SFAS
No. 142, which is permitted for entities with fiscal years beginning after March
15, 2001. As of October 1, 2001, the Company had $1,511,368 in unamortized
goodwill. In accordance with the provisions of SFAS No. 142, the Company has
ceased amortization of goodwill from the acquisitions of OKON and PML. As a
result, the Company has not amortized goodwill, resulting in a decrease of
expense of $70,358 for the nine months ended June 30, 2002, compared to the same
period of fiscal 2001. If the Company had not recorded $70,358 in amortization
of goodwill, the loss applicable to common stock for the nine months ended June
30, 2001 would have been $3,072,860, or $.05 per share. In accordance with SFAS
No. 142, the Company has six months from the initial date of adoption to
complete a transitional impairment test of goodwill. The second step of the
goodwill impairment test measures the amount of the impairment loss (measured as
of the beginning of the year of adoption), if any, and must be completed by the
end of the Company's fiscal year. The Company completed its impairment test as
of March 31, 2002 and determined that there is no impact on the Company's
financial position and results of operations, as goodwill is not impaired.
Goodwill will be tested annually and whenever events and circumstances occur
indicating that goodwill might be impaired.
Upon the adoption of SFAS No. 142, the Company evaluated the useful
lives of its existing intangible assets and determined that the existing useful
lives are appropriate. Therefore, there was no impact on the Company's results
of operations for the nine months ended June 30, 2002.
The Company estimates amortization expense for its intangible assets to
be approximately $456,000 during the fiscal year ended September 30, 2002, and
approximately $290,000 in each of the fiscal years ending September 30, 2003,
2004, 2005 and 2006.
The following table summarizes the activity in goodwill for the periods
indicated:
- ---------------------------------------------------------------------------
Nine Months Ended Year Ended
June 30, 2002 September 30, 2001
(Unaudited)
- ---------------------------------------------------------------------------
Goodwill:
Beginning balance $ 1,511,368 $ 1,104,905
Additions -- 504,814
Amortization -- (98,351)
- ---------------------------------------------------------------------------
$ 1,511,368 $ 1,511,368
===========================================================================
19
The following table summarizes the activity for intangible assets subject to
amortization:
- --------------------------------------------------------------------------------
Nine Months Ended Year Ended
June 30, 2002 September 30, 2001
(Unaudited)
- --------------------------------------------------------------------------------
Licensed technology and technology rights:
Beginning balance $ 1,755,050 $ 2,005,418
Amortization (193,167) (250,368)
- --------------------------------------------------------------------------------
$ 1,561,833 $ 1,755,050
================================================================================
Other intangibles:
Beginning balance $ 295,424 $ --
Additions -- 328,617
Amortization (163,156) (33,193)
- --------------------------------------------------------------------------------
$ 132,268 $ 295,424
================================================================================
11. Line of Credit
On February 25, 2002, the Company entered into a $1,000,000 business
line of credit agreement with Premier Bank through its 56% owned subsidiary,
REN. The line of credit matures on March 1, 2003, at which time all unpaid
principal and interest is due. The line of credit bears interest at prime plus
1.5%, currently 6.25%, and interest is accrued monthly. Payments of principal
are tied to the receipt of accounts receivable from Caterpillar, Inc. by REN. On
February 27, 2002, the Company purchased a $500,000 certificate of deposit with
Premier Bank, to be used as collateral on the line of credit. Interest on the
certificate of deposit is paid to the Company on a monthly basis, and the
certificate matures on December 31, 2002. The line of credit is guaranteed by
Rentech, Petroleum Mud Logging, Inc. and the minority shareholder of REN.
12. Long-Term Convertible Debt
On January 18, 2002, the Company entered into four convertible
long-term notes totaling $2,250,000, dated February 25, 2002, with existing
shareholders of the Company. The notes bear interest at 8.5% and mature on
February 25, 2006, with all unpaid principal and interest due at that time.
Monthly payments on the notes commenced on April 1, 2002. The notes are
convertible into no more than 4,500,000 shares of the Company's common stock,
less two shares for every dollar of principal reduction of the notes paid in the
form of cash. Until the first anniversary date of the notes, the Lenders may
elect to convert part or all of the principal balance into common stock at a
conversion price of $.50 per share if the market price of the common stock on
the conversion date is $.50 per share or higher. Conversion will not be
20
permitted during the first year if the market price on the conversion date is
less than $.50 per share. At any time following the first anniversary date of
the notes, the Lenders may elect to convert part or all of the principal balance
into common stock at a conversion price of $.50 per share, provided, however,
that no conversions shall be made if the market price is less than $.50 per
share on the conversion date. Starting on the first day of the thirteenth
calendar month following the date of the notes, and continuing on the first day
of each succeeding month until the notes are paid in full, principal in the
amount of one-thirty-sixth of the declining principal balance of the notes shall
automatically convert into the Company's common stock at a conversion price of
$.50 per share. If the average daily market price for the seven trading days
preceding the first day of such calendar month is less than $.50 per share, the
difference between $.50 per share and the average of the seven trading days
preceding the date of conversion shall be multiplied by the number of shares
issued to the Lenders as a result of the conversion, and the resulting dollar
amount shall be added to the principal balance of the notes. The notes are
secured by the assets of OKON, Inc., including the capital stock of that
company.
13. Commitments and Contingencies
The Company is currently involved in certain legal proceedings. The
Company does not believe these proceedings will have a material adverse effect
on our consolidated financial position. It is possible, however, that future
results of operations for any particular quarterly or annual period could be
materially affected by changes in our assumptions or in the effectiveness of our
strategies related to these proceedings.
21
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND 2001
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. The most significant estimates and
assumptions relate to accounting for fixed price contracts, the valuation of
long-lived assets, intangible assets and goodwill and the realization of
deferred income taxes. Actual amounts could differ significantly from these
estimates.
Accounting for Fixed Price Contracts. Our 56% owned subsidiary, REN
Corporation, recognizes revenues from fixed price contracts on the
percentage-of-completion method of accounting. Under this method of accounting,
the amount of revenue recognized is the percentage of the contract price that
the costs expended to date bear to the total estimated costs of the contract,
based upon current estimates of the costs to complete the contract. Project
managers make significant assumptions concerning cost estimates for materials
and labor. Due to the uncertainties inherent in the estimation process, as well
as the potential changes in customer needs as these contracts progress, it is at
least reasonably possible that completion costs for uncompleted contracts may be
revised in the future, and that such revisions could be material.
Valuation of Long-Lived Assets, Intangible Assets and Goodwill. We must
assess the realizable value of long-lived assets, intangible assets and goodwill
for potential impairment at least annually or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. In
assessing the recoverability of our goodwill and other intangibles, we must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. In addition, we must make assumptions
regarding the useful lives of these assets. If these estimates or their related
assumptions change in the future, we may be required to record impairment
charges for these assets. Effective October 1, 2001, we elected early adoption
of SFAS No. 142, and were required to analyze goodwill for impairment. We
completed the impairment test as of March 31, 2002 and determined that goodwill
was not impaired.
Deferred Income Taxes. We have provided a full valuation reserve
related to our substantial deferred tax assets. In the future, if sufficient
evidence of our ability to generate sufficient future taxable income in certain
tax jurisdictions becomes apparent, we may be required to reduce this valuation
allowance, resulting in income tax benefits in our consolidated statement of
operations. We evaluate the realizability of the deferred tax assets annually
and assess the need for the valuation allowance.
Results of Operations
Revenues. We had revenues from product sales, service revenues and
royalty income of $7,375,507 and $2,502,948 for the nine and three months ended
June 30, 2002, compared to $5,775,083 and $2,408,816 for the nine and three
months ended June 30, 2001.
Product Sales. Our product sales were realized from sales of
water-based stains, sealers and coatings by our subsidiary, OKON, Inc. through
which we conduct the paint business segment. These sales produced revenues of
$1,384,909 and $575,710 for the nine and three months ended June 30, 2002. This
compares to revenues from this segment of $1,736,114 and $758,959 for the nine
and three months ended June 30, 2001. The decreases of 20% and 24% in revenue
from this segment were due to a continued industry-wide reduction in inventory
22
purchasing and stocking levels by customers, resulting from construction
slow-downs in our primary distribution markets.
Service Revenues. Service revenues are provided by three of our
business segments. The segments are the oil and gas field services segment, the
industrial automation systems segment and the Rentech GTL Technology technical
services portion of the alternative fuels segment. The technical services are
provided through the scientists and technicians who staff our development and
testing laboratory. In addition, the alternative fuels segment includes rental
income from the development and testing laboratory building.
Service revenues in the amount of $1,564,388 and $417,189 were derived
from contracts for the oil and gas field services provided by our subsidiary,
Petroleum Mud Logging, Inc., during the nine and three months ended June 30,
2002. Our oil and gas field services revenue for the nine and three months ended
June 30, 2002 decreased by $438,978 and $379,873 as compared to the service
revenues of $2,003,366 and $797,062 for the nine and three months ended June 30,
2001. The decreases in oil and gas field services revenue were due to decreased
demand for our mud logging services, resulting from a substantial decrease in
drilling for new natural gas wells in our service market.
Service revenues in the amount of $2,288,413 and $860,234 were derived
from contracts for the manufacture of complex microprocessor controlled
industrial automation systems by our 56% owned subsidiary, REN Corporation, for
the nine and three months ended June 30, 2002. We had no service revenues during
the same period of fiscal 2001 for this segment as the acquisition of REN
Corporation was completed on August 1, 2001.
Service revenues also include revenue earned for technical services
provided to certain customers with regard to the Rentech GTL Technology. Our
service revenues for these technical services were $1,872,141 and $560,568 for
the nine and three months ended June 30, 2002, including $1,072,141 and $560,568
from Texaco, as compared to $1,762,957 and $758,187 during the same periods of
fiscal 2001. The increase of 6% in revenue for the nine month period was
primarily due to the completion of the study for the Wyoming Business Council,
under which $800,000 in revenue was recognized. The decrease of 26% in revenue
for the three month period was a result of a decrease in paid feasibility
studies during the third quarter of fiscal 2002 as compared to fiscal 2001,
primarily due to the varied timing of studies awarded by customers. These
technical services were provided at our development and testing laboratory.
Service revenues included rental income as well. We leased part of our
development and testing laboratory building in Denver, which was acquired in
February 1999, to a tenant. Rental income from this tenant contributed $85,656
and $29,247 in revenue during the nine and three months ended June 30, 2002 as
compared to $92,646 and $34,608 during the nine and three months ended June 30,
2001. Rental income is included in our alternative fuels segment.
Royalty Income. Royalty income consisted of royalties that we received
as a result of our October 1998 license of the Rentech GTL Technology to Texaco.
Under the license agreement, we earned $180,000 and $60,000 in royalties during
the nine and three months ended June 30, 2002 and 2001. After Texaco is
producing liquid hydrocarbons through the use of our technology, it is allowed
by the license agreement to apply the royalty payments made after the initial
$100,000 payment against future royalty payments made on account of production.
Royalty income is included in our alternative fuels segment.
Costs of Sales. Our costs of sales include costs for our products as
well as for our oil and gas field services and technical services, which
includes research and development contract costs, and industrial automation
services. During the nine and three months ended June 30, 2002, the combined
costs of sales were $4,122,150 and $1,429,014 compared to $3,804,533 and
$1,756,418 for the prior year. The increase for the nine month periods of
23
$317,617 and the decrease for the three month periods of $327,404 resulted from
the combination of factors described below for each segment.
Costs of sales for product sales are the cost of sales of our paint
business segment for sales of stains, sealers and coatings. During the nine and
three months ended June 30, 2002, our costs of sales for the paint segment
decreased by $169,241 and $191,767 to $657,152 and $237,815, as compared to the
nine and three months ended June 30, 2001. These decreases, primarily in raw
materials and labor costs, are a direct result of the decreases in product sales
for the nine and three month periods due to a continued industry-wide reduction
in inventory purchasing and stocking levels by customers, resulting from
construction slow-downs in our primary distribution markets.
Costs of sales for oil and gas field services were $1,255,144 and
$355,994 for the nine and three months ended June 30, 2002, down from $1,439,131
and $593,511 for the nine and three months ended June 30, 2001. The decreases of
$183,987 and $237,517 for the nine and three month periods, primarily for labor
and employee benefits, were due to decreased demand for our mud logging
services, resulting from a substantial decrease in drilling for new natural gas
wells in our service market.
Costs of sales for the industrial automation systems segment were
$1,666,244 and $620,755 for the nine and three months ended June 30, 2002. We
had no costs of sales during the same periods of fiscal 2001 for this segment as
the acquisition of REN Corporation was completed on August 1, 2001.
Costs of sales for technical services were $415,610 and $211,450 during
the nine and three months ended June 30, 2002, down from $1,539,009 and $733,325
for the nine and three months ended June 30, 2001. The decreases of $1,123,399
and $521,875 resulted primarily from decreased customer-billable hours at the
development and testing laboratory during the nine and three months ended June
30, 2002, while revenue for the nine month period was higher compared to the
prior year as a result of the completion of the study for the Wyoming Business
Council. These decreases result from the variations in timing of studies awarded
by customers while costs of sales for technical services have decreased overall
as a result of decreased employee and contract labor costs resulting from
operating efficiencies gained over time at the facility. Costs of sales for
technical services does not include the research and development costs related
to the Wyoming Business Council contract.
Costs of sales also includes research and development contract costs of
$128,000 and $3,000 for the nine and three months ended June 30, 2002. We had no
such research and development contract costs during the nine or three months
ended June 30, 2001. These costs are made up of engineering and labor costs
incurred on the completion of the Wyoming Business Council ("WBC") contract.
Gross Profit. Our gross profit for the nine and three months ended June
30, 2002 was $3,253,357 and $1,073,934, as compared to $1,970,550 and $652,398
for the 2001 period. The increase of $1,282,807 during the nine month period
resulted from the contribution from the industrial automation systems segment,
as well as the completion of the WBC contract of $800,000, offset by the
remaining costs incurred in the amount of $128,000 to complete the WBC contract.
The WBC contract did not exist during the comparable period in fiscal 2001. The
increase of $421,536 for the three month period resulted from the contribution
from the industrial automation systems segment, as well as an increase in gross
profit from the technical services provided at the development and testing
laboratory, due to decreased employee and contract labor costs resulting from
operating efficiencies gained over time at the facility.
Operating Expenses. Operating expenses consist of general and
administrative expense, depreciation and amortization and research and
development.
24
General and Administrative Expenses. General and administrative
expenses were $5,709,968 and $1,446,306 for the nine and three months ended June
30, 2002, up $2,005,442 and $501,002 from the nine and three months ended June
30, 2001 when these expenses were $3,704,526 and $945,304. The increases for the
current year are primarily due to several factors, including a decrease in
customer-billable hours at the development and testing laboratory of 39% and 26%
for the nine and three month periods. As a result, we did not allocate various
costs (i.e. salaries and related employee benefits) to cost of sales. In
addition, for the nine and three months ended June 30, 2002 we have included
$630,568 and $215,782 of general and administrative expenses from our industrial
automation systems segment which we did not have during the same periods of
fiscal 2001, as well as non-cash accruals of audit, legal and payroll expenses
of $240,600 and $80,200 during the nine and three month periods ended June 30,
2002, for which the Company had previously not accrued. Therefore, we did not
have these costs during the same periods of fiscal 2001. During the first
quarter of fiscal 2002, we wrote-off the note receivable from Dresser Engineers
& Constructors, Inc. as a bad debt expense of $191,779 as we determined that the
note receivable was not collectible.
Depreciation and Amortization. Depreciation and amortization expenses
for the nine and three months ended June 30, 2002 were $973,885 and $321,269. Of
these amounts, $293,648 and $114,316 were included in costs of sales.
Depreciation and amortization expenses for the nine and three months ended June
30, 2001 were $664,619 and $244,113, of which $129,687 and $45,229 were included
in costs of sales. The increase in depreciation and amortization expense is
attributable to the additional equipment acquired for our oil and gas field
services segment as well as for the development and testing laboratory, and the
amortization of production backlog and non-compete agreement capitalized upon
the acquisition of REN Corporation on August 1, 2001. In accordance with SFAS
No. 142, we are no longer amortizing goodwill related to the acquisitions of
OKON and PML. During the nine and three months ended June 30, 2001, we amortized
$71,168 and $24,263 in goodwill related to these acquisitions.
Research and Development. Research and development expenses were
$579,143 and $370,805 for the nine and three months ended June 30, 2002,
increased by $431,327 and $271,018 from the nine and three months ended June 30,
2001, when these expenses were $147,816 and $99,787. Due to a decrease in
billable technical services work performed at the development and testing
laboratory for customers, we were allowed to complete certain research and
development related activities for our own purposes. Extensive tests were
completed evaluating catalyst life and efficiency as well as other aspects of
our technology.
Total Operating Expenses. Total operating expenses for the nine and
three months ended June 30, 2002 were $6,969,348 and $2,024,064, as compared to
$4,387,274 and $1,243,975 for the nine and three months ended June 30, 2001, an
increase of $2,582,074 and $780,089. The increase in total operating expenses is
a result of the factors, previously described, that caused increases in
operating expenses.
Loss From Operations. Loss from operations for the nine and three
months ended June 30, 2002 increased by $1,299,267 and $358,553 to losses of
$3,715,991 and $950,130, as compared to losses of $2,416,724 and $591,577 for
the nine and three months ended June 30, 2001. The increased losses are
primarily due to an increase in operating expenses as previously described,
which is partially offset by an increase in gross profit contributed by our
operating segments.
Other Income (Expenses). Other income (expenses) include equity in loss
of investee, interest income, interest expense and gain on disposal of fixed
assets.
Equity in Loss of Investee. During the nine and three months ended June
30, 2002, we recognized $196,668 and $46,512 in equity in loss of investee, as
compared to $290,803 and $113,758 during the nine and three months ended June
30, 2001. This represents our 50% share of the loss incurred by our joint
venture in Sand Creek Energy LLC. The LLC is holding and maintaining the
mothballed Sand Creek methanol plant. The decrease during fiscal 2002 is due to
a decrease in insurance and other maintenance costs of the facility.
25
Interest Income. Interest income during the nine and three months ended
June 30, 2002 was $14,573 and $6,365, decreased from $101,938 and $34,692 during
the nine and three months ended June 30, 2001. The decreased interest income was
due to having fewer funds invested in interest-bearing cash accounts.
Interest Expense. Interest expense during the nine and three months
ended June 30, 2002 was $163,960 and $87,925, increased from $71,449 and $22,230
during the nine and three months ended June 30, 2001. The increase in interest
expense is the result of the addition of the convertible notes payable and the
notes payable added as a result of the acquisition of REN Corporation in August
2001.
Gain on Disposal of Fixed Assets. Gain on disposal of fixed assets was
$189 and $2,944 during the nine and three months ended June 30, 2002, with no
comparable amounts during the same periods of fiscal 2001. These gains represent
the disposal of out-dated office furniture and equipment, computer equipment and
vehicles.
Total Other Expenses. Total other expense increased to $345,866 and
$125,128 during the nine and three months ended June 30, 2002, an increase of
$85,552 and $23,832 over total other expenses of $260,314 and $101,296 for the
comparable periods ended June 30, 2001. The increase in total other expenses
resulted from the combination of the factors previously described as other
income (expense).
Minority Interest in Subsidiary's Net Income. The minority interest in
subsidiary's net income of $35,085 and $16,761 during the nine and three months
ended June 30, 2002 resulted from the acquisition of 56% of REN Corporation.
This acquisition had not been completed during fiscal 2001.
Net Loss. For the nine and three months ended June 30, 2002, we
experienced net losses of $4,096,942 and $1,092,019 compared to net losses of
$2,677,038 and $692,873 during the nine and three months ended June 30, 2001.
The increases of $1,419,904 and $399,146 resulted from a combination of the
factors previously described.
Dividend Requirements on Convertible Preferred Stock. Dividend
requirements on convertible preferred stock is the imputed amount calculated
when there is a discount from fair market value when we issue our convertible
preferred stock, plus the 9% dividend that accrues on the convertible preferred
stock. The dividends are deducted from net loss in order to arrive at loss
applicable to common stock. During the nine months ended June 30, 2002, we
issued convertible preferred stock, and recorded dividends of $136,932, compared
to $466,180 for the nine months ended June 30, 2001.
Loss Applicable to Common Stock. As a result of recording dividends on
convertible preferred stock as described above, the loss applicable to common
stock was $4,233,874 and $1,092,019 or $.06 and $.02 per share during the nine
and three months ended June 30, 2002, and $3,143,218 and $692,873 or $.05 and
$.01 per share during the nine and three months ended June 30, 2001.
Liquidity and Capital Resources
At June 30, 2002, we had working capital of $1,762,294 as compared to
working capital of $1,412,195 at September 30, 2001. The increase in working
capital was due to the addition of cash resulting from the Company's private
placement of $978,241 and proceeds from convertible debt of $2,250,000, as well
as an increase in costs and estimated earnings in excess of billings related to
contracts being performed by REN Corporation.
As of June 30, 2002, we had $4,336,037 in current assets, including net
accounts receivable of $1,428,744. At that time, our current liabilities were
$2,573,743. We had long-term liabilities of $3,293,119. Our long-term
liabilities relate to our long-term convertible debt, as well as to our mortgage
26
on our laboratory facility, which we purchased in February 1999. The rental
income from the facility is adequate to fund the monthly mortgage payments. The
mortgage is due on March 1, 2029.
The primary source of our liquidity has been equity capital
contributions. We added additional sources of liquidity through cash flow
generated by the operations of OKON, Inc., Petroleum Mud Logging, Inc., the
license agreement with Texaco and billings for technical services relating to
the Rentech GTL Technology. In August 2001, we added an additional source of
liquidity with the purchase of 56% of REN Corporation, which manufactures
complex microprocessor controlled industrial automation systems.
Our principal needs for liquidity in the past have been to fund working
capital, pay for research and development of the Rentech GTL Technology, pay the
costs of acquiring and initially funding the paint, oil and gas field services
and industrial automation segments, invest in the advanced technologies of
INICA, Inc., and acquiring a 56% interest in REN Corporation.
From our inception on December 18, 1981 through June 30, 2002, we have
incurred losses in the amount of $29,667,970. For the nine months ended June 30,
2002, we recognized a $4,096,942 net loss. If we do not operate at a profit in
the future, we may be unable to continue our operations at the present level. As
of June 30, 2002, we had a cash balance of $818,627, including $500,000 in
restricted cash. We have been successful in the past in raising equity
financing. For the years ended September 30, 2001, 2000 and 1999, we received
net cash proceeds from the issuance of common stock of $2,332,005, $6,951,913
and $312,319. For the years ended September 30, 2001, 2000 and 1999, we received
net cash proceeds from the issuance of convertible preferred stock of $793,673,
$150,000 and $1,834,844. During the nine months ended June 30, 2002, we received
net cash proceeds from the issuance of common stock and the proceeds from a
stock subscription receivable of $1,380,249, and we received net proceeds from
the issuance of convertible preferred stock of $475,000. We believe that a
combination of our current cash balance, expected growth in the paint, oil and
gas field services and alternative fuels segments and the sale of all or part of
the assets of Sand Creek Energy, LLC will be sufficient to meet our cash
operating requirements through June 30, 2003. However, additional sources of
equity financing may be necessary to fund any working capital requirements
should the need arise. We are in negotiations to sell all or part of the assets
of Sand Creek Energy, LLC, in which we have a 50% equity interest, for up to
$3,100,000. We are currently funding 50% of the cost of maintaining this
facility at a cost of approximately $20,000 per month. In addition, we have
guaranteed obligations of the LLC in the amount of $1,000,000. However, there
are no active contracts to which this guaranty relates.
We anticipate needs for substantial amounts of new capital for projects
that entail commercializing the Rentech GTL Technology and to continue
significant research and development programs for the GTL projects we are
considering. We expect to undertake these types of expenditures in efforts to
commercialize the technology in one or more plants in which we may acquire part
ownership. In February 2001, we retained Petrie Parkman & Company as a financial
advisor in order to help us evaluate and possibly implement one or more
transactions involving a sale, merger, exchange or other disposition of our
securities or assets, or to form a consortium to fund projects aimed at
achieving our goal of commercializing the Rentech GTL Technology.
We are considering proposals to acquire ownership interests or
leasehold rights in one or more industrial gas plants that are presently
under-utilized. Under these proposals, we would have to contribute capital,
either alone or possibly in a joint venture with a present owner, to retrofit a
plant to use the Rentech GTL Technology. Our goal is to have any converted plant
operate on a commercial basis and realize a new source of revenue from the
production and sale of liquid hydrocarbons. We may attempt to fund other project
costs through sales of some part of our ownership, if we have any, in any
industrial gas plant that we may attempt to retrofit. At this time, we own a
one-half interest in one plant, which is the mothballed Sand Creek methanol
plant. We are not targeting it for use as a commercial scale plant for our
technology. Instead, we may use it as a large pilot plant for continuing work
with the Rentech GTL Technology or we may sell all or part of the assets.
27
If financing is available and we are able to retrofit and economically
operate one or more plants in which we have acquired a share of ownership, we
anticipate two types of benefits. One of these would be new revenues from our
share of sales of liquid hydrocarbons. We also anticipate that economic use of
the Rentech GTL Technology in one or more of these plants would lead to
commercial use of our technology by others and additional revenues from license
fees, engineering services, royalties and catalyst sales.
Net Deferred Tax Asset. We had net deferred tax assets offset by a full
valuation allowance at June 30, 2002 and 2001, since we are not able to
determine if it is more likely than not that the net deferred tax assets will be
realized.
Analysis of Cash Flow
Operating Activities. Operating activities produced net losses of
$4,096,942 and $2,677,038 for the nine months ended June 30, 2002 and 2001,
respectively. The cash flows used in operations during these periods resulted
from the following operating activities.
Depreciation. Depreciation is a non-cash expense. This expense
decreased during the nine months ended June 30, 2002 to $380,595 as compared to
$402,355 during the nine months ended June 30, 2001. The decrease for this
period is attributable to the fact that certain fixed assets became fully
depreciated during the current year.
Amortization. Amortization is also a non-cash expense. This expense
increased during the nine months ended June 30, 2002 to $593,290 as compared to
$262,264 during the nine months ended June 30, 2001. The increase for the fiscal
2002 period is attributable to the amortization of capitalized software,
production backlog and non-compete agreement acquired with the purchase of REN
Corporation. In accordance with SFAS No. 142, the Company is no longer
amortizing goodwill related to the acquisitions of OKON and PML. During the nine
months ended June 30, 2001, we amortized $71,168 in goodwill related to these
acquisitions.
Bad Debt Expense. During the nine months ended June 30, 2002, we
wrote-off the note receivable from Dresser Engineers & Constructors, Inc. as a
bad debt expense of $191,779 as we determined that the note receivable was not
collectible.
Stock Options and Warrants Issued for Services. During fiscal 2002 and
2001, we issued stock options and warrants in lieu of cash to our non-employee
directors and independent contractor consultants for their services. During the
nine month periods ended June 30, 2002 and 2001, we recognized $70,514 and
$153,546 in compensation expense related to the issuances.
Equity in Loss of Investee. We recognized equity in loss of investee in
the amount of $196,668 during the nine months ended June 30, 2002 and $290,803
during the nine months ended June 30, 2001. This represents our 50% share of the
loss incurred by our joint venture in Sand Creek Energy LLC. The LLC is holding
and maintaining the mothballed Sand Creek methanol plant. The decrease during
fiscal 2002 is due to a decrease in insurance and other maintenance costs of the
facility.
Minority Interest in Net Income of Subsidiary. The minority interest in
net income of subsidiary of $35,084 during the nine months ended June 30, 2002
results from the acquisition of 56% of REN Corporation. This acquisition had not
been completed during fiscal 2001.
Revenue Recognized from Contract Liability. We completed the Wyoming
Business Council study during the nine months ended June 30, 2002. As such, we
recognized revenue of $800,000, of which $750,000 has previously been recorded
as a contract liability.
28
Changes in Operating Assets and Liabilities. The changes in operating
assets and liabilities, net of business combination, result from the following
factors.
Accounts Receivable. Accounts receivable decreased by $312,419 during
the nine months ended June 30, 2002, as compared to an increase of $829,281
during the nine months ended June 30, 2001. Accounts receivable decreased for
the nine months ended June 30, 2002, as compared to the same period in fiscal
2001, due to increased collection efforts within each of our business segments,
offset by a decrease in technical services revenue at our research and
development laboratory of 39%, a decrease in sales by the paint segment of 20%
and a decrease of revenue from the oil and gas field services segment of 22%.
Costs and Estimated Earnings in Excess of Billings. Costs and estimated
earnings in excess of billings increased $853,580 during the nine months ended
June 30, 2002 as a result of contracts within the industrial automation systems
segment which are accounted for under the percentage of completion method of
accounting. This segment began operations during the fourth quarter of fiscal
2001.
Other Receivables and Receivable from Related Party. Other receivables
and receivable from related party decreased during the nine months ended June
30, 2002 by $59,858 as compared to a $19,568 increase during the nine months
ended June 30, 2001.
Inventories. Inventories increased by $56,439 during the nine months
ended June 30, 2002 as compared to $96,992 during the nine months ended June 30,
2001. The increase is a result of inventory-building at OKON due to an
industry-wide reduction in inventory stocking levels by customers, resulting
from construction slow-downs in our primary distribution markets.
Prepaid Expenses and Other Current Assets. Prepaid expenses and other
current assets decreased during the nine months ended June 30, 2002 by $250,569
and increased during the nine months ended June 30, 2001 by $47,963. These
changes reflect the payment of the annual insurance premiums of $246,753 in
fiscal 2002. The insurance premiums for fiscal 2002 were financed.
Accounts Payable. Accounts payable decreased by $365,507 and increased
by $47,429 during the nine months ended June 30, 2002 and 2001. The decrease in
fiscal 2002 as compared to fiscal 2001 resulted from a decrease in expenditures
within the alternative fuels segment and the payments of payables made possible
by the additional liquidity resulting from equity financing.
Billings in Excess of Costs and Estimated Earnings. Billings in excess
of costs and estimated earnings decreased $85,950 during the nine months ended
June 30, 2002 as a result of contracts within the industrial automation systems
segment which are accounted for under the percentage of completion method of
accounting. This segment began operations during the fourth quarter of fiscal
2001.
Accrued Liabilities and Accrued Payroll. Accrued liabilities and
accrued payroll increased $36,901 during the nine months ended June 30, 2002 as
compared to $327,893 during the nine months ended June 30, 2001 as a result of
the timing of payroll accruals.
Net Cash Used in Operating Activities. The total net cash used in
operations increased to $4,075,877 during the nine months ended June 30, 2002 as
compared to $2,250,246 during the nine months ended June 30, 2001. The increase
reflects increased cash costs for general and administrative expenses, including
$630,568 for our industrial automation systems subsidiary acquired in August
2001.
Investing Activities. Investing activities during the nine months ended
June 30, 2002 and 2001 included purchases of property and equipment of $226,605
and $467,252. Most of these purchases, $112,346 and $60,090, respectively, were
29
for our development and testing research laboratory facilities and for mud
logging vehicles.
We received proceeds from the disposal of fixed assets during the nine
months ended June 30, 2002 of $9,990. There were no comparable proceeds in the
2001 period.
We used $208,000 and $302,194 to fund our 50% share of expenses of Sand
Creek Energy, LLC during the nine month periods ended June 30, 2002 and 2001.
Financing Activities. Financing activities during the nine months ended
June 30, 2002 provided proceeds of $500,000 from the issuance of convertible
preferred stock as compared to proceeds of $779,175 during the nine months ended
June 30, 2001. During the nine months ended June 30, 2002, we received
$1,132,909 in cash from the issuance of common stock compared to $2,396,192
during the nine months ended June 30, 2001. During the nine months ended June
30, 2002, we received proceeds from a stock subscription receivable in the
amount of $250,000, as compared to no receivable during the same quarter of the
previous year. During the nine months ended June 30, 2002, we purchased
restricted cash in the amount of $500,000, as compared to no such purchase
during the same period of fiscal 2001. During the nine months ended June 30,
2002, we paid $110,010 in offering costs as compared to $185,954 during the nine
months ended June 30, 2001. During the nine months ended June 30, 2002, we
repaid $30,600 on a related party payable. There were no such repayments during
the nine months ended June 30, 2001. During the nine months ended June 30, 2002,
we repaid $322,510 on our debt obligations as compared to $255,570 during the
nine months ended June 30, 2001. During the nine months ended June 30, 2002, we
received net proceeds from a line of credit $877,066 as compared to no such
proceeds during the same period of fiscal 2001. During the nine months ended
June 30, 2002, we received proceeds from long-term convertible debt in the
amount of $2,250,000, compared to no such proceeds during fiscal 2001. The net
cash provided by financing activities during the nine months ended June 30, 2002
was $4,046,855, compared to $3,481,759 in cash provided by financing activities
during the nine months ended June 30, 2001.
Cash decreased during the nine months ended June 30, 2002 by $574,825
compared to $7,439 during the nine months ended June 30, 2001. These changes
decreased the ending cash balances to $318,627 and $1,509,376 at June 30, 2002
and 2001.
Contractual Obligations
In addition to the line of credit and long-term convertible debt
previously described, we have entered into various other contractual
obligations. The following table lists our significant liabilities at June 30,
2002.
Payments Due By Period
-------------------------------------------------------------
Less than After
Contractual Obligations 1 year 2-3 years 4-5 years 5 years Total
- -------------------------------------------------------------------------------------------
Line of credit $ 877,066 $ -- $ -- $ -- $ 877,066
Long-term debt 134,183 79,211 33,725 983,268 1,230,387
Long-term convertible debt 46,062 104,669 2,084,761 -- 2,235,492
Operating leases 234,181 136,741 61,392 -- 432,314
- -------------------------------------------------------------------------------------------
$1,291,492 $ 320,621 $2,179,878 $ 983,268 $4,775,259
===========================================================================================
30
We have entered into various long-term promissory notes, with monthly
principal and interest payments of $37,857, at interest rates of 5.9% to 24%,
which are collateralized by certain fixed assets of the Company.
We have leased office space under a non-cancelable operating lease,
which expires October 31, 2003, with a renewal option for an additional five
years. We have also leased office and warehouse space under a lease which
expires during March 2005. In addition we have entered into various other
operating leases, which expire through August 2004.
In addition to the contractual obligations previously described, we
have entered into various other commercial commitments. The following table
lists these commitments at June 30, 2002.
Amount of Commitment Expiration Per Period
-----------------------------------------------------------
Other Less than After
Commercial Commitments 1 year 2-3 years 4-5 years 5 years Total
- -----------------------------------------------------------------------------------------
Available line of credit $ 122,934 $ -- $ -- $ -- $ 122,934
Guarantees 2,000,000 -- -- -- 2,000,000
Employment agreements 1,060,100 508,608 -- -- 1,568,708
---------- ---------- ---------- ---------- ----------
$3,183,034 $ 508,608 $ -- $ -- $3,691,642
---------- ---------- ---------- ---------- ----------
We are a guarantor on the $1,000,000 line of credit with Premier Bank
until it matures on March 1, 2003. In addition, we have guaranteed certain
commitments of Sand Creek Energy, LLC in the amount of $1,000,000. However,
there are no active contracts to which this guaranty relates.
We have entered into various employment agreements with officers of the
Company which extend from August 31, 2001 to August 31, 2004. These agreements
describe annual compensation as well as the compensation that we must pay upon
termination of employment.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk through interest rates related to
its investment of current cash and cash equivalents. These funds are generally
highly liquid with short-term maturities, and the related market risk is not
considered material. The Company's long-term debt is at fixed rates of interest.
The Company believes that fluctuations in interest rates in the near term will
not materially affect its consolidated operating results, financial position or
cash flow.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On July 13, 2001, REN Corporation filed a civil action against Case
Corporation in Payne County Court, for collection of approximately $342,000. The
civil action was later moved to the United States District Court, Oklahoma. We
have asserted that this sum is due as the contract price payable to REN for test
equipment that we developed for the customer on its order. The customer is
defending the claim on its assertion that the test equipment was not delivered
on a timely basis as required by the terms of the contract. REN has asserted
that this occurred as a result of change orders requested by the customer. The
31
customer has filed a counterclaim against REN for approximately $298,000 plus
attorney fees, costs and interest. REN is defending vigorously against the
counterclaim.
A civil action was filed against Rentech individually and as successor
to OKON, Inc. by Shirley and Kenneth Meaux, in the District Court of Jefferson
County, Texas. The proceeding was filed on April 4, 2002. The plaintiffs claim
that OKON and fifty-seven other defendants injured Shirley Meaux by exposing her
to vinyl chlorides contained in their aerosol sprays and other products, causing
her to contract cirrhosis. The other defendants include Clairol, Inc., Johnson &
Johnson, Revlon, Inc., Walgreens Company and other leading manufacturers and
retailers of cosmetics and personal care products; Conoco, Inc., Shell Oil
Company and other oil and gas companies; Borden Chemicals, Inc.; Dow Chemical
Company, and other manufacturers of chemicals; Coronado Paint Company, Inc., ICI
Paints, Kelly-Moore Paint Company, Sherwin-Williams Company and other
manufacturers of paints; and numerous other defendants. Shirley Meaux and
Kenneth Meaux have requested judgment against each defendant in unspecified
amounts for damages, punitive damages, costs, interest and other relief to which
they may show they are entitled. Rentech has filed its answer with the court,
denying any liability. Rentech intends to seek to be dismissed from the case on
the grounds that OKON has never used vinyl chlorides in any of its water-based
stains, sealers and coatings.
Item 2. Changes in Securities and Use of Proceeds.
The following table shows information concerning all sales of the
Company's equity securities sold by the Company during the period covered by
this report that were not registered under the Securities Act of 1933, as
amended.
No. of
Date of Title of Securities Offering Total Class of Exemptions from
Sale Security Sold Price Commissions Purchasers Registration
---- -------- ---- ----- ----------- ---------- ------------
February 25, Convertible 4(1) $2,250,000 $0 Accredited Rules 505,
2002 Promissory Notes Investors 506, Sections
4(2), 4(6)
February 28, Common Stock 2,226,500 $1,113,850 $55,692.50(2) Accredited Rules 505,
2002 Investors 506, Sections
4(2), 4(6)
March 10, 2002 Stock Purchase 9 (3) $0 Accredited Rules 505,
Warrants Investors 506,Sections
4(2), 4(6)
January 16, Stock Options 3 (4) $0 Accredited Rules 505,
2002 Investors 506, Sections
4(2), 4(6)
(1) Four convertible promissory notes were issued. The notes are payable,
with interest at 8.5% per annum, in monthly installments that amortize
the notes over 20 years, with the remaining balance due on February 25,
2006. In addition to the monthly payments in money, after the first 12
months one thirty-sixth of the declining principal balances of the
notes are automatically converted into common stock at a conversion
price of $.50 per share. If the average market price for the seven
preceding trading days is less than $.50 per share, the amount of the
money difference is added to the principal of the note. The notes are
convertible into no more than 4,500,000 shares of common stock, at a
price of $.50 per share, less two shares for every dollar of principal
reduction of the notes paid in money.
32
(2) In addition to the commissions paid in cash, stock purchase warrants
were issued for the purchase of 708,833 shares of common stock at $1.00
per share, expiring March 10, 2005.
(3) Stock purchase warrants described in Note 2, exercisable for 708,833
shares at $1.00 per share expiring March 10, 2005, issued for placement
agent services valued at $64,284.
(4) Stock options, exercisable for 300,000 shares, one-third at $.55 per
share, one-third at $.60, and one-third at $.65, expiring March 31,
2005, issued for investment banking consulting services valued at
$80,076.
The proceeds of the offerings will be used for development of
gas-to-liquids projects and technology, including general working capital.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders.
On March 26, 2002, the Company held its Annual Meeting of Shareholders. Matters
voted on at the meeting and the results of such voting are as follows:
The following persons were elected as directors of the Company for terms
expiring in 2005. The received the number of votes set forth below:
Director For Withheld
-------- --- --------
John P. Diesel 59,347,404 1,660,385
Dennis L. Yakobson 59,250,788 1,757,001
The terms of John J. Ball, Ronald C. Butz, Douglas L. Sheeran and Erich W.
Tiepel continued after the meeting.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit
Number Document
- ------ --------
2.1 Stock Purchase Agreement dated August 1, 2001 between Rentech and REN
Corporation (incorporated by reference from the exhibits to Rentech's
Form 10-K filed with the Securities and Exchange Commission on December
28, 2001).
3.1 Restated and Amended Articles of Incorporation, dated January 4, 1991
(incorporated by reference from the exhibits to Amendment No. 2 to
Rentech's Form S-18 Registration Statement No. 33-37150-D filed with
the Securities and Exchange Commission on January 18, 1991).
3.2 Articles of Amendment dated April 5, 1991 to the Restated and Amended
Articles of Incorporation (incorporated by reference from the exhibits
to Rentech's Current Report on Form 8-K dated August 10, 1993 filed
with the Securities and Exchange Commission).
33
3.3 Articles of Amendment dated January 26, 1998 to Articles of
Incorporation - Preferences, Limitations and Relative Rights of
Convertible Stock, Series 1998-B of Rentech, Inc. (incorporated by
reference from Exhibit No. 3. (I). 2 to Rentech's Form 10-KSB filed
with the Securities and Exchange Commission on January 13, 1999).
3.4 Articles of Amendment dated December 4, 1998 to Articles of
Incorporation - Designation, Preferences and Rights of Series 1998-C
Participating Cumulative Preference Stock of Rentech, Inc. pertaining
to its Shareholder Rights Plan (incorporated by reference from Exhibit
No. 3. (I). 4 to Rentech's Form 10-KSB filed with the Securities and
Exchange Commission on January 13, 1999).
3.5 Bylaws dated January 19, 1999 (incorporated by reference from Exhibit
No. 3. (11) to Rentech's Form 10-KSB filed with the Securities and
Exchange Commission on January 12, 2000).
4.1 Shareholder Rights Plan dated November 10, 1998 (incorporated by
reference from the exhibits to Rentech's Current Report on Form 8-K/A
filed with the Securities and Exchange Commission on July 10, 2002).
4.2 Form of Convertible Promissory Note issued under the 2002 private
placement of convertible promissory notes (incorporated by reference
from Exhibit No. 4.2 to Rentech's Form S-3/A Amendment One Registration
Statement No. 333-85682 filed with the Securities and Exchange
Commission on August 14, 2002).
4.3 Form of Warrant issued under the 2002 private placement of securities
(incorporated by reference from Exhibit No. 4.3 to Rentech's Form S-3/A
Amendment One Registration Statement No. 333-85682 filed with the
Securities and Exchange Commission on August 14, 2002).
4.4 Form of Registration Rights Agreement (incorporated by reference from
Exhibit No. 4.4 to Rentech's Form S-3/A Amendment One Registration
Statement No. 333-85682 filed with the Securities and Exchange
Commission on August 14, 2002).
4.5 Form of Non-statutory Stock Option Agreement (incorporated by reference
from Exhibit No. 4.5 to Rentech's Form S-3/A Amendment One Registration
Statement No. 333-85682 filed with the Securities and Exchange
Commission on August 14, 2002).
10.2 1990 Stock Option Plan (incorporated by reference from the exhibits to
Rentech's Registration Statement No. 33-37150-D on Form S-18).
10.3 1994 Stock Option Plan (incorporated by reference from the exhibits to
Post-effective Amendment No. 5 to Rentech's Form S-18 on Form SB-2
Registration Statement No. 33-37150-D).
10.4 1996 Stock Option Plan (incorporated by reference from the exhibits to
Rentech's Current Report on Form 8-K dated December 18, 1996).
10.5 Form of employment contracts with certain executive officers
(incorporated by reference from the exhibits to Rentech's Current
Report on Form 8-K dated November 14, 1994).
34
10.6 Employment contract with executive officer of subsidiary REN
Corporation (incorporated by reference from the exhibits to Rentech's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on December 28, 2001).
10.7 Technical Services Agreement dated June 14, 1999 between Rentech and
Texaco Energy Systems, Inc. (incorporated by reference from the
exhibits to Rentech's Form 10-K filed with the Securities and Exchange
Commission on December 28, 2001).
10.9 Services Contract with Wyoming Business Council dated January 30, 2001
(incorporated by reference from Exhibit No. 10.9 to Rentech's Form
S-3/A Amendment One Registration Statement No. 333-85682 filed with the
Securities and Exchange Commission on August 14, 2002).
10.10 Marketing Agreement with Comart dated July 22, 2000 (incorporated by
reference from Exhibit No. 10.10 to Rentech's Form S-3/A Amendment One
Registration Statement No. 333-85682 filed with the Securities and
Exchange Commission on August 14, 2002).
10.11 Letter Agreement with BC Projectos dated March 4, 1999 (incorporated by
reference from Exhibit No. 10.11 to Rentech's Form S-3/A Amendment One
Registration Statement No. 333-85682 filed with the Securities and
Exchange Commission on August 14, 2002).
10.12 Joint Study Agreement with Pertamina dated October 2, 2001
(incorporated by reference from Exhibit No. 10.12 to Rentech's Form
S-3/A Amendment One Registration Statement No. 333-85682 filed with the
Securities and Exchange Commission on August 14, 2002).
10.13 Letter of Intent with Oroboros AB dated September 29, 1999
(incorporated by reference from Exhibit No. 10.13 to Rentech's Form
S-3/A Amendment One Registration Statement No. 333-85682 filed with the
Securities and Exchange Commission on August 14, 2002).
10.14 Memorandum of Understanding with GTL Bolivia, S.A. dated June 22, 2001
(incorporated by reference from Exhibit No. 10.14 to Rentech's Form
S-3/A Amendment One Registration Statement No. 333-85682 filed with the
Securities and Exchange Commission on August 14, 2002).
10.15 Memorandum of Understanding with Jacobs Engineering U.K. Limited dated
July 15, 1999 (incorporated by reference from Exhibit No. 10.15 to
Rentech's Form S-3/A Amendment One Registration Statement No. 333-85682
filed with the Securities and Exchange Commission on August 14, 2002).
10.16 Agreement with Petrie Parkman & Co. dated May 10, 2001 (incorporated by
reference from Exhibit No. 10.16 to Rentech's Form S-3/A Amendment One
Registration Statement No. 333-85682 filed with the Securities and
Exchange Commission on August 14, 2002, 2002).
10.17 Guaranty for Sand Creek Energy, LLC dated December 31, 1999
(incorporated by reference from Exhibit No. 10.17 to Rentech's Form
S-3/A Amendment One Registration Statement No. 333-85682 filed with the
Securities and Exchange Commission on August 14, 2002, 2002).
10.18 Form of employment agreement between Rentech and its executive officers
(incorporated by reference from Exhibit No. 10.18 to Rentech's Form
S-3/A Amendment One Registration Statement No. 333-85682 filed with the
Securities and Exchange Commission on August 14, 2002, 2002).
35
(b) Reports on Form 8-K:
Form 8-K dated October 30, 2001 reporting under Item 2, Acquisition or
Disposition of Assets
Form 8-K dated April 5, 2002 reporting under Item 5, Other Materially
Important Events
Form 8-K/A dated July 10, 2002 reporting under Item 5, Other Materially
Important Events and Item 7, Financial Statements and Exhibits
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RENTECH, INC.
Dated: August 14, 2002 /s/ Dennis L. Yakobson
----------------------------------------
Dennis L. Yakobson, President
Dated: August 14, 2002 /s/ James P. Samuels
----------------------------------------
James P. Samuels, Vice President-Finance
and Chief Financial Officer
37