UNITED STATES
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, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NO. 0-21015
CELL TECH INTERNATIONAL INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-3345046
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
565 Century Court
KLAMATH FALLS, OREGON 97601
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (541) 882-5406
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 per Share
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
As of July 31, 2004, the number of shares outstanding of the registrant's sole
class of common stock, par value $0.01 per share was 13,974,087.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION....................................................................................1
ITEM 1. FINANCIAL STATEMENTS................................................................................1
Consolidated Balance Sheets..............................................................................1
Consolidated Statements of Operations....................................................................2
Consolidated Statements of Cash Flows....................................................................2
Notes to Consolidated Financial Statements...............................................................4
Commissions..............................................................................................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................9
Overview................................................................................................10
Commissions.............................................................................................11
Results of Operations...................................................................................12
Three months ended June 30, 2004 compared with the three months ended June 30, 2003.....................12
Six months ended June 30, 2004 compared with the six months ended June 30, 2003.........................14
Liquidity and Capital Resources.........................................................................15
Cash Flows..............................................................................................16
Recent Financial Accounting Standards Board Statements..................................................16
Special Note Regarding Forward-Looking Statements.......................................................16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................17
ITEM 4. CONTROLS AND PROCEDURES.............................................................................17
PART II -- OTHER INFORMATION.....................................................................................18
ITEM 1. LEGAL PROCEEDINGS...................................................................................18
ITEM 2. CHANGES IN SECURITIES...............................................................................19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................19
ITEM 5. OTHER INFORMATION...................................................................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................................19
SIGNATURES..................................................................................................20
CERTIFICATION PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002......................................21
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002.......................................................................................22
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Current assets
Receivables $ 203,773 $ 284,648
Current portion of inventories 1,900,000 1,900,000
Prepaid expenses 253,097 565,450
----------- -----------
Total current assets 2,356,870 2,750,098
----------- -----------
Long-term inventories, net of current portion 2,658,969 2,816,471
Property and equipment, net of accumulated depreciation 1,723,613 2,460,237
Property and equipment idle, net 791,131 916,355
Other assets 197,879 240,851
----------- -----------
TOTAL ASSETS $ 7,728,462 $ 9,184,012
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft $ 592,898 $ 481,496
Accounts payable 1,441,898 685,146
Commissions payable 761,138 878,258
Accrued payroll and related liabilities 296,866 296,506
Other accrued expenses 1,240,637 1,287,659
Current portion of long-term debt 2,103,400 2,074,229
Related party payable 965,799 746,747
----------- -----------
Total current liabilities 7,402,636 6,450,040
----------- -----------
Long-term liabilities
Long-term debt, net of current portion 229,604 507,855
----------- -----------
TOTAL LIABILITIES 7,632,240 6,957,895
----------- -----------
Stockholders' equity
Series A convertible preferred stock - no par value; 4,175,000 shares
authorized; none issued and outstanding in 2004 and 2003 -- --
Series B convertible preferred stock - no par value; 800,000 shares
authorized; none issued and outstanding in 2004 and 2003 -- --
Undesignated preferred stock - no par value; 1,825,000 shares
authorized; none issued and outstanding in 2004 and 2003 -- --
Common stock - $.01 par value; in 2004 and 2003, 50,000,000 shares
authorized, 13,974,087 shares issued and outstanding 139,741 139,741
Additional paid-in capital 2,891,224 2,891,224
Accumulated Deficit (2,934,743) (804,849)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 96,222 2,226,116
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,728,462 $ 9,184,012
=========== ===========
See accompanying notes to consolidated financial statements.
1
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended For the Three Months Ended
June 30, June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUE $ 10,127,805 $ 11,600,925 $ 4,860,751 $ 5,667,933
COST OF SALES 2,868,991 3,628,427 1,468,655 1,762,165
------------ ------------ ------------ ------------
GROSS PROFIT 7,258,814 7,972,498 3,392,096 3,905,768
COMMISSIONS 4,223,228 4,896,457 2,045,032 2,361,022
------------ ------------ ------------ ------------
GROSS PROFIT AFTER COMMISSIONS 3,035,586 3,076,041 1,347,064 1,544,746
SHIPPING AND HANDLING EXPENSES 729,765 747,012 383,267 363,408
SELLING EXPENSES 1,823,724 2,182,396 843,422 1,072,359
RESEARCH AND DEVELOPMENT 74,331 105,724 35,162 46,165
GENERAL AND ADMINISTRATIVE 2,339,470 1,112,159 1,476,334 633,271
ASSET WRITE-DOWN -- 528,632 -- 528,632
------------ ------------ ------------ ------------
OPERATING LOSS (1,931,704) (1,599,882) (1,391,121) (1,099,089)
OTHER INCOME (35,373) 133,386 (52,215) (33,083)
INTEREST EXPENSE (162,817) (276,037) (80,076) (111,310)
------------ ------------ ------------ ------------
NET LOSS $ (2,129,894) $ (1,742,533) $ (1,523,412) $ (1,243,482)
============ ============ ============ ============
BASIC AND DILUTED LOSS
PER SHARE $ (0.15) $ (0.13) $ (0.11) $ (0.09)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
USED TO CALCULATE BASIC AND
DILUTED LOSS PER SHARE 14,409,426 13,790,519 14,409,426 13,790,519
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
----------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,129,894) $(1,742,533)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation and amortization 926,086 519,966
Impairment of fixed assets and intangibles -- 528,632
(Gain) or Loss on sale of fixed assets (7,528) 90,498
Changes in assets and liabilities:
Receivables 80,875 182,872
Inventories 157,502 528,453
Prepaid expenses 312,353 297,265
Other assets 42,972 186,451
Accounts payable 756,752 167,009
Commissions payable (117,120) (70,780)
Accrued payroll and payroll related liabilities 360 47,378
Other accrued expenses (47,022) (368,484)
----------- -----------
Net cash provided by (used in) operating activities (24,664) 366,727
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (70,185) (64,724)
Proceeds from disposals of equipment 42,734 75,116
Additions to construction in progress (29,259) (50,028)
----------- -----------
Net cash used for investing activities (56,710) (39,636)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 111,402 86,877
Net payments on long-term debt (249,080) (559,203)
Net proceeds from related party debt 219,052 145,235
----------- -----------
Net cash provided by (used in) financing activities 81,374 (327,091)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- --
CASH AND CASH EQUIVALENTS, beginning of year -- --
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period
for:
Interest $ 162,817 $ 276,037
=========== ===========
NON-CASH FLOW TRANSACTIONS
Par value of accrued penalty shares issued: $ -- $ 33,332
Additional paid-in capital related to accrued
penalty shares issued $ -- $ 591,528
Decrease in other accrued expenses for accrued
penalty shares issued $ --) $ (624,860)
=========== ===========
See accompanying notes to consolidated financial statements.
3
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Cell Tech International Incorporated ("Cell Tech" or "we" "us" "our") and The
New Algae Company, Inc. ("NAC"), collectively the "Company," are engaged in
producing and marketing food supplement and personal care products made with
blue-green algae harvested from Klamath Lake, Oregon. We use a multi-level
marketing network throughout the United States, the District of Columbia, Guam,
Puerto Rico, American Samoa, the Virgin Islands and Canada to distribute our
products.
PRESENTATION OF INTERIM INFORMATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of our management,
the accompanying unaudited consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair statement of our financial information as of and for the periods
presented. The consolidated results of operations of any interim period are not
necessarily indicative of the consolidated results of operations we expect for
the fiscal year. For further information, refer to the consolidated financial
statements and accompanying footnotes included in our annual report on Form 10-K
for the year ended December 31, 2003.
GOING CONCERN
Management has introduced a new line of personal care products and initiated
several new advertising campaigns in order to increase revenues and reverse the
trend of net losses in the first six months of 2004 and prior years. Although
management believes that it has made progress during the first six months of
2004 on issues affecting our ability to continue as a going concern, we have
experienced recurring net losses and have negative working capital at June 30,
2004. These conditions give rise to substantial doubt about our ability to
continue as a going concern. In their report on our financial statements for the
year ended December 31, 2003, our independent registered public accountants
included an explanatory paragraph expressing substantial doubt about the
company's ability to continue as a going concern.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue as a going concern. Our
continuation as a going concern is dependent upon our ability to generate
sufficient cash flows to meet our obligations on a timely basis.
We are continuing our efforts to raise both debt and equity financing. However,
there can be no assurance that we will be able to service additional financing,
or that if such financing were available, whether the terms or conditions would
be acceptable to us.
BASIS OF CONSOLIDATION
Our accompanying consolidated financial statements include our accounts and our
subsidiary, NAC. We have eliminated intercompany transactions and balances on
consolidation.
4
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ
materially from those estimates.
REVENUE RECOGNITION
We recognize revenue from the sale of our products upon shipment, at which time
title passes. We estimate an allowance for sales returns based on historical
experience with product returns.
ACCOUNTING FOR STOCK OPTIONS
We have adopted the intrinsic value method of accounting for employee stock
options as permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" (SFAS No. 123) and as amended by SFAS
No. 148. We disclose the pro forma effect on loss and loss per share as if we
had applied the fair value based method. For equity instruments, including stock
options issued to non-employees, the fair value of the equity instruments or the
fair value of the consideration received, whichever is more readily
determinable, is used to determine the value of services or goods received and
the corresponding charge to operations.
We have not disclosed the effect on loss and loss per share as if we had applied
the fair value recognition provision of SFAS No. 123 to stock-based employee
compensation because it is not significantly different from the historical
results.
COMMISSIONS
In November 2001, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
01-09, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products," which addresses the accounting for
consideration given by a vendor to a customer or a reseller of the vendor's
products. In April 2001, the EITF reached a consensus on EITF Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products," which provides guidance on the income statement
classification of consideration from a vendor to a reseller in connection with
the reseller's purchase of the vendor's products or to promote sales of the
vendor's products. We pay commissions to our distributors as compensation for
sales and marketing activities and based on their personal sales volumes and the
sales of distributors they have recruited into our network. Accordingly, we
classify these expenses as a cost and not a reduction of revenue.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Asset," ("SFAS No. 144"), gives guidance
for impaired assets or long-lived assets to be disposed of and supercedes SFAS
No. 121. We account for the impairment of long-lived assets to be held and used,
when indications of impairment are present, by evaluating the carrying value in
relation to the operating performance and future undiscounted cash flows of the
underlying business. We report long-lived assets held for disposal at the lower
of their carrying value or fair value less costs to sell. During the six months
ended June 30, 2003, we identified certain assets for sale by auction and
recorded an additional impairment of $528,632 in order to value the assets at
their net realizable value.
RECLASSIFICATIONS
We have reclassified certain prior period amounts to conform to the current
period presentation.
5
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
NOTE 2 - INVENTORIES
Inventories consist of the following:
June 30, December 31,
2004 2003
----------- -----------
Work in progress $ 5,155,721 $ 6,857,108
Finished goods 482,726 418,999
Sales aids 10,229 5,904
----------- -----------
5,648,676 7,282,011
Less reserve for potentially unsaleable inventories (1,089,707) (2,565,540))
----------- -----------
4,558,969 4,716,471
Less current portion (1,900,000) (1,900,000))
----------- -----------
$ 2,658,969 $ 2,816,471
=========== ===========
Certain of our inventory are marketable only to the agricultural market. Sales
in this market have been less than anticipated and management has recognized
that an impairment of inventory may exist.
NOTE 3 -- EARNINGS PER SHARE COMPUTATION
The computations of the weighted-average common shares used in the computation
of basic and diluted net loss per share is based on 14,409,426 and 13,790,519
shares for the six months ended June 30, 2004 and 2003, respectively. Potential
dilutive securities were not included in the EPS calculation since their effect
would be antidilutive. Potential dilutive securities consisted of outstanding
stock options and convertible preferred stock and common stock purchase
warrants.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
Statement No. 150 affects the classification, measurement and disclosure
requirements of the following three types of freestanding financial instruments:
(i) mandatory redeemable shares, which the issuing company is obligated to buy
back with cash or other assets; (ii) instruments that do or may require the
issuer to buy back some of its shares in exchange for cash or other assets,
which include put options and forward purchase contracts; and (iii) obligations
that can be settled with shares, the monetary value of which is fixed, tied
solely or predominately to a variable such as a market index, or varies
inversely with the value of the issuer's shares. In general, Statement No. 150
is effective for all financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of Statement No. 150 did not
have an impact on the Company's consolidated financial position or disclosures.
NOTE 5 - LONG-TERM DEBT
In September 2002, La Jolla Loans, Inc. ("La Jolla Loans") purchased and took an
assignment of our financing facility with Coast Business Credit. At the same
time, we entered into a Forbearance and Extension Agreement with La Jolla Loans.
Under the terms of the forbearance agreement, La Jolla Loans agreed to not
declare a default until June 30, 2003, when the entire principal would be due.
La Jolla Loans has extended the forbearance period to June 30, 2004 and then to
June 30, 2005. We paid annual loan renewal fees in 2003 and 2004 in the amount
of $75,000 and $98,000 respectively. Interest of $18,225 at an effective rate of
14% is payable monthly along with additional monthly impound payments of
approximately $65,000. La Jolla Loans will defer the difference between the
minimum interest payment of $45,000 under the agreement with Coast Business
Credit and the $24,500 minimum interest payments under the forbearance agreement
for the forbearance period. If we fully perform under the terms and conditions
of the forbearance agreement and no default occurs during the forbearance
period, La Jolla Loans will release us from any obligation to pay that portion
6
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
of the minimum monthly interest payments in excess of $18,225. The outstanding
principal balance at June 30, 2004 was $1,562,164. The Company is in compliance
with all loan covenants as of June 30, 2004.
NOTE 6 - CONTINGENCIES
MICROCYSTIS
As a result of certain conditions, Microcystis, a toxic algae, occasionally
blooms in Klamath Lake at the same time aphanizomenon flos-aquae algae is
harvested. We regularly test the algae we harvest for possible contamination.
Algae that does not meet our standards is not used in products for human or
animal consumption.
In 1997, the Oregon Department of Agriculture issued an administrative rule that
created a standard of 1 microgram per gram (1 ppm) of Microcystis in products
for human consumption that contain aphanizomenon flos-aquae algae. The Oregon
Department of Agriculture has raised no questions about our products under this
rule.
In some years, the presence of Microcystis may reduce the quantity of
aphanizomenon flos-aquae algae that we can harvest.
LITIGATION
On January 16, 2001, we filed an action against Glenn Foods in the Circuit Court
of Klamath County alleging, among other things, that Glenn Foods breached an
agreement with us for the manufacture of our SBG Square Meal Bars and BG Bites
by failing to produce our products according to our specifications, refusing to
turn over our formula, and failing to refund our money. We were seeking monetary
damages of approximately $226,345 for all causes specified in our complaint. The
matter was settled in February 2004 resulting in the defendant paying us $80,000
for damages.
In October of 2001, Teachers for Truth in Advertising filed an action in the
Superior Court of Tulare County, California alleging that we, erroneously sued
as Cell Tech Products, Inc., engaged in unfair business practices and misleading
advertising. In January 2003, the Superior Court of Tulare County issued a
tentative decision stating that Teachers for Truth in Advertising was entitled
to an injunction prohibiting us from making deceptive representations in its
advertising or literature disseminated in California and ordering us to refund
the purchase price paid by California customers for our algae products from the
date four years prior to the filing of the action through the trial date in
November of 2002. In response to the tentative decision, our counsel filed a
Request for Statement of Decision on January 23, 2003. On February 20, 2003, the
Superior Court issued its Final Decision, which essentially affirms the
tentative decision, which judgment was entered in April 2003. Plaintiff has
submitted a proposed judgment to the court consistent with the Tentative and
Final Decisions. The parties mediated this matter on May 9, 2003 before a
retired Orange County, California Superior Court judge and agreed to submit a
proposed confidential settlement to the Superior Court within 60 days, which
they have done. The confidential settlement provides for making partial refunds
to certain of our California customers. The Superior Court approved the
confidential settlement and vacated the judgment on August 25, 2003. We have
complied with the terms of the refund and it did not have a material adverse
impact on our business and financial position.
On February 19, 2002, Daryl J. Kollman, one of our principal shareholders, filed
two separate Notices of Claim of Lien upon Chattels against us, NAC and Marta
Carpenter and others, in Klamath County, Oregon. Mr. Kollman alleges, among
other things, that we owe him approximately $705,693 in past due rent. Mr.
Kollman also claims that we owe Klamath Cold Storage, Inc. ("KCS"), a company
owned by Mr. Kollman and Marta Carpenter, approximately $717,900 in past due
rent. Mr. Kollman asserts that we are not entitled to remove our personal
property from the real property owned by him, Marta Carpenter and KCS and seeks
to subject our property to foreclosure proceedings. We intend to vigorously
defend against these liens. We cannot predict the amount of loss, if any, that
could result from these liens, but do not believe that an unfavorable outcome
would have a material adverse impact upon our financial condition, cash flow, or
results of operations.
7
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
On or about May 31, 2002, Daryl J. Kollman filed an action in the Circuit Court
of Klamath County (Case No. 02-01956CV) seeking to evict us from certain real
property owned by him and Marta Carpenter. Mr. Kollman later added a claim for
allegedly unpaid rent exceeding $558,000. On or about October 31, 2002, the
Court dismissed Mr. Kollman's eviction claim. Mr. Kollman's claim for unpaid
rent is currently pending. We cannot predict the amount of loss, if any, that
could result from this lawsuit but an unfavorable outcome could have a material
adverse effect on our financial condition.
On June 6, 2002, Daryl J. Kollman filed a lawsuit in the name of KCS in the
Circuit Court for the State of Oregon for Klamath County (Case No. 02-02040CV)
to evict us from property owned by KCS. In this lawsuit, Mr. Kollman also
alleges that we have not paid approximately $1,050,000 in rent. We have
voluntarily vacated all of the KCS property. We contend that we have paid all
rents owing and intend to vigorously defend this lawsuit. We cannot predict the
amount of loss, if any, which could result from this lawsuit; but an unfavorable
outcome could have a material adverse effect on our financial condition.
On October 7, 2002, Daryl J. Kollman filed a lawsuit against us, certain of our
officers, directors and counsel in the Circuit Court for the State of Oregon for
Klamath County (Case No. 02-03774CV). The complaint makes a number of individual
and derivative claims. There is only one claim directed against us in the case.
In this claim, Mr. Kollman alleges that we breached an agreement with him to
register our stock for public sale and seeks damages of an amount he must prove
at trial but not exceeding $5,546,279. Mr. Kollman seeks over $55,000,000 from
other defendants in the case. Mr. Kollman also seeks millions of dollars in
damages on behalf of us against Marta C. Carpenter (our President and Chief
Executive Officer) and Donald P. Hateley (our Chairman of the Board of
Directors) based on a variety of legal theories. We are vigorously defending the
lawsuit. We cannot predict the amount of loss, if any, which could result from
this lawsuit and an unfavorable outcome could have a material adverse impact
upon our financial condition, cash flow, or results of operations.
Most of the Kollman claims have been consolidated into a single case. Jury
selection for the trial of most of the Kollman claims, other than the Kollman
claims for back rent, which will be resolved in a separate proceeding, began on
July 6, 2004 and were submitted to the jury on August 19, 2004. As of the date
of this filing, the jury is continuing its deliberations in Eugene, Oregon.
The Company is also involved in various legal matters arising in the normal
course of business. In the opinion of management, the Company's liability, if
any, arising from legal proceedings related to these matters is not expected to
have a material effect on the consolidated financial statements of the Company.
LIEN ON COMPANY STOCK
Stock owned by two of our shareholders, Marta C. Carpenter and Daryl J. Kollman,
is subject to a tax lien filed by the Internal Revenue Service. A trust holds
the stock and the IRS will release it upon satisfaction of federal income taxes
owed by Ms. Carpenter and Mr. Kollman. Ms. Carpenter and Mr. Kollman retain
voting power over the stock held in trust. Ms. Carpenter and Mr. Kollman have
agreed to sell their shares as needed, and as allowed by federal securities
laws, to make quarterly payments to the Internal Revenue Service. Should Ms.
Carpenter or Mr. Kollman fail to make such payments in a timely manner, the
Internal Revenue Service may seize the shares from the trust. The Internal
Revenue Service would thereafter sell or judicially foreclose on some or all of
the shares to satisfy Ms. Carpenter and Mr. Kollman's tax liabilities.
COVENANTS RELATED TO THE PRIVATE PLACEMENT TO ZUBAIR KAZI
In connection with the sale of common shares to a private investor, Zubair Kazi,
in 1999, we agreed to issue common stock and warrants to purchase common stock
to Mr. Kazi if the consolidated stockholders' equity was less than $20,000,000
at December 31, 1999. As a result, penalty shares have accrued and we issued
3,333,192 shares of common stock to Mr. Kazi during the second quarter of 2003
and we converted the associated accrued liability of $624,860 to equity.
Warrants to purchase an additional 3,333,192 shares of common stock were also
8
due to Mr. Kazi on March 31, 2003. During the first half of 2004, an additional
liability was recognized under the agreement in the amount of $61,989 related to
the issuance of these shares and warrants, based on the fair value of the
securities and has been accounted for in the financial statements. Additionally,
we were to register the shares originally sold to Mr. Kazi for resale within 120
days of the sale. We have accrued and will continue to accrue additional
penalties until the shares are registered. The accrued liability at June 30,
2004 was $144,526 and 830,915 shares and 4,164,107 warrants are issuable to Mr.
Kazi. We are also obligated to issue additional securities to Mr. Kazi upon the
effective date of our next registration statement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The Act
provides a safe harbor for forward-looking statements to encourage companies to
provide prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements, other than statements of historical fact,
that we make in this Quarterly Report on Form 10-Q are forward-looking. The
words "anticipates," "believes," "expects," "intends," "will continue,"
"estimates," "plans," "projects," the negative of these terms and similar
expressions are intended to identify forward-looking statements. However, the
absence of these words does not mean the statement is not forward-looking.
Our forward-looking statements are subject to certain risks, trends, and
uncertainties that are difficult to predict and could cause actual results to
vary materially from anticipated results. In particular, statements regarding
market acceptance of our marketing and merchandising concepts, changes in market
conditions, demand for and market acceptance of new and existing products,
availability and development of raw materials and new products, increased
competition, failure to attain satisfactory outside financing and adverse
weather conditions at Upper Klamath Lake are forward-looking.
The following factors, among others, could cause actual results to differ from
those indicated in the forward-looking statements:
o management's plans, objectives and budgets for its future operations
and future economic performance;
o capital budget and future capital requirements;
o meeting future capital needs;
o realization of any deferred tax assets;
o the level of future expenditures;
o impact of recent accounting pronouncements;
o the outcome of regulatory and litigation matters; and
o the assumptions described in this report underlying such
forward-looking statements. Actual results and developments may
materially differ from those expressed in or implied by such
statements due to a number of factors, including:
o those described in the context of such forward-looking statements;
o future product development and manufacturing costs;
o changes in our incentive plans;
o timely development and acceptance of new products;
o the markets of our domestic and international operations;
o the impact of competitive products and pricing;
o the political, social and economic climate in which we conduct
operations; and
o the risk factors described in other documents and reports filed with
the Securities and Exchange Commission, including our Annual Report
on Form 10-K and Form 10-K/A for the year ended December 31, 2003.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The financial statements do not
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CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue as a going concern. Our
continuation as a going concern is dependent upon our ability to generate
sufficient cash flows to meet our obligations on a timely basis.
Management has introduced many new products and several new advertising
campaigns in order to increase revenues and reverse the trend of net losses in
the first half of 2004 and prior years. Although management believes that it has
made progress during the first half of 2004 on issues affecting our ability to
continue as a going concern, we have experienced recurring net losses and have
negative working capital at June 30, 2004. These conditions give rise to
substantial doubt about our ability to continue as a going concern.
We are continuing our efforts to raise both debt and equity financing. However,
there can be no assurance that we will be able to service additional financing,
or that if such financing is available, whether the terms or conditions would be
acceptable to us.
Although we believe the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, performance or achievement.
We undertake no obligation to revise or publicly release the results of any
revisions to these forward-looking statements. If we do update or correct one or
more forward-looking statements, investors and others should not conclude that
we will make additional updates or corrections to other forward-looking
statements.
We intend the following discussion to assist in the understanding of our
financial position and our results of operations for the three and six months
ended June 30, 2004 compared to the same period in 2003. You should refer to the
Consolidated Financial Statements and related Notes in conjunction with this
discussion. Unless stated otherwise, all financial information presented below,
throughout this report and in the Consolidated Financial Statements and related
Notes includes Cell Tech and NAC on a consolidated basis.
OVERVIEW
We are a natural and nutritional products company. We develop and distribute a
wide range of products made with Aphanizomenon flos-aquae (trade name Super Blue
Green(R)) Algae ("SBGA") and other nutrients and ingredients through a
multilevel network of independent Business Associates ("Business Associates").
We currently offer over sixty products that are intended to appeal to
health-conscious consumers. We divide our products into three major product
lines including nutritional supplements and foods, skin and hair care products,
and animal and plant care.
We harvest SBGA and manufacture several of our products at our modern production
facilities in Klamath Falls, Oregon. We market our products through independent
Business Associates located in all fifty states, the District of Columbia, Guam,
Puerto Rico, American Samoa, the Virgin Islands, Federated States of Micronesia,
Marshall Islands, Northern Mariana Islands, Palau and Canada. We encourage our
Business Associates to recruit interested people as new Business Associates for
our products. We place these recruits beneath the recruiting Business Associates
in the "network" and we refer to them as the associates' "downlines" or
"networks." Business Associates earn commissions on sales by their organizations
as well as on the sales they generate directly. We assist Business Associates in
establishing their own businesses and provide support programs such as a
comprehensive, information-packed website (www.celltech.com), audio and
videotapes for training, a national Training tour, Regional Sales Meetings,
seminars and an annual convention called the August Celebration.
Our loss per share was $0.15 for the six months ended June 30, 2004 compared to
a net loss of $0.13 per share for the same period in 2003. We primarily relate
the net loss for the six months ended June 30, 2004 of $2,129,894 to a decrease
in revenue without corresponding decreases in administrative costs and selling
expenses. Legal fees have been much higher in 2004. Some of the increase in
legal fees was offset by a decrease in negative valuation allowances in regards
to assets held for sale during 2004 compared to 2003.
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CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CRITICAL ACCOUNTING POLICIES
INVENTORY VALUATION
We have a significant investment in algae inventory. Our sole source of
blue-green algae is Klamath Lake. Algae grow naturally in Klamath Lake and, like
any plant, are subject to variation due to environmental conditions. The volumes
of annual harvests vary depending on weather and precipitation conditions. As a
result, we carry additional supplies of inventory to sustain operations through
low yield harvest years. In addition, we regularly review the amount of
blue-green algae on hand and evaluate the likelihood that we will be able to
realize the value of our inventory. If we determine that we will not realize all
or a portion of our inventory value, adjustments are made to the carrying value
through a valuation allowance. The decision to write down a portion of the
carrying value of inventory could have a significant adverse effect on our
operating results.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
We record impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows we estimate to generate by those assets are less than
the carrying amount of those items. We base our cash flow estimates on
historical results adjusted to reflect our best estimate of future market and
operating conditions. We reduce the net carrying value of assets not recoverable
to fair value. Our estimates of fair value represent our best estimate based on
industry trends and reference to market rates and transactions. During the first
half of 2003 we recorded impairment expenses for various assets designated as
held for sale in the amount of $528,632. We have not recorded any impairment
expense in 2004.
COMMISSIONS
In November 2001, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
01-09, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products," which addresses the accounting for
consideration given by a vendor to a customer or a reseller of the vendor's
products. In April 2001, the EITF reached a consensus on EITF Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products," which provides guidance on the income statement
classification of consideration from a vendor to a reseller in connection with
the reseller's purchase of the vendor's products or to promote sales of the
vendor's products. We pay commissions to our distributors as compensation for
sales and marketing activities and based on their personal sales volumes and the
sales of distributors they have recruited into our network. Accordingly, we
classify these expenses as a cost and not a reduction of revenue.
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RESULTS OF OPERATIONS
The following table summarizes our unaudited operating results as a percentage
of net sales for each of the periods indicated.
Six Months Ended June 30, Three Months Ended June 30,
------------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUE 100.0% 100.0% 100.0% 100.0%
COST OF SALES 28.3 31.3 30.2 31.1
------------ ------------ ------------ ------------
GROSS PROFIT 71.7 68.7 69.8 68.9
COMMISSIONS 41.7 42.2 42.1 41.7
------------ ------------ ------------ ------------
GROSS PROFIT AFTER COMMISSIONS 30.0 26.5 27.7 27.2
SHIPPING AND HANDLING EXPENSES 7.2 6.4 7.9 6.4
SELLING EXPENSES 18.0 18.8 17.4 18.9
RESEARCH AND DEVELOPMENT 0.7 0.9 0.7 0.8
GENERAL AND ADMINISTRATIVE 23.1 9.6 30.4 11.2
ASSET WRITE-DOWN -- 4.6 -- 9.3
------------ ------------ ------------ ------------
OPERATING LOSS (19.1) (13.8) (28.6) (19.4)
OTHER INCOME (0.3) 1.1 (1.1) (0.6)
INTEREST EXPENSE (1.6) (2.4) (1.6) (2.0)
------------ ------------ ------------ ------------
NET LOSS (21.0) (15.0) (31.3) (21.9)
============ ============ ============ ============
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2003
Net sales for the three months ended June 30, 2004 were $4,860,751, a decrease
of $807,182 or 14.2% from net sales of $5,667,933 for the three months ended
June 30, 2003. We directly relate the decrease in sales to a 11.1% decrease in
orders for the same period. Average order size also decreased to $123 from $126
over the same period. The average number of distributors for the three months
ended June 30, 2004 decreased to an average of 31,931, which was 11.6% lower
than the average of 36,124 distributors for the three months ended June 30,
2003. We make sales of our food supplement products through a multi-level
marketing network of distributors, so we positively link sales with the number
of distributors.
Gross profit represents net sales less the cost of goods sold, which includes
the cost of harvesting blue-green algae from Klamath Lake, the cost of other
materials, direct labor expenses, an allocation of overhead costs, amortization,
and depreciation. Gross profit increased to 69.8% of net sales during the three
months ended June 30, 2004 from 68.9% of net sales during the same period in
2003. This increase was due to decreases in period costs due to our continuing
cost cutting efforts.
Gross profit after commissions represents gross profit less commission expense.
Commission expense for the three months ended June 30, 2004 and 2003 was
$2,045,032 and $2,361,022, respectively, a decrease of $315,990 or 13.4%. We are
a multi-level marketing organization. Business Associates make up our sales
force. Business Associates buy algae products for their own consumption and they
actively recruit other Business Associates into our network. Business Associates
are paid commissions based upon their personal sales volumes and the sales of
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CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
Business Associates beneath them in their network. Commission expense as a
percentage of sales was 42.1% and 41.7% during the three months ended June 30,
2004 and 2003, respectively.
Operating expenses include shipping and handling expenses, selling expenses,
research and development expenses and general and administrative expenses. In
total, operating expenses increased $94,350 or 3.6% to $2,738,185 for the three
months ended June 30, 2004 from $2,643,835 for the three months ended June 30,
2003. We discuss the components of operating expenses discussed below.
o Shipping and handling expenses increased $19,859 or 5.5%, to
$383,267 in 2004 from $363,408 in 2003. The increase was due to an
increase in payroll expenses in 2004. Shipping and handling expenses
as a percent of net sales increased to 7.9% for the three months
ended June 30, 2004 from 6.4% for the three months ended June 30,
2003. The increase is primarily due to the decrease in sales being
greater than the capacity to decrease the fixed costs associated
with the shipping process.
o Selling expenses includes order operator and Business Associates
services, marketing and promotion expenses. Selling expenses
decreased $228,937 or 21.3% between 2004 and 2003 to $843,422 from
$1,072,359. This decrease was primarily due to decreases in payroll
expense of $50,000, advertising and promotional expenses of
$107,000, credit card processing fees of $22,000 and decreases in
various other smaller expenses.
o Research and development expenses decreased $11,003 or 23.8% to
35,162 during the three months ended June 30, 2004 from $46,165
during the same period in 2003, which constituted 0.7% and 0.8% of
net sales, respectively.
o General and administrative expenses increased by $843,063, or 133%,
between 2004 and 2003 to $1,476,334 from $633,271. For the three
months ended June 30, 2004, general and administrative expenses
averaged 30.4% of sales while they were 11.2% of sales for the three
months ended June 30, 2003. The increase between 2004 and 2003 is
attributable to the additional legal fees incurred in 2004 of
$614,000 and an increase in amortization of leasehold improvements
for administrative buildings that we have determined are not needed
and intend to vacate of $240,000.
o There were no asset write-down expenses incurred during the three
months ended June 30, 2004 compared to $528,632 for the three months
ended June 30, 2003. The write-down expense in 2003 related to
equipment we had determined to sell at auction. The auction was held
in September of 2003 and the majority of the equipment was sold.
Other income decreased by $19,132 to a net expense of $52,215 for the three
months ended June 30, 2004 from income of $33,083 for the three months ended
June 30, 2003 due primarily to a decrease in management fees charged to Klamath
Cold Storage, Inc. of $10,000.
Net interest expense decreased to $80,076 for the three months ended June 30,
2004 from $111,310 for the three months ended June 30, 2003. This decrease was
due primarily to reduced principal balances to La Jolla Loan and to Oregon
Freeze Dry. Net interest expense represented 1.6% and 2.0% of sales for each of
the three months ended June 30, 2004 and 2003, respectively.
Net income decreased $279,930 resulting in a loss of $1,523,412 for the three
months ended June 30, 2004 compared to a net loss of $1,243,482 for the
comparable period in 2003. As a percentage of net sales, the net loss was 31.3%
of revenue during the three months ended June 30, 2004 and 21.9% of revenue for
the comparable period in 2003. The larger net loss was due primarily to legal
fees, amortization of leasehold improvements and decreasing sales. Partially
offsetting the larger net loss was no asset write-downs in 2004 when compared to
2003.
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SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2003
Net sales for the six months ended June 30, 2004 were $10,127,805, a decrease of
$1,473,120 or 12.7% from net sales of $11,600,925 for the six months ended June
30, 2003. We directly relate the decrease in sales to a 21.5% decrease in orders
for the same period. Average order size stayed the same at $124. The average
number of distributors for the six months ended June 30, 2004 decreased to an
average of 32,220, which was 14.8% lower than the average of 37,809 distributors
for the six months ended June 30, 2003. We make sales of our food supplement
products through a multi-level marketing network of Business Associates, so we
positively link sales with the number of Business Associates.
Gross profit represents net sales less the cost of goods sold, which includes
the cost of harvesting blue-green algae from Klamath Lake, the cost of other
materials, direct labor expenses, an allocation of overhead costs, amortization,
and depreciation. Gross profit increased to 71.7% of net sales during the six
months ended June 30, 2004 from 68.7% of net sales during the same period in
2003. This increase was due to a price increase late in the first half of 2003
and better profit margins on new products introduced during the last half of
2003 and early in 2004.
Gross profit after commissions represents gross profit less commission expense.
Commission expense for the six months ended June 30, 2004 and 2003 was
$4,223,228 and $4,896,457, respectively, a decrease of $673,229 or 13.7%. We are
a multi-level marketing organization. Business Associates make up our sales
force. Business Associates buy algae products for their own consumption and they
actively recruit other Business Associates into our network. Business Associates
are paid commissions based upon their personal sales volumes and the sales of
Business Associates beneath them in their network. Commission expense as a
percentage of sales was 41.7% and 42.2% during the six months ended June 30,
2004 and 2003, respectively.
Operating expenses include shipping and handling expenses, selling expenses,
research and development expenses and general and administrative expenses. In
total, operating expenses increased $291,367 or 6.2% to $4,967,290 for the six
months ended June 30, 2004 from $4,675,923 for the six months ended June 30,
2003. We discuss the components of operating expenses discussed below.
o Shipping and handling expenses decreased $17,247 or 2.3%, to
$729,765 in 2004 from $747,012 in 2003. The decrease was due to a
decrease in sales volume during 2004. Shipping and handling expenses
as a percent of net sales increased to 7.2% for the six months ended
June 30, 2004 from 6.4% for the six months ended June 30, 2003.
o Selling expenses includes order operator and distributor services
expenses, marketing and promotion expenses. Selling expenses
decreased $358,672 or 16.4% between 2004 and 2003 to $1,823,724 from
$2,182,396. This decrease was primarily due to decreases in
advertising expense of $100,000, payroll expense of $48,000,
depreciation expense of $48,000, promotional expense of $77,000, and
credit card processing fees. Selling expenses as a percent of net
sales were 18.0% for the six months ended June 30, 2004 and 18.8% of
sales for the six months ended June 30, 2003.
o Research and development expenses decreased 29.7% to $74,331 during
the six months ended June 30, 2004 from $105,724 during the same
period in 2003, which constituted 0.7% and 0.9% of net sales,
respectively. The increase related to an increase in payroll cost
and laboratory testing.
o General and administrative expenses increased by $1,227,311 between
2004 and 2003 to $2,339,470 from $1,112,159. For the six months
ended June 30, 2004, general and administrative expenses averaged
23.1% of sales while they were 9.6% of sales for the six months
ended June 30, 2003. The increase between 2004 and 2003 is primarily
attributable to an increase in legal fees of $670,000 and
amortization of $540,000.
o Asset write-down expense of $528,632 for the six months ended June
30, 2003 was not recurring for the six months ended June 30, 2004.
The additional loss of value for the equipment we held for sale
during 2003 was due to the decision to sell the equipment at auction
rather than wait for opportunity to sell the equipment on the open
market.
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CELL TECH INTERNATIONAL INCORPORATED
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Other income and expense decreased by $168,759 to a net expense of $35,373 for
the six months ended June 30, 2004 from $133,386 for the six months ended June
30, 2003. The decrease was due primarily to the settlement with The Nature
Conservancy resulting in a one time recognition of income of $161,000 during
2003.
Net interest expense decreased to $162,817 for the six months ended June 30,
2004 from $276,037 for the six months ended June 30, 2003. This decrease was due
primarily to decreases in principal debt owing in 2004 and due to additional
interest charges recorded during 2003 in connection with the settlement of the
Oregon Freeze Dry litigation and the resulting note payable. Net Interest
expense represented 1.6% and 2.4% of sales for each of the six months ended June
30, 2004 and 2003, respectively.
Net income decreased by $387,361 resulting in a loss of $2,129,894 for the six
months ended June 30, 2004 from a net loss of $1,742,533 for the comparable
period in 2003. As a percentage of net sales, net income decreased by 6.0% for
the six months ended June 30, 2004 resulting in a net loss of 21.0% of revenue
from a net loss of 15.0% of revenue for the comparable period in 2003. The
decrease in net income was due to net sales decreasing by 12.7%, the increase in
litigation costs, and amortization of improvements that either have been
abandoned or are scheduled to be abandoned.
LIQUIDITY AND CAPITAL RESOURCES
We had net losses of $5,651,029, $3,497,387 and $5,015,350 for the years ended
December 31, 2003, 2002 and 2001, respectively and had a working capital deficit
of $3,699,942 and $4,282,898 at December 31, 2003 and 2002, respectively. As a
result, our independent registered public accountants have included in our
annual report an explanatory paragraph in their report covering those periods,
which expresses substantial doubt about our ability to continue as a going
concern.
Working capital deficit at June 30, 2004 amounted to $5,045,766 which represents
a decrease in working capital of $1,345,824 from a working capital deficit of
$3,699,942 as of December 31, 2003. At June 30, 2004, we had a bank overdraft of
$592,898 versus a bank overdraft of $481,496 as of December 31, 2003.
In September 2002, La Jolla Loans, Inc. ("La Jolla Loans") purchased and took an
assignment of our financing facility with Coast Business Credit. At the same
time, we entered into a Forbearance and Extension Agreement with La Jolla Loans.
Under the terms of the forbearance agreement, La Jolla Loans agreed not to
declare a default until June 30, 2003, when the entire principal is due. La
Jolla Loans extended the forbearance period to June 30, 2004 and then again to
June 30, 2005 by payment of annual renewal fees. Interest of $18,225 at an
effective rate of 14% is payable monthly along with additional monthly impound
payments of approximately $. La Jolla Loans will defer the difference between
the minimum interest payment of $45,000 under the agreement with Coast Business
Credit and the $24,500 minimum interest payments under the forbearance agreement
for the forbearance period. If we fully perform under the terms and conditions
of the forbearance agreement and no default occurs during the forbearance
period, La Jolla Loans will release us from any obligation to pay that portion
of the minimum monthly interest payments in excess of $18,225. The outstanding
principal balance at June 30, 2004 was $1,562,164.
Our existing capital resources may not be adequate to fund our operations for an
extended period of time. We have no present commitments or agreements with
respect to any acquisitions or purchases of manufacturing facilities or new
technologies. Any future changes in our operations could utilize our available
capital resources faster than anticipated. Our capital requirements depend on
numerous factors, including:
o the introduction of new products;
o change in the number of distributors and the retention of our
current distributor base; and
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CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
o research and development efforts.
If existing capital resources are insufficient to meet our capital requirements,
we will be required to raise additional funds, which we cannot assure will be
available on favorable terms, if at all, or reduce costs which could impair our
ability to conduct ongoing business operations.
CASH FLOWS
Net cash flows used for operating activities for the six months ended June 30,
2004 amounted to $24,664 compared to cash flows provided by operations of
$366,727 for the six months ended June 30, 2003. The decrease in cash flows
generated by operations is primarily due to decreased revenues during the six
months ended June 30, 2004.
Cash flows used in investing activities for the six months ended June 30, 2004
were $56,710 representing a decrease of $17,074 from net cash used for investing
activities of $39,636 for the six months ended June 30, 2003. The decrease was
due to additional leasehold improvements incurred to accommodate operations
being moved out of rented facilities being abandoned.
Net cash flows provided by financing activities was $81,374 for the six months
ended June 30, 2004 versus net cash used for financing activities of $327,091
during 2003. This change is principally due to an increase in the bank
overdraft. The increase in related party debt was similar in amount to the
decrease in long-term debt.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
Statement No. 150 affects the classification, measurement and disclosure
requirements of the following three types of freestanding financial instruments:
(i) mandatory redeemable shares, which the issuing company is obligated to buy
back with cash or other assets; (ii) instruments that do or may require the
issuer to buy back some of its shares in exchange for cash or other assets,
which include put options and forward purchase contracts; and (iii) obligations
that can be settled with shares, the monetary value of which is fixed, tied
solely or predominately to a variable such as a market index, or varies
inversely with the value of the issuer's shares. In general, Statement No. 150
is effective for all financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of Statement No. 150 did not
have an impact on the Company's consolidated financial position or disclosures.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of our statements under "Legal Proceedings," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Quantitative and
Qualitative Disclosures about Market Risk," "Other Information," the Notes to
Consolidated Financial Statements and elsewhere in this report constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements are subject to certain events, risks and uncertainties that may be
outside our control. Some of these forward-looking statements include statements
of:
o management's plans, objectives and budgets for its future operations
and future economic performance;
o capital budget and future capital requirements;
o meeting future capital needs;
o realization of any deferred tax assets;
o the level of future expenditures;
o impact of recent accounting pronouncements;
o the outcome of regulatory and litigation matters; and
o the assumptions described in this report underlying such
forward-looking statements. Actual results and developments may
materially differ from those expressed in or implied by such
statements due to a number of factors, including:
o those described in the context of such forward-looking statements;
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CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
o future product development and manufacturing costs;
o changes in our incentive plans;
o timely development and acceptance of new products;
o the markets of our domestic and international operations;
o the impact of competitive products and pricing;
o the political, social and economic climate in which we conduct
operations; and
o the risk factors described in other documents and reports filed with
the Securities and Exchange Commission.
In some cases, forward-looking statements are identified by terminology such as
"may," "will," "should," "could," "would," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "approximates," "predicts," "potential"
or "continue" or the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in these forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor anyone else
assumes responsibility for the accuracy and completeness of such statements and
is under no duty to update any of the forward-looking statements after the date
of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not entered into any transactions using derivative financial instruments
or derivative commodity instruments and believe that our exposure to market risk
associated with other financial instruments is not material.
Our primary market risks include fluctuations in interest rates. Our management
believes that fluctuation in interest rates in the near term would not
materially affect our consolidated operating results, financial position or cash
flows as we have limited risks related to interest rate fluctuations.
Marta C. Carpenter and Daryl Kollman have sole voting and investment power with
respect to their shares. The Internal Revenue Service has a security interest in
all of their shares pursuant to a Notice of Determination dated June 18, 1999,
under the terms of which a trust holds the shares and the trust will release the
shares upon Ms. Carpenter and Mr. Kollman's payment of their federal income tax
liabilities for various specified years. Ms. Carpenter and Mr. Kollman will sell
their shares as needed and allowed by federal and state securities laws to make
quarterly payments to the Internal Revenue Service. Ms. Carpenter and Mr.
Kollman retain all voting rights incident to their shares while a trust holds
the shares. The Internal Revenue Service may seize Ms. Carpenter and Mr.
Kollman's shares from the trust if Ms. Carpenter and Mr. Kollman fail to timely
cure a default upon their commitments to the Internal Revenue Service under the
Notice of Determination. The Internal Revenue Service would thereafter proceed
to sell or judicially foreclose some or all of the shares for payment of Ms.
Carpenter and Mr. Kollman's tax liabilities as allowed by applicable law.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
The term "disclosures controls and procedures" refers to the controls and
procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files under
Rules 13a - 14 of the Securities and Exchange Act of 1934 (the "Exchange
Act") is recorded, processed, summarized and reported within the required
time periods. Within 90 days prior to the date of filing this report (the
"Evaluation date"), we carried out an evaluation under the supervision and
with participation of our Chief Executive Officer of the effectiveness of
our disclosure controls and procedures. Based on that evaluation, our
Chief Executive Officer has concluded that, as of the Evaluation Date,
such controls and procedures were effective in ensuring that required
information will be disclosed on a timely basis in our periodic reports
filed under the Exchange Act.
(b) Changes in internal controls
There were no significant changes to our internal controls or in other
factors that could significantly affect these controls subsequent to the
date of such evaluation, and there were no corrective actions required
with regard to significant deficiencies and weaknesses.
17
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 16, 2001, we filed an action against Glenn Foods in the Circuit Court
of Klamath County alleging, among other things, that Glenn Foods breached an
agreement with us for the manufacture of our SBG Square Meal Bars and BG Bites
by failing to produce our products according to our specifications, refusing to
turn over our formula, and failing to refund our money. We were seeking monetary
damages of approximately $226,345 for all causes specified in our complaint. The
matter was settled in February 2004 resulting in the defendant paying us $80,000
for damages.
In October of 2001, Teachers for Truth in Advertising filed an action in the
Superior Court of Tulare County, California alleging that we, erroneously sued
as Cell Tech Products, Inc., engaged in unfair business practices and misleading
advertising. In January 2003, the Superior Court of Tulare County issued a
tentative decision stating that Teachers for Truth in Advertising was entitled
to an injunction prohibiting us from making deceptive representations in its
advertising or literature disseminated in California and ordering us to refund
the purchase price paid by California customers for our algae products from the
date four years prior to the filing of the action through the trial date in
November of 2002. In response to the tentative decision, our counsel filed a
Request for Statement of Decision on January 23, 2003. On February 20, 2003, the
Superior Court issued its Final Decision, which essentially affirms the
tentative decision, which judgment was entered in April 2003. Plaintiff has
submitted a proposed judgment to the court consistent with the Tentative and
Final Decisions. The parties mediated this matter on May 9, 2003 before a
retired Orange County, California Superior Court judge and agreed to submit a
proposed confidential settlement to the Superior Court within 60 days, which
they have done. The confidential settlement provides for making partial refunds
to certain of our California customers. The Superior Court approved the
confidential settlement and vacated the judgment on August 25, 2003. We have
complied with the terms of the refund and do not believe that it had a material
adverse impact on our business and financial position.
On February 19, 2002, Daryl Kollman, one of our principal shareholders, filed
two separate Notices of Claim of Lien upon Chattels against us, NAC and Marta
Carpenter and others, in Klamath County, Oregon. Mr. Kollman alleges, among
other things, that we owe him approximately $705,693 in past due rent. Mr.
Kollman also claims that we owe Klamath Cold Storage, Inc. ("KCS"), a company
owned by Mr. Kollman and Marta Carpenter, approximately $717,900 in past due
rent. Mr. Kollman asserts that we are not entitled to remove our personal
property from the real property owned by him, Marta Carpenter and KCS and seeks
to subject our property to foreclosure proceedings. We intend to vigorously
defend against these liens. We cannot predict the amount of loss, if any, that
could result from these liens, but do not believe that an unfavorable outcome
would have a material adverse impact upon our financial condition, cash flow, or
results of operations.
On or about May 31, 2002, Daryl Kollman filed an action in the Circuit Court of
Klamath County (Case No. 02-01956CV) seeking to evict us from certain real
property owned by him and Marta Carpenter. Mr. Kollman later added a claim for
allegedly unpaid rent exceeding $558,000. On or about October 31, 2002, the
Court dismissed Mr. Kollman's eviction claim. Mr. Kollman's claim for unpaid
rent is currently pending. We cannot predict the amount of loss, if any, that
could result from this lawsuit but an unfavorable outcome could have a material
adverse effect on our financial condition.
On June 6, 2002, Daryl Kollman filed a lawsuit in the name of KCS in the Circuit
Court for the State of Oregon for Klamath County (Case No. 02-02040CV) to evict
us from property owned by KCS. In this lawsuit, Mr. Kollman also alleges that we
have not paid approximately $1,050,000 in rent. We have voluntarily vacated all
of the KCS property we do not need to support our current operations. We contend
that we have paid all rents owing and intend to vigorously defend this lawsuit.
18
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
We cannot predict the amount of loss, if any, that could result from this
lawsuit but an unfavorable outcome could have a material adverse effect on our
financial condition.
On October 7, 2002, Daryl J. Kollman filed a lawsuit against us, certain of our
officers, directors and counsel in the Circuit Court for the State of Oregon for
Klamath County (Case No. 02-03774CV). The complaint makes a number of individual
and derivative claims. There is only one claim directed against us in the case.
In this claim, Mr. Kollman alleges that we breached an agreement with him to
register our stock for public sale and seeks damages of an amount he must prove
at trial but not exceeding $5,546,279. Mr. Kollman seeks over $55,000,000 from
other defendants in the case. Mr. Kollman also seeks millions of dollars in
damages on behalf of us against Marta C. Carpenter (our President and Chief
Executive Officer) and Donald P. Hateley (our Chairman of the Board of
Directors) based on a variety of legal theories. We are vigorously defending the
lawsuit. We cannot predict the amount of loss, if any, which could result from
this lawsuit and an unfavorable outcome could have a material adverse impact
upon our financial condition, cash flow, or results of operations.
Most of the Kollman claims have been consolidated into a single case. Jury
selection for the trial of most of the Kollman claims, other than the Kollman
claims for back rent, which will be resolved in a separate proceeding, began on
July 6, 2004 and were submitted to the jury on August 19, 2004. As of the date
of this filing, the jury is continuing its deliberations in Eugene, Oregon.
The Company is also involved in various legal matters arising in the normal
course of business. In the opinion of management, the Company's liability, if
any, arising from legal proceedings related to these matters is not expected to
have a material effect on the consolidated financial statements of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Incorporation, as amended, incorporated
by reference to the Registration Statement on Form SB-2,
dated June 21, 1996.
3.2 Certificate of Amendment of Certificate of Incorporation
incorporated by reference to the Current Report on Form
8-K dated November 19, 1999.
3.3 Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock incorporated by
reference to the Current Report on Form 8-K dated August
2, 1999.
3.4 Amended and Restated Bylaws incorporated by reference to
the Registration Statement on Form SB-2 dated June 21,
1996.
99.1 Certificate of Marta C. Carpenter pursuant to 18 U.S.C
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Current Reports on Form 8-K. We did not file any currents reports on
Form 8-K during the quarter ended June 30, 2004.
19
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.
CELL TECH INTERNATIONAL INCORPORATED
August 23, 2004 /s/ Marta C. Carpenter
-------------------------------------
Marta C. Carpenter
President and Chief Executive Officer
20