Annual Report (SEC form 10KSB). December 29, 1997
RENTECH INC /CO/ (RNTK)
Management's Discussion and Analysis or Plan of Operation
Results of Operations
For the year ended September 30, 1997 and the nine month period ended September 30, 1996, the Company had net losses of $1,375,686 and $392,478, respectively. The increase of approximately 350% in loss for the twelve month period in 1997 compared to the nine month period in 1996 is due to a decrease in contract revenues and license fees of $295,176, increase in interest expense of approximately $289,000 from the addition of $1,250,500 in debt and extraordinary gain in 1996 of $200,434. Increases in 1997 costs over 1996 are attributable in general to the longer fiscal period in 1997 and in particular to public relations costs, and approximately $100,000 in hiring costs of a chief financial officer. Profit contributed by Okon from its acquisition in March 1997 partially offset the increases in costs due to the longer fiscal period.
During the year ended September 30, 1997, the Company did not recognize any contract revenues related to the Arunachal Pradesh plant under construction in India. Contract revenues of $55,176 were recognized during the nine months ended September 30, 1996.
During the year ended September 30, 1997, no revenue was recognized for license fees compared to $240,000 for license fees from Donyi Polo Petrochemicals Ltd., an Indian corporation, for grant of a license to use the Company's gas conversion technology in the plant under construction by Donyi Polo at Arunachal Pradesh, India. Donyi Polo purchased the Company's Synhytech plant located at Pueblo, Colorado during 1995, dismantled it and shipped the component parts and systems to India in 1996 for reassembly and use as the basis of the Arunachal Pradesh plant.
During the year ended September 30, 1997, the Company recognized $1,189,536 for sales of water-based paints, sealers and coatings for a six and one-half month period commencing March 16, 1997 as compared to no income for the nine month period ended September 30, 1996. This increase reflects the purchase of Okon in March 1997.
During the year ended September 30, 1997, no costs were incurred for cost of contracts compared to $29,463 incurred in the nine months ended September 30, 1996.
During the year ended September 30, 1997, costs of sales related to the water-based paints, sealers and coatings was $481,796 as compared to no costs for the nine months ended September 30, 1996. This increase reflects the purchase of Okon in March 1997.
The gross profit of $707,739 for the year ended September 30, 1997 is primarily a result of sales of water-based paints, sealers and coatings for a six and one-half month period since the acquisition of Okon. The gross profit of $265,713 for the nine months ended September 30, 1996 is a result of the license fees and engineering design and consulting contract for the Indian plant.
During the year ended September 30, 1997, general and administrative expenses increased by 133% over the nine month period ended September 30, 1996. The increase is caused by approximately $366,000 in expenses
associated with Okon which were not included in the prior period, increased costs related to public relations, approximately $100,000 in expense from the hiring of a chief financial officer during 1997, and by the longer fiscal period in 1997 during which costs were incurred.
Depreciation and amortization increased 37% during the year ended September 30, 1997 compared to the nine months ended September 30, 1996 primarily due to the longer period during which equipment was depreciated and licensed technology was amortized and due to depreciation of Okon's equipment and amortization of goodwill acquired when Okon was purchased in March 1997.
Loss from operations for the year ended September 30, 1997 increased by $523,984 to a loss of $1,077,783 compared to a loss of $553,799 for the nine months ended September 30, 1996. The increased loss is primarily due to a decrease in revenue from contracts and license fees, increases in general and administrative expenses and depreciation and amortization, combined with the cost impact of a longer operating period. This increase is partially offset by an operating profit contributed by Okon, which was acquired in March 1997.
Gain of $3,140 on sale of fixed assets for the nine months ended September 30, 1996 reflects sale of an individual component of the Synhytech plant that was not purchased for relocation to India. During the nine months ended September 30, 1996, the Company recognized a write-down of $100,000 on the Synhytech plant held for sale. During the nine months ended September 30, 1996 the Company had $71,813 in other income from refund of a property tax paid in a prior period. Interest expense increased by approximately $293,000 during the twelve months ended September 30, 1997 compared to the nine month period ended September 30, 1996 due to the addition of $1,250,500 in debt. Interest expense in the prior year is due to $798,750 in convertible notes that were converted into the Company's common stock during September 1996.
Liquidity and Capital Resources
The Company has a working capital deficit of $675,630 and has incurred losses since its inception that raise substantial doubt about its ability to continue as a going concern. At September 30, 1997 the Company had a working capital deficit of $675,630 as compared to working capital of $456,560 at September 30, 1996. The decrease in working capital is primarily due to the addition of $1,250,500 in debt that comes due within one year, partially offset by the working capital of Okon. $560,500 of the $1,250,500 in current portion of long-term debt is convertible into the Company's common stock at the Company's option if not converted by the noteholders by April 16, 1998 and if the Company does not pay the debt in cash at that time.
The cash realized by the Company during the fiscal year ended September 30, 1997 and the cash generated from Okon's operations are expected to be adequate to fund the Company's operations at the current level through the first half of the 1998 fiscal year. In order to realize revenues from the Company's interests in ITN Electronic Substrates LLC, which intends to manufacture and sell flexible thin-film, and from ITN/ES
LLC, which intends to manufacture and sell a heat pump, the Company requires additional working capital. The Company expects to make one or more private placements of its securities that would be convertible into common stock at a discount from the market price.
The net proceeds of the private placement would also be applied to pay off the Company's indebtedness. There are no assurances that additional capital will be raised or that the businesses that the Company intends to develop will generate operating income to the Company in time or in amounts adequate to enable the Company to continue its operations as a going concern.
The Company expects to realize income during the next 18 months from its license granted for the plant at Arunachal Pradesh in India. The Company expects to receive license fees in the amount of $240,000, and additional fees for engineering services are expected although not yet under contract. Income from royalties associated with the India plant are not expected until after the completion of construction and startup and operation of the plant. Construction is not expected to be completed until the first part of 1999.
The Company is discussing other proposals made by several energy companies, including Texaco Group, Inc., for exploitation of the Company's gas-to-liquids Technology through licenses or other business ventures. No assurances can be made that these discussions will result in either business ventures or revenues to the Company.
The Company has made no commitments for material capital expenditures, either in the short or long term. Management does not presently expect to make such commitments in the near future.
The Company has deferred tax assets with a 100% valuation allowance at September 30, 1997 and 1996. Management is not able to determine if it is more likely than not that the deferred tax assets will be realized.
Analysis of Cash Flow
The Company had net losses from operations of $1,375,686 during the year ended September 30, 1997, and $392,478 during the nine months ended September 30, 1996. During the year ended September 30, 1997, non-cash expenses included depreciation, which was 41% more, and amortization, which was 37% more, than during the nine month period in 1996, primarily due to the longer period during which equipment was depreciated and licensed technology was amortized, as well as depreciation of Okon's equipment and amortization of goodwill acquired when Okon was purchased in March 1997 and interest expense which was paid by issue of options to purchase common stock at market value. Also during the year ended September 30, 1997, the Company incurred $274,539 in noncash interest expense associated with its convertible notes payable and issued stock options for services valued at $45,028. The Company recorded a $100,000 write-down of the Synhytech plant held for sale and a gain of $3,140 on sale of assets due to sale of the Synhytech plant and issued shares to discharge $152,152 for services during the nine month period ended September 30, 1996.
Changes in operating assets and liabilities are primarily due to accounts receivable, inventories, prepaid expenses and accrued liabilities acquired with the operations of Okon. Property tax refund receivable recorded during the nine months ended September 30, 1996 was received during the year ended September 30, 1997. The total net cash used in operations increased by 53% to $753,324 in the year ended September 30, 1997 compared to an increase of $493,234 during the nine months ended September 30, 1996. The increase reflects increased cash costs for general and administrative expenses partially offset by cash contribution from Okon since its acquisition in March 1997 and increased due to the longer fiscal period.
Investing activities during the year ended September 30, 1997 included purchase of $65,815 in equipment compared to no purchases in the prior period. The Company used $1,075,739 in cash to acquire the assets of Okon during the year ended September 30, 1997. There were no acquisitions in the nine months ended September 30, 1996. There was a reduction in restricted cash of $25,000 during the 1997 period compared to no reduction in restricted cash during the 1996 period. Other assets increased by $23,901 during the 1997 period compared to a decrease of $2,433 in the 1996 period, primarily due to preliminary investments in future joint ventures.
Financing activities during the year ended September 30, 1997 produced $1,378,899 from the issuance of common stock compared to $50,000 during the nine months ended September 30, 1996. During the year ended September 30, 1997, the Company received net proceeds of $1,249,011 from the issuance of $1,500,000 in redeemable and convertible preferred stock. Preferred stock that was not converted was redeemed during the year for $1,474,684. During the year, the Company received $390,000 ($90,000 from a related party) as proceeds of notes payable. Convertible notes payable in the amount of $560,500 generated $481,554 after payment of $78,946 in debt issue costs. During the nine month period, the Company received $798,750 as proceeds from non-subordinated notes payable, offset by offering costs of $104,761, and made payments of $61,750 on a note payable. The net cash provided by financing activities was $2,074,780, an increase of 304% compared to cash provided by financing activities during the 1996 period.
Cash increased during the year ended September 30, 1997 by $181,001 compared to an increase of $194,578 during the nine months ended September 30, 1996. These changes increased the ending cash balance to $391,487 at September 30, 1997 from $210,486 at September 30, 1996.
The Financial Accounting Standards Board ("FASB") recently issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128") and Statement of Financial Accounting Standards No. 129 "Disclosure of Information About an Entity's Capital Structure ("SFAS 129"). SFAS 128 provides a different method of calculating earnings per share than is currently used in accordance with Accounting Board Opinion ("ABP") No. 15, "Earnings Per Share." SFAS 128 provides for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common stock holders 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. SFAS 129 establishes standards for disclosing
information about an entity's capital structure. SFAS 128 and SFAS 129 are effective for financial statements issued for periods ending after December 15, 1997. Their implementation is not expected to have a material adverse effect on the consolidated financial statements.
In June 1997, FASB issued Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income ("SFAS 130") and Statement of Financial Accounting Standard No. 131 "Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 130 establishes standard for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that displays with the same prominence as other financial statements. SFAS 131 supersedes Statement of Financial Accounting Standard No. 14 "Financial Reporting for Segments of a Business Enterprise." SFAS 131 establishes standards of the way the public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
SFAS 130 and SFAS 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Because of the recent issuance of these standards, management has been unable to fully evaluate the impact, if any, the standards may have on future financial statement disclosures. Results of operations and financial position, however, will be unaffected by the implementation of these standards.
Item 7. Financial Statements
The financial statements identified in Item 13 are filed as part of this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Auditors on Accounting and Financial Disclosure
The Company has not had a change of its independent auditors during its two most recent fiscal years or subsequent interim period, except that on January 1, 1996, the Company's auditors, Mitchell - Finley and Company, P.C. combined their practice into BDO Seidman, LLP. Thereafter BDO Seidman, LLP became the Company's independent auditors for the next two fiscal periods ended September 30, 1996 and 1997. The Company has not reported disagreement with its auditors on any matter of accounting principles or practices or financial statement disclosure.
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Recent Filings: | Jan 1997 (Annual Rpt) | Feb 1997 (Qtrly Rpt) | May 1997 (Qtrly Rpt) | Aug 1997 (Qtrly Rpt) | Dec 1997 (Annual Rpt)
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