THERMACELL TECHNOLOGIES INC (VCLL)
Quarterly Report (SEC form 10QSB)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-QSB, that are not purely historical, are forward-looking information and
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These include statements regarding the Company's expectations, intentions, or strategies regarding future matters. All
forward-looking statements included in this document are based on information available to the Company on the date hereof. It
is important to note that the Company's actual results could differ materially from those projected in such forward-looking
statements contained in this Form 10-QSB. The forward-looking statements contained here-in are based on current
expectations that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments regarding,
among other things, the Company's ability to secure financing or investment for capital expenditures, future economic and
competitive market conditions, and future business decisions. All these matters are difficult or impossible to predict accurately
and many of which may be beyond the control of the Company. Although the Company believes that the assumptions
underlying its forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking statements included in this form 10-QSB will prove to be accurate.
GENERAL
The Company was incorporated in Florida in August, 1993, for the purpose of developing, manufacturing and marketing
insulating materials and coatings using partially evacuated glass microspheres ("shells"). The Company's technology utilizes the
insertion of the shells in various materials and products that improve the thermal resistive characteristics of such products.
The Company's business strategy is to (i) expand the marketing and distribution of ThermaCool(TM) paints and coatings, (ii)
develop and manufacture the Company's own shells and (iii) expand the shell technology to other products, such as drywall,
gypsum board, home siding materials, and space foam insulation, among others.
On November 30, 1995, the Company acquired the assets of C.F. Darling Paint & Chemicals, Inc., a paint manufacturing
company, located in New Port Richey, Florida. The Company acquired these assets so that it would have a facility to produce
and develop paints and coatings for its ThermaCool(TM) product line.
On March 19, 1997, the Company completed a public offering for 1,375,000 Units, each Unit consisting of one share of
Common Stock, $.0001 par value, and one Series A Redeemable Common Stock Purchase Warrant, at a price of $4.00 per
Unit. In addition, the underwriter exercised its over-allotment purchase option and purchased 206,250 additional Units at the
initial per Unit public offering price less the underwriting discounts and commission. The net proceeds from this offering was
more than $4.7 million.
On July 28, 1997, the Company acquired all the outstanding common stock, representing 100% ownership, of Atlas Chemical
Company, a paint manufacturer and distributor, located in Miami, Florida. The Company acquired this firm so that it would
have a larger manufacturing facility to both expand production of paints and coatings and to obtain an established marketing
distribution channel which included major accounts such as Builders Square, Ace Hardware, among others.
On March 2, 1998, the Company acquired the assets of Ladehoff Paints, Inc., a paint manufacturer and distributor located in
Mesa, Arizona. The total purchase price was $115,000. This acquisition is classified as a purchase transaction.
On October 15, 1998, the Company agreed to acquire T-Coast Pavers/Sealco Systems, Inc. which have annual revenues of
more than $2 million. ThermaCell acquired these associated businesses effective December 1, 1998 for 300,000 shares of its
common stock valued at $300,000 and in an employment agreement with its founder and key executive, a payment of an
additional 300,000 shares over the three year employment period. This company provides paver installation and driveway
sealant and coating services primarily to contractors in Southeast Florida.
The Company acquired American Paints, Inc., a Pompano Beach, Florida paint manufacturer and distributor with $2.5 million
in annual revenues, for 572,000 common shares on December 1, 1998. American Paints' operations will be consolidated into
the Company's Atlas manufacturing facility to reduce duplicate costs and increase operating profits.
The Company has sustained significant operating losses since its inception. Management's strategy of expanding the
ThermaCool(TM) product line, developing a commercially viable manufacturing process for shells and expansion into new
markets for its shell technology may result in the Company incurring additional losses due to the costs associated with these
strategies. The Company expects to incur losses until it is able to increase its sales, expand its product line and increase its
distribution capabilities to a sufficient revenue level to offset ongoing operating and expansion costs.
RESULTS OF OPERATIONS
Three months ended December 31, 1998 compared to three months ended December 31,
Total consolidated revenue for the three months ended December 31, 1998 was $811,410 compared to $758,284 for the
same period of 1997, which represents an increase of $53,126, or 7%. This increase was primarily attributed to the additional
revenues of two recent acquisitions: American Paints and T-Coast/Sealco Systems, Inc. even though their contribution was for
one month during this quarter. The revenues for the Company's existing business declined for this period over the prior period.,
This resulted from the loss of some customers and adverse weather conditions within the Company's Florida markets that
depressed sales.
Gross profit margins were 29.4% and 35.0%, respectively, for the three month period ended December 31, 1998, as
compared to the prior period ended December 31, 1997. This decrease is the result of a change in the mix of paint and
coatings products sold by the Company, and in part, by lower contribution margin from the America Paints and Sealco
acquisitions. Sealco has traditionally had gross profit margins in the 16% range. The Company expects that with buying
efficiencies and the opportunity to provide all coating and sealant needed for the Sealco operations, that business' overall gross
profit margin can be improved to 25%.
For the three months ended December 31, 1998, total selling, general and administrative expenses were $517,460 as
compared to $339,645 for the same period of the previous year, an increase of $177,815, or 52%. This increase is the result
of higher marketing, staffing and other general expenses associated with both the Company's acquisitions. The Company has
taken steps to reduce duplication of personnel and is in the process of consolidating its staffing, marketing, and production for
more efficient and effective business operations for both the recent acquisitions. With the expansion of distribution channels
provided by the American Paints acquisition, the Company anticipates substantial benefit from the sales of products to an
expanded customer base.
The Company continued to experience losses from operations of $279,193 for the period ended December 31, 1998 as
compared to a loss of $74,070 for the same prior year period. This increase in the operating loss over that of the preceding
year period reflects the lower gross margin contribution from the Company's revenues and the higher S. G & A expense during
this period. Management anticipates that increasing levels of sales, including the contribution of both of the recent acquisitions,
will result in improvement in future operating performances and eventually profitable operations.
Based upon management's current estimates of future taxable income, management has determined that a valuation allowance
of fifty percent (50%) is appropriate during the current period ended December 31, 1998 to represent that portion of deferred
taxes that may be realized in future periods.
The interest expense for the period ended December 31, 1998 was $2,835 as compared to the prior year's quarter of $4,679.
The interest expense for the current period was incurred primarily for financing of Company vehicles that was similar to the
interest expense for prior period.
The basic loss, after income tax benefit, and basic loss per share were $222,078 and $0.04 per share respectively, for the
three months ended December 31, 1998 as compared to a basic loss and basic loss per share of $52,054 and $.02
respectively, for the same period in 1997. This loss represents a 327% increase over the basic loss experienced in the year ago
quarter. The loss per share for the period increased 100% over the previous year ago period. The weighted average shares
outstanding for the quarter ended December 31, 1998 was 5,730,568 as compared to 3,024,761 for the preceding year
quarter ended December 31, 1997.
The Company has focused, in the recent quarter ended December 31, 1998, on expanding its operations by strategic
acquisitions to increase the production throughput of its manufacturing facilities. The second quarter of this fiscal year will
benefit from the higher sales contributions of the two acquisitions that should result in profitability for the Company. Thereafter,
the company will aggressively market its paint and coatings products, with the added opportunity to sell its expanded product
line to a greater customer base. A focus of its strategy will be to continue to expand within the Sunbelt Region of the United
States. In addition to the Company's marketing efforts, the recent acquisitions will further the utilization of the Company's paint
and coatings production capacity. Management is optimistic about the benefits of its near-term strategy.
The Company anticipates improvements in raw material purchasing economies that will result in further cost savings in its
purchases within its manufacturing operation. This benefit will continue in this fiscal year. The Company also anticipates
improvement in gross profit margins during the balance of this fiscal year resulting from these improved purchasing economies.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has largely funded its operations and its product development activities with funds provided by issuing
securities and from borrowings. During the three months ended, the Company received $250,000 that it recorded as an equity
investment for 1,205,000 shares of common stock. These funds were used for working capital purposes.
The issuance of these 1,205,000 shares of common stock during November of 1998, as the Company understood it at that
time, was to acquire the equity interest of Thomson Kernaghan Ltd. of Toronto, Canada, who held a preferred stock position
that allowed conversion to common stock pursuant to a Regulation S transaction. The Company has recently received a
demand by Thomson Kernaghan for immediate conversion of its remaining holdings of preferred stock to common stock.
Thomson Kernaghan has asserted that no sale of its preferred stock position was ever consummated through the efforts of the
Company's former SEC counsel, Mr. David Feingold (see Part II, Item 1, Legal Proceedings below). On February 9, 1999,
Thomson Kernaghan demanded that the Company deliver 789,089 shares of common stock and penalties of $295,570. The
Company originally disputed this demand of common shares. On February 17, 1999, Mr. Feingold informed the Company of
Diversified Lendings assumption of the Company's obligation to Thomson Kernaghan as part of the common stock issued
during the quarter ending December 31. Based upon its obligations to Thomson Kernaghan, the Company on February 18,
1999 agreed to issue 650,000 shares of common stock in complete satisfaction of this issue. Thomson Kernaghan also agreed
to the sale of such common stock only with the full agreement of the Company.
Net cash used in operating activities for the three months ended December 31, 1998 was $64,908 compared to net cash used
of $214,415 for the three months ended December 31, 1997. This decrease in cash used by operating activities is primarily
due to a decrease in levels of inventory and prepaid expenses with a benefit from a higher level of accrued expenses despite the
higher net loss. In the prior year period, increases in both accounts payables and inventory coupled with decreases in accounts
payables and accrued expenses contributed to higher net cash used in operating activities even though the Company incurred a
lower net loss.
Cash used in investing activities for the three months ended December 31, 1998 and 1997 was $1,531,976 and $47,536,
respectively. The major use of funds was for the two acquisitions-American Paints and T-Coast/ Sealco Systems completed
during this period. In addition, capital expenditures for the recent period were increased to $71,875 from $47,536 over the
prior years period. There was no acquisition in the year ago period. The recent period includes an expenditure for patents while
in the year ago period there was no such expenditure.
Cash provided by financing activities for the three months ended December 31, 1998 was $1,571,101 as compared to cash
used in financing activities of $30,996 for the three months ended December 31, 1997. During the recent quarter, the Company
issued common stock with an aggregate value of $1,400,000 for both of its current period acquisitions. Shareholder loans
increased during this period that included the assumption of certain company incurred professional expenses by a shareholder.
As of December 31, 1998, the Company had net working capital of $692,643 as compared to $616,709 at fiscal year ended
September 30, 1998. This increase in net working capital of $75,934 is primarily due to in higher levels of accounts receivable
and inventories while the Company had higher levels of accounts payable and accrued expenses. The Company's ratio of
current assets to current liabilities was 1.5 at December 31, 1998, and 2.1 at fiscal year ended September 30, 1998.
The Company is not presently profitable and continues to fund itself from the proceeds of securities placements. Once the
Company achieves profitability, it will then be in a position to fund itself on an operating basis.
The Company continues to focus its marketing efforts within the Sunbelt Region of the United States to increase consumer
awareness and acceptance of both its existing and new products. In addition to this marketing effort, the Company has
positioned itself to expand the near term production of its proprietary products.
Management believes that additional capital will be needed to fund its present plan to build within this fiscal year a
manufacturing facility to produce shells for its paint and coating technology products. The Company is optimistic that such funds
will be available from investment or financing sources to provide for this expansion plan. Should funds not be readily available,
management intends to defer the building of such a manufacturing facility to a later time when appropriate funding can be
arranged. The Company is in need of additional funding to provide for its working capital requirements over the next six months
to supplement the cash proceeds that can be generated from its recently acquired businesses. Should such funding not be
available, the Company would have to significant curtail its planned operations to achieve breakeven operations.
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