U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
X Quarterly report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended June 30, 2001 or
____ Transition report under section 13 or 15(d) of the Exchange Act for the
transition period from _______ to _______
Commission file number: 000-21811
Torque Engineering Corporation
(Exact Name of Small Business Issuer as Specified In Its Charter)
Delaware 83-0317306
(State of Incorporation) (I.R.S. Employer Identification No.)
2932 Thorne Drive, Elkhart, Indiana 46514
(Address of Principal Executive Offices)
(219) 264-2628
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former fiscal Year,
if Changed Since Last Report)
As of July 26, 2001 the Issuer had 8,751,842 shares of Common Stock, par value
$0.00001, outstanding.
Transitional Small Business Disclosure Format (check one): Yes ____ No X
Torque Engineering Corporation
FORM 10-QSB
For the Quarterly Period Ended June 30, 2001
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.....................................................................3
Consolidated Balance Sheets at June 30, 2001 (unaudited)
and December 31, 2000 (audited)..........................................................3
Consolidated Statements of Operations for the three months ended June 30, 2001
& 2000 (unaudited) and the six months ended June 30, 2001 & 2000 (unaudited).............4
Consolidated Statements of Cash Flows for the six months ended June 30, 2001.............5
and 2000 (unaudited).
Notes to Consolidated Financial Statements...............................................6
Item 2. Management's Discussion and Analysis or Plan of Operations..............................9
.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................11
Item 2. Change in Securities....................................................................11
Item 3. Defaults upon Senior Securities.........................................................11
Item 4. Submission of Matters to a Vote of Security Holders.....................................11
Item 5. Other Information.......................................................................11
Item 6. Exhibits and Reports on Form 8-K........................................................11
Signature........................................................................................12
Torque Engineering Corporation
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2001 2000
(unaudited) (audited)
----------- ---------
CURRENT ASSETS
Cash $ 57,888 160,113
Accounts receivable, net 411,286 311,159
Marketable securities 3,639 1,213
Prepaid expenses 82,782 50,008
Advances to suppliers 94,656 109,180
Due from factor 110,942 -0-
Inventory 797,286 789,135
------- -------
Total current assets 1,558,479 1,420,808
Property & Equipment, net 8,899,190 9,451,698
--------- ---------
TOTAL ASSETS $10,457,669 $10,872,506
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable & other liabilities $ 450,979 $ 341,069
Obligations under capital leases - current portion 161,684 127,278
Due to factor 316,977 -0-
Accrued factor fees 10,706 -0-
Notes payable - related parties 233,156 71,656
------- ------
Total current liabilities 1,173,502 540,003
LONG-TERM LIABILITIES
Obligations under capital leases, net of current portion 391,514 454,363
------- -------
TOTAL LIABILITIES 1,565,016 994,366
--------- -------
STOCKHOLDERS' EQUITY
Common Stock, $0.00001 par value, 50,000,000 shares authorized,
8,751,842 and 8,411,299 shares issued and outstanding 88 84
respectively.
Additional paid in capital 14,727,535 14,243,709
Accumulated deficit (5,425,505) (4,088,936)
Accumulated other comprehensive loss (208,637) (211,063)
----------- -----------
9,093,481 9,943,794
Less treasury stock at cost (6,750 Shares) (56,970) (56,970)
Less deferred compensation expense (6,287) (8,684)
Less stock issued for future services (137,571) -0-
--------- ---
Total stockholders' equity 8,892,653 9,878,140
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,457,669 $10,872,506
=========== ===========
See accompanying notes to consolidated financial statements
3
Torque Engineering Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30 June 30 June 30 June 30
2001 2000 2001 2000
---- ---- ---- ----
SALES $ 24,062 $ 3,749 $ 346,431 $ 8,934
COST OF SALES (230,937) (82,268) (581,666) (264,066)
--------- -------- --------- ---------
GROSS LOSS (206,875) (78,519) (235,235) (255,132)
--------- -------- --------- ---------
OPERATING EXPENSES
Payroll 59,518 54,743 110,497 125,587
Depreciation 282,170 276,836 562,822 539,372
Rent 30,000 30,000 60,000 60,000
Stock based compensation 41,230 -0- 41,230 -0-
Stock based consulting 55,028 -0- 55,028 -0-
Other selling, general & administrative 58,157 202,417 192,356 299,867
------ ------- ------- -------
Total Operation Expenses 526,103 563,996 1,021,933 1,024,826
------- ------- --------- ---------
NET (LOSS) FROM OPERATIONS ($732,978) ($642,515) ($1,257,168) ($1,279,958)
---------- ---------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest Income -0- 1,507 379 8,564
Interest Expense (27,242) -0- (40,755) -0-
Factoring fees (30,325) -0- (30,325) -0-
Other (8,700) -0- (8,700) 428
------- --- ------- ---
Total Other Income (Expenses) (66,267) 1,507 (79,401) 8,992
-------- ----- -------- -----
NET (LOSS) BEFORE EXTRAORDINARY ITEMS ($799,245) ($641,008) ($1,336,569) ($1,270,966)
EXTRAORDINARY ITEMS
Gain on extinguishment of debt -0- 28,708 -0- 28,708
--- ------ --- ------
NET (LOSS) ($799,245) ($612,300) ($1,336,569) ($1,242,258)
OTHER COMPREHENSIVE (LOSS), NET OF TAX
Unrealized gain (loss) on marketable (151) (22,744) 2,426 (13,192)
securities - net ----- -------- ----- --------
COMPREHENSIVE LOSS ($799,396) ($635,044) ($1,334,143) ($1,255,450)
========== ========== ============ ============
Loss before Extraordinary Gain ($ 0.092) ($ 0.081) ($ 0.156) ($ .161)
Extraordinary gain $ - $ 0.004 $ - $ 0.004
-- - ----- - -- - ------
Net loss per share - basic & diluted ($ 0.092) ($ 0.077) ($ 0.156) ($ 0.157)
=========== ============ =========== ============
Weighted average number shares outstanding 8,670,969 7,907,014 8,577,072 7,869,772
during the period - basic & diluted ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
Torque Engineering Corporation
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
Six Months Six Months
Ended Ended
June 30, 2001 June 30, 2000
------------- -------------
CASH FLOWS FROM OPERATIONS ACTIVITIES:
Net Loss $ (1,336,569) $ (1,242,258)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 562,822 539,372
Recognized deferred compensation 2,398 5,184
Stock based compensation 41,230 -0-
Stock based consulting 55,028 -0-
Provision for inventory obsolescence 7,549 -0-
Gain on extinguishment of debt -0- (28,708)
Changes in operating assets & liabilities:
(Increase) Decrease in:
Accounts receivable (100,127) (4,615)
Prepaid expenses (32,774) (13,730)
Advances to suppliers 14,524 (50,000)
Inventory (15,700) (174,032)
Increase (Decrease) in:
Accounts payable & other liabilities 109,911 96,743
Accrued factor fees 10,706 -0-
------ ---
Net cash used in operating activities (681,002) (872,044)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (10,315) (87,466)
-------- --------
Net cash used in investing activities (10,315) (87,466)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITES
Repayments on capital lease obligations (28,443) (988)
Due to factor, net 206,035 -0-
Proceeds from notes payable - related parties 161,500 -0-
Proceeds from issuance of common stock 250,000 400,000
------- -------
Net cash provided by financing activities 589,092 399,012
------- -------
NET INCREASE (DECREASE) IN CASH (102,225) (560,498)
CASH & CASH EQUIVALENTS AT
BEGINNING OF PERIOD 160,113 798,019
------- -------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 57,888 $ 237,521
---------------------------------------- ------- -------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the six months ended June 30, 2001 the Company issued 180,000 restricted
shares of common stock with a fair value of $55,028 to a consultant for business
advisory services.
During the six months ended June 30, 2001 the Company issued 35,543 shares of
common stock with a fair value of $41,230 to an employee as compensation.
During the six months ended June 30, 2000 the Company acquired equipment
totaling $12,125 under capital lease obligations.
See accompanying notes to consolidated financial statements
5
Torque Engineering Corporation
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America and have been condensed pursuant to the rules and regulations of the
Securities and Exchange Commission for interim financial information.
Accordingly, they do not include all the information and footnotes necessary for
a comprehensive presentation of financial position and results of operations.
It is management's opinion, however, that all material adjustments (consisting
of normal recurring adjustments) have been made which are necessary for a fair
financial statement presentation. The results for the interim period are not
necessarily indicative of the results to be expected for the year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's Form 10-KSB for the year ended December 31,
2000.
2. ACCOUNTS RECEIVABLE CONCENTRATIONS
The Company has a concentration of its accounts receivable with two customers
totaling 55% and 44% respectively. As of June 30, 2001 accounts receivable are
deemed fully collectible.
3. ACCOUNTS RECEIVABLE AND FACTOR AGREEMENTS
On May 2, 2001, the Company entered into an accounts receivable financing
agreement with a factor. The receivables were transferred with recourse and due
to a provision that could require the Company to repurchase the receivables, the
transaction is accounted for as a financing arrangement. Under the terms of the
agreement, the factor advances 65% of the face value of the receivables sold by
the Company. The Company is charged a variable percentage fee based upon the
length of the collection period. After 180 days, if the customer's accounts
receivable is not paid, the factor is entitled to keep and assess the remaining
35% holdback reserve as a fee for service. All of the Company's accounts
receivable, equipment, furniture and fixtures are pledged as collateral under
this agreement.
At June 30, 2001 the Company has financed $316,977 in accounts receivable. At
June 30, 2001, the Company has $110,942 due from the factor, which represents
net advances made to the Company by the factor, less cash rebates received from
the holdback reserve. The Company has $316,977 due to the factor, which
represents the gross receivables financed that have yet to be paid by the
Company's customer. For the six months ended June 30, 2001, the Company incurred
$30,325 in factoring fees.
4. INVENTORIES
Inventory at June 30, 2001 (unaudited) and December 31, 2000 (Audited) consisted
of the following:
2001 2000
---- ----
Purchased Parts, net $450,701 $376,532
Engines in Process 116,176 184,405
Completed Engines 230,409 228,198
------- -------
$797,286 $789,135
======= =======
6
During the six months ended June 30, 2001, the company recorded a provision for
inventory obsolescence of $7,549.
5. NOTES PAYABLE
During the three months ended June 30, 2001, the Company received $115,000 in
operating funds from a stockholder. The note is non-interest bearing, however,
upon the maturity date of the note which is August 31, 2001, if the principal is
not paid in full and the note is in default, a 10% interest payment in addition
to principal will become due and payable immediately.
During the three months ended June 30, 2001, the Company received $16,500 in
operating funds from a stockholder. The note is non-interest bearing, however,
upon the maturity date of the note which is September 30, 2001, if the principal
is not paid in full and the note is in default, a 10% interest payment in
addition to the principal will become due and payable immediately.
During the three months ended June 30, 2001, the Company was in default on a
note payable to a stockholder totaling $15,000. The note original maturity date
was June 30, 2001. As a result of the default, according to the provisions of
the note, the Company accrued interest at a one-time charge of $1,500 and both
the principal and interest are due and payable immediately at the request of the
note holder. At June 30, 2001 the note remains outstanding.
6. STOCKHOLDERS' EQUITY
On May 2, 2001, a total of 180,000 restricted shares of common stock were issued
as a consulting fee for investor relations services at a price of $1.07 per
share for a total amount of $192,600. Under the terms of the agreement the
consultant would perform services over a period of seven months. At June 30,
2001, the Company has recorded a consulting fee expense of $55,028 and deferred
consulting fees of $137,751.
On May 15, 2001 a total of 35,543 shares of common stock were issued as
compensation to an employee at a price of $1.16 per share for a total amount of
$41,230. These shares were issued upon the filing of a form S-8 registration
statement under the Securities Act of 1933.
On June 5, 2000 a total of 266,667 shares of common stock were issued at a price
of $1.50 per share or a total amount of $400,000. These shares were issued in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.
7. STOCK OPTIONS
During the six months ended June 30, 2000 an employee was granted 10,000 stock
options at an exercise price of $1.81 per option.
8. EXTRAORDINARY ITEM
In June 2000, the Company's subsidiary IPSL, Inc. confirmed the extinguishment
of debts from certain affiliates and a principal shareholder of IPSL. Inc.
totaling $28,708. As a result, an extraordinary gain was realized for the three
months ended June 30, 2000.
9. COST OF SALES
7
For the six months ended June 30, 2001 and 2000 (unaudited) the Company charged
to cost of goods sold $581,666 and $264,066, respectively.
10. NET LOSS PER SHARE
As a result of an extraordinary item for the three months ended June 30, 2000,
the June 30, 2000 statement of operations reflect a per share loss for both
before and after extraordinary items.
11. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a net loss from
operations of $1,336,569, negative cash flows from operating activities of
$681,002 and had an accumulated deficit of $5,425,505 at June 30, 2001.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
working capital requirements, and the success of its future operations.
Management believes that action presently being taken to revise the Company's
operating and financial requirements provide the opportunity for the Company to
continue as a going concern.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
The following discussion of the financial condition and results of the
Company should be read together with the interim financial statements included
in this report. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
expressed or implied in those forward-looking statements.
Torque Engineering is a company which continues to devote its
efforts toward establishing itself as a manufacturer of a lightweight,
high-powered marine engine built on a production line basis for the luxury
performance pleasure craft industry. For the three and six months ended June 30,
2001 Torque Engineering had a net loss of $799,245 and $1,336,569 respectively.
The Company had negative cash flows from operating activities of $681,002 and an
accumulated deficit of $5,425,505 for the six months ended June 30, 2001. These
conditions raise substantial doubt about Torque Engineering's ability to
continue as a going concern. Torque Engineering's financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Torque Engineering's ability to continue as a going concern is
dependent upon management's ability to increase sales of the Torque V-12 engines
and to obtain adequate levels of additional financing. Management believes that
its current efforts will provide for Torque Engineering to continue as a going
concern. We can not assure you, however, that we will be successful.
Sales
For the three and six months ended June 30, 2001, the Company had sales
of $24,062 and $346,431 respectively, attributable to the sale of various marine
engine parts and three Torque V-12 engines in the first quarter. For the three
and six months ended June 30, 2000, the Company had sales of $3,749 and $8,934
respectively, attributable to the sale of various marine engine parts.
Cost of Sales
Cost of sales for the three and six months ended June 30, 2001 was
$230,937 and $581,666 respectively. Cost of sales for the three and six months
ended June 30, 2000 was $82,268 and $264,066, respectively. Costs of sales were
primarily attributable to Torque Engineering's continued manufacture of the
Torque V-12 engines.
Operating Expenses
Operating expenses for the three and six months ended June 30, 2001
decreased to $526,103 and $1,021,933 from $563,996 and $1,024,826 for the three
and six months ended June 30, 2000, respectively. This is primarily attributable
to decreased expenses in connection with the development of the Torque V-12
engine offset by an increase in marketing and related travel expense in
connection with
9
the establishment and execution of the Company's business plan.
Net Loss
Net loss from operations and before extraordinary items for the three
months ended June 30, 2001 increased to $799,245 from $641,008 for the three
months ended June 30, 2000. Net loss from operations and before extraordinary
items for the six months ended June 30, 2001 increased to $1,336,569 from
$1,270,966 for the six months ended June 30, 2000. This is primarily
attributable to reduced engine shipments during the three months ended June 30,
2001 and an increase in financing costs for the three and six months ended June
30, 2001. For the three and six months ended June 30, 2001 and June 30, 2000
depreciation expense increased to $282,170 from $276,836 and to $562,822 from
$539,372, respectively, for property acquired as part of Torque Engineering's
acquisition of IPSL and being used in connection with the Company's
production-line manufacture of the Torque V-12 engines.
Marketable Securities
Net unrealized (loss) and gain on marketable securities for the three
and six months ended June 30, 2001 was ($151) and $2,426, respectively. Net
unrealized loss on marketable securities for the three and six months ended June
30, 2000 was $22,744 and $13,192, respectively.
Liquidity and Capital Resources
As discussed in Note 3 to our financial statements, on May 2, 2001, we
entered into an accounts receivable financing agreement. Under the terms of the
financing agreement, the factor has advanced us net proceeds of $330,082. These
amounts were utilized for inventory and working capital. Management anticipates
that it will require additional capital to implement its business plan. We plan
to obtain such capital through the sale of securities, obtaining financing from
third parties, and from funds generated by the sale of the Torque V-12 engine.
If we are unable to obtain financing from any of these potential sources, or if
our funds from our ongoing operations do not increase, it is unlikely we will
continue as a going concern.
Cash Flows
A total of $681,002 and $872,044 was used for operating activities for
the six months ended June 30, 2001 and 2000, respectively. The cash used in
operating activities was primarily expended on costs and expenses related to the
production-line manufacture of the Torque V-12 engines.
10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
On May 2, 2001, a total of 180,000 restricted shares of common stock were
issued to Numark Capital Corporation for a consulting fee for investor relations
services at a price of $1.07 per share for a total amount of $192,600. These
shares were issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities.
None.
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:
10.1 Account Purchase Agreement dated May 2, 2001 between
Torque Engineering Corporation and Crown Financial,
L.L.C. (filed herewith)
(b) Reports on Form 8-K.
None
11
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.
Torque Engineering Corporation
Date: August 16, 2001 By: /s/ I. Paul Arcuri
-----------------------------
I. Paul Arcuri
Vice President and
Chief Financial Officer
12