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
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1934 for the quarterly period ended September 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 November 19, 2001, the Issuer had 8,571,842 shares of Common Stock, par
value $0.00001, outstanding.
Transitional Small Business Disclosure Format (check one): Yes ____ No X
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Torque Engineering Corporation
FORM 10-QSB
For the Quarterly Period Ended September 30, 2001
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets at September 30, 2001 (unaudited)
and December 31, 2000 (audited) 3
Consolidated Statements of Operations for the three months ended
September 30, 2001 & 2000 (unaudited) and the nine months ended
September 30, 2001 & 2000 (unaudited). 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000 (unaudited).
Notes to Consolidated Financial Statements. 5
Item 2. Management's Discussion and Analysis or Plan of Operations 6
PART II. OTHER INFORMATION 9
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
------
Sep 30, December 31,
2001 2000
(unaudited) (audited)
----------- ---------
CURRENT ASSETS
Cash $ -0- $ 160,113
Accounts receivable, net 233,407 311,159
Marketable securities 1,213 1,213
Prepaid expenses 37,124 50,008
Advances to suppliers 84,756 109,180
Due from factor 76,855 -0-
Inventory, net 682,094 789,135
------------ ------------
Total current assets 1,115,449 1,420,808
Property & Equipment, net 8,618,281 9,451,698
------------ ------------
TOTAL ASSETS $ 9,773,730 $ 10,872,506
------------ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Cash - Overdraft $ 36,163 $ -0-
Accounts payable & other liabilities 571,812 341,069
Obligations under capital leases - current portion 194,102 127,278
Due to factor 219,586 -0-
Accrued factor fees 16,810 -0-
Loan payable - officer 6,000 -0-
Notes payable - officer 233,156 71,656
------------ ------------
Total current liabilities 1,277,629 540,003
LONG-TERM LIABILITIES
Obligations under capital leases, net of current portion 359,094 454,363
------------ ------------
TOTAL LIABILITIES 1,636,723 994,366
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $0.00001 par value, 50,000,000 shares authorized,
8,571,842 and 8,099,607 shares issued and outstanding 86 84
respectively.
Additional paid in capital 14,589,966 14,243,709
Accumulated deficit (6,219,924) (4,088,936)
Accumulated other comprehensive loss (211,063) (211,063)
------------ ------------
8,159,065 9,943,794
Less treasury stock at cost (6,750 Shares) (56,970) (56,970)
Less deferred compensation expense (5,088) (8,684)
---
Total stockholders' equity 8,097,007 9,878,140
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,733,730 $ 10,872,506
------------------------------------------ ============ ============
See accompanying notes to consolidated financial statements
3
Torque Engineering Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sep 30 Sep 30 Sep 30 Sep 30
2001 2000 2001 2000
---- ---- ---- ----
SALES $ 14,054 $ 229,840 $ 360,485 $ 238,774
COST OF SALES 278,086 (295,828) 859,752 (559,894)
------------ ------------ ------------- ------------
GROSS LOSS (264,032) (65,988) (497,267) (321,120)
------------ ------------ ------------- ------------
OPERATING EXPENSES
Payroll 53,061 55,253 163,558 180,840
Depreciation 280,900 279,588 843,732 818,960
Rent 30,000 30,000 90,000 90,000
Stock based compensation 1,199 -0- 42,429 -0-
Stock based consulting -0- -0- 55,028 -0-
Other selling, general & administrative 118,542 114,357 310,898 414,224
------------ ------------ ------------- ------------
Total Operation Expenses 483,712 479,198 1,505,645 1,504,024
------------ ------------ ------------- ------------
NET (LOSS) FROM OPERATIONS ($747,744) ($545,186) ($2,004,912) ($1,825,144)
------------ ------------ ------------- ------------
OTHER INCOME (EXPENSE)
Interest Income -0- 1,210 379 9,774
Interest Expense (10,218) (35,603) (50,973) (35,603)
Factoring fees (26,442) -0- (56,767) -0-
Other (10,016) -0- (18,716) 428
------------ ------------ ------------- ------------
Total Other Income (Expenses) (46,676) (34,393) (126,077) (25,401)
------------ ------------ ------------- ------------
NET (LOSS) BEFORE EXTRAORDINARY ITEMS ($794,420) ($579,579) ($2,130,989) ($1,850,545)
EXTRAORDINARY ITEMS
Gain on extinguishment of debt -0- -0- -0- 28,708
------------ ------------ ------------- ------------
NET (LOSS) ($794,420) ($579,579) ($2,130,989) ($1,821,837)
OTHER COMPREHENSIVE (LOSS), NET OF TAX
Unrealized gain (loss) on marketable securities - net (2,426) (9,492) -0- (22,684)
------------ ------------ ------------- ------------
COMPREHENSIVE LOSS ($796,846) ($589,071) ($2,130,989) ($1,844,521)
============ ============ ============= ============
Loss before Extraordinary Gain ($ 0.093) ($ 0.072) ($ 0.163) ($ .233)
Extraordinary gain $ - $ - $ - $ 0.004
------------ ------------ ------------- ------------
Net loss per share - basic & diluted ($ 0.093) ($ 0.072) ($ 0.163) ($ 0.229)
============ ============ ============= ============
Weighted average number shares outstanding
during the period - basic & diluted 8,573,799 8,099,607 13,036,418 7,947,266
============ ============ ============= ============
See accompanying notes to consolidated financial statements.
4
Torque Engineering Corporation
CONSOLIDATED STATEMENTS OF CASH FLOW
------------------------------------
(unaudited)
Nine Months Nine Months
Ended Ended
Sep 30, 2001 Sep 30, 2000
------------ ------------
CASH FLOWS FROM OPERATIONS ACTIVITIES:
Net Loss $ (2,130,989) $ (1,821,837)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 843,732 818,960
Recognized deferred compensation -0- 7,776
Stock based compensation 44,826 -0-
Common stock issued for future services 55,028 -0-
Provision for inventory obsolescence 184,273 -0-
Gain on extinguishment of debt -0- (28,708)
Changes in operating assets & liabilities:
(Increase) Decrease in:
Cash Overdraft 36,163 -0-
Accounts receivable 77,752 (3,652)
Prepaid expenses 12,884 (624)
Advances to suppliers 24,426 (82,314)
Inventory (77,232) (262,500)
Increase (Decrease) in:
Accounts payable & other liabilities 230,743 271,736
Accrued factor fees 16,810 -0-
------------- -------------
Net cash used in operating activities (681,584) (1,101,163)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (10,315) (97,649)
-------------- -------------
Net cash used in investing activities (10,315) (97,649)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITES
Repayments on capital lease obligations (28,445) (21,007)
Due to factor, net 142,731 -0-
Proceeds from notes payable - related parties 161,500 30,000
Loan payable - officer 6,000 -0-
Proceeds from issuance of common stock 250,000 400,000
------------- -------------
Net cash provided by financing activities 531,786 408,993
------------- -------------
NET INCREASE (DECREASE) IN CASH (160,113) (789,819)
CASH & CASH EQUIVALENTS AT
BEGINNING OF PERIOD 160,113 798,019
------------- -------------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ -0- $ 8,200
---------------------------------------- ------------- -------------
----------------------------------------------------------------------
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 one customer
totaling 96%. As of September 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.
For the three months ended September 30, 2001 the Company has financed $219,586
in accounts receivable. At September 30, 2001, the Company has $76,855 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 $219,586
due to the factor, which represents the gross receivables financed that have yet
to be paid by the Company's customer. For the three months ended September 30,
2001, the Company incurred $26,442 in factoring fees.
4. INVENTORIES
Inventory at September 30, 2001 (unaudited) and December 31, 2000 (Audited)
consisted of the following:
2001 2000
---- ----
Purchased Parts, net $314,931 $376,532
Engines in Process 135,339 184,405
Completed Engines 231,824 228,198
-------- --------
$682,094 $789,135
======== ========
6
During the nine months ended September 30, 2001, the company recorded a
provision for inventory obsolescence of $184,273.
5. LOAN PAYABLE OFFICER
During the three months ended Sept 30, 2001, the Company received $6,000 in
operating funds from an officer. The note is non-interest bearing, however, upon
the maturity date of the loan 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.
6. SHAREHOLDER LOANS
During the three months ended September 30, 2000 shareholders of the Company
made advances of $30,000 for operating funds.
7. STOCKHOLDERS' EQUITY
Effective July 1, 2001, the company rescinded a consulting contract initially
entered into on May 2, 20001. As a result, 180,000 shares of Common Stock were
cancelled and returned to the company.
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.
Subsequent to September 30, 2000, the Company issued 4,000 shares of its common
stock in exchange for $13,000.
8. COST OF SALES
For the three months ended September 30, 2001 and 2000 (unaudited) the Company
charged to cost of goods sold $278,086 and $295,828 respectively.
9. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has a working capital
deficiency of $162,180, a net loss from operations of $2,130,989, negative cash
flows from operating activities of $681,584 and had an accumulated deficit of
$6,219,924 at September 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.
10. SUBSEQUENT EVENTS
(A)DEBENTURE OFFERING
In order to provide working capital and financing for the Company's expansion,
the Company entered into an agreement with Cornell Capital Partnership L.P.
("the Purchaser") whereby the Purchaser acquired $300,000 of the Company's 6%
Convertible Subordinated Debentures, due November 3, 2006
7
The Holder is entitled, at its option, to convert, and sell all or any part of
the principal amount of the Debenture, plus accrued interest, into shares (the
"Conversion Shares") of the Company's common stock, par value $.00001 per share
("Common Stock"), at the price per share (the "Conversion Price") equal to
either (a) an amount equal to 120% of the closing bid price of the Common Stock
as listed on a Principal Market, as quoted by Bloomberg L.P. (the "Closing Bid
Price") as of the date hereof, or (b) an amount equal to 80% of the average of
the four lowest Closing Bid Prices of the Common Stock for the five trading days
immediately preceding the Conversion Date.
Interest will be paid at the time of maturity or conversion. The Company may
elect to pay interest in cash or in the form of Common Stock.
The Company shall reserve and keep available out of its authorized but unissued
shares of Common Stock such number of shares of Common Stock sufficient to
effect such conversion, based upon the Conversion Price.
This Debenture may be converted at any time following the date of closing, into
shares of Common Stock at a price equal to the Conversion Price.
(B)EQUITY LINE
On November 9, 2001, the Company entered into an equity line of credit pursuant
to which the Company may, at its discretion, periodically sell to the investor
shares of common stock for a total purchase price of up to $5 million. For each
share of common stock purchased under the Equity Line of Credit, the Investor
will pay 91% of the average of the 2 lowest closing bid prices on which the
common stock Common Stock is traded for the during five days immediately
following the notice date. Unless waived by the investor, the amount of each
advance is subject to a maximum advance amount based on an average daily volume
of the Company's common stock. A consulting fee of 10% of each advance will be
paid upon closing each of the sales under this agreement.
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 that 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 nine months ended September 30, 2001 Torque
Engineering had a net loss of $794,420 and $2,130,989 respectively. The Company
had negative cash flows from operating activities of $681,584 and an accumulated
deficit of $6,219,924 for the nine months ended September 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 cannot assure you, however, that we will be successful.
Sales
For the three and nine months ended September 30, 2001, the Company had
sales of $14,054 and $360,485 respectively, attributable to the sale of various
marine engine parts and three Torque V-12 engines in the first quarter. For the
three and nine months ended September 30, 2000, the Company had sales of
$229,840 and $238,774 respectively, attributable to the sale of various marine
engine parts and two Torque V-12 engines in the third quarter.
Cost of Sales
Cost of sales for the three and nine months ended September 30, 2001 was
$278,086 and $859,752 respectively. Cost of sales for the three and nine months
ended September 30, 2000 was $295,828 and $559,894, respectively. Cost of sales
income is primarily attributable to a provision for inventory obsoiencence of
$176,724 taken during the three months ended September 30, 2001.
9
Operating Expenses
Operating expenses for the three and nine months ended September 30, 2001
and 2000 increased to $483,712 and $1,505,645 from $479,198 and $1,504,024,
respectively. This is primarily attributable to decreased expenses in connection
with the development of the Torque V-12 engine. Also an increase in marketing
and related travel expense in connection with 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 September 30, 2001 and 2000 increased to $794,420 and $2,130,989
from $579,579, $1,850,545 respectively. This is primarily attributable to an
increase in cost of sales and financing costs associated with our accounts
receivable factoring agreement for the nine months ended September 30, 2001.
For the three and nine months ended September 30, 2001 and 2000
depreciation expense increased to $280,910 from $279,588 and to $843,732 from
818,960, 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 on marketable securities for the three and nine months
ended September 30, 2001 was $2,426 and $-0-, respectively. Net unrealized loss
on marketable securities for the three and nine months ended September 30, 2000
was $9,492 and $22,684, 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. Amounts received were
utilized for inventory and working capital. In November 2001, we sold $300,000
of 6% Convertible Subordinated Debentures, due November 3, 2006 to Cornell
Capital Partnership, L.P. After expenses, we received approximately $220,000
from such offering. We intend to use the proceeds of the offering for working
capital purposes and to pay certain operational expenses.
We anticipate that we will require additional capital to implement our
business plan. We plan to obtain such capital through the sale of additional
securities, obtaining financing from third parties, and from funds generated by
the sale of the Torque V-12 engine. As discussed in Note 11 to our financial
statements, on November 9, 2001, we entered into an equity line of credit
agreement under which we may sell shares of our common stock to an investor for
a purchase price of up to $5,000,000. As of November 16, 2001, we had not
received any funds under such agreement. If we do receive funds under such
agreement, we expect that such amounts will also be used for working capital and
to implement our business plan. If the equity line of credit agreement does not
provide sufficient capital resources, 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 $681,584 and $1,101,163 was used for operating activities for
the nine months ended September 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 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. Effective as of July 1, 2001, the Company
rescinded this agreement. As a result, 180,000 shares of Common Stock were
cancelled and returned to the Company.
In November 2001, the Company issued $300,000 of 6% Convertible
Subordinated Debentures, due November 13, 2006, to Cornell Capital Partnership
L.P. After certain costs of issuance, the net proceeds from such offering were
approximately $220,000. The holder of the Debentures is entitled, at its option,
to convert, and sell all or any part of the principal amount of the Debenture,
plus accrued interest, into shares of the Company's common stock at a price per
share equal to either (i) an amount equal to 120% of the closing bid price of
the company's common stock as listed on a principal market, as quoted by
Bloomberg L.P., as of November 9, 2001, or (ii) an amount equal to 80% of the
average of the four lowest closing bid prices for the Company's common stock for
the five trading days immediately preceding the date of conversion. These
securities 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:
None
(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: November 19, 2001 By: /s/ Raymond B. Wedel, Jr.
-------------------------
Raymond B. Wedel, Jr.
President
Date: November 19, 2001 By: /s/ I. Paul Arcuri
----------------------------
I. Paul Arcuri
Vice President and
Chief Financial Officer
12