10QSB 1 d10qsb.txt FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 Commission file Number: 0-28707 CARBITE GOLF, INC. (Exact Name of Small Business Issuer as Specified in Its Charter) British Columbia, Canada 33-0770893 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 9985 HUENNEKENS STREET SAN DIEGO, CA 92121 (Address of Principal Executive Offices) Registrant's Telephone Number (858) 625-0065 Check Whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ----- On November 15, 2001, 6,862,326 shares of the Registrant's Common Stock, no par value, were outstanding.
Index Page No. PART I FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheet 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II OTHER INFORMATION 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 11
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CARBITE GOLF INC CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2001 (UNAUDITED) ------------------------------------------------------------------------------- ASSETS Current Assets Cash $ 99,225 Accounts Receivable (Note 2) 2,188,825 Inventory (Note 3) 2,887,910 Prepaid Expenses 213,135 Future Tax Assets 188,000 ------------------------------------------------------------------------------- Total Current Assets 5,577,095 Capital Assets 802,893 Patents and Trademarks Net of Amortization 139,852 Goodwill Net of Amortization 1,715,304 Other Non-Current Assets (Deferred Costs) 497,170 Future Tax Assets 79,800 ------------------------------------------------------------------------------- Total Assets $ 8,812,114 =============================================================================== LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities Accounts Payable 706,157 Accrued Liabilities 466,093 Bank Lines of Credit (Note 4) 502,070 Income Tax Payable (5,932) Note Payable (Note 5) 650,000 LC and DP Financing (Note 6) 1,283,147 ------------------------------------------------------------------------------- Total Current Liabilities $ 3,601,535 Future Tax Liability 37,800 ------------------------------------------------------------------------------- Shareholders Equity Share Capital 11,885,462 Deficit (6,712,683) Total Stockholders Equity 5,172,779 ------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 8,812,114 =============================================================================== 3 CARBITE GOLF INC CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SEPTEMBER 30, 2001 (UNAUDITED)
Three months ended Sept. 30 Nine months ended Sept. 30 2001 2000 2001 2000 --------------------------------------------------------------------------------------------------- Net Sales $ 3,022,696 $ 3,444,715 $ 8,876,299 $ 12,642,039 Cost of Goods Sold 1,864,926 2,076,225 4,902,644 7,046,138 --------------------------------------------------------------------------------------------------- Gross Profit 1,157,770 1,368,490 3,973,655 5,595,901 Operating Expenses Selling Expenses 890,813 1,508,953 3,003,247 4,717,042 Gen. and Admin. Expenses 303,526 308,491 1,167,479 1,460,831 Research & Development Costs 121,722 176,892 362,522 471,354 --------------------------------------------------------------------------------------------------- Income from Operations (158,291) (625,846) (559,593) (1,053,326) Amortization (77,897) (81,072) (232,161) (335,767) Interest Income (Expense) (71,740) (20,893) (138,737) (40,716) Other Income (Expense) (1,625) 0 (1,625) 0 --------------------------------------------------------------------------------------------------- Net Income (306,303) (728,811) (928,866) (1,429,809) =================================================================================================== Basic and Diluted Earnings Per Share (.01) (.03) (.06) (.03) ===================================================================================================
4 CARBITE GOLF INC CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS SEPTEMBER 30, 2001 Nine months ended September 30, 2001 2000 -------------------------------------------------------------------------------- Cash Flows used in Operating Activities Net Loss (928,866) (1,429,809) Adjustments to Net Loss to Cash Used in Operations: Deferred Costs on Unrecognized Sales 107,268 Amortization 232,161 228,499 Depreciation 161,915 134,573 Changes in Operating Assets and Liabilities: Inventories 281,998 (613,241) Accounts Receivable (1,096,370) 640,498 Other Current 77,510 (336,268) Accounts Payable and Accrued Liabilities (521,317) 256,214 Cash Used in Operating Activities (1,792,969) (1,012,266) -------------------------------------------------------------------------------- Cash Flows from Investing Activities: Purchases of Capital Equipment (236,545) (284,441) Patents and Deferred Costs Incurred (251,118) (17,675) Cash Used in Investing Activities (487,663) (302,116) -------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net Borrowings (payments) under Bank Loans (219,556) 463,725 Notes Payable and Credit Lines 1,968,303 (10,294) Net Proceeds From Sale of Common Stock 250,000 1,093,601 -------------------------------------------------------------------------------- Cash Provided by Financing Activities 1,998,747 1,547,032 -------------------------------------------------------------------------------- Net Increase (Decrease) in Cash (281,885) 232,650 Cash at Beginning of Period 381,110 660,669 -------------------------------------------------------------------------------- Cash at End of Period $ 99,225 $ 893,319 ================================================================================ 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - QUARTERLY FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements and related notes as of September 30, 2001 and for the three-month and nine-month periods ended September 30, 2001 and 2000 are unaudited but include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of financial position and results of operations of the Company for the interim periods. The results of operations for the three-month and nine-month periods ended September 30, 2001 are not necessarily indicative of the operating results to be expected for the full fiscal year. The information included in this report should be read in conjunction with the Company's audited consolidated financial statements and notes thereto and the other information, including risk factors, set forth for the year ended December 31, 2000 in the Company's Form 10-KSB. Readers of this Quarterly Report on Form 10-QSB are strongly encouraged to review the Company's Form 10-KSB. Copies are available from the Company's Investor Relations Department at 9985 Huennekens Street, San Diego, CA 92121. NOTE 2 - ACCOUNTS RECEIVABLE Accounts Receivable at September 30, 2001 were $2,299,932 with a reserve for doubtful accounts of ($111,167) for net receivables of $2,188,825. NOTE 3 - INVENTORY Inventories consist of: Raw materials and work-in-progress $1,734,156 Finished Goods 1,153,754 ---------- $2,887,910 NOTE 4 - BANK LINE OF CREDIT Our Line of Credit with US Bank in San Diego, California (previously Scripps Bank), was extended on September 24, 2001 for a four-month period through January 15, 2002, with a limit of $650,000. $200,000 of that limit is specifically allocated to Letter of Credit arrangements with one large customer. At September 30, 2001, $450,000 principal was outstanding on that credit line. We also have an equipment loan through US Bank which had a balance due of $16,093 at September 30, 2001. We also maintain a $50,000 Credit Line account with Wells Fargo Bank which had an outstanding balance of $35,157 at September 30, 2001. NOTE 5 - NOTE PAYABLE On March 23, 2001, we secured additional financing with a Loan Agreement with Inabata America Corporation whereby Inabata advanced the Company $650,000 on a one-year renewable note at 11% interest. The loan is secured by the assets of the Company and is convertible, at Inabata's option, to common shares of our stock at $.50 Canadian per share. We also agreed to pay Inabata a royalty on 6 Putterball sales in Asia of $1 per unit and offered Inabata a right of first refusal to manufacture components for the Company in Asia. The Agreement provides Inabata the option to increase the loan in $50,000 increments up to a total of $2 million. At September 30, 2001, $650,000 principal was outstanding on that loan. NOTE 6 - LETTER OF CREDIT COMMITMENTS The Company purchases some components from overseas vendors through Letter of Credit and Documents Against Payment (DP) financing arrangements. At September 30, 2001, we had $1,283,147 outstanding in Letters of Credit and DP financing with Inabata America Corporation. NOTE 7 - EARNINGS PER SHARE Earnings per share are calculated by dividing the loss available to common shareholders by the weighted average of shares outstanding during the period. At September 30, 2001, there were 27,507,306 common shares outstanding. The computation of diluted loss per share excludes the effect of the exercise of share options and share purchase warrants outstanding because their effect would be antidilutive. At September 30, 2001, there were 2,327,120 share options and 563,158 share purchase warrants outstanding. NOTE 8 - DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada (Canadian GAAP) which differ in certain respects from those principles and practices that the Company would have followed had its consolidated financial statements been prepared in accordance with accounting principles and practices generally accepted in the United States (U.S. GAAP). Had the Company followed U.S. GAAP, the deferred cost and goodwill section of the balance sheet contained within the consolidated financial statements would have been reported as follows: -------------------------------------------------------------------------------- Nine months ended September 30, 2001 Canadian GAAP U.S. GAAP Deferred costs $ 497,170 $ -0- Goodwill 1,715,304 1,995,440 -------------------------------------------------------------------------------- Had the Company followed U. S. GAAP, the shareholders' equity section of the balance sheet contained within the consolidated financial statements would have been reported as follows: -------------------------------------------------------------------------------- 7 Nine months ended September 30, 2001 Canadian GAAP U.S. GAAP Shareholders' equity: Share capital $11,885,462 $ 11,885,462 Additional paid-in capital -0- 668,174 Deficit (6,712,683) (7,597,891) -------------------------------------------------------------------------------- $ 5,172,779 $ 4,955,745 -------------------------------------------------------------------------------- Had the Company followed U.S. GAAP, the statement of operations contained within the consolidated financial statements would have been reported as follows:
-------------------------------------------------------------------------------------------------------------- Three months ended Nine months ended September 30, 2001 September 30, 2001 -------------------------------------------------------------------------------------------------------------- Net income (loss) under Canadian GAAP $ 306,303 $ (928,866) Deferred costs incurred -0- (205,050) Amortization of deferred costs -0- -0- Additional Goodwill amortized (11,838) (35,514) -------------------------------------------------------------------------------------------------------------- Net income (loss) under U.S. GAAP, being Comprehensive income (loss) under U.S. GAAP $ (318,141) $ (1,169,430) -------------------------------------------------------------------------------------------------------------- Net income (loss) per share under U.S. GAAP - Basic and diluted (Note 7) $ (.01) $ (.04)
Had the Company followed U.S. GAAP, the statements of cash flows contained within the consolidated financial statements would have been reported as follows: -------------------------------------------------------------------------------- Nine months ended September 30, 2001 Cash provided by (used in) operating activities under Canadian GAAP $ (1,792,969) Deferred costs incurred (205,050) -------------------------------------------------------------------------------- Cash used in operating activities under U.S. GAAP $ (1,998,019) -------------------------------------------------------------------------------- Cash used in investing activities under Canadian Basis $ (487,663) Deferred costs incurred 205,050 -------------------------------------------------------------------------------- Cash used in investing activities under U.S. basis $ (282,613) 8 (a) Reference should be made to note 11(a) - (e) of audited consolidated Financial Statement for years ending December 31, 2000 and 1999 for a qualitative explanation of the differences between U.S. GAAP and Canadian GAAP as applied to the Company. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements, which involve substantial risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this section and elsewhere in this Quarterly Report on Form 10-QSB. RESULTS OF OPERATIONS NET SALES. Net consolidated sales for the three months ending September 30, 2001 were $3,022,696 versus $3,444,715 for the three months ending September 30, 2000. For the nine months ended September 30, 2001, net sales were $8,876,299 versus $12,642,039 for the same period in 2000. Sales were comparatively lower in 2001 as the Company continued to move away from direct marketing campaigns which had added to top line sales in 2000 but were highly unprofitable. In the Third Quarter of 2000, for example, we had direct sales of $665,163 and wholesale sales of $2,779,552 versus Third Quarter of 2001 with direct sales of $132,438 and wholesale sales of $2,890,258. Our wholesale sales remain stable as we unwind unprofitable direct sales programs. COST OF GOODS SOLD AND GROSS MARGIN. Gross margins in Third Quarter 2001 were nominally lower than Third Quarter 2000, 38% versus 39%. OPERATING EXPENSES. Operating expenses for Third Quarter 2001 were $1,316,061 versus $1,994,336 for Third Quarter 2000, a decrease of 34%. This reduction was principally due to reduced selling and G & A expenses detailed below. SALES AND MARKETING EXPENSE. Sales and marketing expenses for Third Quarter 2001 were $890,813 compared to $1,508,953 for Third Quarter 2000. The reduction was due to reduced variable selling expenses, particularly high commissions paid on direct sales in 2000, reduced media buying and more efficient operations. GENERAL AND ADMINISTRATIVE EXPENSE. G&A expenses in Third Quarter 2001 were $303,526 compared to $308,491 in Third Quarter 2000. This decrease in G&A was consistent with ongoing overhead reductions since mid-2000. RESEARCH AND DEVELOPMENT. R&D expenses in Third Quarter 2001 were $121,222 compared to $176,892 in Third Quarter 2000. The reduction was principally due to continuing reduction in salaries. 9 OTHER EXPENSES. Interest expense increased during Third Quarter 2001 to $77,897 from $20,893 in Third Quarter 2000 as we made greater use of our financing facility with Inabata America Corporation to fund new product purchases for 2001 and 2002 inventory. Amortization expenses were $77,897 in Third Quarter 2001 compared to $81,072 for Third Quarter 2000. INCOME TAXES. The company has not recorded a provision for income taxes for the Nine months ended September 30, 2001. Current losses preclude a provision for year to date September 30, 2001. CAPITAL EXPENDITURES. Capital expenditures in Third Quarter 2001 were $14,163 compared to $72,400 for 2000. These expenditures were for shop and office equipment and tooling. LIQUIDITY AND CAPITAL RESOURCES We presently have the following credit facilities: . Bank Lines of Credit. We have a Line of Credit with US Bank in San Diego (previously Scripps Bank) which was extended on September 24, 2001 for a four-month period through January 15, 2002, with a limit of $650,000. $200,000 of that limit is specifically allocated to Letter of Credit arrangements with one large customer. At September 30, 2001, $450,000 was outstanding on that credit line. We also have a $16,000 equipment loan with US Bank and a $50,000 Credit Line with Wells Fargo Bank. . $650,000 loan from Inabata America Corporation. This is covered by a one-year renewable note dated March 23, 2001 at 11% interest. The loan is secured by the assets of the Company and is convertible, at Inabata's option, to common shares of our stock at $.50 Canadian per share. We also agreed to pay Inabata a royalty on Putterball sales in Asia of $1 per unit and offered Inabata a right of first refusal to manufacture components for the Company in Asia. The Agreement provides Inabata the option to increase the loan in $50,000 increments up to a total of $2 million. At September 30, 2001, $650,000 principal was outstanding. . LC and DP Financing. The Company purchases some components from overseas vendors through Letter of Credit and Documents Against Payment (DP) financing arrangements. At September 30, 2001, we had $1,283,147 outstanding in Letters of Credit and DP financing with Inabata America Corporation. To finance operations and additional growth, the Company will require $1 - $2 million in equity or debt financing. The US Bank Line of Credit is scheduled to expire in January 2002 and the Inabata loan comes due in March 2002. We will undertake to have both of these arrangements extended, but if they are not, we will require financing arrangements to replace them. We are actively investigating additional financing arrangements and have implemented internal programs designed to increase profitability and hence improve internal cash flow. 10 PART II OTHER INFORMATION A 1:4 reverse split of our shares became effective October 12, 2001. One new share was issued for 4 old shares. The trading on a consolidated basis commenced on the Canadian Venture Exchange at the market opening on October 12, 2001. The trading symbol changed from CAB to CGT. The number of issued and outstanding shares was reduced from 27,449,306 to 6,862,326. The number of authorized shares is 50,000,000. The move of our corporate domicile in Canada from British Columbia to the Yukon Territory became effective October 12, 2001. This change in domicile will relieve the Company from certain Canadian residency requirements for its directors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The exhibits filed as part of this report are listed below: Exhibit No. Description ----------- ----------- None (b) Reports on Form 8-K. A report on Form 8-K was filed October 12, 2001. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARBITE GOLF, INC. Date: November 15, 2001 By: /s/ John Pierandozzi -------------------- John Pierandozzi President and CEO 11