U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
| | | |
| þ | | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period endedJune 30, 2007
OR
| | | |
| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from ___to ___.
Commission File Number 1-13852
CET Services, Inc.
(Exact name of small business issuer as specified in its charter)
| | | |
| California | | 33-0285964 |
| (State or other jurisdiction of | | (IRS Employer Identification No.) |
| incorporation or organization) | | |
| | | |
| 12503 E Euclid Dr #30, Centennial, CO | | 80111 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (720) 875-9115
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
As of July 20, 2007, 5,554,489 shares of common stock, no par value per share, were outstanding.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CET SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | |
| | | June 30, | | | | |
| | | 2007 | | | December 31, | |
| | | (unaudited) | | | 2006 | |
| | | | | | | | | |
| ASSETS | | | | | | | | |
| Cash | | $ | 495,286 | | | $ | 396,362 | |
| Accounts receivable | | | 24,834 | | | | 47,633 | |
| Real estate inventories | | | 2,028,612 | | | | 4,181,059 | |
| Prepaid expenses and other receivables | | | 172,544 | | | | 31,519 | |
| Equipment and improvements — net | | | — | | | | 3,034 | |
| Deposits | | | 88,114 | | | | 3,024 | |
| Investment in LLC | | | 297,023 | | | | 280,390 | |
| | | | | | | |
| TOTAL ASSETS | | $ | 3,106,413 | | | $ | 4,943,021 | |
| | | | | | | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| Accounts payable | | $ | 139,815 | | | $ | 109,558 | |
| Accrued expenses | | | 40,257 | | | | 56,881 | |
| Retainage Payable | | | 11,038 | | | | — | |
| Notes payable | | | 471,495 | | | | 1,409,495 | |
| | | | | | | |
| | | | | | | | | |
| TOTAL LIABILITIES | | | 662,605 | | | | 1,575,934 | |
| | | | | | | |
| | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | | |
| STOCKHOLDERS’ EQUITY: | | | | | | | | |
| Common stock (no par value) — authorized 20,000,000 shares; 5,554,489 shares issued and outstanding | | | 8,331,007 | | | | 8,331,007 | |
| Paid-in capital | | | 104,786 | | | | 104,786 | |
| Accumulated deficit | | | (5,991,985 | ) | | | (5,068,706 | ) |
| | | | | | | |
| Total stockholders’ equity | | | 2,443,808 | | | | 3,367,087 | |
| | | | | | | |
| | | | | | | | | |
| | | $ | 3,106,413 | | | $ | 4,943,021 | |
| | | | | | | |
The accompanying notes are an integral part of these financial statements.
1
CET SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | | | |
| | | Three Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2007 | | | 2006 | |
| | | | | | | | | |
| REVENUE | | $ | 1,341,193 | | | $ | 900,689 | |
| | | | | | | | | |
| COST OF REVENUE: | | | | | | | | |
| Direct | | | 2,077,866 | | | | 743,396 | |
| | | | | | | |
| | | | | | | | | |
| Gross (loss) profit | | | (736,673 | ) | | | 157,293 | |
| | | | | | | | | |
| SELLING, GENERAL & ADMINISTRATIVE EXPENSES | | | 158,801 | | | | 148,966 | |
| | | | | | | |
| Operating (loss) income | | | (895,474 | ) | | | 8,327 | |
| | | | | | | |
| | | | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | | | |
| Interest income (expense) | | | 2,995 | | | | (218 | ) |
| Other income | | | 147,180 | | | | — | |
| | | | | | | |
| | | | 150,175 | | | | (218 | ) |
| | | | | | | |
| NET (LOSS) INCOME | | $ | (745,299 | ) | | $ | 8,109 | |
| | | | | | | |
| | | | | | | | | |
| Net loss per common share — basic and diluted | | $ | (0.13 | ) | | $ | 0.00 | |
| | | | | | | |
| | | | | | | | | |
| Weighted average number of common shares outstanding | | | 5,554,489 | | | | 5,554,489 | |
| | | | | | | |
The accompanying notes are an integral part of these financial statements.
2
CET SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | | | |
| | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2007 | | | 2006 | |
| | | | | | | | | |
| REVENUE | | $ | 1,913,130 | | | $ | 2,172,092 | |
| | | | | | | | | |
| COST OF REVENUE | | | 2,638,935 | | | | 1,925,537 | |
| | | | | | | |
| | | | | | | | | |
| Gross (loss) profit | | | (725,805 | ) | | | 246,555 | |
| | | | | | | | | |
| SELLING, GENERAL & ADMINISTRATIVE EXPENSES | | | 352,227 | | | | 312,840 | |
| | | | | | | |
| Operating loss | | | (1,078,032 | ) | | | (66,285 | ) |
| | | | | | | |
| | | | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | | | |
| Gain on elimination of payables | | | — | | | | 43,936 | |
| Interest income (expense) | | | 7,048 | | | | (635 | ) |
| Other income (expense) | | | 147,705 | | | | (800 | ) |
| | | | | | | |
| | | | 154,753 | | | | 42,501 | |
| | | | | | | |
| NET LOSS | | $ | (923,279 | ) | | $ | (23,784 | ) |
| | | | | | | |
| | | | | | | | | |
| Net loss per common share — basic and diluted | | $ | (0.17 | ) | | $ | (0.00 | ) |
| | | | | | | |
| Weighted average number of common shares outstanding | | | 5,554,489 | | | | 5,554,489 | |
| | | | | | | |
The accompanying notes are an integral part of these financial statements.
3
CET SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | |
| | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2007 | | | 2006 | |
| | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
| Net loss | | $ | (923,279 | ) | | $ | (23,784 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 534 | | | | 791 | |
| Real estate impairment | | | 750,000 | | | | — | |
| Non-cash compensation | | | 2,500 | | | | — | |
| Gain on elimination of payables | | | — | | | | (43,936 | ) |
| Changes in operating assets and liabilities: | | | | | | | | |
| Decrease in accounts receivable | | | 22,799 | | | | 22,371 | |
| Increase in prepaid expenses and other receivables | | | (141,025 | ) | | | (19,345 | ) |
| Decrease in real estate inventories | | | 1,402,447 | | | | 626,901 | |
| Increase in deposits and other assets | | | (85,090 | ) | | | — | |
| Increase (decrease) in accounts payable | | | 30,257 | | | | (8,493 | ) |
| Increase (decrease) in retainage payable | | | 11,038 | | | | (5,356 | ) |
| Decrease in accrued construction expense | | | — | | | | (25,207 | ) |
| Decrease in accrued expenses | | | (16,624 | ) | | | (20,386 | ) |
| | | | | | | |
| Net cash provided by operating activities | | | 1,053,557 | | | | 503,556 | |
| | | | | | | |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Investment in LLC | | | (16,633 | ) | | | (16,963 | ) |
| | | | | | | |
| Net cash used in investing activities | | | (16,633 | ) | | | (16,963 | ) |
| | | | | | | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Payments on construction loan | | | — | | | | (652,322 | ) |
| Payments on notes payable | | | (938,000 | ) | | | (300,658 | ) |
| Proceeds from notes payable | | | — | | | | 451,000 | |
| | | | | | | |
| Net cash used in financing activities | | | (938,000 | ) | | | (501,980 | ) |
| | | | | | | |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH | | | 98,924 | | | | (15,387 | ) |
| | | | | | | | | |
| CASH AT BEGINNING OF PERIOD | | | 396,362 | | | | 392,470 | |
| | | | | | | |
| | | | | | | | | |
| CASH AT END OF PERIOD | | $ | 495,286 | | | $ | 377,083 | |
| | | | | | | |
The accompanying notes are an integral part of these financial statements.
4
CET SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
| Note 1. | | Basis of Presentation and Proposed Merger.The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The consolidated balance sheet at December 31, 2006 has been derived from the audited consolidated financial statements at that date. Operating results for the six months ended June 30, 2007 are not necessarily indicative of results that may be expected for the year ending December 31, 2007. For further information, refer to the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006. |
| |
| | | In the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006, the Report of the Independent Registered Public Accounting Firm includes an explanatory paragraph that describes substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements for the six-months ended June 30, 2007 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company reported a net loss of $923,279, which includes an impairment loss related to its real estate of $750,000, and has notes payable of $471,495 due in June 2010. |
| |
| | | These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not contain any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. |
| |
| | | Proposed Merger: |
| |
| | | On February 16, 2007, the Company entered into an Agreement and Plan of Merger with Zoi Interactive Technologies, Inc. The Company also entered into a Stock Repurchase Agreement with Steven H. Davis, CET’s Chief Executive Officer. On July 9, 2007 the Company terminated these Agreements. |
| |
| Note 2. | | Earnings Per Share.The Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 128,Earnings Per Share(“SFAS 128”) requires the presentation of basic earnings per share (“EPS”) and, for companies with potentially dilutive securities such as convertible debt, options and warrants, diluted EPS. |
| |
| | | In 2007 and 2006, basic loss per share data was computed by dividing net loss by the weighted average number of common shares outstanding during the period. For the six months ended June 30 2007 and 2006 diluted loss per share is equivalent to basic loss per share since the computation does not give effect to potentially dilutive securities including stock options and warrants, as their effect would have been anti-dilutive. |
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| Note 3. | | Stock-Based Compensation.The Company applies the provisions of, and accounts for stock-based compensation in accordance with the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 123—revised 2004 (“SFAS 123R”), “Share-Based Payment”. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. |
5
| | | Through March 1, 2005, the Company had an incentive stock option plan (“the Plan”) which is more fully described in the Company’s form 10-KSB for the year-ended December 31, 2006. The Plan terminated on March 1, 2005, and no additional options may be granted under the Plan. |
| |
| | | At June 30, 2007, the Company had outstanding options to purchase 72,500 shares of common stock at $.20 to $1.31 per share at December 31, 2006. All options are exercisable at June 30, 2007. Based on a Black-Scholes options pricing model utilizing the following weighted average assumptions for grants in 2000 and 2002; no expected dividends, expected volatility of 183%, risk-free interest rate of 5.0%, and expected lives of 5 years; the fair value and the intrinsic value of options at June 30, 2007 is not significant. |
| |
| Note 4. | | Segment Information and Concentrations.The Company operates in two business segments — water/wastewater services, and residential housing development and construction. All of the Company’s operations and customers are located in Colorado. A summary of the Company’s business segments is shown below (in thousands). |
| | | | | | | | | | | | | | | | | |
| Three months ended: | | Residential | | | Water/wastewater | | | | | | | |
| June 30, 2007 | | Housing | | | Services | | | Corporate | | | Total | |
| | | |
| Revenues | | $ | 1,256 | | | $ | 85 | | | $ | — | | | $ | 1,341 | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (746 | ) | | $ | 4 | | | $ | (3 | ) | | $ | (745 | ) |
| | | | | | | | | | | | | | | | | |
| Segment assets | | $ | 2,324 | | | $ | — | | | $ | 782 | | | $ | 3,106 | |
| | | | | | | | | | | | | | | | | |
| Three months ended: | | Residential | | | Water/wastewater | | | | | | | |
| June 30, 2006 | | Housing | | | Services | | | Corporate | | | Total | |
| | | |
| Revenues | | $ | 828 | | | $ | 73 | | | $ | — | | | $ | 901 | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 154 | | | $ | 4 | | | $ | (150 | ) | | $ | 8 | |
| | | | | | | | | | | | | | | | | |
| Segment assets | | $ | 4,670 | | | $ | 47 | | | $ | 478 | | | $ | 5,195 | |
| | | | | | | | | | | | | | | | | |
| Six months ended: | | Residential | | | Water/wastewater | | | | | | | |
| June 30, 2007 | | Housing | | | Services | | | Corporate | | | Total | |
| | | |
| Revenues | | $ | 1,725 | | | $ | 188 | | | $ | — | | | $ | 1,913 | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (740 | ) | | $ | 9 | | | $ | (192 | ) | | $ | (923 | ) |
| | | | | | | | | | | | | | | | | |
| Segment assets | | $ | 2,324 | | | $ | — | | | $ | 782 | | | $ | 3,106 | |
| | | | | | | | | | | | | | | | | |
| Six months ended: | | Residential | | | Water/wastewater | | | | | | | |
| June 30, 2006 | | Housing | | | Services | | | Corporate | | | Total | |
| | | |
| Revenues | | $ | 2,010 | | | $ | 162 | | | $ | — | | | $ | 2,172 | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 239 | | | $ | 8 | | | $ | (271 | ) | | $ | (24 | ) |
| | | | | | | | | | | | | | | | | |
| Segment assets | | $ | 4,670 | | | $ | 47 | | | $ | 478 | | | $ | 5,195 | |
| | | As of and for the three and six months ended June 30, 2007 and 2006, one customer accounted for 100% of total accounts receivable and wastewater revenues. |
6
| Note 5. | | Real Estate Inventories. |
| |
| | | Real estate inventories consist of the following (in thousands): |
| | | | | | | | | |
| | | June 30, 2007 | | | December 31, 2006 | |
| | | | | | | | | |
| Townhomes, buildings and finished lots | | $ | 1,050 | | | $ | 1,484 | |
| Land and land under development | | | 979 | | | | 2,697 | |
| | | | | | | |
| | | $ | 2,029 | | | $ | 4,181 | |
| | | | | | | |
| Note 6. | | Impairment of real estate.At June 30, 2007 the Company recorded $750,000 impairment charge related to certain of real estate properties. This charge reflects recent market conditions in the residential housing industry and was based on recent appraisals obtained for certain real estate properties. The charge is included as a component of Cost of Revenue on the Consolidated Statements of Operations. |
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| Note 7. | | Investment. In January 2005 the Company entered into an operating agreement with a newly-formed entity, Arizona Avenue, LLC, a Colorado limited liability corporation in which the Company is a 50% owner. The Company accounts for this investment using the equity method of accounting. The Company has been engaged by the LLC to manage the development of a five-acre site in Aurora, Colorado. There were no management fees in connection therewith during the six months ended June 30, 2007. As of June 30 2007, the Company has invested approximately $297,000 to develop this project. Profits and losses, which are generally to be allocated 50% to the Company and 50% to the other owner, were not material for the six months ended June 30, 2007. This property is currently listed for sale with a local real estate broker. |
| |
| Note 8. | | Deposits.At June 30, 2007, deposits include $85,000 deposited with the City of Westminster in lieu of a private improvement bond. The $85,000 is expected to be refunded when the Company obtains a letter of credit in connection with a construction loan for a redevelopment project. |
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| Note 9. | | Notes Payable.In June 2006, the Company signed a promissory note in the amount of $694,000 (of which $451,000 was drawn) with a local lender to finance the purchase and the remodeling of a retail/office building and the purchase of an adjacent industrial building located in Wheat Ridge, Colorado. The note was for a term of one year bearing interest at prime plus 0.75% with monthly interest-only payments (9.0% at March 31, 2007). The principal was due at maturity and the loan was collateralized by a first deed of trust on the property. This note was paid in full on April 10, 2007, upon the sale of the property. |
| |
| | | In May 2005, the Company, supplemented by $100,000 available under a November 2004 development agreement with the City of Westminster, purchased two properties in a redevelopment area within the City. The Company obtained two notes, $126,000 and $200,000, from a local lender to complete the purchase. The notes were for a term of two years bearing interest at prime plus 0.75%, (9% at March 31, 2007) with monthly interest-only payments. The principal was due at maturity, and the notes were collateralized by a first deed of trust on the properties. The notes were paid in full on May 2, 2007. |
| |
| | | In April 2005, the Company obtained a loan in the amount of $161,000 from a local lender to replace a $161,000 draw note which financed the purchase of a property located in Westminster, Colorado. The loan was repaid on January 9, 2007 and bore interest at the rate of prime plus 0.75% (9% at December 31, 2006) with monthly interest-only payments. |
| |
| | | In June 2004, the Company signed a Brownfields Cleanup Revolving Loan Fund Agreement with the City of Aurora, Colorado, for approximately $471,000, to finance the remediation of a five-acre site on which the Company has approval to construct 54 residential townhomes. The loan is for a period of three years with interest at 2% per annum payable monthly. In June 2007, the Company signed a First Amendment to the Brownfields Cleanup Revolving Loan Fund Agreement which extends the loan for an additional three year period. The principal is to be repaid at 1/54th of the outstanding balance within 30 days of each residential unit sale, and the loan is collateralized by a deed of trust on the property. This property is listed for sale with a local real estate broker. |
7
| Note 10. | | Other Income.During the three months ended June 30, 2007, the Company recorded $147,125 of other income upon the recovery of bad debt written off in 2001 related to the Company’s commercial remediation operations. |
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| Note 11. | | Legal. The Company is not a party to any material legal proceedings, which are pending before any court, administrative agency, or other tribunal. Further, the Company is not aware of any material litigation, which is threatened against it in any court, administrative agency, or other tribunal. Management believes the outcome on any pending litigation that would have a material adverse effect on the Company’s financial position or results of operations is remote. |
| |
| | | Since early 1998, the Company had been the subject of an investigation by the Office of the Inspector General (OIG) of the Environmental Protection Agency (EPA). The Company cooperated fully in all OIG inquiries. On April 27, 2007 the Company received notice that the EPA OIG has closed all investigations involving CET. |
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| Note 12. | | Recent Accounting Pronouncements.The Company has evaluated all recent accounting pronouncements and believes such pronouncements do not have a material effect on the Company’s financial statements. |
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| | | The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (“FIN 48”), on January 1, 2007. There were no unrecognized tax benefits and there was no effect on the Company’s financial condition or results of operations as a result of implementing FIN 48. |
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| | | The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2003. State jurisdictions that remain subject to examination range from 2002 to 2006. Management does not believe there will be any material changes in our unrecognized tax positions over the next 12 months. |
| |
| | | The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, there was no accrued interest or penalties associated with any unrecognized tax benefits nor was any interest expense recognized during the quarter. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
This Quarterly Report on Form 10-QSB contains forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), and information relating to the Company that is based on beliefs of management of the Company, as well as assumptions made by and information currently available to management of the Company. When used in this Report, the words “estimate,” “project,” “believe,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
8
Results of Operations
Quarter Ended June 30, 2007 Compared to the Quarter Ended June 30, 2006
Revenue.Revenues for the second quarter of 2007 were $1,341,193, up from the $900,689 reported for the year-earlier period. The sale of a commercial building and the sale of a housing unit accounted for 94% of revenues in the current period, and the remaining 6% of revenue arose from water services activity. In the second quarter of the prior year, the sale of an industrial building and the sale of housing units accounted for 92% of revenues.
Cost of Revenue.Cost of revenue for the June 2007 period was $2,077,866, up from the $743,396 recorded in the second quarter of 2006, reflecting the increase associated with the sale of the commercial building and a $750,000 impairment charge related to certain of the Company’s real estate properties. This charge reflects recent market conditions in the residential housing industry and was based on recent appraisals obtained for certain real estate properties.
Selling, General & Administrative Costs.Selling, General and Administrative costs were $158,801, up from the year-earlier comparable of $148,966, largely as a result of additional legal and accounting fees associated with the proposed reverse merger that was terminated on July 9, 2007.
Other Income (Expense).Other income of $150,175 was recorded in the second quarter of 2007 as compared to other income of $218 in the respective period of 2006. A gain of $147,125 was realized from the recovery of a previously written-off bad debt from 2001 (see Note 10 — Other Income).
Net (Loss) Income.For the second quarter of 2007, a net loss of ($745,299) or ($0.13) a share was recorded, compared to net income of $8,109, or $0.00 a share, in the second quarter of 2006. The net loss was mainly attributable to the $750,000 allowance for impaired real estate.
Results of Operations
Six Months Ended June 30, 2007 Compared to the Six Months Ended June 30, 2006
Revenue.Revenues were $1,913,130, down from the $2,172,092 reported for the year-earlier period. The decrease for the current period is largely the result of a decrease of closings on housing units at the Westminster development project. Water services activity accounted for of 10% and 7% of revenues in the respective periods.
Cost of Revenue.Cost of revenue was $2,638,935, up from the $1,925,537 recorded in 2006, reflecting decreased activity on development sites and a $750,000 impairment charge related to certain of the Company’s real estate properties. This charge reflects recent market conditions in the residential housing industry and was based on recent appraisals obtained for certain real estate properties.
Selling, General & Administrative Costs.Selling, General and Administrative costs were $352,227, up from $312,840 in the first half of 2006, reflecting higher legal and accounting fees.
Other Income.Other income was $154,753 in 2007 reflecting the recovery of a previously written-off bad debt from 2001 (see Note 10 — Other Income). Other income of $42,501 was recorded in 2006 reflecting gains on the elimination of payables incurred in 2000.
Net Loss.A net loss of $923,279, or $0.17 a share was incurred during the six months ended June 30, 2007, compared to the net loss of $23,784, or $0.00 a share in the first six months of 2006. An erosion of margin on the sale of the commercial building and the final townhome units, plus an increase in Selling, General and Administrative costs, and the $750,000 allowance for impaired real estate resulted in a larger net loss for the first half of 2007.
Liquidity and Capital Resources
The Company’s sources of liquidity and capital resources historically have been net cash provided by operating activities, funds available under its financing arrangements, and proceeds from offerings of equity
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securities. In the past, these sources have been sufficient to meet its needs and finance the Company’s business. The Company can give no assurance that the historical sources of liquidity and capital resources will be available for future development and acquisitions, and it may be required to seek alternative financing sources not necessarily favorable to the Company.
The Company owns a five-acre residential site in Aurora, Colorado, “the Aurora project”, and during 2004, completed a major remediation at the site, aided by a Brownfields Cleanup Revolving Loan Fund Agreement with City of Aurora in the amount of approximately $471,000 (see Note 9 — Notes Payable). The Company currently has this property listed for sale with a local real estate broker.
In November 2004, the Company executed a development agreement with the City of Westminster under which the City would provide approximately $410,000 and other assistance to the Company for the development of a retail/office building of approximately 11,000 square feet as well as twelve townhomes. The Company acquired the property necessary for this project in May 2005, borrowing $326,000 and receiving $100,000 under the development agreement (see Note 9— Notes Payable). In October 2005, upon approval of the development plan, the Company received the remaining $310,000 provided for under the development agreement. In April 2007 the Company repaid the borrowings in full. The Company is currently negotiating with a local lender for a construction loan to finance the construction of the office building as the Company has a contract to sell the building. The Company has deposited $85,000 with the City of Westminster in lieu of a private improvement bond for this project (see Note 8 — Deposits).
Also, in January 2005, the Company entered into an operating agreement with a newly-formed entity, Arizona Avenue, LLC, a Colorado limited liability corporation in which the Company is a 50% owner. The Company has been engaged by the LLC to manage the development of a five-acre site in Aurora, Colorado. There were no management fees in connection therewith during the period. Through June 30, 2007, the Company has invested approximately $297,000 to develop this project. The Company currently has this property listed for sale with a local real estate broker.
In April 2006, the Company entered into a contract to purchase two buildings, an industrial building and a retail/office building, in Wheat Ridge, Colorado. In May 2006, the Company entered into a contract to sell the industrial building. In June 2006, the Company borrowed $694,000 (of which $451,000 was drawn) from a local lender (see Note 9 — Notes Payable) and completed the purchase of both buildings and the sale of the industrial building. The Company completed the rehabilitation of the retail/office building and on April 10, 2007 sold the property and paid the note payable.
Our financial statements have been prepared assuming that we will continue in business as a going-concern. As discussed in our financial statements and in this section, during the quarter ended June 30, 2007 we incurred a net loss of $923,279 and in which the Company recorded an allowance for impairment of real estate of $750,000 and we had notes payable of $471,495 due in June 2010. The report of our Independent Registered Public Accounting Firm on the Company’s financial statements as of and for the year ended December 31, 2006 includes a “going concern” explanatory paragraph which means that the accounting firm expressed substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with respect to these matters are described in this section and in our financial statements, and this material does not include any adjustments that might result from the outcome of this uncertainty.
Contractual Obligations
| | | | | | | | | | | | | |
| | | Payments Due By Period | |
| Contractual | | | | | | Less Than | | | | |
| Obligations | | Total | | | 1 Year | | | 1-3 Years | |
| | | | | | | | | | | | | |
| Operating Leases | | | 45,704 | | | | 39,136 | | | | 6,568 | |
| Notes Payable | | | 471,495 | | | | — | | | | 471,495 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Total | | $ | 517,199 | | | $ | 39,136 | | | $ | 478,063 | |
| | | | | | | | | | |
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ITEM 3. CONTROLS AND PROCEDURES
As of June 30, 2007, under the supervision and with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer, management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2007. There were no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings which are pending before any court, administrative agency, or other tribunal. Further, the Company is not aware of any material litigation which is threatened against it in any court, administrative agency, or other tribunal. Management believes that no pending litigation in which the Company is named as a defendant will have a material adverse effect on the Company’s financial position or results of operations.
Since early 1998, the Company had been the subject of an investigation by the Office of the Inspector General (OIG) of the Environmental Protection Agency (EPA). The Company cooperated fully in all OIG inquiries. On April 27, 2007 the Company received notice that the EPA OIG has closed all investigations involving CET.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The following exhibits are filed herewith:
| | | |
| | | |
| Exhibit 31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| Exhibit 31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| Exhibit 32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
| | | |
| Exhibit 32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
| | CET SERVICES, INC.
| |
| Dated: August 20, 2007 | By: | /s/ Steven H. Davis | |
| | | Steven H. Davis, President and Chief Executive | |
| | | Officer | |
| |
| | | |
| | By: | /s/ Dale W. Bleck | |
| | | Dale W. Bleck, Chief Financial Officer | |
| | | | |
| |
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Exhibit Index
| | | |
| Exhibit No. | | Description |
| | | |
| Exhibit 31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| Exhibit 31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| Exhibit 32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
| | | |
| Exhibit 32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
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