U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
COMMISSION FILE NO. 000-21325
SYSTEMONE TECHNOLOGIES INC.
----------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter
FLORIDA 65-0226813
---------------------- -------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
8305 N.W. 27TH STREET, SUITE 107
MIAMI, FLORIDA 33122
--------------------------------
(Address of Principal Executive Offices)
(305) 593-8015
--------------------------------------------
(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
----------------------
(Former Name)
CHECK WHETHER THE REGISTRANT (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
THE REGISTRANT HAD AN AGGREGATE OF 4,742,923 SHARES OF ITS COMMON STOCK, PAR
VALUE $.001 PER SHARE, OUTSTANDING AS OF THE CLOSE OF BUSINESS ON NOVEMBER 8,
2001.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES [ ] NO [X]
SYSTEMONE TECHNOLOGIES INC.
INDEX TO FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2001
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets-
As of September 30, 2001 (unaudited) and December 31, 2000
Condensed Statements of Operations (unaudited) - For the three
and nine months ended September 30, 2001 and 2000
Condensed Statements of Cash Flows (unaudited) - For the nine
months ended September 30, 2001 and 2000
Notes to Condensed Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis or Plan of Operation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYSTEMONE TECHNOLOGIES INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(IN THOUSANDS, EXCLUDING SHARES)
September 30, December 31,
2001 2000
(Unaudited)
------------------ -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3 $ 488
Receivables, net of allowance of $167 and $269 1,854 1,568
Inventories 1,432 1,873
Prepaid and other assets 357 124
------------ ------------
Total current assets 3,646 4,053
Property and equipment, net 1,736 2,229
Long term portion of deferred billings 1,033 --
Other assets 443 667
------------ ------------
Total assets $ 6,858 $ 6,949
============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 2,569 $ 3,101
Restructuring accrual 88 301
Warranty accrual 948 1,030
Deferred revenue 116 189
Current installments of long-term debt
and obligations under capital leases 5,899 281
------------ ------------
Total current liabilities 9,620 4,902
------------ ------------
Long-term debt 23,014 25,364
Non-current warranty accrual 300 943
------------ ------------
Total liabilities 32,934 31,209
------------ ------------
Redeemable convertible preferred stock, $1.00
par value per share. Authorized 1,500,000 shares,
165,025 issued and outstanding (155,424 in 2000)
at redemption value 16,503 15,542
Less unamortized discount (1,314) (1,680)
------------ ------------
Net redeemable convertible preferred stock 15,189 13,862
------------ ------------
Stockholders' deficit:
Common stock, $0.001 par value per share.
Authorized 25,000,000 shares, issued and
outstanding 4,742,923 5 5
Additional paid-in capital 19,129 19,129
Accumulated deficit (60,399) (57,256)
------------ ------------
Total stockholders' deficit (41,265) (38,122)
------------ ------------
Total liabilities, redeemable convertible
preferred stock and stockholders' deficit $ 6,858 $ 6,949
============ ============
See accompanying notes to condensed financial statements.
3
SYSTEMONE TECHNOLOGIES INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended Nine Months Ended
------------------------------ --------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
-------------- ------------- -------------- ---------------
Revenue $ 4,047 $ 4,536 $ 12,586 $ 13,832
Costs of goods sold 2,451 1,807 7,937 5,597
-------------- ------------ ------------- -------------
Gross profit 1,596 2,729 4,649 8,235
-------------- ------------ ------------- -------------
Operating expenses:
Selling, general & administrative 842 4,882 2,836 15,730
Research and development 51 44 158 287
-------------- ------------ ------------- -------------
Total operating expenses 893 4,926 2,994 16,017
-------------- ------------ ------------- -------------
Profit (loss) from operations 703 (2,197) 1,655 (7,782)
-------------- ------------ ------------- -------------
Interest expense, net (757) (608) (2,210) (1,651)
Amortization of note discount (420) -- (1,259) --
-------------- ------------ ------------- -------------
Total interest (1,177) (608) (3,469) (1,651)
-------------- ------------ ------------- -------------
Net loss (474) (2,805) (1,814) (9,433)
-------------- ------------ ------------- -------------
Dividends and accretion of
discount on redeemable
convertible preferred stock (453) (291) (1,331) (825)
-------------- ------------ ------------- -------------
Net loss to common shares $ (927) $ (3,096) $ (3,145) $ (10,258)
============== ============ ============= =============
Basic and diluted net loss per
common share $ (.20) $ (.65) $ (.66) $ (2.16)
============== ============ ============= =============
Weighted average shares
outstanding 4,742,923 4,742,923 4,742,923 4,742,923
============== ============ ============= =============
See accompanying notes to condensed financial statements.
4
SYSTEMONE TECHNOLOGIES INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
September 30, September 30,
2001 2000
----------------- ----------------
Cash flows used in operating activities:
Net loss $ (1,814) $ (9,433)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of debt issue costs 645 443
Interest accrued on convertible debt and amortization of
note discounts 2,929 1,247
Provision for obsolete inventory and doubtful accounts (91) 85
Changes in operating assets and liabilities:
Receivables (184) 1,116
Inventories 430 931
Long term portion of deferred billings (1,033) --
Prepaid and other assets (233) 121
Accounts payable and accrued expenses (532) (513)
Restructuring accrual (213) --
Warranty accrual (725) --
Deferred revenue (73) 47
------------ -------------
Net cash used in operating activities (894) (5,956)
------------ -------------
Cash flows provided by (used in) investing activities:
Purchase of equipment (20) (3)
Proceeds from sale of equipment 92 --
------------ -------------
Net cash provided by (used in) investing activities 72 (3)
------------ -------------
Cash flows provided by financing activities:
Proceeds from issuance of convertible preferred stock -- 2,000
Proceeds from long-term debt 550 3,485
Repayment of capital lease obligations (213) (263)
------------ -------------
Net cash provided by financing activities 337 5,222
------------ -------------
Net decrease in cash and cash equivalents (485) (737)
Cash and cash equivalents at beginning of period 488 912
------------ -------------
Cash and cash equivalents at end of period $ 3 $ 175
============ =============
Supplemental Information:
Cash paid for:
Interest $ 446 $ 237
------------ -------------
Taxes $ -- $ --
------------ -------------
</Table>
See accompanying notes to condensed financial statements.
5
SYSTEMONE TECHNOLOGIES INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 (UNAUDITED)
AND DECEMBER 31, 2000
THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING
PRONOUNCEMENTS
SystemOne Technologies Inc. (the "Company") designs, manufactures and sells a
full line of patented, self-contained, recycling industrial parts washers, (the
"SystemOne(R) Washers"), for use in the automotive, aviation, marine and general
industrial repair markets. The Company has been awarded eleven patents for its
products, which incorporate innovative, proprietary resource recovery and waste
minimization technologies to distill contaminated solvent and yield pure solvent
and a by-product comparable to used motor oil. The SystemOne(R) Washer
integrates a distillation and recovery process which allows the solvent to be
used, treated and re-used on demand, without requiring off-site processing. The
Company was incorporated in November 1990 and commenced the sale of SystemOne(R)
Washers in July 1996. During 2000, the Company's operating subsidiary was merged
with and into the Company and the Company changed its name to SystemOne
Technologies Inc.
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed interim financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-QSB.
Accordingly, certain information and footnotes required by generally accepted
accounting principles for complete financial statements are not included herein.
The interim statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB/A for the year ended December 31, 2000 as filed with the Securities and
Exchange Commission.
Management acknowledges its responsibility for the preparation of the
accompanying interim financial statements which reflect all adjustments
considered necessary, in the opinion of management, for a fair statement of the
results of interim periods presented. The results of operations for the interim
periods are not necessarily indicative of the results of operations for the
entire year. Where appropriate, certain amounts have been reclassified to
conform with the 2001 presentation.
(2) LIQUIDITY
As a result of restructuring the Company's operations in the fourth quarter of
2000 related to implementing the Marketing and Distribution Agreement, as
amended (the "Exclusive Marketing Agreement") with Safety-Kleen Systems, Inc., a
wholly-owned subsidiary of Safety-Kleen Corp. (collectively, "Safety-Kleen"),
the Company has significantly reduced expenses and has achieved operating
profitability in each of the three quarters ended September 30, 2001. The
Company currently anticipates that for fiscal year 2001 it will not require
additional equity or debt financing in excess of that available under the
Revolving Credit Loan Agreement (the "Senior Revolver"), although there can be
no assurance. However, if none of the outstanding convertible debt and
convertible preferred stock is converted to common stock, significant amounts of
cash would be required commencing in the first quarter of 2002 to repay the
current and long-term
6
debt and the redeemable preferred stock. The Company believes that in 2002 it
will need to either refinance its existing credit facility or obtain new debt or
equity to fund all or part of the required payments. There is no certainty that
the Company would be able to obtain the required funds on acceptable terms.
The Company recognizes revenue upon shipment of equipment with respect to the
deferred billings discussed in footnote 4 of the notes to condensed financial
statements although cash will be received in equal installments over a 12
quarter period following a 90 day deferral in the first year of the Exclusive
Marketing Agreement and a 60 day deferral thereafter.
(3) REVENUE RECOGNITION
The Company recognizes revenue upon shipment of equipment from its
manufacturing facility.
(4) DEFERRED BILLINGS
The majority of the purchase price payable for each unit purchased by
Safety-Kleen, specified in the Exclusive Marketing Agreement, is payable on net
30 day terms from date of shipment with a portion of the purchase price to be
deferred and payable in equal installments over a 36 month period. The Company
recognizes the deferred payments as revenue at the time of shipment based on the
present value of the 12 quarterly payments utilizing a discount rate that
represents the Company's cost of capital. In addition, the Company recognizes
interest income over the discount period which is the difference between the
present value of the 12 quarterly payments recorded at the time of shipment and
the actual amount received. At September 30, 2001, $472,000 is included in
receivables which is the current portion of deferred billings and $1,033,000 is
the long term portion due beyond 12 months.
(5) REVOLVING CREDIT LOAN AGREEMENT
While the Company did not draw any funds on the Senior Revolver in the third
quarter 2001, the Company did borrow $400,000 in the first quarter 2001 and
$150,000 in the second quarter 2001. The Senior Revolver provides the Company
with a $5 million revolving line of credit. Pursuant to the Senior Revolver, the
Company may borrow twice a month up to the Advance Limit. The Advance Limit is
the lesser of $5,000,000 or the sum of the Advance Supplement (as defined) plus
an amount based on the Company's receivables and inventory. The Advance
Supplement is $2,500,000 for the period April 1, 2001 until May 30, 2003. As of
September 30, 2001, there was approximately $250,000 credit available on the
Senior Revolver.
(6) INCOME TAXES
Realization of deferred tax assets associated with federal and state net
operating loss carryforwards ("NOL") is dependent upon generating sufficient
taxable income prior to their expiration. The Company believes that there is a
risk that these NOLs may expire unused and accordingly, has established a
valuation reserve against them in full.
(7) NASDAQ STOCK MARKET
The Company announced on May 8, 2001 that the Company's securities had been
delisted from the Nasdaq Stock Market effective with the open of business that
day. The Company's securities continue to be quoted on the OTC Electronic
Bulletin Board under its current symbol STEK.
7
(8) NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
the application of EITF Issue No. 96-13, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", with
Issue No. 00-7, "Equity Derivative Transactions that Require Net Cash Settlement
if Certain Events Outside the Control of the Issuer Occur" ("EITF 00-7"). Equity
derivative contracts that contain any provision that could require net cash
settlement (except upon the complete liquidation of the Company) must be marked
to fair value through earnings under EITF 00-7. In September 2000, the EITF
reached a consensus on Issue No.00-19, "Determination of Whether Share
Settlement Is Within the Control of the Issuer for purposes of Applying Issue
No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). EITF 00-19
addresses questions regarding the application of EITF 00-7 and sets forth a
model to be used to determine whether equity derivative contracts should be
recorded as equity. Under the transition provisions of EITF 00-19, all contracts
existing prior to the date of the consensus are grandfathered until June 30,
2001, with a cumulative catch-up adjustment to be recorded at that time.
Additionally, any contracts entered into prior to September 20, 2000, which are
not revised to comply with the requirements of EITF 00-19 by December 31, 2000,
will require reclassification out of permanent equity and into temporary equity
pursuant to Accounting Series Release No. 268. This reclassification will remain
until the contracts are revised to comply with EITF 00-19 through June 30, 2001.
The Company believes that the adoption did not have a material impact on the
financial statements.
In August 2001, the FASB issued SFAS 144, Accounting for Impairment or Disposal
of Long-Lived Assets. This Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. This Statement also amends ARB No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The provisions of this
Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The provisions of this Statement
generally are to be applied prospectively. Currently, the Company is assessing
but has not yet determined how the adoption of SFAS No. 144 will impact its
financial position and results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements, including the notes thereto, contained elsewhere in this
10-QSB and the Company's Form 10-KSB/A filed with the U.S. Securities and
Exchange Commission for the fiscal year ended December 31, 2000.
8
GENERAL AND RECENT DEVELOPMENTS
The Company was incorporated in November 1990 and, as a development stage
company, devoted substantially all of its resources to research and development
programs related to its full line of self contained, recycling industrial parts
washers until June 1996. The Company commenced its planned principal operations
in July 1996. The Company began to generate significant revenue from product
sales in 1997 followed by increased operating expenses between 1997 and 2000 in
connection with the development of a direct marketing and distribution
organization, including the establishment of regional distribution centers and a
service fleet. Unfortunately, despite the economic, technological and
environmental advantages offered by the Company's SystemOne(R) products, the
market demand for a capital purchase or capital lease of parts washer equipment
proved to be less than projected as there remained a strong preference in the
parts washer market for the traditional month-to-month service charge or
equipment rental. Consequently, revenues did not increase commensurately with
the expenses of a direct marketing and distribution organization and the Company
did not have the required large amounts of capital to finance rental inventory
necessary to support a month-to-month rental program.
Commencing in the first quarter of 2001, shifting its strategy, the Company
appointed Safety-Kleen the exclusive distributor for SystemOne(R) parts washers
in the United States, Puerto Rico, Canada and Mexico under the Exclusive
Marketing Agreement. This strategic shift has allowed the Company to eliminate
its entire national direct sales and service infrastructure permitting a
significant reduction in the Company's operating expenses.
As a result of the successful launch of its new distribution alliance with
industry leader Safety-Kleen, the Company has recognized significant reductions
in selling, general and administrative expenses, has reduced its unit cost of
production and has transitioned to operating profitability. Beginning with the
first quarter of 2001, the Company has had three successive quarters of
operating profitability which grew at the rate of 25% or more as compared to the
preceding quarter.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Sales decreased by $489,000, or 10.8%, to $4,047,000 for the three months ended
September 30, 2001 from $4,536,000 for the comparable period of 2000. Sales in
the third quarter of 2001 were entirely to Safety-Kleen at contractual
distributor price levels pursuant to the Exclusive Marketing Agreement, compared
to direct sales at higher retail prices for the third quarter of 2000. The
reduction in price is partially offset by an approximate 58% increase in units
sold versus the comparable period last year.
Gross margin as a percentage of sales was 39.4% and 60.2% for the three months
ended September 30, 2001 and 2000, respectively. The decrease is a result of
sales entirely at contractual distributor price levels to Safety-Kleen pursuant
to the Exclusive Marketing Agreement during the three months ended September 30,
2001 as contrasted with direct sales at higher retail prices in the third
quarter of 2000. The reduction in gross margin due to lower sales prices is
partially offset by lower manufacturing plant overhead cost per unit achieved
from higher production levels.
9
Selling, general and administrative expenses for the three months ended
September 30, 2001 were $842,000, a decrease of $4,040,000, or 82.8%, compared
to selling, general and administrative expenses of $4,882,000 for the three
months ended September 30, 2000. The decrease is the result of the significant
restructuring that took place in the fourth quarter of 2000 related to the
Exclusive Marketing Agreement. Cost savings include elimination of the Company's
entire sales force, dismantling the service infrastructure, including service
centers and service fleet, and related reductions in the corporate office staff
and administration.
Research and development expenses increased by $7,000 or 15.9% to $51,000 for
the three months ended September 30, 2001 from $44,000 for the three months
ended September 30, 2000. The increase is due to use of a consulting firm for
product enhancements.
The Company recognized an operating profit of $703,000 for the three months
ended September 30, 2001 compared to an operating loss of $2,197,000 for the
comparable period in 2000. This significant turnaround is the result of the
major strategic shift and significant restructuring and cost reductions
resulting from the Exclusive Marketing Agreement with Safety-Kleen.
The Company recognized net interest expense of $1,177,000 for the three months
ended September 30, 2001, an increase of $569,000 or 93.6% compared to net
interest expense of $608,000 for the three months ended September 30, 2000. The
increase in net interest expense was primarily the result of the amortization of
debt discount associated with common stock warrants issued to lenders during the
third and fourth quarters of 2000 and increased debt incurred during the year
ended December 31, 2000, at higher interest rates, partially offset by interest
income of $32,000 associated with the deferred billings discussed in footnote 4
of the notes to condensed financial statements.
As a result of the foregoing, the Company incurred a net loss of $474,000 for
the three months ended September 30, 2001 compared to a net loss of $2,805,000
for the three months ended September 30, 2000.
Dividends on redeemable convertible preferred stock increased by $162,000 or
55.7% to $453,000 for the three months ended September 30, 2001 from $291,000
for the three months September 30, 2000. The increase is due to amortization in
the 2001 period of preferred stock discounts associated with common stock
warrants issued to investors during the second quarter of 2000 and the impact of
dividends compounding.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Sales decreased by $1,246,000, or 9.0%, to $12,586,000 for the nine months ended
September 30, 2001 from $13,832,000 for the comparable period of 2000. Sales in
the first nine months of 2001 were entirely to Safety-Kleen at contractual
distributor price levels pursuant to the Exclusive Marketing Agreement compared
to direct sales at higher retail prices for the nine months ended September 30,
2000. The reduction in price is partially offset by an approximate 65% increase
in units sold versus the comparable period last year.
Gross margin as a percentage of sales was 36.9% and 59.5% for the nine months
ended September 30, 2001 and 2000, respectively. The decrease is a result of
10
sales entirely at contractual distributor price levels to Safety-Kleen pursuant
to the Exclusive Marketing Agreement during the nine months ended September 30,
2001 as contrasted with direct sales at higher retail prices in the comparable
period of 2000. The reduction in gross margin due to lower sales prices is
partially offset by lower manufacturing plant overhead cost per unit achieved
from higher production levels. Also, the gross margin for the nine months ended
September 30, 2001 is lower than the gross margin for the three months September
30, 2001 due to higher unit cost in inventory at December 31, 2000 that was sold
in the first quarter of 2001.
Selling, general and administrative expenses for the nine months ended September
30, 2001 were $2,836,000, a decrease of $12,894,000, or 82.0%, compared to
selling, general and administrative expenses of $15,730,000 for the nine months
ended September 30, 2000. The decrease is the result of the significant
restructuring that took place in the fourth quarter of 2000 related to the
Exclusive Marketing Agreement. Cost savings include elimination of the Company's
entire sales force, dismantling the service infrastructure, including service
centers and service fleet, and related reductions in the corporate office staff
and administration.
Research and development expenses decreased by $129,000 or 44.9% to $158,000 for
the nine months ended September 30, 2001 from $287,000 for the nine months ended
September 30, 2000. The decrease is due to a shift in emphasis to production
needs related to the Exclusive Marketing Agreement and a reduction in research
and development staff in the fourth quarter of 2000.
As a result of the significant restructuring, the Company recognized an
operating profit of $1,655,000 for the nine months ended September 30, 2001
compared to an operating loss of $7,782,000 for the comparable period in 2000.
The Company recognized net interest expense of $3,469,000 for the nine months
ended September 30, 2001, an increase of $1,818,000 or 110.1% compared to net
interest expense of $1,651,000 for the nine months ended September 30, 2000. The
increase in net interest expense was primarily the result of the amortization of
debt discount associated with common stock warrants issued to lenders during the
third and fourth quarters of 2000 and increased debt outstanding during the year
ended December 31, 2000, at higher interest rates, partially offset by interest
income of $80,000 associated with the deferred billings discussed in footnote 4
of the notes to condensed financial statements and also in the discussion of the
three months ended September 30, 2001 above.
As a result of the foregoing, the Company incurred a net loss of $1,814,000 for
the nine months ended September 30, 2001 compared to a net loss of $9,433,000
for the nine months ended September 30, 2000.
Dividends on redeemable convertible preferred stock increased by $506,000 or
61.3% to $1,331,000 for the nine months ended September 30, 2001 from $825,000
for the nine months ended September 30, 2000. The increase is due to
amortization in the 2001 period of preferred stock discounts associated with
common stock warrants issued to investors during the second quarter of 2000 and
the impact of dividends compounding.
11
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended September 30,
2001 decreased by $5,062,000 to $894,000, compared to net cash used in operating
activities of $5,956,000 for the comparable nine month period of the prior year.
The decrease is primarily attributable to a decrease in net loss of $7,619,000
offset by an increase in deferred billings of $1,033,000, reduction of accounts
payable and accrued expenses of $532,000 and a decrease in the restructuring and
warranty accrual of $938,000.
The Company recognizes revenue upon shipment of equipment with respect to the
deferred billings discussed in footnote 4 of the notes to condensed financial
statements although cash will be received in equal installments over a 12
quarter period following a 90 day deferral in the first year of the Exclusive
Marketing Agreement and a 60 day deferral thereafter.
Net cash provided by investing activities for the nine months ended September
30, 2001 was a result of the one time sale of existing rental equipment to
Safety-Kleen in the first quarter of 2001 for $92,000.
Net cash provided by financing activities for the nine months ended September
30, 2001 decreased by $4,885,000 to $337,000, from $5,222,000 for the nine
months ended September 30, 2000. The decrease is due to reduced borrowing
activity on the Company's line of credit and no promissory notes issued during
the nine months ended September 30, 2001 compared to the $2,500,000 in
promissory notes issued during the nine months ended September 30, 2000. Also,
the Company did not sell preferred stock during the nine months ended September
30, 2001 compared to the same period in 2000 when the Company generated proceeds
of $2,000,000 from preferred stock sales.
At September 30, 2001, the Company had a working capital deficiency of
$5,974,000 and cash and cash equivalents of $3,000, compared to a working
capital deficiency of $849,000 and cash and cash equivalents of $488,000 at
December 31, 2000. The increased working capital deficiency is the result of an
increase in current installments of long term debt of $5,618,000 which was
$281,000 at December 31, 2000 and $5,899,000 at September 30, 2001.
The Company borrowed an additional $550,000 in the first two quarters of 2001 on
its Senior Revolver which provides the Company with a $5 million revolving line
of credit. Pursuant to the Senior Revolver, the Company may borrow twice a month
up to the Advance Limit. The Advance Limit is the lesser of $5,000,000 or the
sum of the Advance Supplement (as defined) plus an amount based on the Company's
receivables and inventory. The Advance Supplement is $2,500,000 for the period
April 1, 2001 until maturity. As of September 30, 2001, there was approximately
$250,000 credit available on the Senior Revolver.
The Company's material financial commitments are obligations to make lease
payments on the Company's principal executive and manufacturing facility in
Miami, Florida and equipment leases (approximately $88,000 per month),
installment payments for financed manufacturing equipment (approximately $28,000
per month), interest payments on its Senior Revolver (up to approximately
$58,000 per month) and interest accrued on its Subordinated Loan Agreement
(approximately $39,000 per month).
The Company's primary sources of cash are the Senior Revolver and sales to
Safety-Kleen. The Exclusive Marketing Agreement with Safety-Kleen has an initial
12
term of five years plus two five-year renewal options and a termination right
exercisable by Safety-Kleen prior to the third year of the initial term.
Safety-Kleen is currently under reorganization pursuant to Chapter 11 of the
federal Bankruptcy Code and there can be no assurance that Safety-Kleen will be
able to continue its operations as currently conducted or otherwise be in a
position to perform under the Exclusive Marketing Agreement.
As a result of restructuring the Company's operations in the fourth quarter of
2000 related to implementing the Exclusive Marketing Agreement with
Safety-Kleen, the Company has reduced expenses and has achieved operating
profitability in each of the first three quarters of 2001. The Company currently
anticipates that for fiscal year 2001 it will not require additional equity or
debt financing in excess of that available under the Senior Revolver, although
there can be no assurance. However, if none of the outstanding convertible debt
and convertible preferred stock is converted to common stock, significant
amounts of cash would be required, commencing in 2002, to repay long-term debt,
interest and the redeemable preferred stock as follows:
DEBT PREFERRED STOCK TOTAL
---- --------------- -----
2002 $ 4,292,199 $ -- $ 4,292,199
2003 27,741,022 -- 27,741,022
2004 -- 20,326,215 20,326,215
------------- --------------- -------------
Total $ 32,033,221 $ 20,326,215 $ 52,359,436
============= =============== =============
The Company intends to raise equity or debt capital to fund all or part of the
required payments or refinance the Company's existing credit facility. There is
no certainty that the Company would be able to obtain the required funds on
acceptable terms.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS.
The foregoing Management's Discussion and Analysis contains various "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs concerning future
events, including, but not limited to, statements regarding growth in sales of
the Company's products and the sufficiency of the Company's cash flow for its
future liquidity and capital resource needs. These forward looking statements
are further qualified by important factors that could cause actual events to
differ materially from those in such forward looking statements. These factors
include, without limitation, increased competition, the sufficiency of the
Company's patents, the ability of the Company to manufacture its products on a
cost effective basis, market acceptance of the Company's products, the effects
of governmental regulation and the ability of the Company to obtain adequate
financing to support its operational and marketing plans, the expansion of its
services network and future product development. Results actually achieved may
differ materially from expected results included in these statements as a result
of these or other factors. In particular, the Company's performance for the
foreseeable future will be dependent almost completely on the performance of
Safety-Kleen, the acceptance by Safety-Kleen's customers of the Company's
products, the ability of Safety-Kleen to resell or rent the Company's products
at attractive price levels, the ability of Safety-Kleen to properly service the
Company's products as well as other factors. In addition, Safety-Kleen is
currently under reorganization pursuant to Chapter 11 of the federal Bankruptcy
Code and there can be no assurance that Safety-Kleen will be able to continue
its operations as currently conducted or otherwise be in a position to perform
under the Exclusive Marketing Agreement.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION.
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Form 8-K dated July 16, 2001 was filed with the Securities and Exchange
Commission on July 23, 2001 and reported Item 4, Changes in Registrant's
Certifying Accountant.
14
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SYSTEMONE TECHNOLOGIES INC.
Date: November 7, 2001 /s/ PAUL I. MANSUR
----------------------------------------
PAUL I. MANSUR
Chief Executive Officer
(Principal Executive Officer)
Date: November 7, 2001 /s/ STEVEN M. HEALY
----------------------------------------
STEVEN M. HEALY
Director of Finance and Controller
(Principal Financial Accounting Officer)
15