U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________.
Commission File Number 1-13012
H.E.R.C. PRODUCTS INCORPORATED
(Name of small business issuer as specified in its charter)
Delaware 86-0570800
(State of Incorporation) (IRS Employer Identification Number)
2215 W Melinda Lane, Suite A
Phoenix, Arizona 85027
(Address of principal executive offices)
(623) 492-0336
(Issuer's telephone number)
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. YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at May 14, 2001
----- ---------------------------
Common Stock, $.01 par value 11,737,633
Transitional Small Business Disclosure Format: YES [ ] NO [X]
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Index To Consolidated Financial Statements
PART I. FINANCIAL INFORMATION Page No.
--------
Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 2001 and December 31, 2000 3
Consolidated Statements of Operations
Three Months Ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 2 - Changes in Securities 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 12
2
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 19,249 $ 302,392
Trade accounts receivable, net of allowance for
doubtful accounts of $32,844 and $41,179, respectively 383,344 327,777
Inventories 33,774 38,131
Costs of contracts in process 81,178 72,897
Other receivables 11,739 10,351
Prepaid expenses 222,903 84,236
------------ ------------
Total Current Assets 752,187 835,784
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment 1,375,287 1,193,421
Less accumulated depreciation 768,900 707,507
------------ ------------
Net Property and Equipment 606,387 485,914
------------ ------------
OTHER ASSETS
Patents, net of accumulated amortization of $84,815 and $79,621, respectively 122,948 128,142
Patents pending 102,502 72,424
Refundable deposits and other assets 22,908 22,853
------------ ------------
Total Other Assets 248,358 223,419
------------ ------------
$ 1,606,932 $ 1,545,117
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 178,267 $ 105,227
Accrued wages 71,187 69,866
Current portion of notes payable 178,857 13,166
Customer Deposits 38,390 42,617
Other accrued expenses 139,824 108,300
------------ ------------
Total Current Liabilities 606,525 339,176
LONG-TERM LIABILITIES
Notes payable, net of current portion 76,317 --
------------ ------------
Total Liabilities 682,842 339,176
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $10.00 stated value; authorized 1,000,000 shares;
issued and outstanding zero shares -- --
Common Stock, $0.01 par value; authorized 40,000,000 shares;
issued and outstanding 11,737,633 and 11,702,728 shares, respectively 117,376 117,027
Additional paid-in capital 13,995,736 13,990,085
Accumulated deficit (13,189,022) (12,901,171)
------------ ------------
Total Stockholders' Equity 924,090 1,205,941
------------ ------------
$ 1,606,932 $ 1,545,117
============ ============
The accompanying notes are an integral part of these
consolidated balance sheets.
3
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
-------------------------------
2001 2000
------------ ------------
SALES $ 1,233,878 $ 1,683,342
COST OF SALES 875,258 805,427
------------ ------------
GROSS PROFIT 358,620 877,915
SELLING EXPENSES 72,088 120,972
GENERAL AND ADMINISTRATIVE EXPENSES 568,166 476,095
------------ ------------
OPERATING PROFIT (LOSS) (281,634) 280,848
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (8,463) (9,982)
Miscellaneous 2,246 5,794
------------ ------------
Total other income (expense) (6,217) (4,188)
------------ ------------
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES (287,851) 276,660
Income tax provision -- --
------------ ------------
NET INCOME (LOSS) $ (287,851) $ 276,660
============ ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED
NET INCOME (LOSS) PER COMMON SHARE $ (0.02) $ 0.02
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 11,737,633 11,666,187
============ ============
DILUTED 11,737,633 11,803,671
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
-------------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $(287,851) $ 276,660
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 66,587 60,705
Common stock issued for services 6,000 4,000
(Increase) decrease in assets
Trade accounts receivable, net (55,567) 104,613
Inventories 4,357 (16,052)
Deferred expenses (8,281) 89,318
Other receivables (1,388) (2,286)
Prepaid expenses (138,667) (117,834)
Refundable deposits and other assets (55) 33,148
Increase (decrease) in liabilities
Accounts payable 73,040 (111,620)
Accrued wages and other accrued expenses 32,845 (9,549)
Customer deposits (4,227) 47,197
--------- ---------
Net cash provided by (used in) operating activities (313,207) 358,300
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (31,349) (39,285)
Expenditures related to patents and patents pending (30,078) (6,680)
--------- ---------
Net cash used in investing activities (61,427) (45,965)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable and long-term debt 154,061 113,369
Principal payments under notes payable (62,570) (40,770)
--------- ---------
Net cash provided by financing activities 91,491 72,599
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (283,143) 384,934
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 302,392 65,722
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,249 $ 450,656
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
5
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements are presented in accordance with
the requirements of Form 10-QSB and consequently do not include all of the
disclosures normally made in an annual Form 10-KSB filing. Accordingly, the
consolidated financial statements of H.E.R.C. Products Incorporated included
herein should be reviewed in conjunction with the consolidated financial
statements and the accompanying footnotes included within the company's Form
10-KSB for the year ended December 31, 2000.
The consolidated financial statements have been prepared in accordance with the
company's customary accounting practices and have not been audited. In the
opinion of management, the consolidated financial statements reflect all
adjustments necessary to fairly report the company's financial position and
results of operations for the interim period. All such adjustments are normal
and recurring in nature. The interim consolidated results of operations are not
necessarily indicative of results to be expected for the year ending December
31, 2001.
NOTE 2 - REVENUE RECOGNITION
We recognize revenue when products are shipped. We also perform pipe-cleaning
services, which are recorded when the work is complete. Included in sales are
certain reimbursable costs from our customers.
NOTE 3 - LONG TERM DEBT AND OTHER FINANCING ARRANGEMENTS
We have a factoring facility whereby the factor purchases eligible receivables
and advances 80% of the purchased amount to us. Purchased receivables may not
exceed $600,000 at any one time. Either party may cancel the arrangement with 30
days notice. At March 31, 2001, there was approximately $272,000 of factored
accounts receivable. This arrangement is accounted for as a sale of receivables
on which the factor has recourse to the 20% residual of aggregate receivables
purchased and outstanding. Interest payable by the company to the factor is
calculated as a fixed discount fee equal to 1% of the amount of the receivable
factored plus a variable discount fee computed on the amount advanced to the
company and accruing on the basis of actual days elapsed from the date of the
80% advance until 5 days after collection of such account receivable by the
factor at a per annum rate equal to an internal rate set by the factor.
NOTE 4 - SEGMENT INFORMATION
Information by segment for the three months ended March 31, 2000:
Pipe
Cleaning Chemicals Corporate Consolidated
---------- --------- --------- ------------
Sales to unaffiliated customers $1,578,993 $ 104,349 $ -- $1,683,342
Income (loss) from continuing operations 566,285 10,784 (300,409) 276,660
Total assets 1,465,591 113,451 790,364 2,369,406
Depreciation and amortization 42,719 1,878 16,108 60,705
Capital expenditures 22,133 13,757 3,395 39,285
6
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information by segment for the three months ended March 31, 2001:
Pipe Tank
Cleaning Cleaning Chemicals Corporate Consolidated
---------- -------- --------- --------- ------------
Sales to unaffiliated customers $1,112,549 $ 61,180 $ 60,149 $ -- $1,233,878
Income (loss) from continuing operations 93,823 (91,693) 34,638 (324,619) (287,851)
Total assets 981,980 220,786 93,480 310,686 1,606,932
Depreciation and amortization 48,754 3,659 1,619 12,555 66,587
Capital expenditures 17,383 12,756 -- 1,210 31,349
NOTE 5 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators (weighted average number of
shares outstanding) of the basic and diluted earnings per share (EPS)
computation for the three months ended March 31, 2001 and 2000 is as follows:
Three Months Ended
March 31, 2000
------------------------------
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $ 276,660 11,666,187 $ 0.02
======
Effect of stock options and warrants -- 137,484
---------- -----------
Diluted EPS $ 276,660 11,803,671 $ 0.02
========== =========== ======
Three Months Ended
March 31, 2001
------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $ (287,851) 11,737,633 $(0.02)
======
Effect of stock options and warrants -- --
---------- -----------
Diluted EPS $ (287,851) 11,737,633 $(0.02)
========== =========== ======
7
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133 (as amended by SFAS No. 138), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, which requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The issuance of SFAS No. 137, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE
OF FASB STATEMENT NO. 133, delayed the required effective date of SFAS No. 133
to all fiscal years beginning after June 15, 2000. The Company adopted SFAS No.
133, as amended, on January 1, 2001. The adoption of SFAS No. 133, as amended,
did not have a material impact on its results of operations or financial
position.
NOTE 7 - ASSET PURCHASE
On February 9, 2001, the company acquired certain tank and boiler cleaning
assets of Industrial Chemical Cleaning Incorporated. In exchange, the company
assumed the existing debt that was secured by the particular assets. The actual
amount of debt assumed during the first quarter was $61,539. The company is
still negotiating the assumption of approximately $20,000 of debt related to a
vehicle.
On February 9, 2001, the company acquired a barge with a capacity of 19,500
barrels from Hampton Roads Barge Rental, LLC. In exchange, the company assumed
$88,978 of debt that was secured by the barge.
8
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB, and in future filings by the company with the
Securities and Exchange Commission in our press releases, and in oral statements
made with the approval of an authorized executive officer of the company, the
words or phrases "are expected", "we anticipate", "will continue", "believe",
"project", "estimated", "will enhance", or similar expressions (including
confirmations by an authorized executive officer of the company of any such
expressions made by a third party with respect to the company) are intended to
identify "forward-looking statements" within the meaning of that term in Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934 as amended. Readers are cautioned not to place undue
reliance on any such forward-looking statements, each of which speak only as of
the date made. Such statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical earnings
and those currently anticipated or projected. Such risks include, but are not
limited to, adequate cash flow and financing for implementation of its business
plan, continued growth in its various customer segments, effective marketing of
its products and services directly by the company and through marketing partners
and the other risks detailed in the company's Form 10-KSB filed with the SEC.
Management has no obligation to publicly release the result of any revisions
that may be made to any forward-looking statements to reflect any anticipated
events or circumstances occurring after the date of such statements.
This discussion and analysis of financial condition and results of operations
should be read in conjunction with the unaudited consolidated financial
statements and the related disclosures included elsewhere herein.
RESULTS OF OPERATIONS
Our company derives the majority of its revenue from cleaning CHT systems on
U.S. Navy and U.S. Coast Guard vessels. This subjects our company to certain
business risks that can cause volatility in our revenue stream and our gross
margins. We are subject to the deployment and servicing schedules of the U.S.
Navy as well as the available maintenance funds in the Navy budget. These
factors can cause revenue to change dramatically from one quarter to the next.
Additionally, we are required by our contract to perform work on different
classes of ships. Performing work on different classes of ships can cause our
gross margins to vary widely from one quarter to the next because we make higher
gross margins on certain classes of ships than we do on others. Moreover, we are
often asked to perform work on ships outside of the state of Virginia. When we
perform work under the Navy contract outside of the state of Virginia, we incur
certain reimbursable travel costs that are included in both revenue and cost of
goods sold. These reimbursable travel costs cause gross margins to be lower than
the margins that would have otherwise been recognized had the work been
performed in Virginia.
Our company recently moved the location of its operating facility in Virginia.
This move was made because of the type of facility required to perform our
expanded offering of tank cleaning services. The move, made during the first
quarter, created certain short term operating inefficiencies and other
additional expenses that caused gross margins to be lower than normal.
Additionally, certain start up costs and expenses related to the move caused
general and administrative costs to increase during the quarter.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Sales during the first quarter of 2001 were $1,234,000 compared to sales of
$1,683,000 during the first quarter of 2000. During the first quarter of 2001,
our Company entered the tank cleaning business by purchasing certain assets of
Industrial Chemical Cleaning, Inc. Sales from tank cleaning services were
$61,000 during the first quarter of 2001. We began offering tank-cleaning
services on February 9, 2001.
9
Sales declined during the first quarter of 2001 compared to sales during the
first quarter of 2000 because of a decrease in revenue generated from pipe
cleaning services on U.S. Navy and Coast Guard Vessels. Our company is subject
to uneven revenue streams as is mentioned above. Sales of pipe cleaning services
during the first quarter of 2001 were $1,113,000 compared to sales of $1,579,000
during the first quarter of 2000. Of the pipe cleaning work performed during the
first quarter of 2001, $819,000 (66% of total revenue) was performed pursuant to
a contract with the United States Navy compared to $1,410,000 (84% of total
revenue) during the first quarter of 2000. Chemical sales decreased to $60,000
during the first quarter of 2001 compared to $104,000 during the first quarter
of 2000. The decline was in Well Klean and Process Water product sales.
Consolidated gross margins were 29% and 52% in 2001 and 2000, respectively.
Lower gross margins were primarily the result of cleaning pipe systems on
certain vessels that typically take more time to complete than other vessels.
This resulted in higher labor costs. Additionally, we performed pipe-cleaning
services on ships located outside of the state of Virginia that resulted in
certain reimbursable costs that are included both in revenue and cost of goods
sold. Lastly, our entrance into the tank cleaning business prompted us to
relocate our east coast operating facility and created certain short term
operating inefficiencies and start up costs. We expect that gross margin
percentages will continue to fluctuate as changes in revenue mix occur.
Gross profit decreased to $359,000 during the first quarter of 2001 compared to
$878,000 during the first quarter of 2000 as a result of the lower gross margin
and revenue discussed above. General and administrative expenses increased by
$92,000. The increase in general and administrative expenses is directly
attributable to our entrance into the tank cleaning business. Personnel and
other general and administrative expenses needed to operate the tank cleaning
business as well as certain start up expenses related to the new facility
increased our general and administrative expenses during the first quarter by
$102,000. Selling expenses decreased to $72,000 during the first quarter of 2001
compared to $121,000 during the first quarter of 2000. The decline in selling
expenses was caused by lower commissions and a reduction in personnel.
Our company had an operating loss of $282,000 during the first quarter of 2001
compared to operating profit of $281,000 during the first quarter of 2000. Net
loss was $288,000 during the first quarter of 2001 compared to net income of
$277,000 during the first quarter of 2000. A tax benefit from the operating loss
has been fully reserved because of the uncertainty of realizing such benefit.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $19,000 at March 31, 2001 and $302,000 at
December 31, 2000. Working capital was $146,000 and $497,000 at those respective
dates. The decrease in cash and working capital during the first quarter of 2001
is attributable to the net loss.
As of March 31, 2001, we had approximately $272,000 of factored receivables
under our factoring facility.
We currently have a contract with one customer responsible for a majority of our
revenue and we expect the high concentration level to continue throughout 2001.
Thus, any material delay, cancellation or reduction of orders from this customer
would most likely have a material adverse effect on our operations and financial
position. Sales to the U.S. Navy under the Navy contract accounted for 66% and
84% of consolidated revenues for the three months ended March 31, 2001 and 2000,
respectively.
Management has no current plans to sell additional securities to raise cash and
can make no guarantee that it could sell additional securities. However, any
such sale, if necessary, could substantially dilute the interest of our existing
stockholders.
10
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
During the first quarter of 2001 the company issued 34,905 shares of common
stock as compensation to its outside Board of Directors. These shares were
issued under an exemption from registration pursuant to section 4(2) of the
securities act of 1933.
During the first quarter of 2001, the board of directors issued to executives of
the company under the 1996 Performance Equity Plan options to purchase an
aggregate of 125,000 shares of common stock. All of the options are exercisable
at a price of $0.19 per share. The options vest immediately and expire 10 years
from the date of grant. These options were issued under an exemption from
registration pursuant to section 4(2) of the securities act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
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.
H.E.R.C. PRODUCTS INCORPORATED
(Registrant)
Date: May 14, 2001 By: /s/ S. Steven Carl
----------------------------------
S. Steven Carl
Chief Executive Officer
By: /s/ Michael H. Harader
----------------------------------
Michael H. Harader
Chief Financial Officer (Principal
Financial and Accounting Officer)
11