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 SEPTEMBER 30, 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.
[X] YES [ ] NO
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Outstanding at
Class November 10, 2001
----- -----------------
Common Stock, $.01 par value 11,864,872
Transitional Small Business Disclosure Format: YES [ ] NO [X]
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Page No.
--------
Index To Consolidated Financial Statements
PART I. FINANCIAL INFORMATION
Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2 - Changes in Securities 13
Item 6 - Exhibits and Reports on Form 8-K 13
2
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 84,933 $ 302,392
Trade accounts receivable, net of allowance for
doubtful accounts of $46,619 and $41,179, respectively 758,739 327,777
Inventories 25,947 38,131
Costs of contracts in process 355,128 72,897
Other receivables 15,800 10,351
Prepaid expenses 137,722 84,236
------------ ------------
Total Current Assets 1,378,269 835,784
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment 1,337,632 1,193,421
Less accumulated depreciation (878,236) (707,507)
------------ ------------
Net Property and Equipment 459,396 485,914
------------ ------------
OTHER ASSETS
Patents, net of accumulated amortization of $95,203 and
$79,621, respectively 112,560 128,142
Patents pending 111,244 72,424
Refundable deposits and other assets 20,871 22,853
------------ ------------
Total Other Assets 244,675 223,419
------------ ------------
$ 2,082,340 $ 1,545,117
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 533,801 $ 105,227
Accrued wages 108,591 69,866
Current portion of notes payable 49,385 13,166
Customer deposits 36,582 42,617
Other accrued expenses 194,636 108,300
------------ ------------
Total Current Liabilities 922,995 339,176
LONG-TERM LIABILITIES
Notes payable, net of current portion 5,081 --
------------ ------------
Total Liabilities 928,076 339,176
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $10.00 stated value; authorized 1,000,000 shares;
no shares issued and outstanding -- --
Common Stock, $0.01 par value; authorized 40,000,000 shares;
issued and outstanding 11,798,206 and 11,702,728 shares, respectively 117,982 117,027
Additional paid-in capital 14,007,130 13,990,085
Accumulated deficit (12,970,848) (12,901,171)
------------ ------------
Total Stockholders' Equity 1,154,264 1,205,941
------------ ------------
$ 2,082,340 $ 1,545,117
============ ============
3
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
SALES $ 1,740,621 $ 1,096,704 $ 4,311,629 $ 3,715,341
COST OF SALES 894,290 605,281 2,454,111 1,922,886
------------ ------------ ------------ ------------
GROSS PROFIT 846,331 491,423 1,857,518 1,792,455
SELLING EXPENSES 60,455 95,216 199,790 324,207
GENERAL AND ADMINISTRATIVE EXPENSES 560,920 467,564 1,739,467 1,381,979
------------ ------------ ------------ ------------
OPERATING PROFIT (LOSS) 224,956 (71,357) (81,739) 86,269
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Gain on sale of asset -- -- 52,378 --
Interest expense (18,354) (1,708) (45,709) (14,304)
Miscellaneous 1,458 4,854 5,393 15,164
------------ ------------ ------------ ------------
Total other income (expense) (16,896) 3,146 12,062 860
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES (68,211) (69,677) 87,129
Income tax provision -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 208,060 $ (68,211) $ (69,677) $ 87,129
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED
NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ (0.01) $ (0.01) $ 0.01
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 11,798,206 11,686,033 11,768,713 11,676,172
============ ============ ============ ============
DILUTED 11,798,788 11,686,033 11,768,713 11,824,632
============ ============ ============ ============
4
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (69,677) $ 87,129
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 192,667 184,501
Gain on sale of asset (52,378) --
Common stock issued for services 18,000 11,999
(Increase) decrease in assets
Trade accounts receivable, net (430,962) 122,261
Inventories 12,184 5,703
Costs of contracts in progress (282,231) 42,524
Other receivables (5,449) 5,146
Prepaid expenses (53,486) (2,548)
Refundable deposits and other assets 1,982 37,226
Increase (decrease) in liabilities
Accounts payable 428,574 (144,739)
Accrued wages and other accrued expenses 125,061 (132,278)
Customer deposits (6,035) 63,844
--------- ---------
Net cash provided by (used in) operating activities (121,750) 280,768
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (82,672) (100,174)
Cash received from sale of asset 135,000 --
Expenditures related to patents and patents pending (38,820) (19,578)
--------- ---------
Net cash provided by (used in) investing activities 13,508 (119,752)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable and long-term debt 198,262 151,870
Principal payments under notes payable (307,479) (150,110)
--------- ---------
Net cash provided by (used in) financing activities (109,217) 1,760
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (217,459) 162,776
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 302,392 65,722
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 84,933 $ 228,498
========= =========
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 our Form 10-KSB for
the year ended December 31, 2000.
The consolidated financial statements have been prepared in accordance with our
customary accounting practices and have not been audited. In the opinion of
management, the consolidated financial statements reflect all adjustments
necessary to fairly report our 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 and tank cleaning services, the costs of which are deferred until
revenues are recognized. Service revenue is 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 September 30, 2001, there was $505,804 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 us 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 us and accruing on the
basis of actual days elapsed from the date of the 80% advance until five days
after collection of such account receivable by the factor at a per annum rate
equal to an internal rate set by the factor.
6
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - SEGMENT INFORMATION
Information by segment for the three months ended September 30, 2001:
Pipe Tank
Cleaning Cleaning Chemicals Corporate Consolidated
-------- -------- --------- --------- ------------
Sales to unaffiliated customers $1,055,988 $582,670 $101,963 $ -- $ 1,740,621
Income (loss) from operations 333,734 148,834 65,656 (340,164) 208,060
Total assets 945,542 566,597 63,883 506,318 2,082,340
Depreciation and amortization 46,924 5,727 1,579 11,215 65,445
Capital expenditures 12,334 31,727 - -- 44,061
Information by segment for the three months ended September 30, 2000:
Pipe
Cleaning Chemicals Corporate Consolidated
-------- --------- --------- ------------
Sales to unaffiliated customers $1,012,449 $ 84,255 $ -- $ 1,096,704
Income (loss) from operations 190,815 21,205 (280,231) (68,211)
Total assets 1,443,799 108,322 425,711 1,977,832
Depreciation and amortization 45,692 1,877 13,203 60,772
Capital expenditures 21,442 -- 2,655 24,097
Information by segment for the nine months ended September 30, 2001:
Pipe Tank
Cleaning Cleaning Chemicals Corporate Consolidated
-------- -------- --------- ----------- ------------
Sales to unaffiliated customers $3,257,320 $ 842,247 $ 212,062 $ -- $ 4,311,629
Income (loss) from operations 735,213 96,699 131,588 (1,033,177) (69,677)
Total assets 945,542 566,597 63,883 506,318 2,082,340
Depreciation and amortization 137,693 16,596 4,733 33,645 192,667
Capital expenditures 32,496 48,964 -- 1,211 82,671
Information by segment for the nine months ended September 30, 2000:
Pipe
Cleaning Chemicals Corporate Consolidated
-------- --------- --------- ------------
Sales to unaffiliated customers $3,347,861 $ 367,480 $ -- $ 3,715,341
Income (loss) from operations 801,562 146,139 (860,572) 87,129
Total assets 1,443,799 108,322 425,711 1,977,832
Depreciation and amortization 133,318 5,633 45,550 184,501
Capital expenditures 78,021 13,757 8,396 100,174
7
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and nine months ended September 30, 2000 and 2001 is
as follows:
Three Months Ended
September 30, 2001
------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $ 208,060 11,798,206 $0.02
========== ========== =====
Effect of stock options and warrants -- --
---------- ---------- -----
Diluted EPS $ 208,060 11,798,206 $0.02
========== ========== =====
Three Months Ended
September 30, 2000
------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $ (68,211) 11,686,033 $(0.01)
========== ========== ======
Effect of stock options and warrants --
---------- ---------- ------
Diluted EPS $ (68,211) 11,686,033 $(0.01)
========== ========== ======
Nine Months Ended
September 30, 2001
------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $ (69,677) 11,768,713 $(0.01)
========== ========== =====
Effect of stock options and warrants -- --
---------- -----
Diluted EPS $ (69,677) 11,768,713 $(0.01)
========== ========== =====
Nine Months Ended
September 30, 2000
------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $ 87,129 11,676,172 $0.01
========== ========== =====
Effect of stock options and warrants -- 148,460
---------- ---------- -----
Diluted EPS $ 87,129 11,824,632 $0.01
========== ========== =====
8
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. We 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 our results of operations or financial position.
In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS. We will be required to adopt these
standards on January 1, 2002. We do not believe the adoption of SFAS No. 141 or
142 will be material to our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. We will be required to adopt SFAS No. 144 on
January 1, 2002. We do not believe that the adoption of SFAS No. 144 will be
material to our financial position or results of operations.
NOTE 7 - ASSET PURCHASE AND SALE
On February 9, 2001, we 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 was $61,539.
On February 9, 2001, we acquired a barge with a capacity of 19,500 barrels from
Hampton Roads Barge Rental, LLC. In exchange, we assumed $88,978 of debt that
was secured by the barge. During the second quarter, we sold the barge for
$135,000 and realized a gain of $52,378.
9
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
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 our business
plan, continued growth in our various customer segments, effective marketing of
our products and services directly by and through marketing partners and the
other risks detailed in the latest Form 10-KSB filed with the SEC. We have 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 two sources, cleaning
piping systems on U.S. Navy and U.S. Coast Guard vessels and cleaning bilge,
fuel and CHT tanks on ships. 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.
During the first quarter of 2001, our company purchased certain tank cleaning
assets of Industrial Chemical Cleaning Incorporated and entered the business of
tank cleaning. Sales generated from tank cleaning have become a significant
portion of our revenue and we expect this revenue source to continue to grow in
the future.
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Sales during the third quarter of 2001 were $1,741,000 compared to sales of
$1,097,000 during the third 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
$583,000 during the third quarter of 2001.
10
Sales increased 59% during the third quarter of 2001 compared to sales during
the third quarter of 2000. The increase is due to the addition of the sales from
the tank cleaning services mentioned above. Sales of pipe cleaning services
during the third quarter of 2001 were $1,056,000 compared to pipe cleaning sales
of $1,013,000 during the third quarter of 2000. Of the pipe cleaning work
performed during the third quarter of 2001, $746,000 (43% of total revenue) was
performed pursuant to a five-year CHT chemical cleaning contract with the United
States Navy compared to $804,000 (73% of total revenue) during the third quarter
of 2000. Chemical sales were $102,000 during the third quarter of 2001 compared
to $84,000 during the third quarter of 2000.
Consolidated gross margins were 49% and 45% for the three months ended September
30, 2001 and 2000, respectively. The variation in gross margin is attributable
to the many types of ships and systems cleaned, the location of the work being
performed, the customer we are servicing and the efficiency with which the
projects are managed. Because of these factors, we expect that gross margin
percentages will continue to fluctuate in the future.
Gross profit increased to $846,000 during the third quarter of 2001 compared to
$491,000 during the third quarter of 2000 as a result of the higher gross margin
and revenue discussed above. General and administrative expenses increased by
$93,000 during the third quarter of 2001 as compared to the third quarter of
2000. The increase in general and administrative expenses is attributable to our
entrance into the tank cleaning business. We have hired several new
administrative personnel to manage this part of our business. Selling expenses
decreased to $60,000 during the third quarter of 2001 compared to $95,000 during
the third quarter of 2000. The reduction in selling expenses was caused by a
lower rate of commission being paid from our employee incentive commission plan,
which resulted in lower commission expense. Additionally, the curtailment of
certain marketing activities in the fire protection market contributed to the
reduction.
Our company had an operating profit of $225,000 during the third quarter of 2001
compared to an operating loss of $71,000 during the third quarter of 2000. Net
income was $208,000 during the third quarter of 2001 compared to a net loss of
$68,000 during the third quarter of 2000.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Sales during the nine months ended September 30, 2001 were $4,312,000 compared
to sales of $3,715,000 during the nine months ended September 30, 2000.
Sales increased 16% during the nine months ended September 30, 2001 compared to
sales during the same period in 2000 due to the addition of the tank cleaning
revenue. Sales of pipe cleaning services during the nine months ended September
30, 2001 were $3,257,000 compared to pipe cleaning sales of $3,348,000 during
the nine months ended September 30, 2000. Of the pipe cleaning work performed
during the nine months ended September 30, 2001, $2,202,000 (51% of total
revenue) was performed pursuant to a five-year CHT chemical cleaning contract
with the U.S. Navy compared to $2,846,000 (77% of total revenue) during the nine
months ended September 30, 2000. Sales from tank cleaning services were $842,000
during the nine months ended September 30, 2001. Chemical sales were $212,000
during the nine months ended September 30, 2001 compared to $367,000 during the
nine months ended September 30, 2000. Lower Line-Out, Well Klean and Process
Water product sales caused the decline.
Consolidated gross margins were 43% and 48% during the nine months ended
September 30, 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 during the first quarter prompted us to relocate our east
coast operating facility and created certain short term operating inefficiencies
and start up costs.
Gross profit increased to $1,858,000 during the nine months ended September 30,
2001 compared to $1,792,000 during the nine months ended September 30, 2000
because of the increase in revenue discussed above. The increase in revenue was
11
somewhat offset by the lower gross margin. General and administrative expenses
increased by $357,000 during the nine months ended September 30, 2001 compared
to the nine months ended September 30, 2000. The increase in general and
administrative expenses is primarily 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 nine months ended September 30, 2001. Selling expenses
decreased to $200,000 during the nine months ended September 30, 2001 compared
to $324,000 during the nine months ended September 30, 2000. The reduction in
selling expenses was due primarily to lower commission expense caused by a
temporary halt in the employee incentive commission pool.
We had an operating loss of $82,000 during the nine months ended September 30,
2001 compared to an operating profit of $86,000 during the nine months ended
September 30, 2000. Net loss was $70,000 during the nine months ended September
30, 2001 compared to net income of $87,000 during the nine months ended
September 30, 2000. The net loss for the nine months ended September 30, 2001
included a gain of $52,000 from the sale of an asset.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $85,000 at September 30, 2001 and $302,000 at
December 31, 2000. Working capital was $455,000 and $497,000 at those respective
dates. The decrease in cash and working capital during the first nine months of
2001 is attributable to the net loss and cash used in operating activities.
Net cash provided by investing activities resulted from the sale of our barge
offset by capital and patent expenditures. Net cash used in financing activities
resulted from the pay down of notes payable offset by certain new notes payable
used to finance insurance premiums.
As of September 30, 2001, we had $505,804 of factored receivables under our
factoring facility (See NOTE 3).
We currently have a contract with one customer responsible for a significant
portion of our revenue, but the high concentration level has begun to decline.
The entrance into the tank cleaning business has begun to reduce our dependence
on the CHT chemical cleaning contract with the U.S. Navy. Nonetheless, any
material delay, cancellation or reduction of orders from this customer would
have a material adverse effect on our operations and financial position. Sales
to the U.S. Navy under the Navy contract accounted for 51% and 77% of
consolidated revenues for the nine months ended September 30, 2001 and 2000,
respectively.
We may in the future sell additional securities to raise capital. Any such sale,
if necessary, could substantially dilute the interest of our existing
stockholders.
12
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
During the third quarter of 2001 we issued 66,666 shares of common stock as
compensation to the non-employee members of our Board of Directors. These shares
were issued under an exemption from registration pursuant to section 4(2) of the
securities act of 1933 as a transaction by an issuer not involving a public
offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K: None
Exhibits: 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: November 13, 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)