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, 1998
( ) 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)
State of Incorporation: Delaware IRS Employer Identification Number:
86-0570800
2202 W Lone Cactus Drive #15
Phoenix, Arizona 85027
(Address of principal executive offices)
(602) 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 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
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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 May 4, 1998
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Common Stock, $.01 par value 9,850,588
Transitional Small Business Development Format:
YES NO X
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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, 1998 and December 31, 1997 3
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997 4
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1997 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 11
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
Assets
Current Assets
Cash and cash equivalents $ 39,833 $ 135,396
Trade accounts receivable, net of allowance for
doubtful accounts of $24,530 and $36,205 respectively 392,880 166,751
Inventories, principally finished goods 150,473 87,738
Other receivables 17,082 11,963
Prepaid expenses 118,976 98,757
------------ ------------
Total Current Assets 719,244 500,605
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Property and Equipment
Property and equipment 1,069,274 1,057,470
Less accumulated depreciation 276,612 235,253
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Net Property and Equipment 792,662 822,217
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Other Assets
Patents, net of accumulated amortization of $93,594 and $93,789 respectively 61,068 62,642
Patents pending 81,310 71,146
Refundable deposits and other assets 126,232 93,021
Goodwill, net of accumulated amortization of $9,509 and $8,150 respectively 99,160 100,519
------------ ------------
Total Other Assets 367,770 327,328
------------ ------------
$ 1,879,676 $ 1,650,150
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 740,227 $ 583,571
Accrued wages 79,966 91,450
Current portion of notes payable 311,238 287,856
Net liabilities of discontinued operation 249,584 261,272
Other accrued expenses 212,076 110,928
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Total Current Liabilities 1,593,091 1,335,077
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Long-Term Liabilities
Notes payable, net of current portion 56,708 66,938
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Total Liabilities 1,649,799 1,402,015
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Stockholders' Equity
Common Stock, $0.01 par value; authorized 40,000,000 shares;
issued and outstanding 8,230,588 shares 82,306 82,306
Additional paid-in capital 12,951,006 12,947,406
Accumulated deficit (12,803,435) (12,781,577)
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Total Stockholders' Equity 229,877 248,135
------------ ------------
$ 1,879,676 $ 1,650,150
============ ============
See accompanying notes to consolidated financial statements.
3
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
1998 1997
---- ----
Sales $ 981,799 $ 805,543
Cost of Sales 491,038 570,781
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Gross Profit 490,761 234,762
Selling Expenses 136,093 259,354
General and Administrative Expenses 429,712 764,209
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Operating Loss (75,044) (788,801)
Other Income (Expense)
Interest expense (24,791) (1,874)
Miscellaneous 380 17,906
Gain on sale of patent 77,597 --
----------- -----------
Total other income 53,186 16,032
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Loss from Continuing Operations Before Taxes on Income (21,858) (772,769)
Taxes on Income -- --
----------- -----------
Loss from Continuing Operations (21,858) (772,769)
Operating Loss from Discontinued Operation -- (78,107)
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Net Loss (21,858) (850,876)
Non-Cash Dividend on Preferred Stock -- 52,135
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Net Loss Allocable to Common Stockholders $ (21,858) $ (903,011)
=========== ===========
Loss Per Common Share - Basic & Diluted
Loss from Continuing Operations $ (0.00) $ (0.13)
Loss from Discontinued Operations -- (0.01)
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Net Loss Per Common Share $ (0.00) $ (0.14)
Weighted Average Common Shares Outstanding 8,230,588 6,574,000
=========== ===========
See accompanying notes to consolidated financial statements.
4
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
Common Stock Additional
Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balance,
January 1, 1998 8,230,588 $ 82,306 $ 12,947,406 $(12,781,577) $ 248,135
Warrants issued for services -- -- 3,600 -- 3,600
Net loss -- -- -- (21,858) (21,858)
--------- ------------ ------------ ------------ ------------
Balance,
March 31, 1998 8,230,588 $ 82,306 $ 12,951,006 $(12,803,435) $ 229,877
--------- ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements.
5
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
1998 1997
---- ----
Cash Flows From Operating Activities
Net Loss $ (21,858) $ (850,876)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 80,694 54,278
Change in net liabilities of discontinued operation (11,688) --
(Increase) decrease in assets
Trade accounts receivable (226,129) (41,607)
Inventories (62,735) (66,265)
Other receivables (5,119) 15,076
Prepaid expenses (34,019) (22,328)
Other assets (52,213) 22,630
Increase (decrease) in liabilities
Accounts payable 156,656 32,510
Accrued expenses 89,664 324,418
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Total adjustments (64,889) 318,712
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Net cash used in operating activities (86,747) (532,164)
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Cash Flows From Investing Activities
Capital expenditures (11,804) (2,844)
Expenditures related to patents and patents pending (10,164) (61,182)
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Net cash used in investing activities (21,968) (64,026)
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Cash Flows From Financing Activities
Private offering costs -- (27,618)
Proceeds from exercise of stock options -- 19,375
Proceeds from issuance of notes payable 45,492 --
Principal payments under notes payable (32,340) (661)
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Net cash provided by financing activities 13,152 (8,904)
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Net increase (decrease) in cash and cash equivalents (95,563) (605,094)
Cash and cash equivalents at beginning of period 135,396 1,369,843
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Cash and cash equivalents at end of period $ 39,833 $ 764,749
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest $ 35,919 $ 3,005
During 1997, 932,342 shares of Common Stock were issued upon the conversion of
101,380 shares of Preferred Stock
During 1997, certain adjustments were made to assets and liabilities acquired in
the purchase of the 50% interest of H.E.R.C. Consumer Products Company and
accordingly, goodwill was reduced by $22,673.
See accompanying notes to consolidated financial statements.
6
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 ("Company")
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, 1997.
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 report fairly 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, 1998.
NOTE 2 - Inventories
Inventories are stated at the lower of cost or market (net realizable value).
Cost is determined by various methods which approximate first-in, first-out.
NOTE 3 - Long Term Debt and Other Financing Arrangements
In September 1997, the Company closed on a five year term loan and borrowed
$250,000. Interest is payable monthly at an annual rate of 14%; principal
repayments are over 54 months and begin 6 months after take-down. In connection
with the closing of such loan, the Company issued two warrants to the lender,
each to purchase 62,500 shares of common stock at $1.18 (market price at
closing) and $1.475 (25% premium over market price at closing), respectively.
The Company may prepay the loan; certain fees and conditions, including the
issuance of two identical warrants, apply if prepayment is not made within two
years of takedown.
At March 31, 1998, the Company is not in compliance with certain covenants in
the loan agreement; accordingly, the total indebtedness is classified as a
current liability in the accompanying Consolidated Balance Sheets.
In October 1997, the Company concluded arrangements for a factoring facility
whereby 80% of a maximum of $600,000 in eligible receivables may be financed at
an effective annual interest rate of approximately 16%. The initial term of the
facility is two years which may be extended.
Substantially all of the Company's assets are pledged as security pursuant to
the above agreements.
NOTE 4 - Stockholders' Equity
In April 1998, the Company completed a private placement of 1,620,000 shares of
Common Stock and received net proceeds of $502,200.
7
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - Discontinued Operation
During the fourth quarter of 1997, the Company determined that it would exit the
agricultural business and commenced efforts to dispose of its investment in its
wholly owned subsidiary, CCT Corporation, which is accounted for as a
discontinued operation in the accompanying financial statements. Accordingly,
the Consolidated Statement of Operations for the three months ended March 31,
1997 is reclassified.
8
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 ("SEC") , in the Company's press releases and
in oral statements made with the approval of an authorized executive officer of
the Company, the words or phrases "are expected", "the Company anticipates",
"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
("the Act"), 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 and effective marketing of its products directly by
the Company and through marketing partners. The Company has no obligation to
publicly release the result of any revisions which 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
- ---------------------
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
- -------------------------------------------------------------------------------
Sales of $981,799 in the first quarter were $176,000 ahead of 1997 first quarter
sales principally because of $416,000 of revenue generated from marine ship
board pipe line chemical cleaning. Of the marine work, $343,000 was performed
pursuant to a five year contract with the United States Navy, which calls for
billings between an annual minimum of approximately $100,000 to an annual
estimate of $1,600,000. Additionally, the Company completed an overhead fire
protection system cleaning project for $100,000 in the first quarter of 1998.
Higher Marine sales in 1998 were offset by lower Consumer Products sales.
Consolidated gross margins were 50% and 29% in 1998 and 1997, respectively.
Improved Industrial margin of 67% in 1998 compared with 52% in 1997 is a
function of a shift in revenue from municipal potable water line rehabilitation
to marine ship board pipe line chemical cleaning and fire protection system
cleaning. Consumer Products margin remained flat at 23% in 1998 and 1997.
The increase in gross profit from $235,000 in 1997 to $491,000 in 1998 combined
with a decrease in aggregate selling, general and administrative expenses of
$458,000 for the same period resulted in a loss from continuing operations of
$22,000 in 1998 compared with $773,000 in 1997. Decreased selling, general and
administrative expenses in 1998 are a direct result of the company's cost
containment program which took effect in late 1997 in addition to a one time
charge related to the settlement of an employment contract in the first quarter
of 1997.
9
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents were $40,000 and $135,000 at March 31, 1998 and
December 31, 1997 and the Company had a working capital deficit of $874,000 and
$834,000 at those respective dates.
In April 1998, the Company completed a private placement of 1,620,000 shares of
restricted Common Stock resulting in net proceeds of $502,200.
As of March 31, 1998 , the Company is not in compliance with certain covenants
pertaining to its term loan. However, all payments required to service the debt
have been made on a timely basis and the lender has taken no action to
accelerate repayment of principal.
The conversion during 1997 of all preferred stock outstanding at December 31,
1996 into common stock had no impact on cash and cash equivalents or working
capital.
Through the first quarter of 1998, the Company was able to generate cash flow to
support its ongoing business. Management cannot assure that financial results
for the balance of 1998 will provide sufficient positive cash flow to fund
ongoing operations. Management believes another private placement similar to the
one completed in April 1998 may be necessary. The proceeds from this additional
private placement would likely be used for capital expenditures, repayment of
debt and other corporate purposes. There can be no assurance that additional
financing will be available on terms favorable to the Company, or at all. If
adequate funds are not available or are not available on acceptable terms, the
Company's business, financial condition, or results of operations may be
adversely affected.
To the extent that any future financing involves the sale of the Company's
equity securities, the interest of the Company's then stockholders could be
substantially diluted.
The Company has received notification from its provider of financial and
accounting software that such software is structured to accommodate the year
2000 and beyond.
10
PART II: OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
In April 1998, the Company completed a private placement of 1,620,000 shares
of restricted Common Stock at $0.31 per share resulting in net proceeds of
$502,200. The sale of the above Common Stock was exempt from the registration
provisions of the Act, pursuant to section 4(2) of the Act for transactions
not involving a public offering, based on the fact that the Common Stock was
offered and sold to accredited investors who had access to financial and other
relevant data concerning the Company, its financial condition, business and
assets.
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: None
Exhibits
Regulation S-B
Exhibit No. Exhibit
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(27) Financial Data Schedule
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 13, 1998 By: /s/ S. Steven Carl
------------------------------
S. Steven Carl
Chief Executive Officer
By: /s/ Michael H. Harader
------------------------------
Michael H. Harader
Chief Accounting Officer