<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended MARCH 31, 2000
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____ to _______
Commission file number 001-15789
-------------------------
STRATUS SERVICES GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3499261
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(State of other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
500 CRAIG ROAD, SUITE 201, MANALAPAN, NEW JERSEY 07726
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(Address of principal executive offices)
(732) 866-0300
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(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
As of May 24, 2000, 5,796,824 shares of the Registrant's common stock were
outstanding.
Traditional Small Business Disclosure Format (Check one): Yes / / No /X/
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
STRATUS SERVICES GROUP, INC.
Condensed Balance Sheet
As at March 31, 2000
(Unaudited)
Assets
<TABLE>
<CAPTION>
March 31,
2000
--------------
<S> <C>
Current assets
Cash and cash equivalents $ 176,904
Due from factor - less allowance for recourse
obligation of $70,000 213,016
Accounts receivable - less allowance for doubtful
accounts of $713,000 632,096
Unbilled receivables 708,114
Unbilled receivables - related parties 49,986
Prepaid insurance 63,050
Prepaid expenses and other current assets 75,354
-----------
1,918,520
Property and equipment, net of accumulated depreciation 384,353
Goodwill 2,263,308
Investment in marketable securities --
Deferred registration costs 666,352
Other assets 58,123
-----------
$ 5,290,656
===========
Liabilities and Stockholders' Deficiency
Current liabilities
Loans payable $ 1,172,110
Loans payable - related parties 252,500
Notes payable - acquisition 1,350,882
Insurance obligation payable 45,160
Accounts payable and accrued expenses 1,561,736
Accrued payroll and taxes 716,596
Payroll taxes payable 291,039
Litigation fees payable 133,299
-----------
5,523,322
Temporary equity - common shares 1,618,060
Temporary equity - put options 520,000
Commitments and contingencies
Stockholders' deficiency
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,349,137
shares issued and outstanding 43,492
Additional paid-in capital 2,150,010
Deferred compensation (91,300)
Accumulated deficit (4,472,928)
-----------
Total stockholders' deficiency (2,370,726)
===========
$ 5,290,656
===========
</TABLE>
See notes to condensed financial statements.
1
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STRATUS SERVICES GROUP, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues (including $220,000,
$757,000, $399,000 and $1,239,000
from related parties) $ 9,201,351 $ 7,007,582 $ 16,925,238 $ 12,920,225
Cost of revenue (including $203,000,
$683,000, $358,000 and $1,148,000
from related parties) 7,174,999 5,628,591 12,903,322 10,307,710
------------ ------------ ------------ ------------
Gross Profit 2,026,352 1,378,991 4,021,916 2,612,515
------------ ------------ ------------ ------------
Operating expenses
Selling, general and administrative expenses 1,658,845 1,873,681 3,203,083 3,292,156
Provision for recourse obligation 10,000 -- 30,000 595,000
------------ ------------ ------------ ------------
1,668,845 1,873,681 3,233,083 3,887,156
------------ ------------ ------------ ------------
Earnings (loss) from operations 357,507 (494,690) 788,833 (1,274,641)
------------ ------------ ------------ ------------
Other income (expenses)
Finance charges (106,676) (169,859) (279,791) (369,307)
Interest expense (92,515) (89,689) (196,687) (121,289)
Other income (expense) 3,287 (1,767) 5,184 11,383
------------ ------------ ------------ ------------
(195,904) (261,315) (471,294) (479,213)
------------ ------------ ------------ ------------
Net earnings (loss) $ 161,603 $ (756,005) $ 317,539 $ (1,753,854)
============ ============ ============ ============
Net earnings (loss) per common share -
Basic $ .04 $ (.20) $ .07 $ (.47)
Diluted .04 (.20) .07 (.47)
Weighted average shares, outstanding per common share
Basic 4,349,137 3,755,823 4,328,522 3,737,579
Diluted 4,543,804 3,755,823 4,517,802 3,737,579
</TABLE>
See notes to condensed financial statements.
2
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STRATUS SERVICES GROUP, INC.
Condensed Statements of Cash flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ 317,539 $(1,753,854)
----------- -----------
Adjustments to reconcile net earnings (loss)
to net cash used by operating activities
Depreciation 63,504 29,227
Amortization 82,247 39,893
Imputed interest 37,549 5,912
Accrued interest 55,516 36,224
Compensation - stock options 23,400 23,400
Changes in operating assets and liabilities
Due to/from factor (896,940) 1,104,524
Accounts receivable (316,771) (203,178)
Prepaid insurance 194,163 (525,640)
Prepaid expenses and other current assets (59,446) (3,866)
Other assets (367) (2,349)
Insurance obligation payable (207,726) 473,292
Accrued payroll and taxes (217,739) (13,675)
Payroll taxes payable 64,807 78,416
Litigation fees payable -- (75,992)
Accounts payable and accrued expenses 91,936 483,458
----------- -----------
Total adjustments (1,085,867) 1,449,646
----------- -----------
$ (768,328) $ (304,208)
=========== ===========
Cash flows (used in) investing activities
Purchase of property and equipment (136,799) (199,301)
Payments for business acquisitions -- (142,431)
----------- -----------
(136,799) (341,732)
----------- -----------
Cash flows from financing activities
Proceeds from loans payable 1,125,000 800,000
Payments of loans payable (301,000) --
Payments of registration costs (165,041) --
----------- -----------
658,959 800,000
----------- -----------
Net change in cash and cash equivalents (246,168) 154,060
Cash and cash equivalents - beginning 423,072 249,987
----------- -----------
Cash and cash equivalents - ending $ 176,904 $ 404,047
=========== ===========
Supplemental disclosure of cash paid
Interest $ 27,717 $ 42,871
Schedule of Noncash Investing and Financing Activities
Fair value of assets acquired $ -- $ 2,421,903
Less: cash paid -- (57,430)
Less: common stock and put options issued -- (520,000)
----------- -----------
Liabilities assumed $ -- $ 1,844,473
=========== ===========
Issuance of common stock in exchange for notes payable $ 300,000 --
=========== ===========
Accrued and imputed interest $ 93,065 $ 42,136
=========== ===========
</TABLE>
See notes to condensed financial statements.
3
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STRATUS SERVICES GROUP, INC.
Notes to Condensed Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. The financial statement information was derived from unaudited
financial statements unless indicated otherwise. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included in the
accompanying condensed financial statements. Operating results for the three and
six month periods ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ending September 30, 2000.
The accompanying unaudited condensed financial statements for the six months
ended March 31, 2000 should be read in conjunction with the Company's audited
financial statements for the year ended September 30, 1999, included in the
Company's Registration Statement on Form (File No. 333-83255), as amended.
NOTE 2 - EARNINGS/LOSS PER SHARE
Basic "Earnings Per Share" ("EPS) excludes dilution and is computed by dividing
earnings available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted EPS assumes conversion of
dilutive options and warrants, and the issuance of common stock for all other
potentially dilutive equivalent shares outstanding. Dilutive shares were
194,667 and 189,280 for the three and six months ended March 31, 2000.
NOTE 3 - INITIAL PUBLIC OFFERING
On May 5, 2000, the Company completed its initial public offering ("IPO") of
1,300,000 shares of common stock at a price of $6.00 per share, generating net
cash proceeds of approximately $6 million after deducting underwriters discounts
and offering costs. Had the IPO occurred on March 31, 2000, pro forma assets
would have been approximately $9,400,000, pro forma liabilities would have been
approximately $2,750,000 and pro forma stockholders' equity would have been
approximately $6,650,000, after reclassification of temporary equity - common
shares of approximately 1,618,000.
NOTE 4 - FACTORING AGREEMENT
The Company has a factoring agreement under which it may sell up to $3,000,000
of qualified trade accounts receivable, with limited recourse provisions. The
agreement expires August 10, 2000 and is renewed automatically for one-year
periods unless either party is notified of termination 60 days prior to renewal.
The Company is required to repurchase or replace any receivable remaining
uncollected for more than 90 days. The provision for recourse obligation
includes the estimated recourse obligations on the sale of receivables.
4
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NOTE 5 - ACQUISITION
On January 4, 1999, the Company entered into an asset purchase agreement with
B&R Employment, Inc. ("B&R"). The Company purchased certain assets including
office equipment, furniture and fixtures, sales and operating records, customer
contracts and agreements, vendor lists, and seller's licenses and certificates.
The purchase price was $2,400,000, consisting of notes for $1,880,000 and the
issuance of 34,667 shares of the Company's common stock. B&R had a put option to
sell these shares back to the Company at $15 per share, provided that the
Company did not conduct an initial public offering within twenty-four months. In
February 2000, the Company entered into a debt-equity conversion agreement with
B&R whereby, B&R will convert, except for $666,000, the amounts due under the
notes payable-acquisition, including accrued interest, into shares of the
Company's common stock upon the Company's initial public offering of securities.
The number of shares to be issued is based on the offering price in the initial
public offering. The excess of net assets acquired, of approximately $2.4
million was recorded as goodwill and is being amortized on a straight-line basis
over fifteen years. The results of operations for B&R are included from the date
of the acquisition.
The following unaudited pro forma results of operations for the six months ended
March 31, 1999, assume that the purchase of B&R occurred on October 1, 1998.
Pro forma revenues $14,254,016
Pro forma net (loss) (1,854,202)
Basic and diluted net loss per share (.50)
Basic and diluted shares 3,737,579
NOTE 6 - TEMPORARY EQUITY - COMMON STOCK
Certain stockholders of the Company may have a right to pursue claims against
the Company as a result of possible technical violations of the laws and
regulations governing the private placement and issuance of securities. In
connection therewith, the Company intends to make a rescission offer to these
stockholders, representing approximately 3,500,000 shares, whereby the Company
will offer to repurchase the shares at their original purchase price which
ranges from $.075 to $3.75 per share. Accordingly, the Company has recorded the
original total proceeds of the sale of the shares in the amount of $1,618,060 as
temporary equity - common shares in the balance sheet. The Chief Executive
Officer of the Company has agreed to assume the Company's obligation to purchase
shares from any stockholder who elects rescission. The net worth of the Chief
Executive officer is in excess of $1,700,000. The amount related to any shares
held by stockholders who do not elect rescission within thirty days of the
rescission offer (expiration date) and any shares purchased by the Chief
Executive Officer pursuant to his assumption obligation will be reclassified to
additional paid-in capital.
NOTE 7 - INCOME TAXES
There were no provisions for income taxes for the six and three months ended
March 31, 2000 and 1999 because the Company has net operating loss carryforwards
with a corresponding valuation against them.
NOTE 8 - SUBSEQUENT EVENTS
In connection with the IPO (see Note 3), the following transactions have
occurred:
1. Substantially all loans, including loans from related parties, as of March
31, 2000, were repaid from the proceeds, except for $200,000 which was
converted into 33,333 shares of the Company's common stock at the IPO;
5
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2. Notes Payable - Acquisition (see Note 5) of $666,000 was repaid and the
balance was converted into shares of the Company's common stock of the
IPO price of $6.00 per share;
3. Litigation fees payable of $133,299 were repaid, and
4. $520,000 of temporary equity - put options was reclassified to
stockholders' equity.
6
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-QSB contains "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. These statements relate to future
economic performance, plans and objectives of management for future operations
and projections of revenue and other financial items that are based on the
beliefs of our management, as well as assumptions made by, and information
currently available to, our management. The words "expect", "estimate",
"anticipate", "believe", "intend", and similar expressions are intended to
identify forward-looking statements. Such statements involve assumptions,
uncertainties and risks. If one or more of these risks or uncertainties
materialize or underlying assumptions prove incorrect, actual outcomes may vary
materially from those anticipated, estimated or expected. Among the key factors
that may have a direct bearing on our expected operating results, performance or
financial condition are economic conditions facing the staffing industry
generally; uncertainties related to the job market and our ability to attract
qualified candidates; uncertainties associated with our brief operating history;
our ability to achieve and manage growth; our ability to successfully identify
suitable acquisition candidates, complete acquisitions or integrate the acquired
business into our operations; our ability to attract and retain qualified
personnel; our ability to develop new services; our ability to cross-sell our
services to existing clients; our ability to enhance and expand existing
offices; our ability to open new offices; general economic conditions; and other
factors discussed from time to time in our filings with the Securities and
Exchange Commission. These factors are not intended to represent a complete list
of all risks and uncertainties inherent in our business. The following
discussion and analysis should be read in conjunction with the Condensed
Financial Statements and notes appearing elsewhere in this report.
INTRODUCTION
We provide a wide range of staffing and engineering services nationally through
a network of offices located throughout the United States.
We recognize revenues based on hours worked by assigned personnel. Generally, we
bill our customers a pre-negotiated fixed rate per hour for the hours worked by
our temporary employees. We are responsible for workers' compensation,
unemployment compensation insurance, Medicare and Social Security taxes and
other general payroll related expenses for all of the temporary employees we
place. These expenses are included in the cost of revenue. Because we pay our
temporary employees only for the hours they actually work, wages for our
temporary personnel are a variable cost that increases or decreases in
proportion to revenues. Gross profit margin varies depending on the type of
services offered. Our Engineering Services typically generate higher margins
while Staffing Services typically generates lower margins. In some instances,
temporary employees placed by us may decide to accept an offer of permanent
employment from the customer and thereby "convert" the temporary position to a
permanent position. Fees received from such conversions are included in our
revenues. Selling, general and administrative expenses include payroll for
management and administrative employees, office occupancy costs, sales and
marketing expenses and other general and administrative costs.
RECENT DEVELOPMENTS
On May 5, 2000, we completed our initial public offering ("IPO") of 1,300,000
shares of common stock at a price of $6.00 per share, realizing net cash
proceeds of approximately $6,000,000 after deducting underwriting discounts and
offering costs.
On April 1, 2000, we discontinued doing business with a customer that
represented approximately 8% of our revenue and 7% of our gross profit for the
three and six months ended March 31, 2000. We believe that there will be no
material impact on our operations or financial condition since we expect to
replace the lost business during the three months ended June 30, 2000.
7
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain selected operating results for the three
months and six months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
March 31, 2000 March 31, 1999 March 31, 2000 March 31, 1999
----------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 9,201,351 100.0% $ 7,007,582 100.0% $ 16,925,238 100.0% $ 12,920,225 100.0%
Cost of Revenues 7,174,999 78.0 5,628,591 80.4 12,903,322 76.2 10,307,710 79.8
Gross Profit 2,026,352 22.0 1,378,991 19.6 4,021,916 23.8 2,612,515 20.2
Selling, general
and administrative
expenses (1,583,536) -17.2 (1,816,038) -25.9 (3,057,331) -18.1 (3,223,036) -25.0
Depreciation and
amortization (75,309) -0.8 (57,643) -0.8 (145,752) -0.8 (69,120) -0.5
Provision for recourse
obligation (10,000) -0.1 -- -- (30,000) -0.2 (595,000) -4.6
Earnings (loss) from
operations 357,507 3.9 (494,690) -7.1 788,833 4.7 (1,274,641) -9.9
Other income (expenses):
Finance charges (106,676) -1.2 (169,859) -2.4 (279,791) -1.7 (369,307) -2.8
Interest expense (92,515) -1.0 (89,689) -1.3 (196,687) -1.2 (121,289) -1.0
Other income 3,287 -- (1,767) -- 5,184 -- 11,383 0.1
------------ ----- ------------ ------ ------------ ----- ------------ ------
Net earnings (loss) $ 161,603 1.7% $ (756,005) -10.8% $ 317,539 1.8% $ (1,753,854) -13.6%
============ ===== ============ ====== ============ ===== ============ ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased 31.3% to $9,201,351 for the three months ended
March 31, 2000 from $7,007,582 for the three months ended March 31, 1999.
Revenues increased primarily as a result of the growth of our SMARTSolutions(TM)
division, which began its first programs in December 1998.
GROSS PROFIT. Gross profit increased 46.9% to $2,026,352 for the three months
ended March 31, 2000 from $1,378,991 for the three months ended March 31, 1999.
Gross profit as a percentage of revenues increased to 22.0% for the three months
ended March 31, 2000 from 19.6% for the three months ended March 31, 1999. This
increase was due to successfully implementing our plan to seek higher gross
margin business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, not including depreciation and amortization, decreased
12.8% to $1,583,536 for the three months ended March 31, 2000 from $1,816,038
for the three months ended March 31, 1999. Selling, general and administrative
expenses as a percentage of revenues decreased to 17.2% for the three months
ended March 31, 2000 from 25.9% for the three months ended March 31, 1999.
Selling, general and administrative expenses in the three months ended March 31,
1999 includes $173,000 for legal fees in connection with administrative actions
pertaining to the attempted unionization of a customer facility.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
30.6% to $75,309 for the three months ended March 31, 2000 from $57,643 for the
three months ended March 31, 1999. Depreciation and amortization expenses as a
percentage of revenues, was 0.8% for both periods. The increase was due to the
impact of increased capital expenditures.
8
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FINANCE CHARGES. Finance charges decreased 37.2% to $106,676 for the three
months ended March 31, 2000 from $169,859 for the three months ended March 31,
1999. As a percentage of revenues, finance charges decreased to 1.2% for the
three months ended March 31, 2000, from 2.4% for the three months ended March
31, 1999. This decrease was due to improved collections, which reduced the
average days outstanding of the accounts receivable sold.
INTEREST EXPENSE. Interest expense increased 3.2% to $92,515 for the three
months ended March 31, 2000 from $89,689 for the three months ended March 31,
1999. This increase was due to increased borrowings necessary to fund a working
capital shortfall.
NET EARNINGS (LOSS). As a result of the foregoing, we had net earnings of
$161,603 for the three months ended March 31, 2000 compared to a net loss of
($756,005) for the three months ended March 31, 1999. The net earnings as a
percentage of revenues was 1.7% for the three months ended March 31, 2000. The
net loss for the three months ended March 31, 1999 as a percentage of revenues
was (10.8)%.
SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased 31.0% to $16,925,238 for the six months ended March
31, 2000 from $12,920,225 for the six months ended March 31, 1999. Revenues
increased primarily as a result of the growth of our SMARTSolutions(TM)
division, which began its first programs in December 1998.
GROSS PROFIT. Gross profit increased 53.9% to $4,021,916 for the six months
ended March 31, 2000 from $2,612,515 for the six months ended March 31, 1999.
Gross profit as a percentage of revenues increased to 23.8% for the six months
ended March 31, 2000 from 20.2% for the six months ended March 31, 1999. This
increase was due to successfully implementing our plan to seek higher gross
margin business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses not including depreciation and amortization, decreased
5.1% to $3,057,331 for the six months ended March 31, 2000 from $3,223,036 for
the six months ended March 31, 1999. Selling, general and administrative
expenses as a percentage of revenues decreased to 18.1% for the six months ended
March 31, 2000 from 25.0% for the six months ended March 31, 1999. Selling,
general and administrative expenses in the six months ended March 31, 1999
included $173,000 for legal fees in connection with administrative actions
pertaining to the attempted unionization of a customer facility.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
110.9% to $145,752 for the six months ended March 31, 2000 from $69,120 for the
six months ended March 31, 1999. Depreciation and amortization expenses as a
percentage of revenues increased to 0.8% for the six months ended March 31, 2000
from 0.5% for the six months ended March 31, 1999. This increase was primarily
due to the amortization of goodwill associated with the acquisition of certain
assets of B&R Employment, Inc. in January 1999 and the impact of increased
capital expenditures.
PROVISION FOR RECOURSE OBLIGATION. Provision for recourse obligation is the
estimated amount of uncollectible accounts receivable sold to a factor, which
the factor may obligate us to repurchase. This amount decreased 95.0% to $30,000
for the six months ended March 31, 2000 from $595,000 for the six months ended
March 31, 1999. Provision for recourse obligation as a percentage of revenues
decreased to 0.2% for the six months ended March 31, 2000 from 4.6% for the six
months ended March 31, 1999. Almost all of the amount for the six months ended
March 31, 1999 was due to the uncertainty of recoverability of accounts with
which we ceased doing business during that same time period. We believe that the
$30,000 provision for recourse obligation for the six months ended March 31,
2000 is sufficient.
9
<PAGE>
FINANCE CHARGES. Finance charges decreased 24.2% to $279,791 for the six months
ended March 31, 2000 from $369,307 for the six months ended March 31, 1999. As a
percentage of revenues, finance charges decreased to 1.7% for the six months
ended March 31, 2000 from 2.8% for the six months ended March 31, 1999. This
decrease was due to improved collections, which reduced the average days
outstanding of the accounts receivable, sold.
INTEREST EXPENSE. Interest expense increased 62.2% to $196,687 for the six
months ended March 31, 2000 from $121,289 for the six months ended March 31,
1999. As a percentage of revenues, interest expense increased to 1.2% for the
six months ended March 31, 2000 from 1.0% for the six months ended March 31,
1999. This increase was due to increased borrowings necessary to fund a working
capital shortfall.
NET EARNINGS (LOSS). As a result of the foregoing, we had net earnings of
$317,539 for the six months ended March 31, 2000 compared to a net loss of
($1,753,854) for the six months ended March 31, 1999. The net earnings as a
percentage of revenues was 1.8% for the six months ended March 31, 2000. The
net loss for the six months ended March 31, 1999 as a percentage of revenues
was (13.6)%.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through private sales of
securities, borrowings and sales of accounts receivable to a factor. In
addition, on May 5, 2000 we completed our IPO of 1,300,000 shares of common
stock at a price of $6.00 per share, realizing net cash proceeds of
approximately $6 million after deducting underwriting discounts and offering
expenses.
Net cash used in operating activities was $768,328 and $304,208 in the six
months ended March 31, 2000 and 1999, respectively. Approximately $897,000 was
used to reduce the balance due to the factor in the six months ended March 31,
2000.
Net cash used in investing activities was $136,799 and $341,732 in the six
months ended March 31, 2000 and 1999, respectively. Cash used in investing
activities for the six months ended March 31, 1999 attributable to acquisitions
aggregated $142,431. The balance in both periods was for capital expenditures.
Net cash provided by financing activities was $658,959 and $800,000 in the six
months ended March 31, 2000 and 1999, respectively. The sources of cash provided
by financing activities were from the net proceeds of borrowings and private
placements of our common stock and debt.
Our principal uses of cash are to fund temporary employee payroll expense and
employer related payroll taxes; investment in capital equipment; start-up
expenses of new offices; expansion of services offered; and costs relating to
other transactions such as acquisitions and legal expenses. Temporary employees
are paid weekly. Although we sell substantially all of our accounts receivable
to a factor, the factor initially only remits to us 90% of the face amount of
the accounts receivable purchased. The net balance after the purchase fee and
other costs of the factor are remitted to us after the factor receives the
customer remittance, which is generally 45 days from the time work was performed
by the temporary employees.
We anticipate that the proceeds of our IPO will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
Reference is made to the section captioned "Business - Legal and
Administrative Proceedings and Potential Legal Issues" set forth in Amendment
No. 7 to the Company's SB-2 Registration Statement (Registration No.
333-83255) filed with the Securities and Exchange Commission on March 17,
2000. Since March 17, 2000, the Company has not been named as a defendant in
any action that, to the best of the Company's knowledge, could reasonably be
expected to have a material adverse effect on the financial condition or
results of operations.
As of May 23, 2000, the Company was no longer a party defendant to Dewayne
Cargill Et al v. Metropolitan Water District of Southern California, Et al.
On April 26, 2000, a Request for Dismissal was approved by the Los Angeles
Superior Court of the State of California. Said dismissal was made with
prejudice and pursuant to a settlement agreement in which the Company agreed
to notify plaintiff's counsel if it intended to do business with the
Metropolitan Water District of Southern California at any time over the six
months after dismissal.
ITEM 2 - Changes in Securities and Use of Proceeds
On May 5, 2000, the Company completed an initial public offering of its
common stock, $0.01 par value. The managing underwriter of the offering was
Hornblower & Weeks, Inc. The shares of common stock sold in the offering were
registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form SB-2 that was declared effective by the SEC on April 11,
2000. The offering commenced on April 26, 2000 and was consummated on May 5,
2000, on which date 1,300,000 shares of common stock registered under the
Registration Statement were sold at a price of $6.00 per share. The
underwriters have an overallotment option of 195,000 additional shares which
has not been exercised and which expires on May 26, 2000. The aggregate price
of the offering amount registered and sold was $7,800,000. In connection with
the offering, the Company incurred an aggregate of approximately $780,000 in
underwriting discounts and approximately $1,020,000 in other related
expenses. The net proceeds of the offering were approximately $6,000,000.
The Company has used the net proceeds from the initial public offering as
follows:
$1,175,000 to repay outstanding indebtedness.
$517,000 to reduce outstanding trade payables.
$666,000 to repay acquisition debt.
$448,000 to pay indebtedness to attorneys incurred in
connection with various litigation.
$144,000 to pay accrued compensation to officers of the Company.
The Company plans to use the remaining proceeds to (i) recruit, hire and
train qualified management-level personnel, (ii) purchase computers and other
equipment, (iii) for marketing and promotion, (iv) to develop its website and
expand its internet presence and (v) for working capital and general
corporate purposes. The Company may also use a portion of the net proceeds to
acquire additional businesses that it believes will complement its current or
future business. Although the Company has no present commitments or
agreements with respect to such acquisitions, management will have
significant discretion in applying the net proceeds of this offering. The
Company's expenditures for general corporate purposes will vary significantly
depending on a number of factors, including future revenue growth, if any,
and the amount of cash generated from operations.
11
<PAGE>
The Company has invested the remaining net proceeds from its initial public
offering of common stock in short term, interest bearing, investment grade
instruments.
Except for the $144,000 of accrued compensation paid to officers, none of the
net proceeds of the Company's offering were paid directly or indirectly to
any director, officer of the Company or their associates, person owning 10%
or more of any class of equity securities of the Company or an affiliate of
the Company.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
- ------ -----------
2.1 Asset Purchase Agreement, dated July 9, 1997, among Stratus
Services Group, Inc. and Royalpar Industries, Inc., Ewing
Technical Design, Inc., LPL Technical Services, Inc. and
Mainstream Engineering Company, Inc., as amended by Amendment No.
1 to the Asset Purchase Agreement, dated as of July 29, 1997.(1)
2.2 Asset Purchase Agreement, effective January 1, 1999, by and
between Stratus Services Group, Inc. and B&R Employment Inc.(1)
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
3.2 By-Laws of the Registrant.(2)
4.1 Specimen Common Stock Certificate of the Registrant.(1)
4.2.1 Warrant for the Purchase of 10,000 Shares of Common Stock of Stratus
Services Group, Inc., dated November 30, 1998, between Alan Zelinsky
and Stratus Services Group, Inc., and supplemental letter thereto
dated December 2, 1998.(1)
4.2.2 Warrant for the Purchase of 40,000 Shares of Common Stock of
Stratus Services Group, Inc., dated November 23, 1998, between
David Spearman and Stratus Services Group, Inc.(1)
4.2.3 Warrant for the Purchase of 10,000 Shares of Common Stock of Stratus
Services Group, Inc., dated November 30, 1998, between Sanford I.
Feld and Stratus Services Group, Inc., and supplemental letter
thereto dated December 2, 1998.(1)
4.2.4 Warrant for the Purchase of 20,000 Shares of Common Stock of
Stratus Services Group, Inc., dated November 30, 1998, between
Peter DiPasqua, Jr. and Stratus Services Group, Inc.(1)
4.2.5 Warrant for the Purchase of 20,000 Shares of Common Stock of
Stratus Services Group, Inc., dated December 2, 1998, between
Shlomo Appel and Stratus Services Group, Inc.(1)
10.1.1 Employment Agreement dated September 1, 1997, between Stratus
Services Group, Inc. and Joseph J. Raymond.(1)
10.1.2 Executive Employment Agreement dated September 1, 1997, between
Stratus Services Group, Inc. and J. Todd Raymond, Esq.(1)
10.1.3 Executive Employment Agreement dated December 1, 1997, between
Stratus Services Group, Inc. and Charles A. Sahyoun.(1)
12
<PAGE>
10.1.4 Executive Employment Agreement dated April 17, 1998, between
Stratus Services Group, Inc. and Mark S. Levine.(1)
10.1.5 Executive Employment Agreement dated May 7, 1998, between Stratus
Services Group, Inc. and A. George Komer.(1)
10.1.6 Executive Employment Agreement dated September 1, 1997 between
Stratus Services Group, Inc. and Michael A. Maltzman.(1)
10.1.7 Consulting Agreement, dated as of August 11, 1997, between
Stratus Services Group, Inc. and Jeffrey J. Raymond.(1)
10.2 Lease, effective June 1, 1998, for offices located at 500 Craig
Road, Manalapan, New Jersey 07726.(1)
10.3 Sale and Purchase Agreement, dated August 11, 1997, between AGR
Financial, LLC and Stratus Services Group, Inc., with supplemental
letter thereto dated January 8, 1999.(1)
10.4.1 Promissory Note in the amount of $250,000, dated October 14,
1998, between Stratus Services Group, Inc. and J. Todd Raymond,
Esq., Trustee with Powers of Attorney.(1)
10.5.1 Registration Rights Agreement, dated August, 1997, by and among
Stratus Services Group, Inc. and AGR Financial, L.L.C.(1)
10.5.2 Registration Rights Agreement, dated August, 1997, by and among
Stratus Services Group, Inc. and Congress Financial Corporation
(Western).(1)
10.6.1 Stock Purchase and Investor Agreement, dated August, 1997, by and
between Stratus Services Group, Inc. and Congress Financial
Corporation (Western).(1)
10.6.2 Stock Purchase and Investor Agreement, dated August, 1997, by and
among Stratus Services Group, Inc. and AGR Financial, L.L.C.(1)
10.7 1999 Equity Incentive Plan.(1)
10.8 Debt to Equity Conversion Agreement by and between Stratus
Services Group, Inc. and B&R Employment, Inc.(3)
10.8.1 Amendment to Debt to Equity Conversion Agreements by and between
Stratus Services Group and B&R Employment, Inc.(2)
10.9 Undertaking Letter from Joseph J. Raymond, Chairman & CEO to the
Board of Directors.(4)
27 Financial Data Schedule for the 6 months ended March 31, 2000.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the three months ended
March 31, 2000.
13
<PAGE>
- --------------------------------------------------------------------------------
Footnote 1 Incorporated by reference to similarly numbered Exhibits filed
with Amendment No. 1 to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-83255) as filed with the
Securities and Exchange Commission on September 3, 1999.
Footnote 2 Incorporated by reference to similarly numbered Exhibits filed
with Amendment No. 6 to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-83255) as filed with the
Securities and Exchange Commission on February 1, 2000.
Footnote 3 Incorporated by reference to similarly numbered Exhibits filed
with Amendment No 3 to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-83255) as filed with the
Securities and Exchange Commission on December 17, 1999.
Footnote 4 Incorporated by reference to similarly numbered Exhibits filed
with Amendment No 7 to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-83255) as filed with the
Securities and Exchange Commission on March 17, 2000.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRATUS SERVICES GROUP, INC.
Date: May 24, 2000 By: /s/ Joseph J. Raymond
---------------------------------------
Joseph J. Raymond
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: May 24, 2000 By: /s/ Michael A. Maltzman
---------------------------------------
Michael A. Maltzman
Chief Financial Officer
(Principal Financial and Accounting
Officer)
15
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
27 Financial Data Schedule for the 6 months ended March 31, 2000
16
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
STRATUS SERVICES GROUP, INC.
UNDER SECTIONS 245 AND 242 OF THE
DELAWARE GENERAL CORPORATION LAW
THE UNDERSIGNED, JOSEPH J. RAYMOND AND J. TODD RAYMOND, HEREBY CERTIFY
THAT:
1. They are the duly elected and acting President and Secretary,
respectively, of Stratus Services Group, Inc., a Delaware
corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on March 11, 1997.
3. At a Special Meeting of the Board of Directors held on September 3,
1999, resolutions approving and adopting this Amended and Restated
Certificate of Incorporation (the "Certificate") were duly adopted
and declared to be effective.
4. The holders of a majority of the issued and outstanding shares of
capital stock of the Corporation required to approve and adopt this
Certificate approved this Certificate by written consent in
accordance with Section 228 of the Delaware General Corporation Law
and written notice of the approval and adoption of this Certificate
has been given pursuant thereto.
5. The Certificate of Incorporation of this corporation shall be
amended and restated to read in full as follows:
ARTICLE I
CORPORATION NAME
The name of the corporation is Stratus Services Group, Inc. (the
"Corporation").
ARTICLE II
ADDRESS OF REGISTERED AGENT
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road Wilmington, New Castle County. The name of its
registered agent at such address is Corporation Service Company.
17
<PAGE>
ARTICLE III
PURPOSE OF THE CORPORATION
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
CAPITAL STOCK
SECTION 4.1 TOTAL NUMBER OF SHARES OF STOCK. The total number of
shares of all classes of stock which the Corporation has authority to issue is
thirty million (30,000,000) consisting of twenty-five million (25,000,000)
shares of Common Stock, $.01 par value per share (the "Common Stock"), and five
million (5,000,000) shares of Preferred Stock, $.01 par value per share (the
"Preferred Stock").
SECTION 4.2 COMMON STOCK.
(a) The holders of shares of Common Stock shall be entitled to one vote
for each share so held with respect to all matters voted on by the stockholders
of the Corporation. The shares of Common Stock do not have cumulative voting
rights.
(b) Subject to any prior or superior right of the Preferred Stock, upon
any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation, after payment shall have been made to the holders of
the Preferred Stock of the full amount to which they are entitled, the holders
of Common Stock shall be entitled to receive that portion of the remaining funds
to be distributed. Such funds shall be paid to the holders of Common Stock on
the basis of the number of shares of Common Stock held by each of them.
(c) Dividends may be paid on the Common Stock as and when declared by
the Board of Directors.
SECTION 4.3 PREFERRED STOCK.
(a) The Preferred Stock may from time to time be divided into and issued
in series. The different series of Preferred Stock shall be established and
designated, and the variations in the relative rights and preferences as between
the different series shall be fixed and determined, by the Board of Directors as
hereinafter provided. In all other respects all shares of Preferred Stock shall
be identical.
(b) The Board of Directors is hereby expressly authorized, subject to
the provisions hereof, to establish series of Preferred Stock and to fix and
determine by vote providing for the issuance of such series, which shall have
the rights and preferences designated by the Board of Directors, including, but
no limited to, any of the following:
(i) the distinctive designation of such series and the number
of shares which shall constitute such series, which number may be increased
(except where otherwise provided by the Board of Directors in creating such
series) or decreased (but not below the number of shares then outstanding) from
time to time by the Board of Directors;
(ii) the dividend rate or rates and preferences, if any, to
which the shares of such series shall be entitled, the times at and conditions
upon which dividends shall be paid, any limitations, restrictions or conditions
on the payment of dividends, and whether dividends shall be cumulative and, if
cumulative, the terms upon and dates from which such dividends shall be
cumulative, which dates may differ for shares of any one series issued at
different times;
18
<PAGE>
(iii) whether or not the shares of such series shall be
redeemable, and, if redeemable, the redemption prices which the shares of such
series shall be entitled to receive and the terms and manner of redemption;
(iv) the preferences, if any, and the amounts which the shares
of such series shall be entitled to receive and all other special or relative
rights of the shares of such series, upon any voluntary or involuntary
liquidation, dissolution or winding up of, or upon any distribution of the
assets of, the Corporation;
(v) the obligation, if any, of the Corporation to maintain a
purchase, retirement or sinking fund for shares of such series and the
provisions with respect thereto;
(vi) the term, if any, upon which the shares of such series
shall be convertible into, or exchangeable for, shares of any other class or
classes or of any other series of the same or any other class or classes of
stock of the Corporation, including the price or prices or the rate of
conversion or exchange and the terms of adjustments, if any;
(vii) the terms and conditions of the voting rights, if any, of
the holders of the shares of such series, including the conditions under which
the shares of such series shall vote as a separate class; and
(viii) such other designating preferences, powers, qualifications
and special or relative rights or privileges of such series to the full extent
now or hereafter permitted by the laws of the State of Delaware.
ARTICLE V
STOCKHOLDER ACTIONS AND MEETINGS OF STOCKHOLDERS
Except as may be provided in a resolution or resolutions providing for any
class or series of Preferred Stock pursuant to Article IV hereof, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at a duly called annual or special meeting of such holders and may not
be effected by any consent in writing by such holders. Special meetings of
stockholders of the Corporation may be called only by the Board of Directors
pursuant to a resolution adopted by a majority of the members of the Board of
Directors then in office or by the Chief Executive Officer of the Corporation.
Elections of directors need not be by written ballot, unless otherwise provided
in the Bylaws.
ARTICLE VI
AMENDMENTS TO BY-LAWS
The Board of Directors shall have the power to adopt, amend or repeal the
By-laws.
19
<PAGE>
ARTICLE VII
COMPROMISE
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application of any receiver or receivers
appointed for this Corporation under the provisions of section 291 of Title 8 of
the Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this Corporation under the provisions of
section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or
class of creditors, and/or the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
ARTICLE VIII
LIMITATION ON LIABILITY OF DIRECTORS
No director of this Corporation shall be personally liable to the
Corporation or any of its stockholders for monetary damages for breach of a
fiduciary duty as a director, except for liability (i) for any breach of a
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under section 174 of the Delaware General
Corporation Law as the same exists or hereafter may be amended, or (iv) for any
transaction from which the director derived an improper benefit. If the Delaware
General Corporation Law hereafter is amended to authorize the further
elimination or limitation of the liability of directors, then liability of a
director of the Corporation, in addition to limitation on personal liability
provided herein, shall be limited to the fullest extent permitted by the amended
Delaware General Corporation Law. Any repeal or modification of this paragraph
by the stockholders of the Corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of directors of the
Corporation existing at the time of such repeal or modification.
ARTICLE IX
INDEMNIFICATION
The Corporation shall to the fullest extent permitted by section 145 of
the Delaware General Corporation Law, as the same may be amended or
supplemented, or by any successor thereto, indemnify and reimburse any and all
persons whom it shall have the power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters referred to
in, or covered by said section. Notwithstanding the foregoing, the
indemnification provided for in this Article IX shall not be deemed exclusive of
any other rights to which those entitled to receive indemnification or
reimbursement hereunder may be entitled under any By-law of the Corporation,
agreement, vote of stockholders or disinterested directors or otherwise.
20
<PAGE>
ARTICLE X
RESERVATION OF RIGHTS
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now
other hereafter provided by statute, and all rights conferred upon stockholders
herein or granted subject to this reservation.
The foregoing Amended and Restated Certificate of Incorporation has been
duly adopted by this Corporation's Board of Directors and stockholders in
accordance with the applicable provisions of sections 242 and 245 of the General
Corporation Law of the State of Delaware.
/s/ Joseph J. Raymond
--------------------------------
Joseph J. Raymond, President
/s/ J. Todd Raymond
--------------------------------
J. Todd Raymond, Secretary
Executed at Manalapan, New Jersey
on March 31, 2000
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 176,904
<SECURITIES> 0
<RECEIVABLES> 2,103,196
<ALLOWANCES> 713,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,918,520
<PP&E> 565,144
<DEPRECIATION> 180,791
<TOTAL-ASSETS> 5,290,656
<CURRENT-LIABILITIES> 5,523,322
<BONDS> 0
0
0
<COMMON> 43,492
<OTHER-SE> (2,414,218)
<TOTAL-LIABILITY-AND-EQUITY> 5,290,656
<SALES> 16,925,238
<TOTAL-REVENUES> 16,925,238
<CGS> 12,903,322
<TOTAL-COSTS> 12,903,322
<OTHER-EXPENSES> 3,477,690
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 196,687
<INCOME-PRETAX> 317,539
<INCOME-TAX> 0
<INCOME-CONTINUING> 317,539
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 317,539
<EPS-BASIC> 0.07
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