SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee required]
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No fee required]
Commission File Number 0-16322
ECOS Group, Inc.
(Name of Small Business Issuer in Its Charter)
Colorado 84-1061207
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
99 Southeast Fifth Street, 4th floor. Miami, Florida 33131
(Address of Principal Executive Offices) (Zip Code)
(305) 374-8300
Issuer's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]
As of June 30, 1999 the Company had a total of 29,418,334 shares of $.012 par
value Common Stock outstanding.
Transitional Small Business Disclosure format (check one):
Yes [ ] No [x]
<PAGE>
ECOS GROUP, INC.
----------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
PART I: Financial Statements:
Item 1: Consolidated Balance Sheet 3
June 30, 1999 and March 31, 1999
Consolidated Statements of Operations 4
Three months ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows 5 - 6
Three months ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements 7 - 9
Item 2: Management's Discussion and Analysis 10 - 11
PART II: Other Information
Item 1: Legal Proceedings *
Item 2: Changes in Securities *
Item 3: Defaults Upon senior Securities *
Item 4: Submission of Matters to a Vote of Security Holders *
Item 5: Other Information *
Item 6: Exhibits and Reports on Form 8K 12
SIGNATURES 12
* Substantially the same information as previously reported in March 31, 1999
10-KSB
2
<PAGE>
<TABLE>
<CAPTION>
ECOS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 1999 March 31, 1999
------------- --------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and equivalents $ 151,185 $ 90,677
Accounts receivable, net of allowance
of $167,931 and $152,151 1,076,924 999,197
Prepaid expenses & other assets 71,654 66,922
------------ ------------
TOTAL CURRENT ASSETS 1,299,763 1,156,796
Amounts due under state reimbursement program 179,008 179,008
Property and equipment, net 45,106 41,410
Goodwill, net of accumulated amortization of $294,951
and $284,416 295,002 305,537
------------ ------------
TOTAL ASSETS $ 1,818,879 $ 1,682,751
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,167,488 $ 1,041,025
Accrued expenses 483,354 830,309
Current portion of related party notes payable 200,033 196,741
Notes payable 257,327 264,077
------------ ------------
TOTAL CURRENT LIABILITIES 2,108,202 2,332,152
------------ ------------
Long-term debt - related party notes payable, less current portion 374,836 378,128
------------ ------------
STOCKHOLDERS' DEFICIT
Preferred stock ($.75 liquidation value):
Series A; $.001 par value, 5,000,000 authorized,
None issued and outstanding
Series B convertible; $.001 par value,
1,000,000 authorized, issued and outstanding 1,000 1,000
Common stock, $.012 par value; 75,000,000 authorized,
29,418,334 and 20,266,693 issued and outstanding 353,019 243,199
Additional paid in capital 16,839,992 16,592,898
Accumulated deficit (17,858,170) (17,864,626)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (664,159) (1,027,529)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ 1,818,879 $ 1,682,751
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30, 1999 and 1998
(Unaudited)
1999 1998
------------ ------------
REVENUE
<S> <C> <C>
Consulting services $ 1,245,076 $ 1,422,653
----------- -----------
COSTS OF CONSULTING SERVICES
Subcontractor expenses 343,804 345,327
Other direct costs and expenses 427,328 466,142
----------- -----------
TOTAL DIRECT COSTS AND EXPENSES 771,132 811,469
----------- -----------
GROSS PROFIT 473,944 611,184
----------- -----------
OTHER COSTS AND EXPENSES
General, administrative and other operating costs 451,671 440,884
TOTAL OTHER COSTS AND EXPENSES 451,671 440,884
----------- -----------
OPERATING INCOME 22,273 170,300
----------- -----------
OTHER INCOME (EXPENSE)
Interest, net (15,817) (18,686)
Gain on sale of laboratory assets -- --
Other income (expense), net -- --
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (15,817) (18,686)
----------- -----------
NET INCOME $ 6,456 $ 151,614
=========== ===========
BASIC INCOME PER COMMON SHARE: $ -- $ 0.01
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended June 30, 1999 and 1998
(Unaudited)
1999 1998
--------- ----------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 6,456 $ 151,614
--------- ---------
Adjustments to reconcile net income to net cash used
by operating activities:
Depreciation & amortization 19,895 57,734
Increase in provision for bad debts and potential loss on
State reimbursement program 23,311 13,800
Changes in operating assets & liabilities
Accounts receivable (101,038) (152,585)
Prepaid expenses & other assets (4,732) (62,554)
Accounts payable and accrued expenses 130,573 54,573
--------- ---------
Total adjustments 68,009 (89,032)
--------- ---------
Net cash provided by operating activities 74,465 62,582
--------- ---------
Investing activities:
Purchases of property and equipment (7,207) (2,817)
--------- ---------
Net cash (used in) investing activities (7,207) (2,817)
--------- ---------
Financing activities:
Payments on notes payable (6,750) (9,000)
Payments on related party notes payable -- (33,306)
--------- ---------
Net cash (used in) financing activities (6,750) (42,306)
--------- ---------
Net increase in cash 60,508 17,459
Cash, beginning of period 90,677 68,902
--------- ---------
Cash, end of period $ 151,185 $ 86,361
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended June 30, 1999 and 1998
(Unaudited)
1999 1998
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S> <C> <C>
Cash paid during the period for interest $ 14,851 $ 18,924
======== ========
SUPPLEMENTAL SCHEDULE ON NONCASH INVESTING AND FINANCING ACTIVITIES:
On June 4, the Company issued 1,637,500 shares of common stock to employees
holding options issued July 1, 1999. The stock and related
cost of issuance was valued at: $ 63,862 $ --
======== ========
On June 4, the Company issued 7,364,141 shares of common stock to its
directors and officers in payment of past due unpaid compensation
The cost of issuance was valued at: $287,203 $ --
======== ========
On June 4, the Company issued 150,000 shares of common stock to an employee
in exchange for assets acquired. The stock and related
cost of issuance was valued at: $ 5,850 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
ECOS GROUP, INC
NOTES TO FINANCIAL STATEMENTS
1. Business and Organization
Ecos Group, Inc. ("The Company") is engaged, through its wholly-owned
subsidiary, Evans Environmental and Geological Science and Management,
Inc., in environmental consulting and other environmental related
services.
2. Significant Accounting Policies
INTERIM FINANCIAL STATEMENTS. The accompanying unaudited financial
statements have been prepared in accordance with the instructions to Form
10-QSB and do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The consolidated balance sheet as of March 31, 1999 has been derived from
the audited financial statements as of the period ended March 31, 1999, but
does not include all disclosures required by generally accepted accounting
principles. Certain amounts previously reported in both the June 30, 1998
Consolidated Statement of Operations and Consolidated Statement of Cash
Flows have been reclassified to conform to the 1999 financial statement
presentation. In the opinion of management, these statements reflect all
adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation for the periods presented. Operating
results for the three months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended March 31,
2000. These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-KSB for the period ended March 31, 1999.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. All
inter-company balances and transactions have been eliminated.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
REVENUE RECOGNITION. Consulting revenue is recognized as services are
performed.
NET INCOME PER SHARE. Net income per share computations are based on the
weighted average common shares outstanding of 22,881,448 and 20,266,693 for
the quarters ended June 30, 1999 and 1998, respectively. Potential common
shares have not been included in the weighted average common shares
outstanding as they are anti-dilutive for all periods presented.
7
<PAGE>
3. COMMITMENTS AND CONTINGENCIES.
CONTINGENT LIABILITY. The Company has been involved in various discussions
with a former private senior lender to the Company. The purpose of these
discussions has been to settle all outstanding differences between the
former lender and the Company regarding a variety of matters including,
without limitation, the exercise price of the former lender's outstanding
warrants, amounts claimed to be owed to the former lender for legal and
financial advisory fees, shares claimed to be owed to the former lender for
the loan of funds and services rendered, and claimed rights to additional
shares of the Company's stock. Although all cash amounts owed to the former
lender for principal and interest were paid in full in July, 1996, the
former lender made demands on the Company, as well as asserting
enforceability of claimed agreements. Although the Company has rejected the
validity of all such claims, it has agreed to reach an accommodation with
the former lender on some of these claims solely for the purpose of
reaching a definitive settlement of all outstanding differences. To date,
the former lender has not agreed to any settlement. The Company, is unable
to foresee the ultimate outcome of this matter.
NASDAQ DELISTING. The Company shares were delisted from the NASDAQ Small
Cap Market effective January 2, 1998. The Company did not meet NASDAQ
requirements for total capital and surplus of $2,000,000. The Company's
plan for maintaining compliance with NASDAQ listing requirements was
rejected and the Company received notification of delisting December 17,
1997.
4. RELATED PARTY TRANSACTIONS. In July, 1995, the Company borrowed $85,000
from the spouse of the Chairman of the Board of Directors. The note is due
upon demand and bears interest at 12% per annum. The Chairman disclaims any
beneficial interest in the loan. The balance of this note is $15,000 at
June 30, 1999
On May 5, 1997, the Company borowed $1,000,000 from the father of a
shareholder/director of the Company. The three month promissory note was
secured by all trade receivables of the Company and matured on August 5,
1997. On September 23, 1997, the Company received a notice of default on
this note for nonpayment of principal and interest. The Company settled its
default on this note by delivering a $608,000 promissory note dated October
29, 1997 in favor of the shareholder's father, bearing interest at 12% per
annum with quarterly principal and interest payments of $40,867, and
agreeing to issue 2,666,667 shares of the Company's Common Stock. The new
note and the agreement to issue stock extinguishes the $1,000,000
promissory note dated May 5, 1997. The balance of the October, 1997 note is
$487,869 at June 30, 1999.
In May, 1997, the Company borrowed $72,000 from the mother of a former
director and shareholder of the Company. The loan is due upon demand and
bears interest at 12% per annum. The balance of this loan is $72,000 at
June 30, 1999.
8
<PAGE>
5. STOCKHOLDER'S EQUITY.
STOCK OPTION PLANS AND STOCK ISSUED FOR PAST DUE COMPENSATION. On June 4,
1999, the stock option price of 1,637,500 options covered by the current
plan was waived and stocks were issued to the employees holding the
options. Additionally, in payment of past due unpaid compensation, the
Company issued 7,364,141 shares of stock to its Directors and Officers.
Using the market price at the time of issuance of $.039, a stock
compensation expense of $351,065 was recorded in the year ended March 31,
1999. These shares issued were included in the calculations for diluted
earnings per share in the year ended March 31, 1999.
STOCK ISSUED FOR ASSETS ACQUIRIED. On June 4, 1999, 150,000 shares of stock
were issued to an employee in exchange for assets acquired. Using the
market price at the time of issuance of $.039, the assets acquired were
recorded for $5,850 in June, 1999.
6. GOING CONCERN CONSIDERATION. The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a
going concern. Despite its profitability in Fiscal 1999, the Company
suffered significant net losses for the years ended March 31, 1998 and 1997
and currently has a working capital deficiency. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. Management has developed a plan that will include, but is not
limited to, the following actions to fund its working capital requirements
and raise capital to achieve its growth:
1. Continued limited support of funds from related parties as
discussed herein.
2. Continue cost reduction measures in the consulting division
and the holding company.
3. Seek outside financing from banks or other lenders.
4. Increase profitability through sales growth in Fiscal 2000
while continuing to reduce costs.
Management continues to implement its plans. However, actual results may
differ from management's plans.
9
<PAGE>
ECOS GROUP, INC
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS:
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and
development activities and similar matters. With respect to this Quarterly
report, statements included in Management's Discussion and Analysis or Plan
of Operation and in the Notes to the Consolidated Financial Statements
which are not historical in nature, are intended to be and are hereby
identified as "forward looking statements" for purposes of the safe harbor
by the Private Securities Litigation Reform Act of 1995. In order to comply
with the terms of the safe harbor, the Company notes that a variety of
factors could cause the company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in
the Company's forward-looking statements. The risks and uncertainties that
may affect the operations, performance, development and results of the
Company's business include the following: (i) changes in legislative
enforcement and direction, (ii) unusually bad weather conditions, (iii)
unanticipated delays in contract execution, (iv) sudden loss of key
personnel, (v) abrupt changes in competition, and (vi) decisions by the
Company's lenders to demand the Company's indebtedness.
RESULTS OF OPERATIONS:
Revenues for the quarter ended June 30, 1999 (the "99 Quarter") decreased
by $177,577 or 12.5% to $1,245,076 from $1,422,653 of the corresponding
prior quarter ended June 30, 1998 (the "98 Quarter"). This decrease in
revenue is attributable to two large short-term projects in the Hazardous
Substance practice area during the 98 Quarter.
Direct costs were $771,132 for the 99 Quarter, representing a decrease of
$40,337 or 5% from the $811,469 in the 98 Quarter.
Gross profit as a percentage of revenue was 38.1% and 43.0% in the 99
Quarter and 98 Quarter, respectively. General, administrative and other
operating costs increased $10,787, or 2.4% to $451,671 for the 99 Quarter
compared to $440,884 for the 98 Quarter.
Net income for the 99 Quarter of $6,456 decreased by $145,158 over the
$151,614 income in the 98 Quarter.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
The company had a working capital deficit of $808,439 at June 30, 1999
compared to $1,175,356 at March 31, 1999. This working capital decrease in
deficit of $366,917 reflects a working capital ratio of .62 at June 30,
1999 from .50 at March 31, 1999. Historically the Company has experienced
capital and liquidity problems and no assurances can be given that such
shortages will not negatively impact the Company's operations in the
future.
The Company's cash flow was $60,508 in the 99 Quarter compared to $17,459
in the 98 Quarter. The major cash inflow in the 99 to date was $74,465 from
operating activities. The Company's control of expenditures during 99 to
date is reflected in the small amount ($7,207) of cash used in investing
activities. The cash generated in the 99 quarter was used to pay its
obligations in the amount of $6,750.
The Company has no major material commitments for capital expenditures.
The Company intends to continue to fund its current operations from the
combination of cash on hand, cash generated from operations, cost savings
generated from its continued cost reduction measures, as well as potential
sale of equity. These sources of capital are expected to largely fund the
Company's current operations through March 31, 2000. Management expects to
continue the profitability experienced in the 99 Quarter in the subsequent
quarters of Fiscal 1999. However, if the Company does continue to operate
profitably, and absent alternative sources of financing, there would be a
material adverse effect on the financial condition, operations and business
prospects of the Company. The Company has no arrangements in place for
alternative sources of financing, and there can be no assurance that any
such financing will be available at all or on terms acceptable to the
Company.
11
<PAGE>
ECOS GROUP, INC.
FINANCIAL STATEMENTS
PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8K incorporated by reference:
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.
ECOS GROUP, INC.
By: /s/ Charles C. Evans
-----------------------------------
Dr. Charles C. Evans
Chairman of the Board
By: /s/ Ana Caminas
-----------------------------------
Ana Caminas
Chief Financial Officer
On behalf of the Registrant and as
Principal Accounting Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 151185
<SECURITIES> 0
<RECEIVABLES> 1244855
<ALLOWANCES> 167931
<INVENTORY> 0
<CURRENT-ASSETS> 1299763
<PP&E> 210326
<DEPRECIATION> 165220
<TOTAL-ASSETS> 1818879
<CURRENT-LIABILITIES> 2108202
<BONDS> 0
0
1000
<COMMON> 353019
<OTHER-SE> (1018178)
<TOTAL-LIABILITY-AND-EQUITY> 1818879
<SALES> 1245076
<TOTAL-REVENUES> 1245076
<CGS> 771132
<TOTAL-COSTS> 771132
<OTHER-EXPENSES> 451671
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15817
<INCOME-PRETAX> 6456
<INCOME-TAX> 0
<INCOME-CONTINUING> 6456
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6456
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
