U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number:
June 30, 1996 0-17776
LEAK-X ENVIRONMENTAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 23-2823596
(State or other jurisdiction of (IRS Employer Identi-
incorporation or organization fication Number)
790 East Market Street, Suite 270, West Chester, PA 19382
(Address of Principal Executive Offices) (Zip Code)
(610) 344-3380
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to filing requirements for
the past 90 days.
Yes X No
The number of shares of Common Stock, par value $.001 per share,
outstanding as of August 12, 1996 is 15,855,388 shares.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
June 30, December 31,
1996 1995
(Unaudited)
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ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 600,974 $ 442,946
Accounts receivable, net 1,667,965 2,363,769
Inventory 198,816 362,782
Subscription receivable --- 225,000
Other current assets 108,673 175,492
Net assets of discontinued operations 528,107 528,107
TOTAL CURRENT ASSETS 3,104,535 4,098,096
PROPERTY AND EQUIPMENT, NET 205,752 211,471
OTHER ASSETS
Goodwill, net of accumulated amortization of
$45,399 in 1996 and $15,625 in 1995 1,770,592 1,799,770
Patents and other assets, net of accumulated
amortization of $2,769 in 1996 and $2,556
in 1995 17,174 15,118
TOTAL OTHER ASSETS 1,787,766 1,814,888
TOTAL ASSETS $ 5,098,053 $ 6,124,455
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES
Accounts payable and accrued expense $ 1,653,085 $ 2,108,564
Unearned revenue 85,809 168,206
Line of credit 372,000 450,000
Note payable to directors 161,770 161,770
Current portion of long term debt 52,000 52,348
Net liabilities of discontinued operations 502,594 533,324
TOTAL CURRENT LIABILITIES 2,827,258 3,474,212
LONG TERM DEBT 81,208 106,411
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value:
5,000,000 shares authorized, 1,688,888
issued and outstanding in 1996 and 1995 1,900,000 1,900,000
Common stock $.001 par value:
30,000,000 shares authorized, 14,354,154
issued and outstanding in 1996 and 1995 14,355 14,355
Additional paid-in capital 6,365,960 6,354,541
Deficit (6,090,728) (5,725,064)
TOTAL STOCKHOLDERS' EQUITY 2,189,587 2,543,832
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,098,053 $ 6,124,455
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
(Unaudited)
Three Months Ended June 30,
1996 1995
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Revenues:
Service $1,500,026 $980,928
Product 546,927 ----
2,046,953 980,928
Cost of Revenues:
Service 1,118,007 695,857
Product 404,455 ----
1,522,462 695,857
Selling, general and
administrative expenses 591,130 271,433
Operating income(loss) (66,639) 13,638
Other income (6,454) ----
Interest expense 18,175 829
Net income(loss) before taxes (78,360) 12,809
Income tax credit (245) ----
Net income(loss) (78,115) 12,809
Weighted average common
shares outstanding 14,354,154 8,832,923
Net income(loss) per share ($0.01) $0.00
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
(Unaudited)
Six Months Ended June 30,
1996 1995
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Revenues:
Service $2,747,195 $1,767,292
Product 1,116,496 ----
3,863,691 1,767,292
Cost of Revenues:
Service 2,009,252 1,182,466
Product 951,690 ----
2,960,942 1,182,466
Selling, general and
administrative expenses 1,248,414 546,361
Operating income(loss) (345,665) 38,465
Other income (12,729) ----
Interest expense 32,359 1,424
Net income(loss) before taxes (365,295) 37,041
Income tax expense/(credit) 369 (1,029)
Net income(loss) (365,664) 38,070
Weighted average common
shares outstanding 14,354,154 8,774,861
Net income(loss) per share ($0.03) $0.00
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
(Unaudited)
Six Months Ended June 30,
1996 1995
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CASH FLOW FROM
OPERATING ACTIVITIES:
Net income (loss) ($365,664) $38,070
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation 33,010 14,753
Goodwill amortization 29,178 ----
Valuation of stock options 13,500 15,625
(Increase) decrease in accounts receivable 695,804 (167,050)
(Increase) decrease in costs and estimated
earnings in excess of billings 70,804 (60,961)
Decrease in inventories 163,966 ----
Increase in other current assets (3,985) (61,107)
Decrease in accounts payable (305,655) (71,043)
Decrease in billings in excess of cost (82,397) ----
Increase (decrease) in accrued
expenses and other liabilities (66,397) 814
(Increase) decrease in net assets of
discontinued operation (30,730) 15,352
NET CASH PROVIDED (USED) BY OPERATIONS 151,434 (275,547)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (27,290) (21,819)
Increase in other assets, net (2,056) (4,000)
NET CASH USED BY INVESTING ACTIVITIES (29,346) (25,819)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit (78,000) ----
Payments on long-term debt (25,551) ----
Issuance of common stock ---- 1,380
Proceeds from subscription receivable,
net of expenses 139,491 ----
NET CASH PROVIDED BY
FINANCING ACTIVITIES 35,940 1,380
NET INCREASE/(DECREASE) IN CASH 158,028 (299,986)
CASH, beginning of the period 442,946 724,669
CASH, end of the period $600,974 $424,683
See notes to consolidated financial statements
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
(UNAUDITED)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements
of Leak-X Environmental Corporation (the "Company") 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.
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 considered necessary for a fair presentation
(consisting of normal recurring accruals) have been included. 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.
Operating results for the six month period ended June 30, 1996 are
not necessarily indicative of the results that may be expected for
the year ending December 31, 1996. For further information, refer
to the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995.
Per share data for the periods are based upon the weighted
average number of common shares outstanding during such periods,
plus net additional shares issued upon exercise of options and
warrants. Outstanding options and warrants have not been included
in the computation of per share data in the three and six month
periods ended June 30, 1996 or June 30, 1995 as they would be
immaterial or anti-dilutive, respectively.
Note 2. Financial Matters
Total interest expense for the six months ended June 30, 1996
and June 30, 1995 was $32,359 and $1,424, respectively.
Note 3. Discontinued Operations
Net assets of discontinued operations at June 30, 1996 consist
of accounts receivable of $528,107. Net liabilities of
discontinued operations at June 30, 1996 include accounts payable
and accrued expenses of $348,814 and $153,780, respectively.
Note 4. Line of Credit
On March 29, 1996, the Company received a waiver from its
financial institution with respect to certain covenants of its
Revolving Credit Agreement (the "Credit Agreement"). The waiver was
extended for the balance of the term of the agreement to July 1,
1996. The Company executed a new Credit Agreement for the period
July 1, 1996 through July 1, 1997. The new Credit Agreement
permits the Company to borrow up to $750,000. Borrowings under the
Credit Agreement are limited to 60% of eligible accounts
receivable, as defined, and bear interest at the prime rate plus
three-quarter (3/4) percent.
Note 5. Subsequent Events
On July 1, 1996, the Company entered into an agreement with
John S. Gelles and William H. Gelles, Jr., Officers and Directors
of the Company, to convert their 1,688,888 shares of Preferred
Stock into 1,501,234 shares of Common Stock in exchange for certain
registration rights. In accordance with the agreement, John and
William Gelles irrevocably waived any and all rights to dividends
to which they may have been entitled in accordance with the terms
of the Preferred Stock. In addition, the Company entered into
thirty-month employment agreements with John and William Gelles to
serve as employees of the Company, each at an monthly salary of
$6,250 through December 31, 1996 and $4,167 thereafter. The Company
also granted 200,000 incentive stock options each to John and
William Gelles pursuant to the Company's 1995 stock Option plan at
an exercise price of $0.265.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Quarter ended June 30, 1996 compared to the Quarter ended June 30,
1995
Net revenue increased 109% to $2,046,953 for the quarter ended
June 30, 1996 (the "1996 Quarter") compared to $980,928 for the
quarter ended June 30, 1995 (the "1995 Quarter"). The increase in
revenues is attributable to a 53% increase in environmental
consulting services and the addition of the Company's groundwater
remediation business which the Company acquired in September 1995.
The Company had a lower gross margin of 26% for the 1996
Quarter as compared to a gross margin of 29% in the 1995 Quarter.
The lower gross margin is primarily attributable to higher
construction management revenues in the 1996 Quarter which have a
lower margin than environmental consulting revenues.
The Company reported a loss of $78,115 in the 1996 Quarter as
compared to income of $12,809 in the 1995 Quarter. The loss in the
1996 Quarter is primarily due to low sales in the groundwater
remediation business in the 1996 Quarter. Revenues for groundwater
remediation services were lower than anticipated for the 1996
Quarter primarily attributable to delays in receipt of anticipated
equipment orders. These delays were, in part, a result of proposed
changes that are being considered by environmental regulators that
would require a longer "up-front" evaluation of sites where
remediation may be required. Accordingly, potential customers of
the groundwater remediation services are postponing purchases until
the proposed changes are more fully defined by environmental
regulators.
The $78,115 loss in the quarter ended June 30, 1996 is a
significant improvement over the $287,549 loss reported for the
quarter ended March 31, 1996. In the quarter ended June 30, 1996,
the Company made significant reductions in its overhead expenses in
the groundwater remediation business in order to better compensate
for the period of lower sales.
Six Months ended June 30, 1996 compared to the Six Months ended
June 30, 1995
Net revenue increased 119% to $3,863,691 for the six months
ended June 30, 1996 (the "1996 Period") compared to $1,767,292 for
the six months ended June 30, 1995 (the "1995 Period"). The
increase in revenues is attributable to a 55% increase in
environmental consulting services and the addition of the Company's
groundwater remediation business which the Company acquired in
September 1995.
The Company had a lower gross margin of 23% for the 1996
Period as compared to a gross margin of 33% in the 1995 Period.
The lower gross margin is primarily attributable to the low gross
margin from the Company's groundwater remediation business which
was adversely affected by a decline in sales volume in the 1996
Period.
The Company reported a loss of $365,664 in the 1996 Period as
compared to income of $38,070 in the 1995 Period. The loss in the
1996 Period is primarily due to low sales and the resultant low
gross margin in the groundwater remediation business. Even though
the Company's environmental consulting business attained its
highest six month sales volume in its six year history, revenues
for groundwater remediation services were lower than anticipated
for the 1996 Quarter, primarily attributable to delays in receipt
of anticipated equipment orders.
Liquidity and Capital Resources
The Company generated $151,434 in cash from operating
activities in the 1996 Period as compared to utilizing $275,547 in
the 1995 Period. The primary change in the generation of cash from
operating activities was a $695,804 decrease in accounts receivable
in the 1996 Period as compared to a $167,050 increase in the 1995
Period. Accounts payable was reduced by $305,655 in the 1996
Period as compared to a reduction of $71,043 in the 1995 period.
In addition, the Company incurred a loss of $365,664 in the 1996
Period as compared to income of 38,070 in the 1995 Period.
Net cash used by investing activities in the 1996 Period was
$29,346 as compared to $25,819 net cash used in the 1995 Period.
Capital expenditures were primarily for computer equipment.
Net cash provided by financing activities was $35,940 in the
1996 Period as compared to $1,380 in the 1995 Period. In the 1996
Period, the Company completed a private placement of its common
stock and warrants which commenced in December 1995 and which
resulted in net cash of $139,491. In addition, the Company paid
down $78,000 on its line of credit and $25,551 on its long-term
debt. The Company received $1,380 in proceeds from the exercise of
stock options in the 1995 Period.
The Company's working capital decreased 56% at June 30, 1996
to $277,277 as compared to $623,884 at December 31, 1995. The
change in working capital was primarily the result of the decrease
in accounts receivable, inventory and the subscription receivable
from the private placement. The Company utilized working capital
to manage accounts payable, fund ongoing operations and pay down
its line of credit.
Backlog at June 30, 1996 of $5,000,000 was consistent with the
level at December 31, 1995, primarily as a result of the
continuation of the NYNEX work. The Company believes that all of
the current backlog will be completed in 1996, although, no
assurance of this can be given. Much of the Company's backlog is
subject to termination at will and rescheduling without significant
penalty.
On March 29, 1996, the Company received a waiver through July
1, 1996 with respect to failure to meet some of the terms of the
financial covenants of its Credit Agreement at December 31, 1995.
The Company was not in default of any covenants of the Credit
Agreement at June 30, 1996. On June 27, 1996, the Company renewed
its Credit Agreement with First Union National Bank effective July
1, 1996. The new Credit Agreement permits the Company to borrow up
to $750,000. Borrowings under the Credit Agreement are limited to
60% of eligible accounts receivable, as defined, and bear interest
at the prime rate plus three-quarter (3/4) percent. The Company
had $378,000 of available borrowing at June 30, 1996.
On July 1, 1996, the Company entered into an agreement with
John S. Gelles and William H. Gelles, Jr., Officers and Directors
of the Company, to convert their 1,688,888 shares of Preferred
Stock into 1,501,234 shares of Common Stock in exchange for certain
registration rights. In accordance with the agreement, John and
William Gelles irrevocably waived any and all rights to dividends
to which they may have been entitled in accordance with the terms
of the Preferred Stock.
The Company deems its present facilities and equipment
adequate for its immediate needs and it has no material commitments
for capital expenditures. The Company believes its present
liquidity and cash flow are adequate for its current needs. There
can be no assurance, however, that additional financing, whether
from debt or equity, will be available to the Company when needed
on commercially reasonable terms, or at all.
The Company's management believes that inflation has not had
a significant impact on its business during the past three years.
The statements contained herein include forward looking
statements that involve a number of risks and uncertainties. In
addition to the facts discussed, among the other factors that could
cause actual results to differ materially are the following:
business conditions and growth in the industry and general economy;
competitive factors, such as rival designs and prices; inventory
risks due to shifts in market demand; changes in sales mix; and the
risk factors listed from time to time in the Company's SEC reports.
PART II. OTHER INFORMATION
Item 1. Legal proceedings
A legal proceeding captioned Christine Bruno and Riccardo
Bruno, Plaintiff against Lexicon Environmental Associates, Inc. and
Y.R.I. Environmental, a Subdivision of Yellowstone, Inc.,
Defendant, Supreme Court of the State of New York, County of
Suffolk was commenced in May 1996. The plaintiff in this action
seeks $1.25 million in damages for injuries allegedly sustained as
a result of the inhalation of noxious fumes which resulted from
work being performed by the Defendant. Responsibility for the
defense of this lawsuit has been assumed by the Company's insurance
carrier.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None.
<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.
Dated: August 13, 1996
LEAK-X ENVIRONMENTAL CORPORATION
by: /s/ Joyce A. Rizzo
Chief Executive Officer
by: /s/ Eileen E. Bartoli
Controller and
Chief Accounting Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LEAK-X
ENVIRONMENTAL CORPORATION CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996, AND
THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE
30, 1996, AND THE ACCOMPANYING NOTES, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 600974
<SECURITIES> 0
<RECEIVABLES> 1701008
<ALLOWANCES> 33043
<INVENTORY> 198816
<CURRENT-ASSETS> 636780
<PP&E> 425965
<DEPRECIATION> 220213
<TOTAL-ASSETS> 5098053
<CURRENT-LIABILITIES> 2827258
<BONDS> 81208
0
1900000
<COMMON> 14355
<OTHER-SE> 275232
<TOTAL-LIABILITY-AND-EQUITY> 5098053
<SALES> 3863691
<TOTAL-REVENUES> 3863691
<CGS> 2960942
<TOTAL-COSTS> 2960942
<OTHER-EXPENSES> 1248414
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32359
<INCOME-PRETAX> (365295)
<INCOME-TAX> 369
<INCOME-CONTINUING> (365664)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (365664)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
