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, 1998 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 14, 1998 is 1,219,645 shares.
CONSOLIDATED BALANCE SHEET
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
<TABLE>
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June 30, December 31,
1998 1997
(Unaudited)
ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 150,948 $ 240,769
Accounts receivable, net 2,188,140 2,111,682
Estimated earnings in excess of billings 25,337 117,749
Inventory 190,817 267,733
Other current assets 130,281 78,454
Net assets of discontinued operations 499,234 499,234
TOTAL CURRENT ASSETS $ 3,184,757 $ 3,315,621
PROPERTY AND EQUIPMENT, NET 137,565 158,024
OTHER ASSETS - Deposits 126,004 82,488
TOTAL ASSETS $ 3,448,326 $ 3,556,133
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES
Accounts payable and accrued expense $ 2,312,797 $ 2,292,012
Unearned revenue 32,380 307,041
Line of credit 607,000 422,000
Note payable to directors 100,000 100,000
Current portion of long term debt 26,187 50,809
Net liabilities of discontinued operations 417,354 440,114
TOTAL CURRENT LIABILITIES $ 3,495,718 $ 3,611,976
STOCKHOLDERS' EQUITY
Common stock $.001 par value:
5,000,000 shares authorized,
1,219,645 issued and outstanding in 1998 and 1997 1,220 1,220
Additional paid-in capital 8,308,015 8,308,015
Accumulated deficit (8,356,627) (8,365,078)
TOTAL STOCKHOLDERS' EQUITY (47,392) (55,843)
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,448,326 $ 3,556,133
See notes to consolidated financial statements.
</TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
(Unaudited)
<TABLE>
Three Months Ended June 30,
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1998 1997
Revenues:
Service $ 1,568,144 $ 1,840,897
Product 736,390 584,708
2,304,534 2,425,605
Cost of Revenues:
Service 1,126,404 1,445,095
Product 574,607 365,457
1,701,011 1,810,552
Selling, general and
administrative expenses 643,945 587,939
Operating income (loss) $ (40,422) $ 27,114
Other income (796) (2,792)
Interest expense 19,278 17,773
Net income (loss) before taxes (58,904) 12,133
Income tax expense 821 840
Net income (loss) $ (59,725) $ 11,293
Weighted average shares of common
stock outstanding Basic 1,219,645 1,219,645
Diluted 1,219,645 1,287,060
Net income (loss) per share
Basic ($0.05) $0.01
Diluted ($0.05) $0.01
See notes to consolidated financial statements.
</TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
(Unaudited)
<TABLE>
Six Months Ended June 30,
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1998 1997
Revenues:
Service $ 3,387,587 $ 3,287,120
Product 1,503,452 1,135,375
4,891,039 4,422,495
Cost of Revenues:
Service 2,476,184 2,512,200
Product 1,093,861 761,550
3,570,045 3,273,750
Selling, general and
administrative expenses 1,279,942 1,168,380
Operating income (loss) $ 41,052 $ (19,635)
Other income (4,177) (15,951)
Interest expense 35,136 36,962
Net income (loss) before taxes 10,093 (40,646)
Income tax expense 1,642 1,680
Net income (loss) $ 8,451 $ (42,326)
Weighted average shares of common
stock outstanding Basic 1,219,645 1,219,645
Diluted 1,293,401 1,219,645
Net income (loss) per share
Basic $0.01 ($0.03)
Diluted $0.01 ($0.03)
See notes to consolidated financial statements.
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
(Unaudited)
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Six Months Ended June 30,
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1998 1997
CASH FLOW FROM
OPERATING ACTIVITIES:
Net income (loss) $ 8,451 ($ 42,326)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation 34,800 34,800
Goodwill amortization 0 30,000
Gain on sale of asset 0 (4,831)
Increase in accounts receivable (76,458) (705,801)
(Increase) decrease in estimated
earnings in excess of bill 92,412 (51,035)
Decrease in inventories 76,916 59,422
Increase in other current assets (51,827) (41,402)
Increase (decrease) in accounts payable (83,727) 761,015
Decrease in unearned revenue (274,661) (9,100)
Increase in accrued expenses
and other liabilities 104,512 2,880
Change in net assets of discontinued operations (22,760) (24,993)
NET CASH PROVIDED (USED) BY OPERATIONS (192,342) 8,629
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (14,341) (18,265)
Sale of asset 0 14,079
(Increase) decrease in other assets, net (43,516) 213
NET CASH USED BY INVESTING ACTIVITIES (57,857) (3,973)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit 185,000 200,000
Payments on long-term debt (24,622) (29,210)
Payments on notes payable to directors 0 (35,297)
NET CASH PROVIDED BY FINANCING ACTIVITIES 160,378 135,493
NET INCREASE (DECREASE) IN CASH (89,821) 140,149
CASH, beginning of the period 240,769 156,617
CASH, end of the period $ 150,948 $ 296,766
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, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997. Per share data
for the periods are based upon the weighted average number of shares of
common stock outstanding during such periods, plus net additional shares issued
upon exercise of options and warrants (see Note 4).
Note 2. Financial Matters
Total interest expense for the six months ended June 30, 1998 and June
30, 1997 was $35,136 and $42,847, respectively.
Note 3. Discontinued Operations
Net assets of discontinued operations at June 30, 1998 consist of
accounts receivable of $499,234. Net liabilities of discontinued operations
at June 30, 1998 include accounts payable and accrued expenses of $346,251
and $71,103, respectively.
Note 4. Income from Continuing Operations per Share
The following is a reconciliation of the numerator and denominator
underlying the income from continuing operations per share calculations:
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Three Months Ended June 30, 1997
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Income Shares Per Share
(Numerator) (Denominator) Amount
Income from continuing operations
available to common stockholders $11,293 $1,219,645 $0.01
Effect of dilutive securities:
Incremental shares of assumed
conversions of options 67,415
Diluted income from continuing
operations available to common
stockholders and assumed
conversions $11,293 $1,287,060 $0.01
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Six Months Ended June 30, 1998
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Income Shares Per Share
(Numerator) (Denominator) Amount
Income from continuing operations
available to common stockholders $ 8,451 $1,219,645 $0.01
Effect of dilutive securities:
Incremental shares of assumed
conversions of options 73,756
Diluted income from continuing
operations available to common
stockholders and assumed
conversions $ 8,451 $1,293,401 $0.01
</TABLE>
Because the Company incurred net losses for the three months ended June
30, 1998 and the six months ended June 30, 1997, the reconciliation for those
periods have not been presented since any incremental shares converted would
be anti-dilutive to the net loss for the respective periods then ended.
Note 5. Line of Credit
On July 8, 1998, the Company signed a Loan Modification Agreement (the
"Modification Agreement") to the Company's Revolving Credit Agreement (the
"Credit Agreement") with First Union National Bank. The Modification
Agreement extended the Credit Agreement from July 1, 1998 to December 31,
1998. All other terms of the Credit Agreement remained unchanged. The
Company had $143,000 of available borrowing under the Credit Agreement at
June 30, 1998.
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations
Quarter Ended June 30, 1998 Compared to the Quarter Ended June 30, 1997
Net revenue decreased 5% to $2,304,534 for the quarter ended June 30,
1998 (the "1998 Quarter") compared to $2,425,605 for the quarter ended June
30, 1997 (the "1997 Quarter"). The decrease in revenues is attributable to a
decrease in environmental consulting services due to lower volume of
construction management services.
The Company's gross margin remained consistent at 26% in the 1998
Quarter as compared to a gross margin of 25% in the 1997 Quarter. The
Company's environmental consulting business attained 12% higher gross margin,
however, the improvement was offset by a 27% decrease in gross margin at the
Company's groundwater remediation business primarily due to higher production
costs.
Selling, general and administrative ("SG&A") expenses increased $56,006
to $643,945 for the 1998 Quarter, as compared to $587,939 in the 1997
Quarter. This increase is partly attributable to the investment being made
in the Company's new environmental monitoring services in the 1998 Quarter. In
addition, the Company had reduced SG&A expenses in the 1997 Quarter through
partial waivers of two officers' salaries of $11,335 in the aggregate which
did not occur in the 1998 Quarter. This was offset, in part, by the
elimination of goodwill amortization in the 1998 Quarter as compared to
$15,000 of goodwill amortization in the 1997 Quarter. The Company continues
to use available resources to pursue its growth.
The net loss in the 1998 Quarter was $59,725 as compared to net income
of $11,293 in the 1997 Quarter. The change is attributable to losses incurred
at the Company's groundwater remediation business. The Company incurred higher
interest expense of $19,278 in the 1998 Quarter, as compared to $17,773 in
the 1997 Quarter due to a higher use of debt in the 1998 Quarter.
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997
Net revenue increased 11% to $4,891,039 for the six months ended June
30, 1998 (the "1998 Period") compared to $4,422,495 for the six months ended
June 30, 1997 (the "1997 Period"). The increase in revenues is primarily
attributable to a 32% increase in sales at the Company's groundwater
remediation business due to a higher demand for remediation systems.
Revenues for the Company's environmental consulting services remained
consistent.
The Company's gross margin remained relatively consistent at 27% for the
1998 Period as compared to a gross margin of 26% in the 1997 Period.
SG&A expenses increased $111,562 to $1,279,942 for the 1998 Period, as
compared to $1,168,380 in the 1997 Period. This increase is partly
attributable to the investment being made in the Company's new environmental
monitoring services. In addition, the Company had significantly reduced SG&A
expenses in the 1997 Period through partial waivers of two officers' salaries
of $61,940 in the aggregate which did not occur in the 1998 Period. This was
offset, in part, by the elimination of goodwill amortization in the 1998
Period as compared to $30,000 of goodwill amortization in the 1997 Period.
Net income in the 1998 Period was $8,451 as compared to a net loss of
$42,326 in the 1997 Period. The improvement is attributable to a 30%
increase in net income in the Company's environmental service business. The
Company incurred slightly lower interest expense of $35,136 in the 1998 Period,
as compared to $36,962 in the 1997 Period.
Liquidity and Capital Resources
The Company utilized $192,342 of cash from operating activities in the
1998 Period as compared to providing $8,629 in the 1997 Period. The primary
change in the utilization of cash from operating activities was the decrease
in unearned revenue (i.e., monies received in advance of services performed)
in the 1998 Period.
Net cash used by investing activities in the 1998 Period was $57,857 as
compared to $3,973 net cash used in the 1997 Period. Capital expenditures,
which were primarily for computer equipment, remained relatively consistent.
The 1998 Period included $43,516 for an investment in the expansion of an
existing product line and the 1997 Period included $14,079 of cash received
from the sale of an asset.
Net cash provided by financing activities was $160,378 in the 1998
Period as compared to $135,493 in the 1997 Period. During the 1998 and 1997
Periods, the Company borrowed $185,000 and $200,000, respectively, on its line
of credit in order to support ongoing operations. The Company paid out $35,297
on the notes payable to directors in the 1997 Period. The Company continued
to make scheduled payments on its long-term debt in the 1998 Period and 1997
Period.
The Company's working capital deficit was consistent at $310,961 at June
30, 1998 as compared to $296,355 at December 31, 1997. Even though the
working capital deficit remained consistent, the Company did increase its
bank borrowings in order to support the Company's ongoing operations.
Backlog at June 30, 1998 was $4,800,000 which is lower than the level at
December 31, 1997 of $5,800,000, primarily as a result of a higher percentage
of completion of ongoing projects which were booked at the beginning of the
fiscal year. The Company believes that all of the current backlog will be
completed in 1998, 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.
The Company has upgraded its internal computerized information systems
to ensure that it is able to accurately process information that may be date
sensitive and to be Year 2000 compliant. The Company is in the process of
evaluation of compliance with the Year 2000 by its primary suppliers and
customers. The potential does exist that if customers of the Company are not
Year 2000 compliant, payments to the Company in the first quarter of the Year
2000 could be delayed until the customers are able to correct their Year 2000
compliance deficiencies.
In May 1998, the Company received a notice from The Nasdaq Stock Market,
Inc. stating that the Company was not in compliance with the new tangible net
worth requirement, pursuant to the NASD Marketplace Rules, which became
effective on February 23, 1998. The Company's common stock was delisted from
the Nasdaq SmallCap Market as of June 8, 1998.
Management has maintained control of overhead expenses and operating
margins. However, there is no assurance that the cost controlling measures
will be sufficient to permit the Company to meet its financial obligations
while providing capital for ongoing operations.
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: enforcement of environmental regulations,
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: August 19, 1998
LEAK-X ENVIRONMENTAL CORPORATION
by: /s/ Joyce A. Rizzo
Joyce A. Rizzo
Chief Executive Officer
by: /s/ Eileen E. Bartoli
Eileen E. Bartoli
Controller and
Chief Financial Officer
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LEAK-X
ENVIRONMENTAL CORPORATION CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998, AND
THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE
30, 1998, 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-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 150,948
<SECURITIES> 0
<RECEIVABLES> 2,223,140
<ALLOWANCES> 35,000
<INVENTORY> 190,817
<CURRENT-ASSETS> 3,184,757
<PP&E> 478,391
<DEPRECIATION> 340,826
<TOTAL-ASSETS> 3,448,326
<CURRENT-LIABILITIES> 3,495,718
<BONDS> 0
0
0
<COMMON> 1,220
<OTHER-SE> (48,612)
<TOTAL-LIABILITY-AND-EQUITY> 3,448,326
<SALES> 4,891,039
<TOTAL-REVENUES> 4,891,039
<CGS> 3,570,045
<TOTAL-COSTS> 3,570,045
<OTHER-EXPENSES> 1,279,942
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,136
<INCOME-PRETAX> 10,093
<INCOME-TAX> 1,642
<INCOME-CONTINUING> 8,451
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,451
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
