U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-17776
LEAK-X ENVIRONMENTAL CORPORATION
(Exact name of small business issuer 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
(Issuer's telephone number)
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
The number of shares of Common Stock, par value $.001 per share, outstanding
as of November 10, 1999 is 990,126 shares.
Transitional Small Business Disclosure Format: Yes X No
CONSOLIDATED BALANCE SHEETS
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
<TABLE>
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September 30, December 31,
1999 1998
(Unaudited)
ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 0 $ 1,742
Accounts receivable 659,921 1,492,982
Estimated earnings in
excess of billings 19,461 89,980
Other current assets 87,670 85,423
Net assets of discontinued operations 450,000 450,000
TOTAL CURRENT ASSETS 1,217,052 2,120,127
PROPERTY AND EQUIPMENT, NET 65,154 82,371
OTHER ASSETS 6,269 6,269
TOTAL ASSETS $1,288,475 $2,208,767
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 849,288 $1,723,455
Unearned revenue 47,315 123,989
Line of credit 502,134 335,403
Current portion of long term debt 150,000 150,000
Net liabilities of discontinued operations 421,725 450,000
TOTAL CURRENT LIABILITIES 1,970,462 2,782,847
LONG-TERM DEBT 12,500 112,500
STOCKHOLDERS' EQUITY
Common stock $.001 par value:
5,000,000 shares authorized,
990,126 issued and outstanding 990 990
Additional paid-in capital 8,310,195 8,310,195
Accumulated deficit (9,005,672) (8,997,765)
TOTAL STOCKHOLDERS' EQUITY (694,487) (686,580)
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,288,475 $2,208,767
See notes to consolidated financial statements.
</TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
(Unaudited)
<TABLE>
<S> <C> <C>
Three Months Ended September 30,
1999 1998
Revenues $ 793,704 $1,578,994
Cost of revenues 421,975 1,109,138
Gross profit 371,729 469,856
Selling, general and
administrative expenses 390,258 440,411
Operating income (18,529) 29,445
Other income (851) 455
Interest expense 9,447 3,176
Net income before taxes and
discontinued operations (27,125) 25,814
Income tax expense 1,941 821
Net income before
discontinued operations (29,066) 24,993
Discontinued Operations:
Operating Income -------- (142,472)
Loss on Sale of Discontinued Operations -------- (441,665)
0 (584,137)
Net Income $ (29,066) $ (559,144)
Weighted average number of shares of common
stock outstanding Basic 990,126 1,217,137
Diluted 990,126 1,294,783
Net income per share:
Basic: Continuing operations (0.03) 0.02
Discontinued operations 0.00 (0.48)
Total Basic (0.03) (0.46)
Diluted: Continuing operations (0.03) 0.02
Discontinued operations 0.00 (0.45)
Total Diluted (0.03) (0.43)
See notes to consolidated financial statements.
</TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
(Unaudited)
<TABLE>
<S> <C> <C>
Nine Months Ended September 30,
1999 1998
Revenues $2,856,649 $4,966,581
Cost of revenues 1,656,165 3,585,322
Gross profit 1,200,484 1,381,259
Selling, general and
administrative expenses 1,183,252 1,293,019
Operating income 17,232 88,240
Other income (1,709) (3,733)
Interest expense 21,189 10,184
Net income before taxes and
discontinued operations (2,248) 81,789
Income tax expense 5,660 2,463
Net income before
discontinued operations (7,908) 79,326
Discontinued Operations:
Operating Income ------- (188,511)
Loss on Sale of Discontinued Operations ------- (441,665)
0 (630,176)
Net Income $ (7,908) $ (550,850)
Weighted average number of shares of common
stock outstanding Basic 990,126 1,218,800
Diluted 990,126 1,296,446
Net income per share:
Basic: Continuing operations (0.01) 0.07
Discontinued operations 0.00 (0.52)
Total Basic (0.01) (0.45)
Diluted: Continuing operations (0.01) 0.06
Discontinued operations 0.00 (0.49)
Total Diluted (0.01) (0.43)
See notes to consolidated financial statements.
</TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
(Unaudited)
<TABLE>
<S> <C> <C>
Nine Months Ended September 30,
1999 1998
CASH FLOW FROM
FROM
OPERATING ACTIVITIES:
Net loss ($7,907) ($550,850)
Adjustments to reconcile net loss to net cash
provided by / (used) in operating activities of
continuing operations:
Loss from discontinued operations ------- 204,082
Depreciation 29,100 27,000
Loss on sale of asset ------- 1,794
Loss on sale of GRS ------- 441,665
Changes in assets and liabilities:
Accounts receivable 833,061 59,603
Costs and estimated earnings
in excess of billings 70,519 810
Other current assets (2,247) (27,778)
Accounts payable (803,031) (110,204)
Billings in excess of cost (76,674) (80,191)
Accrued expenses and
other liabilities (71,136) 39,199
NET CASH PROVIDED BY / (USED IN) OPERATING
ACTIVITIES OF CONTINUING OPERATIONS (28,315) 5,130
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11,883) (13,408)
Sale of asset ------- 2,593
Sale of GRS ------- 127,781
Increase in other assets, net ------- (54,582)
NET CASH PROVIDED BY/(USED IN) INVESTING
ACTIVITIES OF CONTINUING OPERATIONS (11,883) 62,384
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance on line-of-credit 166,731 ------
Repayments on line-of-credit ------- (150,000)
Payments on long-term debt (100,000) ------
Decrease in advances to discontinued operations ------- 66,509
NET CASH PROVIDED BY / (USED IN) FINANCING
ACTIVITIES OF CONTINUING OPERATIONS 66,731 (83,491)
NET CASH PROVIDED BY / (USED IN)
CONTINUING OPERATIONS 26,533 (15,977)
NET CASH PROVIDED BY / (USED IN)
DISCONTINUED OPERATIONS (28,275) 7
NET DECREASE IN CASH (1,742) (15,970)
CASH, beginning of the period 1,742 240,769
CASH, end of the period 0 $224,799
See notes to consolidated financial statements.
</TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
(Unaudited)
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Nine Months Ended September 30,
1999 1998
SUPPLEMENTAL CASH FLOW INFORMATION:
Sale of Groundwater Recovery Systems, Inc.
Non-cash (assets) liabilities
Accounts receivable, net --------- (473,942)
Inventory --------- (204,188)
Other current assets --------- (35,946)
Property, plant and equipment --------- (33,247)
Other assets --------- (10,227)
Accounts payable, accrued expenses and
other current liabilities --------- 388,106
Forgiveness of Note Payable --------- 100,000
Deferred payout --------- (300,000)
Net liabilities assumed --------- ($569,444)
</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 nine-month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. 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, 1998.
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 nine months ended September 30, 1999 and
September 30, 1998 was $21,520 and $10,184, respectively.
Note 3. Discontinued Operations
Net assets of discontinued operations at September 30, 1999 consist of
accounts receivable of $450,000. Net liabilities of discontinued operations
at September 30, 1999 include accounts payable and accrued expenses of
$346,251 and $75,474, respectively.
Note 4. Income Per Share
The following is a reconciliation of the numerator and denominator
underlying the income per share calculations:
<TABLE>
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Three Months Ended September 30, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
Income from continuing
operations available to
common stockholders $24,993 1,217,137 $0.02
Effect of dilutive securities:
Incremental shares of assumed
conversions of options 77,646
Diluted income from
continuing operations available
to common stockholders and
assumed conversions $24,993 1,294,783 $0.02
</TABLE>
<TABLE>
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Nine Months Ended September 30, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
Income from continuing
operations available to
common stockholders $79,326 1,218,800 $0.07
Effect of dilutive securities:
Incremental shares of assumed
conversions of options $77,646
Diluted income from continuing
operations available to common
stockholders and assumed
conversions $79,326 1,296,446 $0.06
</TABLE>
The reconciliations for the three-month and nine-month periods ended
September 30, 1999 have not been presented since any incremental shares
converted would have been anti-dilutive, respectively.
Note 5. Line of Credit
The Company's Loan Agreement (the "Loan Agreement") with First Union
National Bank permits the Company to borrow up to the greater of $750,000 or
75% of eligible accounts receivable, as defined. The eligible accounts
receivable, as defined by the terms of the Loan Agreement, were $637,669 at
September 30, 1999. The calculated borrowing base of 75% of eligible accounts
receivable was $478,252, for which the Company has utilized $497,247 as of
September 30, 1999. This overadvance was subsequently paid down. Borrowings
under this facility are collateralized by a security interest in
substantially all of the assets of the Company and impose restrictions on
the payment of dividends and stock redemptions and the sale of property.
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations
Quarter Ended September 30, 1999 Compared to the Quarter Ended September 30,
1998
The Company's net loss was $29,066, or ($0.03) per share, for the quarter
ended September 30, 1999 (the "1999 Quarter"), as compared to a net loss of
$559,144, or ($0.46) per share, for the quarter ended September 30, 1998 (the
"1998 Quarter"). The loss in the 1999 Quarter is primarily attributable to a
50% decrease in revenues of $785,290 to $793,704 for the 1999 Quarter, as
compared to $1,578,994 for the 1998 Quarter. The decrease in revenues was
anticipated and is a result of lower volume of construction management
services as the compliance deadline for the upgrade or replacement of
underground storage tanks passed in December 1998. Construction management
services have typically included a large portion of subcontractor costs which
became included in the Company's revenues, but resulted in lower margins.
The Company's gross margin improved significantly to 47% in the 1999
Quarter, as compared to 30% in the 1998 Quarter. As the demand for low margin
construction management services declined, the Company provided a higher
percentage of traditional environmental engineering services which contribute
a higher gross margin.
Selling, general, and administrative ("SG&A") expenses decreased 11%, or
$50,153, to $390,258 for the 1999 Quarter, as compared to $440,411 in the 1998
Quarter. The decrease in SG&A is attributable to actions taken to reduce
the Company's corporate overhead costs. The Company's focus is to
incur minimum corporate overhead expenses in order to preserve its working
capital for growth within the Company's operating subsidiary. During August
1999, the Company initiated some cost-cutting and cash saving actions at its
operating subsidiary to further reduce overhead expenses to compensate for
the lower volume of sales. These actions primarily include personnel layoffs,
and the reduction of marketing expenditures.
The Company incurred higher interest expense of $9,778 in the 1999
Quarter, as compared to $3,176 in the 1998 Quarter, due to lower cash and
higher debt levels. Income tax expense of $1,941 in the 1999 Quarter was
higher than income tax expense of $821 in the 1998 Quarter.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
The Company's net loss was $7,908, or ($0.01) per share, for the nine
months ended September 30, 1999 (the "1999 Period"), as compared to a net loss
of $550,850, or ($0.45) per share, for the nine months ended September 30,
1998 (the "1998 Period"). The 1998 Period included a $630,176 loss from
discontinued operations. Excluding the loss from discontinued operations, the
Company's net income in the 1998 Period would have been $79,326.
The loss in the 1999 Period was primarily due to a 42% decrease in
revenues of $2,109,932 to $2,856,649 for the 1999 Period, as compared to
$4,966,581 for the 1998 Period. The decrease in revenues was anticipated and
is a result of a lower volume of construction management services as the
compliance deadline for the upgrade or replacement of underground storage
tanks passed in December 1998. Construction management services have
typically included a large portion of subcontractor costs which became
included in the Company's revenues, but resulted in lower margins.
The Company's gross margin improved to 42% in the 1999 Period, as
compared to 28% in the 1998 Period. As the demand for low margin construction
management services declined, the Company provided a higher percentage of
traditional environmental engineering services which contribute a higher gross
margin.
SG&A expenses decreased 8%, or $109,766, to $1,183,252 for the 1999
Period, as compared to $1,293,018 in the 1998 Period. The decrease in SG&A
is attributable to actions taken to reduce the Company's corporate
overhead costs. The Company's focus has been to incur minimal corporate
overhead expenses in order to preserve its working capital for growth within
the Company's operating subsidiary. Some of the overall SG&A decrease was
partially offset by continued investment in the Company's growth strategy,
including a greater sales effort spent on the development of new business
prospects and continued marketing of its new environmental monitoring
services. However, during August 1999, the Company initiated some
cost-cutting and cash saving actions at its operating subsidiary to further
reduce overhead expenses to compensate for the lower volume of sales. These
actions primarily include personnel layoffs and the reduction of marketing
expenditures.
The Company incurred higher interest expense of $21,189 in the 1999
Period, as compared to $10,184 in the 1998 Period due to lower cash and higher
debt level. Income tax expense of $5,660 in the 1999 Period was higher than
income tax expense of $2,463 in the 1998 Period due to higher Fiscal 1998
expenses which were recorded in Fiscal 1999.
Liquidity and Capital Resources
The Company used $28,315 of cash from operating activities of continuing
operations in the 1999 Period, as compared to providing $5,130 of cash from
operating activities in the 1998 Period. The net loss of $7,907 in the 1999
Period was lower than the net loss of $550,850 in the 1998 Period. The 1999
Period included a $833,061 decrease in accounts receivable and a $803,031
decrease in accounts payable, as compared to an increase of $59,604 in
accounts receivable and a decrease of $110,204 in accounts payable in the 1998
Period. This significant change in accounts receivable and accounts payable
is primarily due to the decrease in revenues which resulted from the reduction
in construction management services.
Net cash used by investing activities of continuing operations in the
1999 Period was $11,883, as compared to net cash provided by investing
activities of $62,384 in the 1998 Period. Capital expenditures in the 1999
Period of $11,883, which were primarily for computer equipment, were slightly
lower than the $13,408 in the 1998 Period. The 1998 Period included $2,593
provided by the sale of assets, $127,781 provided by the sale of Groundwater
Recovery Systems ("GRS") and a $54,582 investment in the development of the
Company's environmental monitoring services division.
Net cash provided by financing activities of continuing operations was
$66,731 in the 1999 Period, as compared to net cash used in financing
activities of continuing operations of $83,491 in the 1998 Period. During the
1999 Period, the Company's cash management system, which applies excess cash
balances against its outstanding line of credit, resulted in an increase of
$166,731 on the line of credit balance. During the 1999 Period, the Company
paid out $100,000 on long-term debt, and during the 1998 Period, the
Company received $66,509 from its discontinued operations
in payback on outstanding debt. During the 1998 Period, the Company
also repaid $150,000 on its line-of-credit balance as a result of the
sale of GRS.
The Company's working capital deficit of $753,410 at September 30, 1999
increased as compared to the working capital deficit of $662,720 at December
31, 1998 due to the losses incurred during Fiscal 1999. However, the Company
continues to manage its working capital to support the Company's ongoing
operations and make scheduled payments on its long-term debt.
The Company's Loan Agreement (the "Loan Agreement") with First Union
National Bank permits the Company to borrow up to the greater of $750,000 or
75% of eligible accounts receivable, as defined. The eligible accounts
receivable, as defined by the terms of the Loan Agreement, were $637,669 at
September 30, 1999. The calculated borrowing base of 75% of eligible accounts
receivable was $478,252, for which the Company has utilized $497,247 as of
September 30, 1999. This overadvance was subsequently paid down.
Borrowings under this facility are collateralized by a security interest in
substantially all of the assets of the Company and impose restrictions on the
payment of dividends and stock redemptions and the sale of property.
During August 1999, the Company implemented some cost-cutting and cash
conserving actions in an effort to offset the decrease of sales volume
experienced during the second and third quarters. Some of these actions
include officer salary deferrals, personnel layoffs, and reduction of
marketing expenditures. Management believes that these actions will help
alleviate cash pressures, as well as reduce overall overhead expenses in an
effort to improve profitability.
Backlog at September 30, 1999 of $1,400,000 was lower than the backlog of
$2,600,000 at December 31, 1998 as a result of the completion of some of the
larger volume construction work during the first half of 1999. The Company
believes that all of the current backlog will be completed in 1999, 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.
Computers, software, and other equipment utilizing microprocessors that
use only two digits to identify a year in a date field may be unable to
process accurately certain date-based information after the year 2000. This
is commonly referred to as the "Y2K" problem. The Company is utilizing
internal resources to address the potential impact of the Y2K problem. Key
areas of the Company's operations that have been addressed include external
customers and suppliers and internal computers and software.
Y2K considerations may have an effect on some of the Company's customers
and suppliers, and thus, indirectly on the Company. The Company is assessing
the potential effect on the Company with respect to customers and suppliers
with Y2K issues and does not expect a material affect on the Company's
financial condition or results of operation at this time. However, the
potential does exist that if customers of the Company are not Y2K compliant,
payments to the Company in the first quarter of the Year 2000 could be delayed
until the customers are able to correct their Y2K compliance deficiencies.
The Company has upgraded its internal computerized information systems to
ensure that it is able to process information that may be date sensitive and
to be Y2K compliant. No related software or hardware costs are expected. A
contingency plan is being formulated to address unavoidable Y2K risks with
customers, vendors, and other third parties.
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 in Item 2 (Management's Discussion and Analysis of
Financial Condition and Results of Operations) that were not historical facts
may be forward-looking statements. Whenever possible, the Company has
identified these forward-looking statements by words such as "believes",
"plans", "intends", and similar expressions. The Company cautions readers that
these forward-looking statements are subject to a variety of risks and
uncertainties that could cause the Company's actual results in the remainder of
1999 and beyond to differ materially from those expressed in any forward-
looking statements made by, or on behalf of, the Company. These risks and
uncertainties are more fully described in the Company's filings with the
Securities and Exchange Commission including, without limitation, general
economic and business conditions affecting the industries of the Company's
customers, competition from other environmental consulting firms that have
greater financial, technical, and marketing resources than the Company,
enforcement of government regulations, changes in sales mix, competitive factors
such as rival designs, and the Company's ability to adequately address its Year
2000 issues in a timely manner.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 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: November 15, 1999
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LEAK-X
ENVIRONMENTAL CORPORATION CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999,
AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999, AND THE ACCOMPANYING NOTES, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 659,921
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,217,052
<PP&E> 283,298
<DEPRECIATION> (218,144)
<TOTAL-ASSETS> 1,288,475
<CURRENT-LIABILITIES> 1,970,462
<BONDS> 12,500
0
0
<COMMON> 990
<OTHER-SE> (695,477)
<TOTAL-LIABILITY-AND-EQUITY> 1,288,475
<SALES> 2,856,649
<TOTAL-REVENUES> 2,856,649
<CGS> 1,656,165
<TOTAL-COSTS> 1,656,165
<OTHER-EXPENSES> 1,183,252
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,189
<INCOME-PRETAX> (2,248)
<INCOME-TAX> 5,660
<INCOME-CONTINUING> (7,908)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,908)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
