SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For Quarter Ended June 30, 2000 Commission File No. 001-15567
PROBEX CORP.
(Exact name of registrant as specified in charter)
Colorado 33-0294243
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(State or other Jurisdiction (IRS Employer Identification No.)
of Incorporation)
13355 Noel Road, Suite 1200, Dallas, TX 75240
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (972) 788-4772
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
1467 LeMay, Suite 111, Carrollton, Texas 75007
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 such filing
requirements for the past 90 days.
YES X NO
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As of August 11, 2000, there were 25,461,716 shares of common stock, no par
value, of the registrant issued and outstanding.
Transitional Small Business Disclosure Format (check one)
YES NO X
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PROBEX CORP.
June 30, 2000
INDEX
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) as of June 30, 2000 and
September 30, 1999..................................................................1
Consolidated Statements of Operations (unaudited) for the
three and nine months ended June 30, 2000 and
1999................................................................................2
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended June 30, 2000 and
1999................................................................................3
Notes to Interim Consolidated Financial Statements (unaudited)......................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..........................................................................10
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................................15
Item 2. Changes in Securities and Use of Proceeds...........................................15
Item 3. Defaults Upon Senior Securities.....................................................16
Item 4. Submission of Matters to a Vote of Security Holders.................................16
Item 5. Other Information...................................................................16
Item 6. Exhibits and Reports on Form 8-K....................................................16
SIGNATURES............................................................................................17
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<TABLE>
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
PROBEX CORP.
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, September 30,
2000 1999
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ASSETS
Cash and cash equivalents $ 1,121,936 $ 2,658,055
Accounts and notes receivable - net 496,767 8,708
Inventories 136,263 -
Prepaid and other 76,585 13,687
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Total current assets 1,831,551 2,680,450
Property, plant and equipment - net 3,994,477 792,384
Goodwill - net 3,670,823 -
Other assets - net 160,347 208,229
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TOTAL ASSETS $ 9,657,197 $ 3,681,063
=======================================================
LIABILITIES
Accounts payable $ 792,671$ 287,764
Accrued liabilities 1,166,050 263,581
Short-term debt 169,498 750,000
Current maturities of long-term debt 334,866 -
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Total current liabilities 2,463,085 1,301,345
Long-term debt 1,274,200 20,361
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TOTAL LIABILITIES 3,737,285 1,321,706
=======================================================
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Series A 10% Cumulative Convertible Preferred Stock,
no par value, authorized 10,000,000 shares:
Issued - 535,000 at Jun. 30, 2000 and None at Sep. 30, 1999 4,634,412 -
Subscribed - None at Jun. 30, 2000 and 190,000 at Sep. 30,
1999 - 1,608,227
Common Stock, no par value, authorized 50,000,000 shares:
Issued-25,295,299 at Jun. 30, 2000 and 18,932,029 at Sep.
30, 1999 12,061,229 7,324,051
Subscribed-170,588 at Jun. 30, 2000 and 2,011,388 at Sep.
30, 1999 547,684 1,316,600
Accumulated Deficit (11,322,786) (7,889,521)
Less: Treasury Stock (common: 62,690 shares at Jun. 30,
2000 and None at Sep. 30, 1999) at cost (627) -
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TOTAL STOCKHOLDERS' EQUITY 5,919,913 2,359,357
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,657,197 $ 3,681,063
=======================================================
See Notes to Interim Consolidated Financial Statements
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PROBEX CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended June 30, Nine Months Ended June 30,
2000 1999 2000 1999
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REVENUES $ 1,033,008 - $ 1,033,008 -
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EXPENSES:
Operating 711,772 - 711,772 -
Research and development 543,798 237,046 1,161,941 827,554
Selling, general and administrative 930,513 182,915 2,063,705 513,906
Depreciation and amortization 126,180 96,264 235,354 111,404
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TOTAL EXPENSES 2,312,263 516,225 4,172,772 1,452,864
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OPERATING LOSS (1,279,256) (516,225) (3,139,765) (1,452,864)
Interest - net 3,364 (28,438) 43,752 (76,805)
Other - net - - 10,933 4,615
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NET LOSS $(1,275,892) $(544,663) $(3,085,081) $(1,525,054)
=======================================================================
NET LOSS PER SHARE $ (0.06) $ (0.03) $ (0.14) $ (0.10)
=======================================================================
</TABLE>
See Notes to Interim Consolidated Financial Statements
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PROBEX CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended June 30,
2000 1999
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OPERATING ACTIVITIES
Net loss $ (3,085,081) $(1,525,054)
Adjustments:
Depreciation and amortization 235,354 111,404
Working capital 729,646 (110,330)
Long-term assets and liabilities 89,130 -
Other non-cash charges 153,562 336,094
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NET CASH USED BY OPERATING ACTIVITIES (1,877,388) (1,187,886)
----------------------------------------
INVESTING ACTIVITIES
Capital expenditures (2,510,072) (344,187)
(1,600,000)
Acquisitions -
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NET CASH USED BY INVESTING ACTIVITIES (4,110,072) (344,187)
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FINANCING ACTIVITIES
Proceeds from debt 140,318 450,000
Payments on debt (3,339) -
Issuance of preferred stock 3,026,185 -
Issuance of common stock 1,288,176 1,295,135
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NET CASH PROVIDED BY FINANCING ACTIVITIES 4,451,341 1,745,135
----------------------------------------
NET CHANGE IN CASH (1,536,119) 213,062
CASH AT BEGINNING OF PERIOD 2,658,055 12,590
----------------------------------------
CASH AT END OF PERIOD $ 1,121,936 $ 225,652
========================================
INTEREST PAID $195,652 $ 1,496
</TABLE>
See Notes to Interim Consolidated Financial Statements
<PAGE>
PROBEX CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(unaudited)
NOTE 1 BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
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The Company owns proprietary technology whose primary application is for the
purification, recycling, and upgrading of used lubricating oils. On May 1, 2000,
the Company acquired Petroleum Products, Inc. and Intercoastal Trading Company,
Inc, ("PPI/ITC") and as result the Company has begun recognizing revenue related
to its waste oil collection business, and has emerged from its developmental
stage.
The condensed consolidated financial statements included herein have been
prepared without audit, pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission. Certain information and notes normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The financial statements reflect all adjustments which
are, in the opinion of the management, necessary for a fair statement of the
results for the interim periods. Such adjustments are considered to be of a
normal recurring nature unless otherwise identified. Results of operations for
the three and nine months periods ended June 30, 2000 are not necessarily
indicative of the results of operations that will be realized for the year ended
September 30, 2000. These financial statements should be read in conjunction
with the audited financial statements and the notes thereto included in the
Company's Form 10-SB/A filed with U.S. Securities and Exchange Commission on
February 1, 2000.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
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CONSOLIDATION - The accompanying consolidated financial statements include the
accounts of PROBEX CORP. (the "Company"), and its wholly owned subsidiaries -
Probex Fluids Recovery, Inc., Quadrex Corporation, and Apollo Oil Company.
Significant inter-company transactions and balances have been eliminated in
consolidation.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost is
computed on a weighted average basis. There is a risk that the Company will
forecast demand for its products and market conditions incorrectly and
accumulate excess inventories. Therefore, there can be no assurance that the
Company will not accumulate excess inventory and incur inventory lower of cost
or market charges in the future.
PROPERTY AND EQUIPMENT AND DEPRECIATION METHODS - Fixed assets greater than
$1,000 are recorded at cost and depreciated over their estimated useful lives,
which range from three to five years, using the straight-line method. Equipment
leased under capital leases is amortized over the life of the respective lease.
INTANGIBLE ASSETS - Patents, a component of "Other assets" in the Consolidated
Balance Sheet, are being amortized on a straight-line basis over 17 years.
Goodwill is being amortized on a straight-line basis of 15 years.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to expense
when incurred.
NET LOSS PER COMMON SHARE - The Company has a complex capital structure that
requires a dual presentation of basic and diluted earnings per share ("EPS") on
the face of the income statement. The net loss per common share ("basic") is
computed by dividing the net loss for the period by the weighted average number
of shares outstanding during the period. The net loss per common share-assuming
dilution ("diluted") reflects the potential dilution that could occur if
securities (warrants, options, and convertible preferred stock of the Company)
were exercised or converted into common stock.
<PAGE>
The following table summarizes the numerator and denominator elements of the
basic EPS computations.
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3 month period ending Jun 30, 9 month period ending Jun 30,
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2000 1999 2000 1999
------------------- --------------------- --------------------- -------------------
Loss (Numerator) $ 1,275,892 $ 544,663 $ 3,085,081 $ 1,525,054
------------------------------- ------------------- --------------------- --------------------- -------------------
Shares (Denominator) 22,856,265 16,303,696 21,532,241 15,540,698
------------------------------- ------------------- --------------------- --------------------- -------------------
Loss Per Share $ 0.06 $ $0.03 $ 0.14 $ 0.10
------------------------------- ------------------- --------------------- --------------------- -------------------
</TABLE>
The Company's outstanding warrants, options and convertible preferred stock were
anti-dilutive for the three-month and nine-month periods ending June 30, 2000
and 1999.
NOTE 3 STOCKHOLDERS' EQUITY
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On July 21, 1999, the Board of Directors approved a series of Preferred Stock,
which currently consists of up to 1,000,000 shares of Preferred Stock (such
amount may from time to time be increased or decreased by the Board of
Directors), designated as Series A 10% Cumulative Convertible Preferred Stock
(the "Series A Preferred Stock"). The Series A Preferred Stock, with respect to
rights on liquidation, winding up and dissolution, ranks senior to all classes
and series of Common Stock and may rank senior to other classes of Preferred
Stock. The Series A Preferred Stock has a liquidation preference of $10.00 per
share plus accrued and unpaid dividends, which is prior to the liquidation
preference of the Common Stock. The Series A Preferred Stock is entitled to
receive semi-annual dividends at the rate of $1.00 per annum payable either in
cash or shares of Common Stock, at the option of the Company. The holders of
Series A Preferred Stock are not entitled to vote, except for certain limited
matters and to the extent required by law. Each share of Series A Preferred
Stock is convertible at any time into 5.33333 shares of Common Stock and shall
be automatically converted, without further action on the part of the Company or
the holder thereof, into 5.33333 fully paid and nonassessable shares of Common
Stock on the date following any thirty-day trading period in which the average
daily closing price exceeds $5.625 per share. The Company will not issue any
fractional shares of Common Stock.
The Series A Preferred Stock offering was terminated in December 1999 with a
total of $5,350,000 of gross proceeds and 535,000 shares of Series A Preferred
Stock were subscribed and not issued. All 535,000 shares of Series A Preferred
Stock were issued before June 30, 2000. Additionally, $372,922 of the above
gross proceeds were being held in a separate interest bearing account and were
not available for use by the Company until certain incorporation documents were
approved by the Company's stockholders. These amendments were approved on
December 30, 1999 and the cash was transferred to the Company in January 2000.
As a result of the above Series A Preferred Stock private placement, the Company
incurred $715,588 of expenses ($615,600 of placement fees and $99,988 of legal
fees) and these have been recorded as offering costs and offset against the
Series A Preferred Stock proceeds in the Consolidated Financial Statements.
On June 30, 1995, the Company purchased a 28% ownership in the assets and
liabilities of Probex Technologies, L.P. (the "Limited Partnership"). From
October to November 1999, the Limited Partnership sold 50,912 shares of Common
Stock at prices ranging from $0.95 to $1.70 per share resulting in $64,336 of
gross proceeds. The proceeds were utilized to liquidate all of the outstanding
liabilities of the Limited Partnership and the remainder was held in reserve for
distribution to the Limited Partnership partners. Effective December 31, 1999,
the Limited Partnership was liquidated and the remaining shares of Common Stock
and remaining cash were distributed. The Company's share of this liquidation was
62,690 shares of Common Stock and $10,306 of cash. The Company has recorded
these shares of Common Stock as treasury stock at $0.01 per share.
In January 2000, the Company received a subscription for 240,750 shares of
Common Stock at $2.70 per share resulting in $650,025 of cash proceeds. As
result of this subscription, the Company paid $39,002 of placement fees and
these have been recorded as offering costs and offset against the Common Stock
proceeds in the Consolidated Financial Statements. Under the terms of this
offering, for each share of Common Stock sold, the placement agent received a
0.15 warrant that is exercisable for five years at $2.70 per share.
<PAGE>
From January to March 2000, $672,681 of proceeds was received from the exercise
of various warrants, with exercise prices ranging from $0.20 to $3.00 per share.
As result of one of these warrant exercises, the Company paid $9,000 of
placement fees and these have been recorded as offering costs and offset against
the Common Stock proceeds in the Consolidated Financial Statements.
On February 1, 2000, the Company filed a Form 10-SB/A, pursuant to Section 12(b)
of the Securities Exchange Act of 1934, as amended, which was subsequently
declared effective by the Securities and Exchange Commission on February 2,
2000. Additionally, on February 3, 2000, the Company's common stock began
trading on the American Stock Exchange under the symbol "PRB".
In March 2000, the Company issued and/or committed to issue 3,740 shares of
Common Stock at $1.875 per share to one consultant as compensation for services
rendered.
In March 2000, the Company issued and/or committed to issue 52,702 shares of
Common Stock at $1.50 per share to Preferred Stock owners in lieu of cash
dividends.
In April 2000, the Company issued 68,500 shares of Common Stock at $1.00 per
share to six employees as compensation for services rendered.
In May 2000, the Company issued 800,000 shares of Common Stock at $1.875 per
share to two third parties as part of the purchase price paid to acquire
PPI/ITC.
In May 2000, the Company issued and/or committed to issue 131,223 shares of
Common Stock at $1.50 per share to Series A Preferred Stock owners in lieu of
cash dividends.
In June 2000, the third party who entered into an agreement whereby the third
party would loan up to $1,500,000 for working capital purposes converted the
actual outstanding loan balance of $750,000 into 2,796,114 shares of Common
Stock. Please refer to the following "Note 5 Commitments and Contingencies"
section for more details.
In June 2000, the Company issued 25,000 shares of Common Stock at $3.00 per
share to one consultant as compensation for services rendered.
NOTE 4 INCOME TAX
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All tax returns have been filed through September 30, 1999. The net operating
loss carryforward is approximately $6,800,000, which expires by 2014. No
deferred tax asset has been recognized since management believes that it is not
likely to be realized.
NOTE 5 COMMITMENTS AND CONTINGENCIES
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On June 30, 1998, the Company and a third party entered into an agreement
whereby the third party would loan up to $1,500,000 for working capital
purposes. Interest accrued at 15% annually and all amounts drawn under the loan
agreement would mature on June 30, 2000. The outstanding principal amount of the
loan was convertible into shares of Common Stock of the Company, at $0.01 per
share, equal to 10% of the number of shares of Common Stock outstanding on a
fully diluted basis, subject to certain adjustments. On June 6, 2000, the third
party exercised a loan conversion of the then outstanding loan balance of
$750,000, resulting in the Company issuing 2,796,114 shares of Common Stock. In
addition, the Company paid accrued interest of $188,625.
In June 1999, the Company secured from The Port Authority of Columbiana County
(the "Port Authority") in Wellsville, Ohio, a twelve-month option agreement in
the amount of $1,350,000 to purchase a 22-acre site for its first domestic
facility. The Company paid $5,000 for the option agreement. Additionally, the
site and other surrounding property will be improved by construction of an
adjacent highway interchange primarily using Federal Funds. The Federal Highway
Administration has determined that no transfers of title to such land to private
industry may take place prior to completion of the highway interchange that is
projected to occur in 2001. Should the Company exercise the option to purchase
the land, an interim lease agreement would be in effect until the Seller
certifies in writing that the highway interchange is complete. Rental payments
under the interim lease will be $20,000 per month and payments in total shall be
credited against the purchase price. On June 19, 2000, the Company executed an
extension of the option agreement. Under the terms of this agreement, the Port
Authority extended the option period for a period of six months, from July 1,
2000 through December 31, 2000. In consideration, on July 1, 2000 the Company
paid a sum of $5,000 to the Port Authority. In addition, commencing July 1,
2000, the Company will pay the sum of $ 10,000 for each month of this option
extension until such option is exercised or cancelled by the Company. If said
option is exercised, then all monthly option payments made shall be credited
toward the purchase price. If however, said option is not exercised, or is
cancelled by the Company, then all monthly option payments shall remain the sole
property of the Port Authority.
<PAGE>
On April 24, 2000, the Company announced a non-binding Letter of Intent to
purchase an undisclosed (actual name can not be disclosed at this time) waste
oil collection company. The Company is performing due diligence and no
definitive agreement has been structured as of the date of this Form 10-QSB
filing. The Company anticipates formalizing a definitive agreement and closing
the proposed transaction by September 30, 2000.
On July 14, 2000, the Company entered into an agreement with a third party to
sublease office space for the Company's new corporate headquarters in Dallas,
Texas. The terms of the agreement require equal consecutive monthly installments
of $14,850 through February 2004.
The Company has committed to issue a warrant to purchase 10,000 shares of Common
Stock at $0.50 per share to a consultant, contingent upon certain agreed upon
conditions occurring.
The Company has committed to issue a warrant to purchase 240,000 shares of
Common Stock at $1.875 per share to an employee, contingent upon certain agreed
upon conditions occurring.
The Company has committed to issue a warrant to purchase 300,000 shares of
Common Stock at $3.12 per share to a third party, contingent upon certain agreed
upon conditions occurring.
The following table summarizes information about warrants outstanding at June
30, 2000:
Weighted Average Remaining
Exercise Price Contractual Life (Years) Number of Shares
-------------- -------------------------- ----------------
$0.20 2.46 248,766
$0.50 3.82 680,000
$0.55 3.86 386,194
$1.00 1.42 1,712,349
$1.875 4.50 441,000
$2.00 2.24 414,432
$2.70 3.58 36,113
$3.12 4.92 200,000
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2.71 4,118,854
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NOTE 6 INDEBTEDNESS
In September 1998, the Company was funded $300,000 under the third party working
capital agreement discussed previously in Commitments and Contingencies. From
October to December 1998, the Company was funded an additional $450,000 under
the agreement. On June 6, 2000, the third party exercised a loan conversion of
the then outstanding loan balance of $750,000, resulting in the Company issuing
2,796,114 shares of Common Stock. In addition, the Company paid accrued interest
of $188,625.
On May 1, 2000, in conjunction with the acquisition of Petroleum Products, Inc.,
the Company issued Petroleum Products, Inc. a promissory note. The Company has
agreed to pay Petroleum Products, Inc. the principal sum of $1,500,000 together
with interest in arrears on the unpaid principal balance at an annual rate equal
to 8%. The principal amount of this note shall be due and payable in five equal
consecutive annual installments commencing on the anniversary of the closing
date and upon each anniversary of the closing date thereafter until paid in
full. Interest on the unpaid principal balance of this note shall be due and
payable annually, together with each payment of principal.
In addition, in May 2000, the Company borrowed $100,000 from the owners of
PPI/ITC to be used as working capital for the acquired businesses. The Company
has agreed to pay the principal together with interest in arrears on the unpaid
principal balance at an annual rate equal to 8%. The principal amount of this
note, together with interest on the unpaid principal balance of this note, shall
be due and payable on or before September 30, 2000.
<PAGE>
The following table summarizes the Company's long-term debt:
June 30
2000 1999
8.0% Note payable to Petroleum Products, Inc,
payable in five annual installments of $300,000
commencing May 1, 2001 $1,500,000 $ -
12.0% - 13.5% Five Capital lease payable for
equipment and trucks, payable monthly $6,179 109,066 -
15.0% Convertible Note payable to HSB
Engineering Finance Corporation,
Commencing June 30, 1998 and due June 30, 2000 - 750,000
Deferred and unpaid legal fees - 109,923
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1,609,065 859,923
Less current portion 334,866 -
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$1,274,200 $ 859,923
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NOTE 7 ACQUISITIONS
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Effective May 1, 2000, the Company purchased substantially all of the assets of
PPI/ITC for $4.6 million consisting of cash of $1.6 million, a promissory note
of $1.5 million and the issuance of 800,000 shares of the Company's common stock
valued at $1.875 per share.
The accompanying table reflects the pro forma results of operations as if
PPI/ITC had been acquired on October 1, 1998:
Pro Forma
Nine Months Ended June 30,
2000 1999
---- ----
Revenues $4,550,016 $1,411,818
Net Loss ($2,623,109) ($1,544,704)
Net Loss per Share ( $0.12) ($0.10)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
References in this document to "us", "we", "it" ,"our" or "the Company" refer to
Probex Corp.
General
Probex is an energy technology company that has begun commercialization of its
proprietary re-refining technology (ProTerra(TM)). The primary application of
ProTerra is for the purification, recycling, and upgrading of used lubricating
oils. The Company has utilized the majority of its resources since inception on
research and development of ProTerra(TM).
Probex was formed as a Colorado corporation in 1988 under the name Conquest
Ventures, Inc. It engaged in an unrelated line of business that had been
discontinued by 1994, when the Company acquired certain technology rights from
Probex Technologies, L.P. In connection with the 1994 acquisition, the Company
changed its name to Probex Corp. and focused its subsequent activities on
research and development of the acquired technology that lead to the Company's
present line of business. The Company has developed a proprietary re-refining
process for used lubricating oils which the Company believes provides major
performance advantages over all known re-refining technologies. The Company's
technology has been validated through extensive pilot testing and results have
been validated by a number of independent and reputable testing laboratories as
well as by leading technical experts in the refining and base oil processing
industries. The Company has attracted and retained strong, experienced persons
in management functions with a depth of expertise in commercializing new
technologies, managing early stage companies, and in the waste oil and base oil
industries.
Our objective is to meet the market need for new outlets for a material portion
of the estimated 5.3 billion gallons of available waste oil worldwide, as well
as to supply premium base oils that will comply with the new motor oil standards
expected to be implemented in the United States in late 2000 and thereafter
around the world.
<PAGE>
The Company's principal business address is One Galleria Tower, 13355 Noel Road,
Suite 1200, Dallas, Texas 75240. Our Internet site can be accessed at
www.probex.com. The Company's fiscal year end is September 30. Currently, the
Company has 40 full-time employees, located at either the Company's headquarters
or at other locations. Additionally, the Company has consulting agreements with
two entities proving services on a part-time basis.
The Company has not been subject to any bankruptcy, receivership or similar
proceeding.
Strategic Alliances
The Company has a number of strategic relationships which we believe are of
material benefit and significance with respect to the implementation of our
corporate goals. Our principal strategic relationships are with the following
companies.
HSB Group, Inc. (HSB:NYSE)
The Company has attracted a strategic corporate sponsor in Hartford Steam Boiler
Inspection & Insurance Company, a wholly-owned subsidiary of HSB Group, Inc.
("HSB") and a world leader in petroleum and processing industry equipment
maintenance insurance. The Company has received a letter of intent from the
Hartford Steam Boiler Inspection & Insurance Company to issue a binding
quotation for Systems Performance Insurance ("SPI") for the Company's core
proprietary technology. SPI is a custom form of "efficacy insurance" that
facilitates the financing of projects that present technological risk. It
protects the interests of lenders and financial institutions from default in
repayment of senior debt due to under-performance or non-performance that
results from deficiencies in design, materials, technology or construction. In
the event of such under-performance or project failure, the Hartford Steam
Boiler Inspection & Insurance Company will make debt service payments in direct
proportion to the shortfall, less a deductible. HSB Group, Inc., the parent
company of The Hartford Steam Boiler Inspection and Insurance Company, is a
global provider of specialty insurance products, engineering services, and
management consulting. The Hartford Steam Boiler Inspection & Insurance Company
was founded in 1866 to provide loss prevention service and insurance to
businesses, industries and institutions. A separate wholly owned subsidiary of
HSB, HSB Engineering Finance Corp., has made a substantial direct convertible
loan to the Company. On June 6, 2000, HSB Engineering Finance Corp. executed a
loan conversion of the current outstanding loan balance of $750,000, resulting
in the Company issuing 2,796,114 shares of Common Stock. In addition, the
Company paid accrued interest of $188,625.
Environmental Resources Management
Principals of Environmental Resources Management, Inc. ("ERM"), (a $280 million
revenue environmental consulting firm), have invested directly in the Company
and the Company has retained ERM to perform its permitting work for the initial
production plant in Wellsville, Ohio.
Bechtel Corp.
On February 29, 2000, the Company entered into a Memorandum of Understanding
with Bechtel Corp. ("Bechtel") for entering into negotiations with respect to a
strategic alliance under which the Company will engage Bechtel for the
engineering, procurement, and construction of the Company's plants on a
worldwide basis. The Company has entered into an agreement to license MP
Refining Technology owned by Bechtel to enhance the Company's own proprietary
technology (ProTerra(TM)). In addition, on March 27, 2000, Bechtel made a
$600,000 investment in the Company by exercising a warrant to purchase 200,000
shares of Probex common stock. Probex issued the warrant, which had a two-year
expiration, on February 28, 2000, in consideration for Bechtel agreeing to defer
up to $1 million of license and engineering payments for Probex's first
operating plant in Wellsville, Ohio.
Wellsville Project
We are presently engaged in development of our first production facility,
located in Wellsville, Ohio, which will convert waste lubricating oils into
premium base oils, fuel oil and asphalt flux or modifier.
In June 1999, the Company entered into a $1,350,000 twelve-month purchase option
agreement for the first production site in Wellsville, Ohio and is currently
undertaking site planning and permitting. This 22-acre site is optimally located
on the Ohio River in the center of large supply and product markets, and
includes a barge dock, significant tankage, a rail spur, and rail and truck
loading and unloading racks. Phase I and Phase II environmental studies have
been or are being performed and the Wellsville, Ohio site is currently being
readied for development. On June 19, 2000, the Company executed an extension of
the option agreement. Under the terms of this agreement, the Port Authority
extended the option period for a period of six months, from July 1, 2000 through
December 31, 2000. In consideration, on July 1, 2000, the Company paid a sum of
$5,000 to the Port Authority. In addition, commencing July 1, 2000, the Company
will pay the sum of $ 10,000 for each month of this option extension until such
option is exercised or cancelled by the Company. If said option is exercised,
then all monthly option payments made shall be credited toward the purchase
price. If however, said option is not exercised, or is cancelled by the Company,
then all monthly option payments shall remain the sole property of the Port
Authority.
<PAGE>
Probex has completed all material research and development activities related to
ProTerra, and we expect to complete a Design and Critical Specifications Package
("DCSP") by late-2000. The DCSP will summarize Probex's experience and knowledge
developed over the past five years, including pilot plant trials, process
simulations, and research and industry experience. Among the items included in
the DCSP will be a detailed description of the battery limits process, offsites
and utilities, process flow diagrams, piping and instrumentation diagrams, mass
balances, equipment design notes, information management and process control
systems, site description and layout, and Company standards.
Probex is in negotiations with Bechtel, a global engineer/constructor firm, for
a turnkey engineering/procurement/construction ("EPC") alliance and anticipates
obtaining agreement with Bechtel for its engineering work at some point in the
future. This EPC agreement will include contracts encompassing industry-standard
design, material, and workmanship warranties as well as appropriate and
necessary credit-support commitments.
We anticipate operating this initial plant facility under operations and
maintenance ("O&M") contracts. The exact details and responsibilities of the O&M
contractor have yet to be determined. However, Probex envisions that the O&M
contractor would be responsible for the operation and maintenance for the entire
facility, including battery limit plant operations, material transfers, and
storage and maintenance (scheduled and unscheduled). Probex will secure
feedstock, market the products, and oversee facility operations and finances.
The Company is in negotiations with various debt and equity partners to provide
the financing for the initial facility and that financing will be used to fund
capital costs, working capital, construction period interest, and financing
expenses and fees. With regard to technical risk coverage for the senior project
lender, we intend to match any SPI Policy which may be issued by the Hartford
Steam Boiler Inspection & Insurance Company with cost and schedule guarantees
from the selected EPC firm, which is presently expected to be Bechtel. Finally,
Probex is in the process of securing the product off-take letters of intent and
contracts necessary to provide the revenue streams to support projected debt
service requirements.
With respect to project equity, HSB Engineering Finance Corp. has expressed an
interest in providing up to $10 million of project equity and/or investments
subordinated to senior debt, once senior debt financing is committed, if this
type of investment is required. The debt and equity capital requirements for the
initial plant are substantial, and there can be no assurances that Probex
ultimately will obtain the capital required to construct its plant as projected.
Current Quarter Company Updates
On May 1, 2000, the Company acquired substantially all the assets of PPI/ITC
through its newly created wholly owned subsidiary, Probex Fluids Recovery, Inc.
As result of this acquisition, the Company has emerged from its developmental
stage to the first phase of becoming an operating company. Phase one of the
Company's operating plan is to acquire and operate waste fluid collection
companies. Phase two of the Company's operating plan is to build and operate the
Company's waste oil re-refining plants. Actual ground breaking of the Company's
first plant, in Wellsville, Ohio, is anticipated for the first quarter of 2001.
Waste oil currently collected by the Company's waste fluids collection operation
is being sold to third party waste oil markets. Once the Company's waste oil
re-refining plants are operational, the waste oil collected by the Company's
waste fluids collection companies will ensure sufficient availability of waste
oil feedstock.
On April 24, 2000, the Company entered into a non-binding Letter of Intent to
purchase another undisclosed waste oil collection company and is close to
announcing a definitive purchase agreement.
On June 6, 2000, HSB Engineering Finance Corporation, a wholly owned subsidiary
of HSB Group, Inc. (NYSE: HSB), exercised a loan conversion of the then
outstanding loan balance of $750,000, resulting in the Company issuing 2,796,114
shares of Common Stock. In addition, the Company paid accrued interest of
$188,625.
Financial Analysis of the Three and Nine Months Ended June 30, 2000 and 1999
Operating Revenue. Total operating revenue for the three months ended June 30,
2000 was $1,033,008 as compared to none for the three months ended June 30,
1999. As discussed previously, the May 1, 2000 purchase of PPI/ITC directly
contributed to waste oil collections related revenue recognized. Total operating
revenue for the nine months ended June 30, 2000 was $1,033,008 as compared to
none for the nine months ended June 30, 1999. Again, the increase in operating
revenue is directly attributable to the purchase of PPI/ITC.
Operating Expense. Total operating expense for the three months ended June 30,
2000 was $711,772 as compared to none for the three months ended June 30, 1999.
As discussed previously, the May 1, 2000 purchase of PPI/ITC directly
contributed to waste oil collections related operating expense recognized. Total
operating expense for the nine months ended June 30, 2000 was $711,772 as
compared to none for the nine months ended June 30, 1999. Again, the increase in
operating expense is directly attributable to the operations of newly acquired
PPI/ITC.
Research and Development. Total research and development expense for the three
months ended June 30, 2000 was $543,798 as compared to $237,046 for the three
months ended June 30, 1999. The increase in research and development expense is
attributable to additional resources, including employees, consultants, and
testing, required to advance the commercialization of the Company's proprietary
re-refining technology. Total research and development expense for the nine
months ended June 30, 2000 was $1,161,941 as compared to $827,554 for the nine
months ended June 30, 1999. Again, the increase in research and development
expense is attributable to additional resources, including employees,
consultants, and testing, required to advance the commercialization of the
Company's proprietary re-refining technology.
Selling, General and Administration. Total selling, general and administration
expense for the three months ended June 30, 2000 was $930,513 as compared to
$182,915 for the three months ended June 30, 1999. The increase in selling,
general and administration expense is attributable to additional resources,
including employees, consultants, legal counsel, and other infrastructure
changes, required to advance the commercialization of the Company's proprietary
re-refining technology. Total selling, general and administration expense for
the nine months ended June 30, 2000 was $2,063,705 as compared to $513,906 for
the nine months ended June 30, 1999. Again, the increase in selling, general and
administration expense is attributable to additional resources, including
employees, consultants, legal counsel, and other infra-structure changes,
required to advance the commercialization of the Company's proprietary
re-refining technology.
Depreciation and Amortization. Total depreciation and amortization expense for
the three months ended June 30, 2000 was $126,180 as compared to $96,264 for the
three months ended June 30, 1999. The primary increase in depreciation and
amortization expense is attributable to fixed assets and goodwill related to the
May 1, 2000 purchase of PPI/ITC. Total depreciation and amortization expense for
the nine months ended June 30, 2000 was $235,354 as compared to $111,404 for the
nine months ended June 30, 1999. Depreciation and amortization was adjusted
favorably $230,131 for the nine months ended June 30, 1999 due to a new company
accounting policy of expensing fixed asset purchases less than $1,000 each. In
addition, the increase in depreciation and amortization expense is attributable
to fixed assets and goodwill related to the May 1, 2000 purchase of PPI/ITC.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
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None
Item 2. Changes in Securities and Use of Proceeds
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During the three months ended June 30, 2000, we issued the securities listed
below:
In May, the Company issued 68,500 shares of common stock to non-officer
employees in lieu of compensation for overtime services provided to the Company
for the six months ended December 31, 1999, at an average value of $1.00 per
share.
In May, the Company issued 640,000 and 160,000 shares of common stock to William
and Phyllis Snedegar, and Keith Mills, respectively, in connection with the
purchase of substantially all of the assets of Petroleum Products, Inc. and
Intercoastal Trading Company, Inc. by Probex Fluids Recovery, Inc., a Delaware
corporation and wholly owned subsidiary of the Company. The common stock issued
by the Company to William and Phyllis Snedegar, and Keith Mills is restricted
and will vest pursuant to a vesting schedule which provides for 25% vesting at
the closing and the remaining shares vesting ratably over the next three (3)
years. Such shares were valued at $1.875 per share.
In May, the Company declared and paid a dividend on its Series A 10% Cumulative
Convertible Preferred Stock (the "Series A Preferred Stock"), in the form of
shares of common stock of the Company. Pursuant to the terms of the Series A
Preferred Stock, dividends are payable, at the Company's option, in shares of
common stock at a deemed value of $1.50 per share. The dividend payment on the
Series A Preferred Stock was $196,835, resulting in the issuance of an aggregate
of 131,223 shares of common stock.
In May, the Company issued warrants to purchase 500,000 shares of common stock
at an exercise price of $3.12 per share to Stonegate Securities, Inc., as
compensation under that certain Financial Advisory Agreement entered into
between the Company and Stonegate Securities, Inc. Pursuant to such warrant,
200,000 shares vested immediately upon issuance of the warrant and the remainder
of the shares shall vest in the sole discretion of the Company's management
prior to December 15, 2000.
In June, the Company issued to HSB Engineering Finance Corporation 2,796,114
shares of common stock pursuant to the exercise of a conversion right contained
in the Convertible Secured Promissory Note, dated as of June 30, 1998, by and
between the Company and HSB Engineering Finance Corporation. Under the
Convertible Secured Promissory Note, HSB Engineering Finance Corporation loaned
an aggregate of $750,000 to the Company.
In June, the Company issued 5,000 and 20,000 shares of common stock to Grove
Capital Corp. and Greg Grove, respectively, for consulting services rendered to
the Company at a value of $3.00 per share.
In June, the Company issued warrants to purchase 100,000 shares of common stock
to Project Development Associates, LLC, pursuant a Project Development Advisory
Agreement, as amended, effective as December 31, 1998, by and between Project
Development Associates, LLC, and the Company. Such warrants have an exercise
price of $0.50 per share, a term of five years, and vest upon the closing of the
financing for the Company's initial plant.
With respect to the issuance of common stock as a dividend to the holders Series
A Preferred Stock, we relied on Section 2(a)(3) of the Securities Act of 1933,
as amended, as a basis for an exemption from registration of the securities
issued, as the dividend was not an event of sale. With respect to each of the
other foregoing transactions, we relied on Section 4(2) of the Securities Act of
1933, as amended, as a basis for an exemption from registration of the
securities issued, as none of the transactions involved any public offering.
Item 3. Defaults Upon Senior Securities
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None
Item 4. Submission of Matters to a Vote of Security Holders
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None
Item 5. Other Information
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For information relating to certain other transactions by the Company through
June 30, 2000, see "Management's Discussion and Analysis of Financial Conditions
and Results of Operations" in Item 2 of Part I of this Quarterly Report on Form
10-QSB. Such information is incorporated herein by reference.
Item 6. Exhibits
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a) EXHIBITS
Exhibit
Number Description
10. 21 Financial Advisory Agreement between Stonegate Securities, Inc. and
the Company, dated as of May 23, 2000.
27.1 Financial Data Schedule
b) REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K on May 16, 2000. This filing
reported under Item 2 that on May 1, 2000, the Company, through its newly
formed, wholly owned subsidiary, Probex Fluids Recovery, Inc., acquired
substantially all of the assets of Petroleum Products, Inc. and Intercoastal
Trading Company, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this quarterly Report to be signed on its behalf by
the undersigned thereunto duly authorized.
PROBEX CORP.
(Registrant)
Date: August 14, 2000 By: /s/ Charles M. Rampacek
--------------------------
Charles M. Rampacek,
President and
Chief Executive Officer
Date: August 14, 2000 By: /s/ Bruce A. Hall
--------------------------
Bruce A. Hall, Senior
Vice President and Chief
Financial Officer
Date: August 14, 2000 By: /s/ John N. Brobjorg
--------------------------
John N. Brobjorg,
Corporate Controller and
Chief Accounting Officer
