SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934: For the Quarterly Period Ended March 31, 1997
Commission File Number 1-13012
H.E.R.C. PRODUCTS INCORPORATED
State of Incorporation: Delaware IRS Employer Identification Number: 86-0570800
2202 W Lone Cactus Drive #15
Phoenix, Arizona 85027
(602) 492-0336
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
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
--------------
Class May 7, 1997
----- -----------
Common Stock, $.01 par value 8,080,579
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
<TABLE>
<CAPTION>
Index To Consolidated Financial Statements
PART I. FINANCIAL INFORMATION Page No.
<S> <C>
Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Operations
Three Months Ended March 31, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1997 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 11
</TABLE>
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 764,749 $ 1,369,843
Trade accounts receivable, net of allowance for
doubtful accounts of $28,621 and $38,621 respectively 441,445 417,534
Inventories (Note 2) 683,078 616,813
Other receivables 31,966 47,042
Prepaid expenses 109,607 87,280
------------ ------------
Total Current Assets 2,030,845 2,538,512
------------ ------------
Property and Equipment
Property and equipment 656,085 635,696
Less accumulated depreciation 163,575 139,342
------------ ------------
Net Property and Equipment 492,510 496,354
------------ ------------
Other Assets
Patents, net of accumulated amortization
of $71,556 and $65,205 respectively 190,934 197,285
Patents pending 199,877 138,695
Refundable deposits 29,214 18,337
Other 8,192 41,699
Goodwill, net of accumulated amortization
of $169,242 and $146,168 respectively 1,645,958 1,691,705
------------ ------------
Total Other Assets 2,074,175 2,087,721
------------ ------------
$ 4,597,530 $ 5,122,587
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 394,841 $ 347,858
Accrued wages 41,411 44,047
Current portion of capitalized leases 6,023 --
Other accrued expenses 485,620 220,394
------------ ------------
Total Current Liabilities 927,895 612,299
------------ ------------
Long-Term Liabilities
Capitalized leases, net of current portion 18,466 --
------------ ------------
Total Liabilities 946,361 612,299
------------ ------------
Stockholders' Equity
Preferred Stock, $10.00 stated value; authorized 1,000,000 shares;
issued and outstanding 68,620 and 170,000 shares respectively 597,398 1,480,000
Common Stock, $0.01 par value; authorized 40,000,000 shares;
issued and outstanding 7,298,820 and 6,356,478 shares respectively 72,988 63,565
Additional paid-in capital 12,140,664 11,223,593
Accumulated deficit (9,159,881) (8,256,870)
------------ ------------
Total Stockholders' Equity 3,651,169 4,510,288
------------ ------------
$ 4,597,530 $ 5,122,587
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
Sales $ 1,094,067 $ 473,549
Cost of Sales 707,690 310,197
----------- -----------
Gross Profit 386,377 163,352
Selling Expenses 420,828 200,725
General and Administrative Expenses 830,870 401,478
----------- -----------
Operating Loss (865,321) (438,851)
----------- -----------
Other Income (Expense)
Interest expense (3,005) (3,564)
Miscellaneous 17,450 17,893
----------- -----------
Total Other Income 14,445 14,329
----------- -----------
Loss Before Taxes on Income (850,876) (424,522)
Taxes on Income -- --
----------- -----------
Net Loss (850,876) (424,522)
Dividend on Preferred Stock Payable in Common Stock Upon Conversion 52,135 --
----------- -----------
Net Loss Allocable to Common Stockholders $ (903,011) $ (424,522)
=========== ===========
Net Loss Per Common Share $ (0.14) $ (0.14)
=========== ===========
Weighted Average Common Shares Outstanding 6,574,000 2,928,441
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1997 170,000 $1,480,000 6,356,478 $63,565 $11,223,593 $(8,256,870) $4,510,288
Net loss -- -- -- -- -- (850,876) (850,876)
Conversion of Preferred
Stock to Common Stock (101,380) (882,602) 932,342 9,323 873,279 -- --
Exercise of stock options -- -- 10,000 100 19,275 -- 19,375
Preferred Stock offering costs -- -- -- -- (27,618) -- (27,618)
Dividend on Preferred Stock payable
in Common Stock upon conversion -- -- -- -- 52,135 (52,135) --
------ ---------- --------- ------- ----------- ----------- ----------
Balance,
March 31, 1997 68,620 $ 597,398 7,298,820 $72,988 $12,140,664 $(9,159,881) $3,651,169
====== ========== ========= ======= =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss $ (850,876) $ (424,522)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 54,278 42,690
(Gain) loss on sale of equipment -- 17,446
(Increase) decrease in assets
Trade accounts receivable (41,607) (75,324)
Inventories (66,265) (47,778)
Other receivables 15,076 12,151
Prepaid expenses (22,328) (4,565)
Other assets 22,630 74,978
Increase (decrease) in liabilities
Accounts payable 32,510 133,003
Accrued expenses 302,960 (7,701)
Other liabilities 21,458 --
----------- -----------
Total adjustments 318,712 144,900
----------- -----------
Net cash used in operating activities (532,164) (279,622)
----------- -----------
Cash Flows From Investing Activities
Capital expenditures (2,844) (8,956)
Expenditures related to patents and patents pending (61,182) (26,908)
----------- -----------
Net cash used in investing activities (64,026) (35,864)
----------- -----------
Cash Flows From Financing Activities
Proceeds from exercise of stock options 19,375 --
Proceeds from issuance of notes payable
and long-term debt -- 275,000
Deferred private offering costs -- (101,482)
Private offering costs (27,618) --
Principal payments under capital lease obligation (661) (21,416)
----------- -----------
Net cash provided by financing activities (8,904) 152,102
----------- -----------
Net decrease in cash and cash equivalents (605,094) (163,384)
Cash and cash equivalents at beginning of period 1,369,843 331,601
----------- -----------
Cash and cash equivalents at end of period $ 764,749 $ 168,217
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest $ 3,005 $ 3,564
During 1997, a capital lease obligation of $17,545 was incurred when the Company entered into a lease for new equipment.
During 1997, 932,342 shares of Common Stock were issued upon the conversion of 101,380 shares of Preferred Stock.
During 1997, certain adjustments were made to assets and liabilities acquired in the purchase of the 50% interest of
H.E.R.C. Consumer Products Company and accordingly, goodwill was reduced by $22,673.
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Basis of Presentation
The unaudited consolidated financial statements are presented in accordance with
the requirements of Form 10-QSB and consequently do not include all of the
disclosures normally made in an annual Form 10-KSB filing. Accordingly, the
consolidated financial statements of H.E.R.C. Products Incorporated ("Company")
included herein should be reviewed in conjunction with the consolidated
financial statements and the accompanying footnotes included within the
Company's Form 10-KSB for the year ended December 31, 1996.
The consolidated financial statements have been prepared in accordance with the
Company's customary accounting practices and have not been audited. In the
opinion of management, the consolidated financial statements reflect all
adjustments necessary to report fairly the Company's financial position and
results of operations for the interim period. All such adjustments are normal
and recurring in nature. The interim consolidated results of operations are not
necessarily indicative of results to be expected for the year ending December
31, 1997.
NOTE 2 - Inventories
Inventories are summarized as follows:
March 31, 1997 December 31, 1996
-------------- -----------------
Raw Materials $ 16,258 $ 9,126
Work in Progress 5,753 5,633
Finished Goods 661,067 602,054
-------- --------
Total $683,078 $616,813
======== ========
NOTE 3 - Acquisition
On July 1, 1996, the Company acquired the 50% interest of H.E.R.C. Consumer
Products Company ("LLC") owned by Conair Corporation. This transaction was
accounted for by the purchase method. The Company had accounted for its 50%
investment in the LLC by the equity method, and accordingly, sales of the LLC
prior to July 1, 1996, were not reported as sales of the Company.
Pro forma results for the three months ended March 31, 1996 are unaudited and
were prepared as if the aforementioned acquisition had occurred at the beginning
of the period presented:
Three Months Ended March 31, 1996
---------------------------------
Net sales $873,549
Net loss (410,522)
Net loss per Common Share $ (0.14)
7
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - Convertible Preferred Stock
In December 1996 the Company completed a private equity offering of 170,000
shares of Class A Preferred Stock ("Preferred Stock") for $10 per share and
received net proceeds of $1,480,000. The Preferred Stock has a par and stated
value of $.01 and $10, respectively.
Holders of the Preferred Stock are entitled to receive dividends of 10% of the
stated value per annum from the date of issuance through the date of conversion,
payable solely in shares of the Company's Common Stock. The preferred
stockholders had the right to convert each share of Preferred Stock and the
accrued amount of dividends thereon into shares of Common Stock determined by
dividing the aggregate of the stated value of the Preferred Stock plus accrued
dividends, by 75% of the five day average closing bid price of a share of Common
Stock immediately prior to conversion.
During the quarter ended March 31, 1997, 101,380 shares of Preferred Stock were
converted into 932,342 shares of Common Stock, which amount includes shares
issued for the dividend on the Preferred Shares converted. As of May 12, 1997,
all 170,000 Preferred Shares had been converted into 1,714,101 shares of Common
Stock, including shares issued for the dividend.
8
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
- --------------------------
When used in this Form 10-QSB and in future filings by the Company with the
Securities and Exchange Commission ("SEC"), in the Company's press releases and
in oral statements made with the approval of an authorized executive officer of
the Company, the words or phrases "are expected", "the Company anticipates",
"will continue", "estimated", "will enhance" or similar expressions (including
confirmations by an authorized executive officer of the Company of any such
expressions made by a third party with respect to the Company) are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Readers are cautioned not to place
undue reliance on any such forward-looking statements, each of which speak only
as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those currently anticipated or projected. Such risks
include, but are not limited to, adequate cash flow and financing for
implementation of its business plan, continued growth in its various customer
segments and effective marketing of its products directly by the Company and
through marketing partners. The Company has no obligation to publicly release
the result of any revisions which may be made to any forward-looking statements
to reflect anticipated or unanticipated events or circumstances occurring after
the date of such statements.
Results of Operations
- ---------------------
Sales of $1,094,000 during the first quarter of 1997 are 131% ahead of 1996
first quarter sales of $474,000, primarily as a result of the consolidation of
H.E.R.C. Consumer Products which added $625,000 to 1997 revenues. Industrial
product revenue increased by $150,000 in 1997, but agricultural sales declined
by a similar amount. On a pro forma basis, 1997 revenues are a company record
for a quarter (see Note 3 to accompanying financial statements).
Growth of Consumer Products sales by $225,000 over the first quarter of 1996,
when sales were $400,000, is a function of the Company's ongoing development of
its base of existing and new customers. Reduced agricultural revenues in 1997
are attributable to lower sales of PYRELLIN as a result of the loss in
California of organic certification of the product for use by organic farmers.
The increase in Industrial Product revenues to $180,000 reflects the continuing
development of the market for the Company's Marine-Ship Board Pipe Line Chemical
Cleaning. Based on current backlog and ongoing negotiations with existing marine
customers, the Company anticipates that marine business will continue to grow
and provide substantially increasing revenues in 1997 and 1998.
The Company also anticipates that the recent alliance with Calgon Corporation
("Calgon") will enhance sales to the water distribution and water well
rehabilitation markets through:
(a) New distribution outlet for the well product through Calgon
dealers.
(b) New water distribution product which will combine the Company's
chemical cleaning of water pipe with Calgon's passivating
chemistry to prevent corrosion.
Consolidated gross margins were 35.3% and 34.5% in 1997 and 1996 respectively.
Lower raw material costs for agricultural products and elimination of certain
start up costs within industrial products resulted in improved margins of 52% in
both of those segments in 1997. However, Consumer Products margins were
depressed at 23% in 1997 because of certain product allowances and discounts in
January and February 1997, which are not expected to recur.
9
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Although gross profit increased from $163,000 in 1996 to $386,000 in 1997, net
loss was $851,000 in 1997 compared to $425,000 in 1996 because of an increase of
$650,000 in aggregate selling, general and administrative expenses.
Consolidation of Consumer Products accounts for $190,000 of the increase while
the balance of $460,000 is attributable to settlement of an employment contract
and to additional personnel and related costs to support revenue growth and the
Company's expanding operations and services.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents were $765,000 and $1,370,000 at March 31, 1997 and
December 31, 1996 respectively while working capital was $1,103,000 and
$1,926,000 at those respective dates. The decrease in working capital is a
function of the net loss; the impact of the net loss on cash and cash
equivalents was softened by an increase in accrued expenses.
The conversion during 1997 of all preferred stock outstanding at December 31,
1996 into common stock had no impact on cash and cash equivalents or working
capital.
Through the first quarter of 1997, the Company did not generate cash flow
necessary to support its ongoing business. However, management believes, but
cannot assure, that financial results for the balance of 1997 will provide
sufficient positive cash flow to fund ongoing operations and capital
expenditures. Should management determine that the current operating plan will
not provide positive cash flow, the Company may take actions, particularly in
the marketing and corporate areas, until revenues and operating margins reach a
level to produce overall profitable results.
In 1997 the Company arranged a $150,000 credit line with a bank at the bank's
prime interest rate. No amount has been drawn against the line which expires
March 31, 1998. The Company is currently discussing additional financing,
primarily for capital expenditures, with other potential lenders, but no
arrangements have been concluded. To the extent that any future financing
involves the sale of the Company's equity securities, the interest of the
Company's then stockholders could be substantially diluted.
10
<PAGE>
PART II: OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
The following relates to all securities of the Company sold within the
first quarter of 1997 which were not registered under the Securities
Act of 1933.
<TABLE>
<CAPTION>
Title of Security Consideration Exemption from Terms of
Date of Sale & Number Sold received registration claimed exercise
------------ ----------------- ------------- -------------------- --------
<S> <C> <C> <C> <C>
2/6/97-3/31/97 101,380 shares of Conversion of Section See Note 4
Preferred Stock Preferred Stock 4(2) to consolidated
converted into financial
932,342 shares of statements
Common Stock
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: None
Exhibits
Regulation S-B
Exhibit No. Exhibit
-------------- -------
(27) Financial Data Schedule
11
<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.
H.E.R.C. PRODUCTS INCORPORATED
(Registrant)
Date: May 15, 1997 By /s/ S. Steven Carl
--------------------------
S. Steven Carl
Chief Executive Officer
By /s/ John P. Johnson
--------------------------
John P. Johnson
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 764,749
<SECURITIES> 0
<RECEIVABLES> 470,066
<ALLOWANCES> 28,621
<INVENTORY> 683,078
<CURRENT-ASSETS> 2,030,845
<PP&E> 656,085
<DEPRECIATION> 163,575
<TOTAL-ASSETS> 4,597,530
<CURRENT-LIABILITIES> 777,478
<BONDS> 0
0
597,398
<COMMON> 72,988
<OTHER-SE> 3,131,200
<TOTAL-LIABILITY-AND-EQUITY> 4,597,530
<SALES> 1,094,067
<TOTAL-REVENUES> 1,094,067
<CGS> 707,690
<TOTAL-COSTS> 1,101,281
<OTHER-EXPENSES> (17,450)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,005
<INCOME-PRETAX> (700,459)
<INCOME-TAX> 0
<INCOME-CONTINUING> (700,459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (700,459)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
