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 June 30, 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 August 8, 1997
----- --------------
Common Stock, $.01 par value 8,230,588
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Index To Consolidated Financial Statements
PART I. FINANCIAL INFORMATION Page No.
Consolidated Financial Statements:
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1997 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 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
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 299,110 $ 1,369,843
Trade accounts receivable, net of allowance for
doubtful accounts of $27,012 and $38,621 respectively 681,282 417,534
Inventories (Note 2) 379,499 616,813
Other receivables 43,984 47,042
Prepaid expenses 157,080 87,280
------------ ------------
Total Current Assets 1,560,955 2,538,512
------------ ------------
Property and Equipment
Property and equipment 1,020,465 635,696
Less accumulated depreciation 166,180 139,342
------------ ------------
Net Property and Equipment 854,285 496,354
------------ ------------
Other Assets
Patents, net of accumulated amortization
of $79,079 and $65,205 respectively 213,325 197,285
Patents pending 198,133 138,695
Refundable deposits 41,062 18,337
Other 7,573 41,699
Goodwill, net of accumulated amortization
of $192,316 and $146,168 respectively 1,622,884 1,691,705
------------ ------------
Total Other Assets 2,082,977 2,087,721
------------ ------------
$ 4,498,217 $ 5,122,587
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 740,291 $ 347,858
Accrued wages 65,289 44,047
Notes payable and current portion of capitalized leases 145,411 --
Other accrued expenses 288,935 220,394
------------ ------------
Total Current Liabilities 1,239,926 612,299
------------ ------------
Long-Term Liabilities
Capitalized leases, net of current portion 81,787 --
------------ ------------
Total Liabilities 1,321,713 612,299
------------ ------------
Stockholders' Equity
Preferred Stock, $10.00 stated value ; authorized 1,000,000 shares;
issued and outstanding zero and 170,000 shares respectively -- 1,480,000
Common Stock, $0.01 par value; authorized 40,000,000 shares;
issued and outstanding 8,230,588 and 6,356,487 shares respectively 82,306 63,565
Additional paid-in capital 12,876,926 11,223,593
Accumulated deficit (9,782,728) (8,256,870)
------------ ------------
Total Stockholders' Equity 3,176,504 4,510,288
------------ ------------
$ 4,498,217 $ 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 June 30, Six Months Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 1,465,818 $ 497,565 $ 2,559,885 $ 971,114
Cost of Sales 1,087,895 236,929 1,795,585 547,126
----------- ----------- ----------- -----------
Gross Profit 377,923 260,636 764,300 423,988
Selling Expenses 370,532 266,184 792,451 466,909
General and Administrative Expenses 622,341 385,859 1,451,211 787,288
----------- ----------- ----------- -----------
Operating Loss (614,950) (391,407) (1,479,362) (830,209)
----------- ----------- ----------- -----------
Other Income (Expense)
Interest expense (4,418) (6,678) (7,423) (14,175)
Miscellaneous 7,227 18,949 23,769 40,726
----------- ----------- ----------- -----------
Total Other Income 2,809 12,271 16,346 26,551
----------- ----------- ----------- -----------
Loss Before Taxes on Income (612,141) (379,136) (1,463,016) (803,658)
Taxes on Income -- -- -- --
----------- ----------- ----------- -----------
Net Loss (612,141) (379,136) (1,463,016) (803,658)
Dividend on Preferred Stock Payable
in Common Stock upon conversion 10,707 -- 62,842 --
----------- ----------- ----------- -----------
Net Loss Allocable to Common Stockholders $ (622,848) $ (379,136) $(1,525,858) $ (803,658)
=========== =========== =========== ===========
Net Loss Per Common Share $ (0.08) $ (0.06) $ (0.21) $ (0.18)
=========== =========== =========== ===========
Weighted Average Common Shares Outstanding 8,037,399 6,107,130 7,309,746 4,517,786
=========== =========== =========== ===========
</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 6,356,487 $ 63,565 $ 11,223,593 $ (8,256,870) $ 4,510,288
Net loss -- -- -- -- -- (1,463,016) (1,463,016)
Conversion of Preferred
Stock to Common Stock (Note 4) (170,000) (1,480,000) 1,714,101 17,141 1,462,859 -- --
Exercise of stock options -- -- 10,000 100 19,275 -- 19,375
Exercise of warrant (Note 5) -- -- 150,000 1,500 138,750 -- 140,250
Preferred Stock offering costs -- -- -- -- (30,393) -- (30,393)
Dividend on Preferred Stock payable in
Common Stock upon conversion (Note 4) -- -- -- -- 62,842 (62,842) --
------- ----------- --------- --------- ------------ ------------ ------------
Balance,
June 30, 1997 -- $ -- 8,230,588 $ 82,306 $ 12,876,926 $ (9,782,728) $ 3,176,504
======= =========== ========= ========= ============ ============ ============
</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>
Six Months Ended June 30,
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss $(1,463,016) $ (803,658)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 138,000 84,268
Loss on sale or disposal of equipment 3,255 1,522
(Increase) decrease in assets
Trade accounts receivable (281,444) (136,137)
Inventories 25,629 (165,461)
Other receivables 3,058 (55,016)
Prepaid expenses (69,800) 238
Other assets 11,401 66,496
Increase (decrease) in liabilities
Accounts payable 392,433 (114,243)
Accrued expenses 130,153 (31,590)
Other liabilities 226,798 --
----------- -----------
Total adjustments 579,483 (349,923)
----------- -----------
Net cash used in operating activities (883,533) (1,153,581)
----------- -----------
Cash Flows From Investing Activities
Capital expenditures (212,275) (76,701)
Cash received from the sale of equipment -- 21,000
Expenditures related to patents and patents pending (89,352) (38,117)
----------- -----------
Net cash used in investing activities (301,627) (93,818)
----------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of Common Stock -- 1,981,670
Proceeds from exercise of stock options 19,375 --
Proceeds from exercise of warrant 140,250 --
Proceeds from issuance of notes payable
and long-term debt -- 361,968
Private offering costs (30,393) --
Principal payments under long-term debt
and capital lease obligations (14,805) (21,920)
----------- -----------
Net cash provided by financing activities 114,427 2,321,718
----------- -----------
Net decrease in cash and cash equivalents (1,070,733) 1,074,319
Cash and cash equivalents at beginning of period 1,369,843 331,601
----------- -----------
Cash and cash equivalents at end of period $ 299,110 $ 1,405,920
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest $ 7,423 $ 8,676
During 1996, notes payable to shareholder of $325,000 were repaid through the issuance of common stock.
During 1996, pledged certificates of deposit of $75,628 were applied in partial satisfaction of certain long term debt obligations.
During 1997, capital lease obligations of $121,910 were incurred when the Company entered into certain leases for new equipment.
During 1997, 1,714,101 shares of Common Stock were issued upon the conversion of 170,000 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.
During 1997, inventory with a value of $211,685 was reclassified to property and equipment.
</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
During 1997, certain finished goods inventory used to service customers for the
Company's industrial products was reclassified to property and equipment. Such
equipment was carried at $212,000 and is now being depreciated.
Inventories are summarized as follows:
June 30, 1997 December 31, 1996
------------- -----------------
Raw materials $ 11,785 $ 9,126
Work in progress 3,261 5,633
Finished goods 364,453 602,054
-------- --------
Total $ 379,499 $ 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 six months ended June 30, 1996 are unaudited and were
prepared as if the aforementioned acquisition had occurred at the beginning of
the period presented:
Six Months Ended June 30, 1996
------------------------------
Net sales $ 1,732,360
Net loss (713,170)
Net loss per Common Share (0.16)
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 had a par and stated
value of $.01 and $10, respectively.
Holders of the Preferred Stock were 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.
All Preferred Shares were converted into 1,714,101 shares of Common Stock,
including shares issued for the dividend, during the first and second quarters
of 1997.
NOTE 5 - Exercise of Warrant
In May 1997, the placement agent for the 1996 private offering of Common Stock
and four individuals partially exercised a unit option and acquired 150,000
units consisting of one share of Common Stock and one warrant to acquire one
share of Common Stock at $2.00 per share. The unit option was exercised at $.935
per unit. In connection therewith, the Company granted warrants to acquire an
aggregate of 150,000 shares of Common Stock at $1.3125 per share to the persons
exercising the unit option. Such warrants are currently exercisable and expire
on June 18, 2002.
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 any anticipated events or circumstances occurring after the date of
such statements.
Results of Operations
- ---------------------
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
- -----------------------------------------------------------------------------
Sales of $1,466,000 during the second quarter of 1997 are 194% ahead of
1996 second quarter sales of $498,000. The increase reflects consolidation of
HERC Consumer Products which added $381,000 to 1997 revenues (see Note 3 to
accompanying financial statements) and substantial growth in Industrial Products
and Agricultural sales. Industrial sales were $363,000 and $47,000 in 1997 and
1996 respectively while Agricultural revenues increased to $722,000 from
$451,000. The increase in Industrial Products revenues is attributable to the
continuing evolution of the Company's pipe rehabilitation services through both
chemical cleaning and introduction of mechanical cleaning combined with epoxy
lining. Also expansion of the Company's Marine Ship Board Pipe Line Chemical
Cleaning has generated increasing revenues in 1997 and should continue to do so
for the remainder of the year and into 1998.
Increases in 1997 sales of over $100,000 for both PYRELLIN and DENY
account for the growth of Agricultural revenues.
Consolidated gross margins were 26% and 52% in 1997 and 1996
respectively. Negative margin for Industrial Products in 1997 resulted from loss
provisions recorded in June for costs required to complete two municipal
cleaning projects on which the Company encountered delays caused by weather and
other unanticipated interruptions. Also the Company incurred training costs for
certain members of its field staff. Consumer Products margin of 35% is
indicative of the highly competitive nature of the marketplace. Agricultural
margins are down from 49% in 1996 to 45% in 1997 because of slightly higher raw
material costs.
Although gross profit increased from $261,000 in 1996 to $378,000 in
1997, net loss was $612,000 in 1997 compared to $379,000 in 1996 because of an
increase of $341,000 in aggregate selling, general and administrative expenses.
Consolidation of Consumer Products accounts for $122,000 of the increase while
the balance is attributable to additional selling and other personnel and
support costs, primarily at the Corporate and Industrial Products levels.
9
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
- -------------------------------------------------------------------------
Sales of $2,560,000 during the first half of 1997 are 164% ahead of
1996 sales of $971,000. Industrial Products sales were $542,000 and $81,000 in
1997 and 1996 respectively while an increase of $83,000 in DENY sales
contributed to growth in agricultural revenues of $120,000. Consolidation of
Consumer Products also accounted for $1,008,000 of the increase in 1997
revenues.
Consolidated gross margins were 30% and 44% in 1997 and 1996
respectively. Industrial Products margin was 2% because of the loss provisions
discussed above. Consumer Products margin was 27% as a result of certain product
allowances and discounts in January and February 1997, which are not expected to
recur. Agricultural margin of 47% in 1997 is in line with the second quarter of
1997 and 1996 first half.
Although gross profit increased from $424,000 in 1996 to $764,000 in
1997, net loss was $1,463,000 in 1997 compared to $804,000 in 1996 because of an
increase of $989,000 in aggregate selling general and administrative expenses.
Consolidation of Consumer Products accounts for $312,000 of the increase while
the balance is attributable to settlement of an employment contract during the
first quarter of 1997 and to additional selling and other personnel and support
costs, primarily at the Corporate and Industrial Products levels. (See comments
on cost reductions in Liquidity and Capital Resources section below).
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents were $299,000 and $1,370,000 at June 30, 1997
and December 31, 1996 respectively while working capital was $321,000 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 accounts payable and 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 half of 1997, the Company did not generate cash flow
necessary to support its ongoing business. The Company has instituted a cost
containment program for its selling, general and administrative expenses and
field expenses on its Industrial Products contracts, but will require additional
working capital during the third quarter to fund continuing operations. The
Company is discussing financing with potential lenders and is also evaluating
the sale of certain assets. No assurance can be given that the Company will be
able to raise any additional capital from the lenders with which it is in
discussions or any other lenders or any purchasers will be found for the assets
for which it is considering sale. If the Company is unable to obtain the
required funds during the third quarter, it will have to curtail some of its
operations.
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. No assurance can be given that the Company will
be able to raise additional equity capital to fund its operations.
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 second
quarter of 1997 which were not registered under the Securities Act of 1933.
Title of Security Consideration Exemption from Terms of
Date of Sale & Number Sold received registration claimed exercise
- ------------ ------------- -------- -------------------- --------
6/18/97 Warrants to purchase None Section See Note 5
150,000 shares of 4(2) to consolidated
Common Stock financial
statements
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: August 14, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 299,110
<SECURITIES> 0
<RECEIVABLES> 708,294
<ALLOWANCES> 27,012
<INVENTORY> 379,499
<CURRENT-ASSETS> 1,560,955
<PP&E> 1,020,465
<DEPRECIATION> 166,180
<TOTAL-ASSETS> 4,498,217
<CURRENT-LIABILITIES> 1,239,926
<BONDS> 0
0
0
<COMMON> 82,306
<OTHER-SE> 3,094,198
<TOTAL-LIABILITY-AND-EQUITY> 4,498,217
<SALES> 2,559,885
<TOTAL-REVENUES> 2,559,885
<CGS> 1,795,585
<TOTAL-COSTS> 2,243,662
<OTHER-EXPENSES> (23,769)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,423
<INCOME-PRETAX> (1,463,016)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,463,016)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,463,016)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
