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, 1998.
TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
Commission File No. 0-24490
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AQUAGENIX, INC.
---------------
(Exact name of small business issuer as specified in its charter)
Delaware 65-0419263
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6500 Northwest 15th Avenue, Fort Lauderdale, Florida 33309
----------------------------------------------------------
(Address of principal executive offices)
(954) 975-7771
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 outstanding of the issuer's Common Stock, $.01 Par Value,
as of October 31, 1998 was 5,326,058.
Transitional Small Business Disclosure Format: Yes X No
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AQUAGENIX, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1: Financial Statements
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 (unaudited) 3
Consolidated Statements of Operations for the three
months and nine months ended September 30, 1998 and
September 30, 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the three
months and six months ended September 30, 1998 and
September 30, 1997 (unaudited) 5
Notes to Consolidated Financial Statements 6-9
Item 2: Management's Discussion and Analysis or Plan of Operation 10-15
PART II. OTHER INFORMATION 16
SIGNATURES 17
</TABLE>
2
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AQUAGENIX, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1998 1997
---- ----
<S> <C> <C>
Assets
Current Assets:
Cash $ 235,040 $ 799,286
Accounts Receivable, net of allowance for doubtful
accounts of $169,861 and $182,809 respectively 2,021,681 842,741
Inventories 398,807 640,225
Receivable - remediation services - 1,269,431
Prepaid expenses and other 808,462 560,082
Refundable deposit - 670,000
-------------- ---------------
Total Current Assets 3,463,990 4,781,765
============== ===============
Property and equipment, net 2,580,445 3,006,877
Intangibles, net 3,411,680 5,035,675
Other assets 229,783 326,358
-------------- ---------------
Total Assets $ 9,685,898 $ 13,150,675
============== ===============
Liabilities and Stockholders' Equity
Current Liabilities:
Borrowings under credit agreement $ 640,000 $ 550,000
Current maturities of long-term debt 5,857,127 393,164
Accounts payable 1,927,372 1,002,375
Other current liabilities 1,659,034 552,554
-------------- ---------------
Total Current Liabilities 10,083,533 2,498,093
Long-term debt, net of current maturities 355,526 5,850,018
-------------- ---------------
10,439,059 8,348,111
-------------- ---------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, par value $.01, 1,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, par value $.01, 10,000,000 shares
authorized, 5,326,058 and 4,724,617 shares issued
and outstanding, respectively 53,261 47,246
Additional paid-in capital 19,587,242 15,539,235
Accumulated deficit (20,307,821) (10,636,268)
Unearned Compensation (85,843) (147,649)
-------------- ---------------
Total Stockholders' Equity (753,161) 4,802,564
-------------- ---------------
Total Liabilities and Stockholders' Equity $ 9,685,898 $ 13,150,675
============== ===============
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
3
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AQUAGENIX, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------------
1998 1997 1998 1997
--------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Revenues $ 5,298,818 $ 3,689,128 $ 12,890,081 $10,186,456
- - -------- ------------- ------------- ------------- ------------
Costs and expenses:
Costs of services 4,615,719 2,538,867 9,891,221 6,297,464
Selling, general and administrative 1,399,624 1,417,852 5,926,201 4,179,574
Impairment losses of long-lived assets 1,251,000 -- 1,251,000 --
Restructuring charges 755,800 -- 755,800 --
Termination of consultant relationship -- -- 932,000 --
Depreciation and amortization 248,312 235,873 775,097 696,912
------------- ------------- ------------- ------------
Total costs and expenses 8,270,455 4,192,592 19,531,319 11,173,950
Operating (loss) income (2,971,637) (503,464) (6,641,238) (987,494)
Loss on termination of business acquisition
Interest expense (223,694) (186,338) (684,125) (565,241)
(Loss) before income tax benefit (3,195,331) (689,802) (9,671,554) (1,552,735)
Provision for Income Taxes -- -- -- --
------------- ------------- ------------- ------------
Net Loss (3,195,331) (689,802) $ (9,671,554) $(1,552,735)
============= ============= ============= ============
(Loss) per weighted average common share
Basic loss per share $ (0.60) $ (0.15) $ (1.84) $ (0.36)
============= ============= ============= ============
Weighted average common shares outstanding 5,326,058 4,478,871 5,255,510 4,339,720
============= ============= ============= ============
</TABLE>
The accompanying notes are an integral part of the Consolidated
Financial Statements
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AQUAGENIX, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss): $ (9,671,554) $ (1,552,735)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Compensation expense for options granted and restructured 2,265,462 -
Provision for forfeited acquisition deposits 1,216,298 -
Depreciation and amortization 775,097 696,912
Provision for impairment losses of long-lived assets 1,251,000 -
Advances to officers (592,000) -
Restructuring charges 703,873 -
Provision for losses on claims, receivables and advances 1,222,635 90,341
Discontinued operations (216,744)
Receivable collection, remediation services 1,214,431 -
Net change in operating assets and liabilities 87,225 (761,546)
--------------- ---------------
Net cash provided by (used in) operating activities (1,527,533) (1,743,772)
--------------- ---------------
Cash flows from investing activities:
Acquisition escrow fund deposits (1,830,000) -
Refund from acquisition escrow fund 1,283,702 -
Proceeds from sale of marketable securities - 162,196
Purchase of property and equipment (163,633) (754,158)
Other, net - 23,324
--------------- ---------------
Net cash (used in) operating activities (709,931) (568,638)
Cash flows from financing activities:
Proceeds under credit agreements 540,000 841,141
Payment of credit agreements (450,000) (695,556)
Proceeds from other borrowings 370,000 756,090
Payment of notes payable and long-term debt (330,340) (408,638)
Advances for financing arrangements (225,000) -
Payment of financing costs - (46,365)
Issuance of common stock 1,768,558 1,865,942
--------------- ---------------
Net cash provided by financing activities 1,673,218 2,312,614
--------------- ---------------
Cash and cash equivalents
Increase (decrease) (564,246) 204
Beginning balance 799,286 890,731
--------------- ---------------
$ 235,040 $ 890,935
=============== ===============
Supplemental disclosures of cash flow information:
Interest Paid $ 552,876 $ 484,696
--------------- ---------------
Income taxes refunded - -
=============== ===============
</TABLE>
The accompanying notes are an integral part of the Consolidated
Financial Statements.
5
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AQUAGENIX, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements, which are
for interim periods, do not include all disclosures provided in the
audited annual consolidated financial statements. These unaudited
consolidated financial statements should be read in conjunction with
the consolidated financial statements and the footnotes thereto,
together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's annual
Report on Form 10-KSB for the year ended December 31, 1997 of
Aquagenix, Inc. ("the Company"), as filed with the Securities and
Exchange Commission. The December 31, 1997 financial statements were
derived from audited consolidated financial statements, but do not
include all disclosures required by generally accepted accounting
principles. Certain amounts from 1997 financial statements have been
reclassified to conform to 1998 presentation.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (which are of a normal
recurring nature) necessary for a fair presentation of the financial
position and results of operations. The results of operations for the
interim periods are not necessarily indicative of the results to be
expected for the full year.
2. Related Party Transactions
--------------------------
On June 2, 1998, the Board of Directors removed the Chief Executive
Officer from his executive management capacity and from his capacity as
Chairman of the Board of Directors. In a series of transactions
commencing in the fourth quarter of 1997 through the termination date,
the Company disbursed cash either directly to or for the benefit of the
former Chief Executive Officer totaling $682,000. Of this amount,
$282,000 was disbursed at the unilateral direction of the former CEO
without approval of the Board of Directors. Prior to the removal date,
the Board did authorize $400,000 of these disbursements with the
understanding that the former CEO would deliver a two-year promissory
note bearing interest at 7%. Subsequent to June 30, 1998, the Board
demanded immediate repayment of the $282,000 portion of the advances
and delivery of a signed note with acceptable collateral for the
authorized portion of the advances. These demands have not been met.
Based upon the facts and circumstances available to management at this
time, the ultimate recovery of these advances remains uncertain, and,
accordingly, the Company has recorded a loss allowance of $682,000
relative to these claims. This accounting treatment does not constitute
forgiveness of the claims against the former CEO, and the Company
intends to pursue collection through available legal channels.
3. Financing Advances
------------------
At the direction of the CEO removed by the Board of Directors, and
without authorization of the Board of Directors, the Company
transferred funds totaling $225,000 to two different entities to secure
financing arrangements for the Company. Such funds were transferred
prior to performance by the entities to provide the financings. The
financings never occurred, and although there is no assurance that the
deposits can be recovered, the Company intends to actively attempt
obtaining refunds, including placing a demand upon the former CEO for
reimbursement of the $225,000 or
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the delivery of adequate collateral. The accompanying financial
statements include a loss provision of $225,000 relative to these
deposits, however, this accounting treatment does not indicate that the
Company is relinquishing its claim to these deposits.
4. Termination of Business Acquisition
-----------------------------------
On November 30, 1997, the Company entered into a Stock Purchase
Agreement, (the "Agreement") with the owner of Lewis Tree Service, Inc.
("Lewis") a New York Corporation, to acquire all of the issued and
outstanding stock of Lewis. Pursuant to the Stock Purchase Agreement,
an Escrow Agreement was also entered into on November 30, 1997
requiring the Company to place $670,000 in escrow pending the closing
of the purchase of Lewis by January 31, 1998. On January 29, 1998, the
Company entered into an Amended Stock Purchase Agreement and Escrow
Agreement to extend the closing date to May 15, 1998 and to place an
additional $1,830,000 in the escrow account. The Company increased the
deposit to the escrow account to $2,500,000 on February 4, 1998. On
April 17, 1998, the Company entered into a Termination Agreement with
the owner of Lewis. The Termination Agreement provided for (i) the
termination of the original Agreement and Amended Stock Purchase
Agreement, (ii) the termination of the original and amended Escrow
Agreement and (iii) the distribution of $1,250,000 of the funds held in
escrow to the Lewis owner with the balance, including interest earned,
distributed to the Company.
In order to raise the deposit required by the Amended Stock Purchase
and Escrow Agreement, the Company restructured stock options previously
granted to certain officers, directors, employees and former employees
of the Company. Such restructuring involved the resetting of option
exercise prices to amounts below the current market at that time and
the acceleration of the date on which certain options could be
exercised. Accordingly, the Company recognized compensation expense for
options restructured based on the difference between the quoted market
price of the Company's stock at the date of grant and the amount the
grantees paid to acquire the stock. In connection with the Lewis
transaction the Company recognized $752,225 of compensation expense.
The following summary presents the nature of the loss recognized
pursuant to the Lewis termination agreement:
<TABLE>
<CAPTION>
<S> <C>
Provision for forfeited acquisition escrow deposits $ 1,216,298
Compensation expense related to the
restructuring of stock options 752,225
Professional and consulting fees 377,668
-------------
$ 2,346,191
=============
</TABLE>
5. Termination of Consulting Relationship
--------------------------------------
At December 31, 1997, an independent consultant held options to
purchase 200,000 common shares at $5.00 per share, the market price on
date of issuance, which were granted in connection with a proposed
financing. In satisfaction of the agreement with the consultant
(inclusive with the grant of stock options), on January 19, 1998 the
Company issued 100,000 shares of common stock. Subsequent to March 31,
1998, the Company disbursed $151,000 to the consultant.
6. Loss Per Share
--------------
Basic loss per common share was computed by dividing net loss by the
weighted average number of shares outstanding. Common share equivalents
resulting from options and warrants have not been
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included for the loss per share computation for the three months ended
March 31, 1998 and 1997 since their effect would be anti-dilutive.
7. Impairment Losses
-----------------
During 1998 the Company experienced a significant loss of revenues
relating to ongoing operations of certain business acquisitions
completed in prior years. Accordingly, the Company evaluated the
ongoing value of certain intangible assets recorded in connection with
those acquisitions, namely Recurring Service Contracts and Goodwill.
Based on the evaluation, the Company determined that assets with a
carrying value of $1,431,000 were impaired and wrote them down by
$1,251,000 to their fair value. Fair value was based on estimated
future cash flows to be generated from recurring revenues of the
businesses acquired, discounted at an appropriate rate of interest.
8. Restructuring Charges
---------------------
During the third quarter of 1998, the Company initiated a restructuring
plan to reduce costs and increase future operating efficiency. The plan
consists primarily of reducing management and administrative costs,
negotiating favorable payment arrangements with the Company's vendors
and creditors and consolidating a portion of the operation. In
connection with this plan, approximately 16 employees (8% of the
Company's workforce) have been or will be terminated. Restructuring
charges of $755,800 include employee termination benefits, estimated
fees of outside consultants engaged by the Company to implement the
restructuring, estimated legal fees in connection with the
restructuring and estimated charges related to auto lease terminations.
Restructuring charges include the dissolution of $155,000 of notes
receivable from the Company's former Chief Executive Officer, appointed
June 2, 1998, who resigned on October 23, 1998. In connection with this
resignation, the Company entered into a Severance, General Release and
Separation Agreement, which provides for the future dissolution of the
notes, provided the former officer complies with the terms of the
agreement.
9. Notes Payable
-------------
The Company has not paid interest and the related consent fees on its
12.5% Senior Secured Notes since July 31, 1998. The holder of those
notes has notified the Company of an Existing Event of Default pursuant
to the terms of the related Amended and Restated Senior Note and
Warrant Purchase Agreement. The holder has also voluntarily determined
to forbear on a day to day basis from the exercise of remedies in
respect of the Existing Event of Default. The Existing Event of Default
has also created a default pursuant to the Company's various credit
agreements with Union Planters Bank (Bank). Although the Bank has not
formally notified the Company of an event of default, the Bank had
previously informed the Company of its unwillingness to remain a
creditor and requested the Company to liquidate its debt by either
securing a replacement lender or repaying the notes. The aggregate
amount of debt under default totals $6,100,000, $5,361,000 of which has
been reclassified to Current Maturities of Long Term Debt in the
accompanying September 30, 1998 consolidated balance sheet.
10. Commitments & Contingencies
---------------------------
On December 31, 1997, the President of the Company at that
time, entered into an agreement, not authorized by the Board of
Directors, with a significant shareholder providing a guarantee of a
$2.00 per share profit on 120,213 shares in return for the
shareholder's commitment to hold
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the shares through April 1998. The Company's legal counsel is
currently reviewing the agreement to determine the enforceability of
the guarantee.
In 1997, the Company entered into an agreement with Wharton Capital
Partners, Ltd. (Wharton) whereby Wharton agreed to arrange $3,000,000
of financing for the Company in return for a 6% fee at the closing of
such financing transaction. No closing occurred; however, Wharton
initiated litigation against the Company in August of 1997 claiming
$180,000 on the basis that it performed its obligations under the
terms of the agreement. The litigation is scheduled for trial in
December 1998.
11. Issuance of Common Stock
------------------------
In January and February of 1998, the Company issued 346,500 shares of
common stock for the exercise of options. The Company received total
cash proceeds of $1,017,976.
On January 16, 1998, the successor of the underwriter for the Company's
initial public offering exercised cashless warrants granted pursuant to
the underwriting agreement resulting in the issuance of 11,458 common
shares with no cash proceeds.
On February 3, 1998, the Company issued 125,000 shares of common stock
resulting from the exercise of outstanding warrants granted on that
date. The Company received total cash proceeds of $750,000 upon the
exercise of these warrants.
On January 19, 1998, the Company issued 105,000 shares of common stock
with no cash proceeds received by the Company. Of these shares, 5,000
were issued pursuant to an employment agreement with a former employee
and 100,000 were issued to a consultant (see note 3 above) for the
exercise of a cashless option. The Company `s financial statements for
the year to date period ended June 30, 1998, include a compensatory
expense totaling $781,000 relative to the issuance of these shares.
On June 24, 1998, the Company issued 13,333 shares of common stock to
its outside legal counsel in exchange for professional services valued
at $20,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
The discussions in this quarterly report contain both historical
information and forward-looking statements. The forward-looking
statements involve risks and uncertainties that affect the Company's
operations, markets, services, prices and factors discussed in the
Company's filings with the Securities and Exchange Commission. These
risks and uncertainties include, but are not limited to, economic,
competitive governmental and technological factors. Accordingly, there
can be no assurance that the Company's expectations will be realized.
Aquagenix, Inc. (the "Company"), through its wholly-owned subsidiaries,
provides aquatic and industrial vegetation management services to both
governmental and commercial customers in Florida, the general
Southeastern region of the United States, California and Arizona. The
Company's continued emphasis on quality service, internal growth and
the selective acquisition of privately held waterway and vegetation
management companies in the Sunbelt region of the United States has
resulted in the Company becoming one of the largest providers of
aquatic and industrial vegetation management services in the United
States with annual revenues of approximately $13,000,000 for 1997. The
Company's services consist primarily of waterway and wetland management
(the control of aquatic weeds, algae and exotic plants), brush and
noxious tree control, roadside vegetation management, and ancillary
lake management services (installation of aeration systems, fish
stocking for plant and insect control the stocking of fish for game,
plant and insect control).
In April 1997, the Company established a new branch office in
Birmingham, Alabama as the Company had started to provide industrial
vegetation management services in that region. In September 1997, the
Company opened a branch in Martinez, California.
Results of Operations
Three Months Ended September 30, 1998 Compared to Three Months Ended
--------------------------------------------------------------------
September 30, 1997
------------------
Revenues. The Company's revenues increased by $1,610,000 or 44%, from
$3,689,000 during the three months ended September 30, 1997 to $5,299,
000 during the three months ended September 30, 1998. The increase in
revenues was primarily attributable to an increase in environmental
construction (planting vegetation medians and barriers and installing
related irrigation systems) and industrial vegetation management
revenues while aquatic vegetation revenues remained flat. The
California branch, opened in September 1997, provided 52% of the
revenue increase, all from environmental construction projects.
10
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Cost of services. Cost of services increased by $2,077,000 or 82%, from
$2,539,000 during the three months ended September 30, 1997 to
$4,616,000 during the three months ended September 30, 1998. Cost
trended higher in conjunction with the higher revenue volume and level
of activity. Higher supply, material and labor costs accounted for
approximately 60% of the costs increases, reflecting the revenue shift
to environmental construction and industrial vegetation work mentioned
above. As a percentage of revenues, cost of services has increased from
69% in the third quarter of 1997 to 81% in the third quarter of 1998.
Losses on environmental construction projects provided an additional
influence on cost increases. At the end of the third quarter, the
California construction projects were approximately 43% complete
compared to approximately 25% complete at June 30, 1998. In conjunction
with the additional work completed, the Company refined and revised its
cost estimates to complete the projects. The Company now projects
overall losses on the majority of these projects. In accordance with
its accounting policies, the Company has provided for estimated losses
on uncompleted contracts during the quarter ended September 30, 1998,
the period during which the loss was determined. In addition to costs
incurred to date on these projects, third quarter costs include a
provision for future losses approximating $240,000, approximately 4% of
quarterly revenues.
Gross profit. Gross profit margins (revenues less cost of services)
declined from 31% of revenues for the comparable quarter last year to
13% this year. The service mix shift to industrial vegetation
management revenues and the losses on the California projects provided
the primary causes for the decline in profit margins. Gross profit
margins on industrial vegetation management business is significantly
lower than the margins enjoyed through aquatic management services
primarily because of competitive pressures.
As mentioned above, the Company provided reserves of ($240,000) for
future losses on the California projects, however, the total loss
recognized on these projects approximates ($352,000). At June 30, 1998,
gross profits recognized on the California business totaled $106,000
based upon cost estimates utilized at that time. The negative impact
from environmental construction projects on gross profits recognized
during the current quarter approximated ($458,000). Several of these
projects require ongoing maintenance phases upon completion of the
construction phases. These maintenance phases contractually obligate,
in decreasing amounts, the Company through December 31, 2001. The
projected losses include the estimated costs to complete these
maintenance contracts.
Selling, general and administrative. Selling, general and
administrative expense remained relatively flat from the comparable
1997 quarter to the third quarter of 1998, decreasing from $1,418,000
to $1,400,000. Current quarter expense includes a $276,000 provision in
anticipation of honoring a guarantee the Company issued in connection
with the acquisition of Aquatic Dynamics (ADI) in 1996. The guarantee,
exercisable in December 1998 by the selling shareholders of ADI,
requires the Company to pay the difference between quoted market
immediately prior to the exercise date and $5.625 per share. Lower
promotion, travel
11
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and compensation expenses mitigated the impact of this provision in the
current quarter compared to the third quarter of 1997.
Impairment losses of long-lived assets. The Company adjusted certain
intangible assets down to their estimated fair value by recording a
charge of $1,251,000. The Company will continue to monitor certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicated that the carrying amount of an asset may not be
recoverable.
Restructuring charges. The Company has engaged outside management
consultants to formulate and implement a plan to restructure
operations. Among other things, the plan includes elimination of
several management and administrative positions and certain actions
undertaken by the consultants including the negotiation of favorable
payment arrangements with the Company's vendors and creditors and the
evaluation and consolidation of services currently offered by the
Company. The restructuring charges represent the costs to implement the
plan and the cost of employee termination benefits related thereto. In
connection with this plan, the Company estimates it should realize
approximately $1,100,000 in annual cost reductions resulting from
employee terminations.
Interest expense. Interest expense increased by $58,000 from $186,000
during the three months ended September 30, 1997 to $224,000 during the
three months ended September 30, 1998, primarily as a result of
increased borrowings and consent fees charged by the holder of the
Company's Senior Secured Notes.
Quarterly results. The net loss of ($3,195,000) incurred by the Company
for the three months ended September 30, 1998, was mainly attributable
to losses incurred on the California projects, impairment losses of
long-lived assets and provisions for restructuring charges.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
------------------------------------------------------------------
September 30, 1997
------------------
Revenues. The Company's revenues increased by $2,704,000, or 27%, to
$12,890,000 from $10,186,000 for the first nine months of 1997. The
increase in revenues was primarily attributable to an increase in
environmental construction contracts generated by the California
operation and to a lesser extent growth in industrial vegetation
management revenue.
Cost of services. Cost of services increased by $3,593,000, or 57%,
from $6,297,000 during the nine months ended September 30, 1997 to
$9,891,000 during the nine months ended September 30, 1998. As a
percentage of revenue, cost of services, approximated 77% in 1998
compared to 62% last year. Consistent with the current quarter, higher
supply, material and labor costs, along with the loss provisions for
uncompleted contracts (discussed above) caused cost of services to
trend higher.
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Gross profit. The losses on the California projects produced a
significant negative impact upon gross profits for the nine-month
period ended September 30, 1998. Approximately 15% of year to date
revenues resulted in gross losses of ($352,000). Additionally
aggressive bidding resulting in aquatic and industrial vegetation
contracts with lower margins while unforeseen abnormal terrain
characteristics and stringent environmental requirements contributed to
losses on certain other aquatic and industrial vegetation removal
contracts.
Selling, general and administrative. Selling, general and
administrative expenses increased by $1,747,000, or 42% to $5,926,000
from $4,179,000 for the current year to date period compared to the
prior year. Loss provisions pertaining to the Related Party
Transactions and Financing Advances (discussed in Notes 2 and 3 to the
financial statements) and compensatory expenses relating to the
granting and exercising of employee stock options accounted for
approximately $1,400,000 of the increase. Additionally, the provision
for honoring the guarantee discussed above, coupled with higher legal
and professional fees, caused administrative costs to increase.
Interest expense. Interest expense increased by $119,000 from $565,000
during the first nine months of 1997 to $684,000 during the first nine
months of 1998 primarily as a result of increased borrowings and
consent fees charged by the holder of the Company's Senior Secured
Notes.
Liquidity and Capital Resources
Working capital. At September 30, 1998, the Company is in a working
capital deficit position. Three factors can be identified as primary
causes. Net operating losses for the nine-month period have caused cash
balances to decrease and account payable balances and other current
liabilities to increase. The actual cash outlay during the nine-month
period related to the Related Party Transactions and the Financing
Advances discussed in Notes 2 and 3 to the financial statements
approximated $678,000, resulting in a further decrease in working
capital. As discussed in Note 9 to the financial statements, long-term
debt aggregating $5,461,000 has been reclassified to current
maturities, negatively influencing working capital. Additionally, in
May of 1998, the Company advanced $140,000 to its former CEO who
resigned in October of 1998.
The Company's accounts receivable have increased by $1,233,000 since
December 31, 1997. The increase was primarily due to the higher volume
of revenues in the second quarter compared to the fourth quarter of
1997. Of the Company's accounts receivable outstanding at December 31,
1997 and September 30, 1998, approximately $311,000 (30%) and $642,000
(32%) were due from five customers, respectively. At September 30,
1998, the Company's allowance for doubtful receivables approximated
$170,000, which the Company believes is currently adequate to cover
anticipated losses. The average collection period for account
receivable was approximately 39 days as of September 30, 1998 as
compared to 28 days at December 31, 1997.
13
<PAGE>
Funding Requirements The Company is in default under the terms of its
major debt agreements, encompassing total outstanding debt of
$6,100,000. Additionally the Company is unlikely to attract capital
investment on favorable terms in its current financial position. In the
absence of capital investment, the Company must enter into deferred
credit arrangements with its vendors, negotiate extended forbearance
agreements or replace holders of its major debt securities, and return
to profitable operations. While vendors currently are continuing to
supply the Company with needed chemicals and materials and debt holders
have not pursued default remedies, there can be no assurance that the
current arrangements will continue. As discussed in Note 8 to the
financial statements and under Restructuring Charges in the above
Results of Operations, the Company has initiated actions which should
improve operational results. Additionally, the Restructuring Plan
currently recommended by the outside management consultants, mentioned
above, indicates that the Company should achieve positive Earnings
Before Interest, Taxes, Depreciation, and Amortization in 1999.
However, the Company will likely remain unattractive to investment
capital until such time that it can demonstrate the future
effectiveness of the Restructuring Plan. The Restructuring Plan is
subject to risks and uncertainties that affect the Company's
operations, markets, services, and prices. These risks and
uncertainties include, but are not limited to, economic, competitive
governmental, and technological factors. Accordingly, there can be no
assurance that the Company's expectations, or those of its consultants,
will be realized.
Cash flows from operating activities. For the nine months ended
September 30, 1998, the Company's cash flows used in operations were
($1,527,000) compared to ($1,743,000) used in operations for the nine
months ended September 30, 1997. The decrease in cash flows generated
from continuing operations was primarily attributable to the net losses
incurred for the nine months ended September 30, 1998.
Cash flows from investing activities. For the nine months ended
September 30, 1998, cash used in investing activities totaled
($710,000) resulting from deposits to and refunds back from the escrow
fund in connection with the attempted acquisition of Lewis Tree.
Cash flows from financing activities. Net cash provided by financing
activities for the nine months ended September 30, 1998, was $1,673,000
as compared to $2,313,000 for the nine-month period of 1997. The cash
flow was derived primarily from the issuance of common stock resulting
from exercise of options and warrants.
Year 2000 Readiness Disclosure
The Company is working on making its systems ready for the next
millennium by assessing all systems for Year 2000 (Y2K) impacts and
costs of upgrading or replacing systems that are not Y2K ready. The
assessment phase is approximately 50% complete. The Company currently
believes that the project will be complete in the latter part of 1999
and anticipates that the project costs does will not have a
14
<PAGE>
material effect on its financial position or results of operations.
The Company is contacting major suppliers to seek assurance of their
intent to be Y2K ready, and is responding to customer requests for
information on the Company's Y2K project. The Company cannot control
whether third parties, including governments, upon which the Company
relies will be fully Y2K compliant by 2000.
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. The Company is unable to determine at this time whether a
Y2K failure will have a material impact on the Company's results of
operations, liquidity or financial conditions.
The costs of the Y2K project and the time by which the Company expects
to complete it are based on management's estimates, which were derived
using numerous assumptions of future events including the availability
of certain resources, third party modifications, and other factors.
There is no guarantee that these estimates will be achieved and actual
results could differ from these plans.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit Description
--------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Subsequent to the quarter ended September 30, 1998, the
registrant filed the following reports on Form 8-K:
(i) Current Report on Form 8-K dated October 22, 1998
filed on October 22, 1998) which reported
certain changes in amangement, postponement of
the Company's annual shareholder's meeting and
notification by the holder of the Company's 12.5%
Senior Secured Notes that an event of default had
occurred.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AQUAGENIX, INC.
Date: November 16, 1998 By: /s/ Abraham S. Fischler
------------------------
Abraham S. Fischler,
Acting Chief Executive Officer,
(Principal Executive Officer)
Date: November 16 , 1998 By: /s/ Frederick E. Barone
-----------------------
Frederick E. Barone,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED FINANCIAL STATEMENTS AS OF SEPTEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 235,040
<SECURITIES> 0
<RECEIVABLES> 2,191,542
<ALLOWANCES> (169,861)
<INVENTORY> 398,807
<CURRENT-ASSETS> 3,463,990
<PP&E> 4,666,277
<DEPRECIATION> (2,085,832)
<TOTAL-ASSETS> 9,685,898
<CURRENT-LIABILITIES> 10,083,533
<BONDS> 0
0
0
<COMMON> 53,261
<OTHER-SE> (806,422)
<TOTAL-LIABILITY-AND-EQUITY> 9,685,898
<SALES> 0
<TOTAL-REVENUES> 12,890,081
<CGS> 9,891,221
<TOTAL-COSTS> 9,891,221
<OTHER-EXPENSES> 5,650,152
<LOSS-PROVISION> 2,558,849
<INTEREST-EXPENSE> 684,125
<INCOME-PRETAX> (9,671,554)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,671,554)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,671,554)
<EPS-PRIMARY> (1.84)
<EPS-DILUTED> (1.84)
</TABLE>
