SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Quarterly Period Ended
March 31, 1997.
[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from ________________ to________________.
Commission file number 0-24490
AQUAGENIX, INC.
---------------------------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 65-0419263
------------------------------- ----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6500 N.W. 15th Avenue
Fort Lauderdale, Florida 33309
------------------------------- ----------------
(Address of Principal Executive Offices) (Zip Code)
(954) 975-7771
----------------------------------
(Issuer's Telephone Number, Including Area Code)
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 May 14, 1998 was 5,312,575.
Traditional Small Business Disclosure Format: Yes No [X]
Page 1 of 12
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AQUAGENIX, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
Item 1: Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 (unaudited) 3
Consolidated Statements of Operations for the three
months ended March 31, 1998 and March 31, 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and March 31, 1997 (unaudited) 5
Notes to Consolidated Financial Statements 6-7
Item 2: Management's Discussion and Analysis or Plan of
Operation 8-10
PART II. OTHER INFORMATION 11
-----------------
SIGNATURES 12
</TABLE>
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<PAGE>
AQUAGENIX, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
----------- -----------
Assets 1998 1997
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<S> <C> <C>
Current Assets:
Cash $ 1,123,855 $ 799,286
Accounts Receivable, net of allowance for doubtful
accounts of $197,809 and $182,809 respectively 1,067,410 842,741
Inventories 729,053 640,225
Receivable - remediation services 239,135 1,269,431
Prepaid expenses and other 390,628 560,082
Refundable deposit 1,283,702 670,000
--------------- ----------------
4,833,783 4,781,765
Property and equipment, net 2,949,292 3,006,877
Intangibles, net 4,676,856 4,876,815
Deferred financing costs, net 150,541 158,860
Other assets 305,903 326,358
--------------- ----------------
Total Assets $ 12,916,375 $ 13,150,675
=============== ================
Liabilities and Stockholders' Equity
Current Liabilities:
Borrowings under credit agreement $ 640,000 $ 550,000
Current maturities of long-term debt 462,350 393,164
Accounts payable 1,161,004 825,927
Net liabilities of discontinued operations 121,536 176,448
Other current liabilities 707,485 552,554
--------------- ----------------
Total Current Liabilities 3,092,375 2,498,093
Long-term debt, net of current maturities 5,964,449 5,850,018
--------------- ----------------
9,056,824 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, 5,312,575 and 4,724,617 shares issued
and outstanding, respectively 53,126 47,246
Additional paid-in capital 19,566,793 15,539,235
Accumulated deficit (15,633,321) (10,636,268)
Unearned Compensation (127,047) (147,649)
--------------- ----------------
Total stockholders' equity 3,859,551 4,802,564
--------------- ----------------
Total liabilities and stockholders' equity $ 12,916,375 $ 13,150,675
=============== ================
</TABLE>
The accompany notes are an integral part of the Consolidated Financial
Statements.
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<PAGE>
AQUAGENIX, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Ended
March 31,
---------------------------------------
1998 1997
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<S> <C> <C>
Revenues $ 3,014,728 $ 2,893,519
-------------- ----------------
Costs and expenses:
Costs of services 1,937,013 1,619,746
Selling, general and administrative 2,320,520 1,246,788
Termination of consultant relationship 932,000 -
Depreciation and amortization 255,014 226,542
-------------- ----------------
Total costs and expenses 5,444,547 3,093,076
Operating (loss) income (2,429,819) (199,557)
Loss on termination of business acquisition 2,346,191 -
Interest expense 221,043 198,181
-------------- ----------------
(Loss) before income tax benefit (4,997,053) (397,738)
Income tax benefit - -
-------------- ---------------
Net Loss $ (4,997,053) $ (397,738)
============== ===============
(Loss) per weighted average common share
Basic loss per share $ (0.98) $ (0.09)
============== ===============
Weighted average common shares outstanding 5,125,456 4,187,408
============== ===============
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
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<PAGE>
AQUAGENIX, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Ended
March 31,
-------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities: $ (4,997,053) $ (397,738)
Net (loss):
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 255,014 226,542
Loss on sale of property and equipment - 51,758
Provision for doubtful accounts 70,000 24,485
Discounted operations - (121,801)
Receivable collection, remediation services 975,296 -
Net change in operating assets and liabilities 430,335 (264,398)
---------------- ------------
Net cash provided by (used in) operating activities 215,352 (481,152)
---------------- ------------
Cash flows from investing activities:
Acquisition escrow fund deposits (1,830,000) -
Proceeds from sale of marketable securities - 162,196
Purchase of property and equipment (97,546) (216,551)
Other, net - 4,336
---------------- ------------
Net cash (used in) operating activities (1,927,546) (50,019)
---------------- ------------
Cash flows from financing activities:
Proceeds under credit agreements 540,000 173,746
Payment of credit agreements (450,000) -
Proceeds from other borrowings 270,000 -
Payment of notes payable and long-term debt (91,213) (240,365)
Issuance of common stock 1,767,976 314,588
---------------- ------------
Net cash provided by financing activities 2,036,763 247,969
---------------- ------------
Cash and cash equivalents
Increase (decrease) 324,569 (283,202)
Beginning balance 799,286 890,731
---------------- ------------
$ 1,123,855 $ 607,529
================ ============
Supplemental disclosures of cash flow information:
Interest Paid $ 220,351 $ 99,444
================ ============
Income taxes refunded $ - $ -
================ ============
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
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<PAGE>
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. Subsequent Event
----------------
On November 30, 1997, the Company entered into a Stock Purchase
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 to require the Company to
place $670,000 in escrow pending the closing of the purchase of Lewis
by January 31, 1998. As of January 29, 1998, the Company entered into
an Amended Stock Purchase and Escrow Agreements 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
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.
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<PAGE>
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>
3. Termination of Consultant 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.
4. 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 included for the loss
per share computation for the three months ended March 31, 1998 and
1997 since their effect would be anti-dilutive.
5. 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. The Company
received total cash proceeds of $750,000 upon the exercise of these
warrants.
On January 19, 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
three-month period ended March 31, 1998 include a compensatory expense
totaling $781,000 relative to the issuance of these shares.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
General
Aquagenix, Inc. (the "Company"), through its wholly-owned subsidiaries,
provides aquatic and industrial vegetation management services to both
governmental and commercial customers in Florida, Georgia, North and
South Carolina, Arizona, Alabama, Tennessee and California. 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 the largest provider 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, installation of floating
fountains and aeration systems and 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 has started to provide industrial
vegetation management services in that region. In September 1997, the
Company opened a branch in San Francisco, California. The Company
believes that the California market provides significant growth
opportunities relating to surface water management, wetland restoration
and roadside vegetation management.
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended
----------------------------------------------------------------
March 31, 1997
--------------
Revenues. The Company's revenues increased by $121,209 or 4% from
$2,893,519 during the three months ended March 31, 1997 to $3,014,728
during the three months ended March 31, 1998. Specialty land management
revenue produced the primary source of revenue gains while revenue from
aquatic vegetation management declined resulting in a shift in revenue
mix. In the 1998 quarter, revenues from aquatic vegetation management
accounted for 78% of total revenues compared to 85% in the prior year.
Cost of services. Cost of services increased by $317,267, or 20%, from
$1,619,746 during the three months ended March 31, 1997 to $1,937,013
during the three months ended March 31, 1998. As a percentage of
revenues, cost of services has increased from 56% in the first quarter
of 1997 to 64% in the first quarter of 1998. The increase in cost of
services was mainly attributable to increased labor, equipment leasing
expenses and subcontracting expenses for terrestrial clearing services.
The Company opened two new branches subsequent to the first quarter of
1997, Alabama, primarily geared for industrial vegetation management,
and California. Accordingly, the Company staffed these facilities with
basic technical staffs, employed operational management and leased
equipment to initiate operations. The first quarter of 1998 reflected
these fixed costs with no comparable expenses in the prior year. Heavy
rains and unfavorable weather conditions resulted in lower than
anticipated revenues in California while a major utility customer in
Alabama delayed contract commencement, again resulting in lower than
anticipated revenues. Both facilities are still in the relative
start-up stage
-8-
<PAGE>
and failed to produce gross profit margins in the first quarter of
1998. The Company also recognized a loss on a problem industrial
vegetation contract that approximated 10% of its revenues. Abnormal
terrain characteristics and stringent environmental requirements
regarding the removal of vegetation resulted in unanticipated costs.
The Company plans to petition the client for additional billing
authorizations, however, no assurances can be made regarding the
success of those petitions.
Selling, general and administrative. Selling, general and
administrative expense increased by $1,073,732 from $1,246,788 during
the three months ended March 31, 1997 to $2,320,520 during the three
months ended March 31, 1998. In the three month period ended, March 31,
1998, this expense caption includes one-time $700,000 of compensatory
expense related to the granting and exercise of employee stock options,
the issuance of which was made in connection with the Lewis Tree
acquisition. Expenses of a selling and administrative nature at the
California and Alabama branches, nonexistent in the 1997 first quarter
accounted for approximately $75,000 of the increase. The remaining
increase resulted primarily from additional administrative staff and
increased legal and professional fees and related services performed in
connection with NASDAQ listing requirements, regulatory filings, and a
compensatory termination settlement with a former executive of the
Company.
Termination of Consultant Relationship. This expense represents a
one-time nonrecurring expense of $932,000 as described in Footnote 3 in
the accompanying financial statements.
Loss on termination of business acquisition. In April 1998, the Company
terminated negotiations for the acquisition of Lewis Tree Service, Inc.
along with all agreements related to the proposed acquisition. In
connection with this termination, the Company recognized a loss of
$2,346,191 in the three-month period ended March 31, 1998.
Interest expense. Interest expense increased by $22,862 from
$198,181 during the three months ended March 31, 1997 to $221,043
during the three months ended March 31, 1998 primarily as a result of
increased bank borrowings.
Quarterly results. The net loss of $4,997,053 incurred by the Company
for the three months ended March 31, 1998 can be primarily attributed
to one-time nonrecurring events totaling $3,978,191. The remaining
losses from operations resulted from the start-up efforts of two new
branches, the seasonality factor normal for the first quarter and
increased professional fees as described above.. The revenues of the
first quarter of 1998 continue to indicate the stability of the
Company's core aquatic and industrial vegetation management business,
while the securing several new government contracts in late 1997 and
early 1998 in the California market indicate growth potential
Liquidity and Capital Resources
Working capital. Working capital (excluding net liabilities of
discontinued operations), which consists principally of cash and
accounts receivable, was $2,460,120 at December 31, 1997, compared to
$1,862,944 at March 31, 1998. The decrease in working capital was
mainly attributable to the net loss incurred for the three months ended
March 31, 1998, resulting in
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<PAGE>
increased bank borrowings and higher payables as compared to December
31, 1997. Of the Company's accounts receivable outstanding at December
31, 1997 and March 31,1998, approximately $311,000 (30%) and $389,000
(31%) were due from five customers, respectively. The collection period
for accounts receivable was approximately 37 days as of March 31, 1998
as compared to 28 days at December 31, 1997. At March 31, 1998, the
Company's allowance for doubtful debts was $197,809 which the Company
believes is currently adequate to cover anticipated losses.
As of March 31, 1998, the Company had loan agreements with Union
Planters Bank which provided for borrowings under a revolving line of
credit of up to an aggregate of $1,000,000, a three-year term loan of
$215,000 for purchases of computer equipment with interest accruing at
9.75% and a $270,000 equipment financing line with a four-year
amortization term at an interest rate of 9.75%. At March 31, 1998, an
aggregate of $1,116,173 was outstanding under the loan agreements, of
which $640,000 represented borrowing under the line of credit with
$211,798 and $264,375 outstanding under the two term loans
respectively. Advances under the line of credit are based on certain
borrowing formula relating to eligible accounts receivable. Interest
accrues at the rates of 1-1/4% above prime for the line of credit and
9.75% for the term loans. Substantially all of the Company's assets are
pledged to the bank as collateral.
Cash flows from operating activities. For the three months ended March
31, 1998, the Company's cash flows provided from operations was
$215,352 as compared to $(481,152) used in operations for the three
months ended March 31, 1997. Collection of a receivable relating to
remediation services totaling $975,296 provided the primary increase in
cash flows in the quarter ended March 31, 1998.
Cash flows from investing activities. Cash used in investing activities
in the three months ended March 31, 1998 was $(1,927,546) compared to
net cash used in investing activities of $50,019 for the three months
ended March 31, 1997. Deposits into the escrow fund relating to the
Lewis purchase transaction of ($1,830,000) primarily accounted for the
cash flows used in investing activities in the quarter ended March 31,
1998.
Cash flows from financing activities. Net cash provided by financing
activities was $2,036,763 during the three months ended March 31, 1998
compared to net cash provided of $247,969 during the three months ended
March 31, 1997. The increase was primarily attributable to proceeds for
the issuance of common stock totalling $1,767,976 and additional
borrowings under the various credit agreements with Union Planters
Bank. Cash flows provided from financing activities in the three months
ended March 31, 1997 resulted primarily from bank borrowings and the
issuance of common stock.
Delisting. The Company has been delisted from The NASDAQ Stock
MarketSM. See Part II- Other Information, Item 5.
Liquidity. The Company believes that it has sufficient working capital
to fund its current operations and continued internal growth. At this
time the Company has identified no specific needs for additional
working capital.
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<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
-----------------
On May 8, 1998, the Company received notification from the NASDAQ
Listing Qualifications Panel that the Company's securities were
delisted from The NASDAQ Stock MarketSM effective with the close of
business May 8, 1998. The Company may request the NASDAQ Listing and
Hearing Review Council to review the decision of the panel. The
securities of the Company trade on the OTC Bulletin Board.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit Description
------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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<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: May 15, 1998 By: /s/ Andrew P. Chesler
-------------------------
Andrew P. Chesler,
Chairman of the Board,
Chief Executive Officer
President and Treasurer
(Principal Executive Officer)
Date: May 15, 1998 By: /s/ Frederick E. Barone
---------------------------
Frederick E. Barone
Chief Financial Officer
(Principal Finance and
Accounting Officer)
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED FINANCIAL STATEMENTS AS OF MARCH 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,123,855
<SECURITIES> 0
<RECEIVABLES> 1,265,219
<ALLOWANCES> (197,809)
<INVENTORY> 729,053
<CURRENT-ASSETS> 4,833,783
<PP&E> 4,768,348
<DEPRECIATION> (1,819,056)
<TOTAL-ASSETS> 12,916,375
<CURRENT-LIABILITIES> 3,092,375
<BONDS> 0
0
0
<COMMON> 53,126
<OTHER-SE> 3,806,425
<TOTAL-LIABILITY-AND-EQUITY> 12,916,375
<SALES> 0
<TOTAL-REVENUES> 3,014,728
<CGS> 0
<TOTAL-COSTS> 1,937,013
<OTHER-EXPENSES> 5,773,725
<LOSS-PROVISION> 80,000
<INTEREST-EXPENSE> 221,043
<INCOME-PRETAX> (4,997,053)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,997,053)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,997,053)
<EPS-PRIMARY> (0.98)
<EPS-DILUTED> (0.98)
</TABLE>
