UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGES ACT
For the transition period from to
------------- -------------
Commission file number 000-14646
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
(Exact name of Small Business Issuer as Specified in Its Charter)
New York 06-1113228
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 Ashlagan Street, P.O. Box 8624,
Kiryat Gat, Israel 82021
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number, including area code)
011 972 8 660 2108
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 registrant's Common Stock, $0.01 Par
Value, on March 31, 2005 was 81,962,670 shares.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements..............................................4-11
Item 2. Management's Discussion and Analysis or Plan of Operation........12-17
Item 3. Controls and Procedures.............................................18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................19
Item 2. Unregistered sale of equity and use of proceeds.....................19
Item 3. Defaults upon Senior Securities.....................................19
Item 4. Submission of Matters to a Vote of Securities Holders...............19
Item 5. Other information...................................................19
Item 6. Exhibits and Reports on Form 8-K....................................19
Signature Page................................................................20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of September 30, 2004(Unaudited)........4
Consolidated Statements of Operations for the three and
nine months ended September 30, 2004 and 2003 (Unaudited)..........5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003 (Unaudited)......................6
Notes to the Consolidated Financial Statements (Unaudited).........7-11
3
Clean Systems Technology Group, Ltd
Consolidated Balance Sheet
September 30, 2004
(Unaudited)
(in thousand)
ASSETS
Current assets:
Cash and cash equivalents $ 975
Account receivable - net of allowance
for doubtful accounts of $116 2,696
Inventory 2,510
Other current assets 380
------------
Total current assets 6,561
Property and equipment - net 1,048
Investment 178
Other assets 132
------------
$ 7,919
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current potion long term debt -
Lines of credit and notes payable $ 2,750
Due to related parties 70
Accounts payable 1,835
Accrued expenses 477
Accrued compensation 640
Other liabilities 109
------------
Total current liabilities 5,881
------------
Long-term debt 395
Commitments and contingencies -
Shareholders' equity:
Common stock, $0.01 par value, 110,000,000 shares authorized,
81,962,670 issued and outstanding 820
Additional paid-in capital 5,411
Stock subscription receivable (97)
Accumulated deficit (4,491)
------------
Total shareholders' equity 1,643
------------
$ 7,919
============
See notes to unaudited consolidated financial statements.
4
Clean Systems Technology Group, Ltd
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
Three months Ended Nine months Ended
------------------------------------ --------------------------------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
--------------- ----------------- ----------------- ----------------
Revenues $ 1,560 $ 477 $ 4,531 $ 2,809
Cost of Revenues 914 645 2,600 2,269
--------------- ----------------- ----------------- ----------------
Gross profit (loss) 646 (168) 1,931 540
Administrative and general expenses 412 466 1,215 1,121
--------------- ----------------- ----------------- ----------------
Income (loss) from operations 234 (634) 716 (581)
--------------- ----------------- ----------------- ----------------
Other (expense) income
Interest expenses (70) (105) (223) (474)
Other (expense) income (26) 86 (15) (337)
--------------- ----------------- ----------------- ----------------
Total other (expense) income (96) (19) (238) (811)
--------------- ----------------- ----------------- ----------------
Income (loss) before provision for
income taxes 138 (653) 478 (1,392)
(Benefit) provision for income taxes (7) 6 7 62
--------------- ----------------- ----------------- ----------------
Net income (loss) $ 145 $ (659) $ 471 $ (1,454)
=============== ================= ================= ================
Net income (loss) per share - basic $ - $ (0.01) $ 0.01 $ (0.03)
============== ================= ================= ================
Net income (loss) per share - diluted $ - $ (0.01) $ 0.01 $ (0.03)
============== ================= ================= ================
Weighted average number of common
shares - basic 81,962,670 54,376,184 80,778,071 48,823,519
============== ================= ================= ================
Weighted average number of common
shares - diluted 81,962,670 54,376,184 80,778,071 48,823,519
============== ================= ================= ================
See notes to unaudited consolidated financial statements.
5
Clean Systems Technology Group, Ltd
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine months Ended
-----------------------------------
September 30, September 30,
2004 2003
--------------- ---------------
Operating Activities:
Net income (loss) $ 471 $ (1,454)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 225 235
Gain from the sale of property and equipment - 10
Issuance of common stock for services - 147
Changes in operating assets and liabilities:
Account receivable (1,415) 246
Inventory (295) 184
Other assets (131) (9)
Accounts payable (39) 408
Accrued expenses (100) 84
Accrued compensation (102) (210)
Other liabilities (173) (9)
--------------- ---------------
Net cash used in operating activities (1,559) (368)
--------------- ---------------
Investing Activities:
Acquisition of property and equipment (35) -
Proceeds from sale of property and equipment - 44
Investment in unconsolidated subsidiary - (50)
--------------- ---------------
Net cash used in investing activities (35) (6)
--------------- ---------------
Financing Activities:
Proceeds from lines of credit and notes payable 1,477 116
Repayments of lines of credit and notes payable (584) (188)
Proceeds from issuance of common stock 1,108 429
Offering costs associated with issuance of common stock (20) -
--------------- ---------------
Net cash provided by financing activities 1,981 357
--------------- ---------------
Net increase (decrease) in cash 387 (17)
Cash and cash equivalents at beginning of period 588 23
--------------- ---------------
Cash and cash equivalents at end of period $ 975 $ 6
=============== ===============
Supplemental disclosure of cash flow information:
Cash Paid for:
Interest $ 242 $ 230
=============== ===============
Income taxes $ - $ -
=============== ===============
See notes to unaudited consolidated financial statements.
6
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(All amounts in thousands, except share
and per share data or as otherwise noted)
[1] BASIS OF PRESENTATION
The accompanying un audited consolidated financial statements of Clean
Systems Technology Group, Ltd. have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all normal
recurring adjustments considered necessary in order to make the interim
financial statements not misleading have been included Results for the
nine months ended September 30, 2004 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2004.
These interim unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and
footnotes thereto of the Company and management's discussion and
analysis of financial condition and results of operations included in
the Company's annual report on Form 10-KSB for the year ended December
31, 2003.
On October 17, 2001, Entertainment International Ltd. ("ENTI"), through
its wholly-owned subsidiary ENTI Acquisition I Corp., closed a
transaction (the "Transaction") providing for the acquisition of CSTI
Hi-Tec, Ltd. ("CSTI Hi-Tec") an Israeli corporation. All of the issued
and outstanding shares of CSTI Hi-Tec were exchanged for shares of
ENTI's unregistered restricted common stock. Simultaneously with the
closing, the Board of Directors authorized a one for twenty reverse
stock split of all ENTI's issued and outstanding common stock. All
references in the accompanying consolidated financial statements to the
number of shares have been restated to reflect the reverse stock split.
For accounting purposes, the Transaction has been accounted for as a
reverse acquisition under the purchase method for business
combinations, and accordingly the Transaction has been treated as a
recapitalization of CSTI Hi-Tec, with CSTI Hi-Tec as the acquirer. The
shares issued in the Transaction are treated as being issued for cash
and are shown as outstanding for all periods presented in the same
manner as for a stock split. The consolidated financial statements
reflect the financial position and the result of operations of CSTI
Hi-Tec and its subsidiaries and ENTI as of September 30, 2004 and for
the three and nine months ended September 30, 2004 and 2003. Pro forma
information on the Transaction is not presented as, at the date of the
Transaction, ENTI was considered a public shell and accordingly, the
Transaction was not considered a business combination. On December 27,
2001, ENTI amended its certificate of incorporation to change its name
from Entertainment International, Ltd. to Clean Systems Technology
Group, Ltd. (the "Company" or "CSTI").
7
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are set forth in Note 2
to the Company's consolidated financial statements included in the
Company's Form 10-KSB for the year ended December 31, 2003.
Reclassifications - Certain reclassifications have been made to prior
period consolidated financial statements to conform to the current
period presented.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Significant estimates include the Company's estimate of allowance for
doubtful accounts and its revenue recognition policy using the
percentage of completion method of accounting for contracts.
Revenue Recognition -
The Company follows the percentage-of-completion method of accounting
for contracts that extend for periods in excess of one year.
Accordingly, income is recognized in the ratio that costs incurred
bears to estimated total costs. Where contracts in progress are subject
to negotiation and it is probable that the additional costs will be
recovered, none of the costs are recognized in the income statement
until pricing has been approved. Similarly, the revenue is not
recognized until realization is assured beyond a reasonable doubt.
Adjustments to cost estimates are made periodically, and losses
expected to be incurred on contracts in progress are charged to
operations in the period such losses are determined. The aggregate of
cost incurred on contracts in progress in excess of related billings is
shown as a current asset, and the aggregate of billings on contracts in
progress in excess of related costs incurred as shown as a current
liability.
Revenue Recognition -
The Company follows the percentage-of-completion method of accounting
for contracts that extend for periods in excess of one year.
Accordingly, income is recognized in the ratio that costs incurred
bears to estimated total costs. Where contracts in progress are subject
to negotiation and it is probable that the additional costs will be
recovered, none of the costs are recognized in the income statement
until pricing has been approved. Similarly, the revenue is not
recognized until realization is assured beyond a reasonable doubt.
Adjustments to cost estimates are made periodically, and losses
expected to be incurred on contracts in progress are charged to
operations in the period such losses are determined. The aggregate of
cost incurred on contracts in progress in excess of related billings is
shown as a current asset, and the aggregate of billings on contracts in
progress in excess of related costs incurred as shown as a current
liability.
8
Recent accounting pronouncements -
- In November 2004, the Financial Accounting Standards Board issued
(`the FASB") issued Statement of Financial Accounting Standards No.
151 ("SFAS No. 151"), "Inventory Costs, an amendment of ARB No. 43,
Chapter 4." SFAS No. 151 clarifies that abnormal inventory costs such
as costs of idle facilities, excess freight and handling costs, and
wasted materials (spoilage) are required to be recognized as current
period costs. The provisions of SFAS No.151 are effective for
inventory costs incurred during fiscal years beginning after June 15,
2005. Management is currently evaluating the provisions of SFAS No.
151 and does not expect the adoption will have a material impact on
the Company's financial position, results of operations or cash flows.
- In December 2004, the FASB finalized SFAS No. 123R "Share-Based
Payment" ("SFAS 123R"), amending SFAS No. 123, effective beginning the
Company's first quarter of fiscal 2006. SFAS 123R will require the
Company to expense stock options based on grant date fair value in its
financial statements. Further, adoption of SFAS No. 123R will require
additional accounting related to income tax effects and additional
disclosure regarding cash flow effects resulting from share-based
payments arrangements. The adoption of SFAS 123R will not effect the
Company's cash flows or financial position, but may have an adverse
impact on results of operations if options are granted in the future.
- In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment for APB Opinion No. 29". This
statement amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has commercial
substance if future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions of SFAS No.
153 are effective for the Company's year ended December 31, 2006.
Management is currently evaluating the impact of the adoption of SFAS
No. 153 on the Company's consolidated financial position, liquidity,
or results of operations.
[3] INVENTORY
Inventory, which consists of raw materials, is valued at the lower of cost
or market. Cost is determined by the weighted average method.
[4] NET INCOME PER SHARE
Earnings per share are calculated in accordance with the provisions of
Statement of Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 requires the reporting of both basic earnings per share,
which is the weighted-average number of common shares outstanding, and
diluted earnings per share, which includes the weighted-average number of
common shares outstanding and all dilutive potential common shares
outstanding, utilizing the treasury stock method. For the three and nine
months ended September 30, 2004 and 2003, the shares issued in the
Transaction are treated as outstanding for all periods presented. Share and
per share amounts reflect the effect of the one for twenty reverse stock
split in October 2001.
9
[5] ISSUANCE OF SHARES
During the nine month ended September 30,2004, the Company issued
11,080,000 shares of common stock at $0.10, for proceeds of $1,108,
inclusive of issuance costs of $20.
[6] OTHER (EXPENSE) INCOME
Aggregate amounts in other (expense) income are primarily the result of
foreign currency translation adjustments. Substantially all of the
Company's sales are made in U.S. dollars. In addition, a substantial
portion of the Company's costs are incurred in U.S. dollars. Since the U.S.
dollar is the primary currency in the economic environment in which the
Company operates, the U.S. dollar is its functional currency.
During the nine months ended September 30, 2004, certain assets and
liabilities were denominated in NIS (New Israeli Shekels) while the
payments to suppliers were linked to the U.S. dollar. This caused a
substantial translation adjustment due to relative strength of the U.S
dollar to the NIS in 2004.
[7] GEOGRAPHIC REPORTING
Revenues by geographic classifications are as follows:
[In U.S. $ thousands]
Israel Italy France Total
------ ----- ------ -----
For the three month period
ended September 30, 2004 $ 163 $ 1,397 $ -- $ 1,560
For the thee month period
ended September 30, 2003 $ 427 $ 50 $ -- $ 477
For the nine month period
ended September 30, 2004 $ 1,499 $ 3,032 $ -- $ 4,531
For the nine month period
ended September 30, 2003 $ 2,502 $ 80 $ 227 $ 2,809
Assets by geographic classifications are as follows:
[IN U.S. $ THOUSANDS]
Israel Italy France Total
------ ----- ------ -----
As of September 30, 2004 $ 7,116 $ 803 $ -- $ 7,919
10
[8] COMMITMENTS AND CONTINGENCIES
The Company, from time to time, is a party to claims and lawsuits, in the
ordinary course of business. The Company has accrued amounts to cover such
claims if management believes, with advice of counsel, that losses are
probable.
The Company has initiated legal proceedings in India to recover costs
incurred in a project for a European customer. Total receivable as of
September 30, 2004 for this project is approximately $400,000. As
management can not reasonably determine the outcome of this matter, a
reserve of approximately $100,000 has been accounted for with regards to
this receivable.
[9] LINE OF CREDIT
In July 2004 the Company entered into a line of credit agreement for up to
$1,000,000. This line bears interest at LIBOR + 5%. The LIBOR rate at the
date of the Line was approximately 1.4%. This line is available through
March 31, 2006, with prescribed repayments of principal and interest
throughout the life of the line of credit. This line is collateralized by
the assignment of a receivable from a customer of the Company's Italian
subsidiary Clean Systems Technology Italia S.r.l for approximately
$983,000. In addition the Company has placed into an escrow account
1,212,121 shares of its common stock with a value of approximately
$400,000, as security in the event of non-payment. The line requires a
credit extension fee of 2% of the available credit, or $20,000. This fee
has been recorded as a discount against net proceeds the line of credit,
and is being amortized as interest expense over the life of the line.
In the event of non-payment the lender may convert any unpaid portion of
the unpaid line of credit into shares of the Company's common stock at the
lower of $0.20 per share or 67% of quoted market price of the Company's
common stock on the date of conversion.
As of September 30, 2004, the Company has drawn approximately $746,000 from
this line of credit
Through March 31, 2005, the Company has drawn approximately $850,000 under
this line of credit.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-looking Statements
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements,
which are other than statements of historical facts. These statements are
subject to uncertainties and risks including, but not limited to, product and
service demand and acceptance, changes in technology, economic conditions, the
impact of competition and pricing, government regulation, and other risks, many
of which are beyond the Company's control, defined in this document and in
statements filed from time to time with the Securities and Exchange Commission.
These cautionary statements and any other cautionary statements that may
accompany the forward-looking statements expressly qualify all such
forward-looking statements. In addition, Clean Systems Technology Group, Ltd.
disclaims any obligation to update any forward-looking statements to reflect
events or circumstances after the date hereof.
Overview
CSTI designs, engineers, manufactures, installs and services ultra high
purity systems for transportation of clean gases and liquids from the source,
where the gases and liquids are stored, to the point of use for the following
processing industries:
o Micro-electronics (semi conductors);
o Optical fibers;
o Pharmaceuticals and Bio-technology; and
o Metal Blades.
CSTI product lines provide a total solution for the four major gas and
chemical systems from source to the point of use referenced above. Since the
gases and the chemicals are pure and extremely dangerous, the systems that CSTI
manufactures must have the highest levels of safety and quality.
CSTI products are divided into three main categories:
o Systems for ultra high purity gases from source to point of use;
o Pre-manufactured products sub-systems; and
o System upgrades.
A strategic decision was adopted by CSTI to be involved in the fiber optic
industry. Since May 2002 to date 5 types of processing machines have been
developed to solve smooth fabrication and quality problems of the fibers. Those
machines are to be manufactured for CSTI clients in the fiber industry. The
prototype of the first machine is to be launched - January 2005.
Critical Accounting Policies and Estimates
This discussion and analysis of the Company's financial condition and
results of operations are based on its consolidated financial statements that
have been prepared under accounting principles generally accepted in the United
States of America. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates. All significant accounting policies are disclosed in note
2 to the consolidated financial statements included in Form 10-KSB. The
12
consolidated financial statements and the related notes thereto should be read
in conjunction with the following discussion of the Company's critical
accounting policies. Critical accounting policies and estimates are:
o Revenue Recognition
o Use of Estimates
Revenue Recognition - The Company follows the percentage-of-completion method of
accounting for contracts that extend for periods in excess of one year.
Accordingly, income is recognized in the ratio that costs incurred bears to
estimated total costs. Where contracts in progress are subject to negotiation
and it is probable that the additional costs will be recovered, none of the
costs are recognized in the income statement until pricing has been approved.
Similarly, the revenue is not recognized until realization is assured beyond a
reasonable doubt. Adjustments to cost estimates are made periodically, and
losses expected to be incurred on contracts in progress are charged to
operations in the period such losses are determined. The aggregate of cost
incurred on contracts in progress in excess of related billings is shown as a
current asset, and the aggregate of billings on contracts in progress in excess
of related costs incurred as shown as a current liability.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Results of Operations
The following table sets forth, as a percentage of total revenue, certain
consolidated statements of operations data for the periods indicated. These
operating results are not necessarily indicative of the results for any future
period.
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
% % % %
Revenues 100 100 100 100
Cost of revenues 59 135 57 81
Administrative & general 26 98 27 40
Income (loss) from operations 15 (133) 16 (21)
Interest expense (4) (22) (5) (17)
Other (expense) income (2) 18 - (12)
Income (loss) before provision
For income taxes 9 (137) 11 (50)
(Benefit) provision for income taxes 0 1 - 2
------- ------- ------ ------
Net income (loss) 9 (138) 11 (52)
======= ======= ====== ======
13
Three Months Ended September 30, 2004 compared with Three Months ended
September 30, 2003
(Amounts in Thousands unless Otherwise Indicated)
Revenues
Revenues in 2004 of $1,560,000 increased $1,083,000 (or 227%) from $477,000 in
2003. Management's strategic decision is to continue to be a premier industry
leader in Israel as well as to continue to gain market share in the European and
Central Asian markets. During the three months ended September 30, 2004 and
2003, revenues to customers in Israel amounted to 163 and 427 respectively.
Revenues to non-domestic customers amounted to $1,397 and $50, respectively. In
general, the Company is not dependent upon any single customer or group of
customers. The nature of the Company's business is such that it works on several
large contracts at any one time. Therefore, several customers may comprise a
significant portion of CSTI's revenues during any fiscal period. Once the
Company installs a system for its customer, the customer is generally dependent
on the Company for future upgrades of that system.
Cost of Revenues
The following table sets forth a comparison of the costs of revenues for the
periods indicated:
Three months ended
September 30,
2 0 0 4 2 0 0 3
------- -------
Cost of materials and inventory $ 392,000 $ 152,000
Salaries, Subcontractors and
related expenses 275,000 237,000
Cost of service abroad 94,000 17,000
Rent and taxes 44,000 43,000
Vehicles and transportation 44,000 98,000
Equipment maintenance and insurance 22,000 31,000
Depreciation and Amortization 45,000 56,000
Miscellaneous (2,000) 11,000
---------- ----------
Cost of Revenues $ 914,000 $ 645,000
=========== ==========
Cost of revenues has increased by 269$ (or 42%) to $914 in 2004 from $645 in
2003. The increase is in line with the overall increase in Company revenues. The
purchase cost of materials has decreased in 2004 as a percentage of the revenue
as compared to 2003, 25% and 32% respectively. Materials, inventory costs and
labor as a percentage of revenues was lower in 2004 lower as compared in 2003,
at 43% and 81% respectively. The average number of employees during 2004 was 58
as compared to 65 for 2003. Other costs such as rent and taxes, transportation,
equipment maintenance and insurance and depreciation have changed in relative
proportion to the decrease in revenues, and number of employees.
Gross Profit
Gross profit (loss) has increased by $814 (or 485%) to $646 in 2004 from $(168)
in 2003.
14
Administrative & general expenses
The following table sets forth details regarding selling, general and
administrative expenses for the periods indicated:
Three months ended
September 30,
2 0 0 4 2 0 0 3
------- -------
Salaries and related expenses $ 165,000 $ 104,000
Professional fees 195,000 202,000
Telephone and office maintenance 40,000 72,000
Travel vehicles and transportation 12,000 10,000
Depreciation 27,000 41,000
Sales and marketing (27,000) 37,000
------------ ---------
$ 412,000 $ 466,000
============ =========
Administrative & general expenses have decreased $54,000 (or 12%) to $412 in
2004 from $466,000 in 2003.
Interest Expense
Interest expense decreased by $35,000 to $70,000 in 2004 from $105,000 in 2003.
The decrease is primarily attributable, to lower rate of interest.
The decrease is primarily attributable to lower interest rates on credit lines
and notes payable in 2004 as compared to 2003, and the repayments of credit
lines and the conversion of the convertible notes into shares of the Company's
common stock in 2003.
Other (Expense) Income
The increase in other (expense) income by $112,000 to $(26,000) in 2004 as
compared to an income of $86,000 in 2003 is primarily due to the result of
foreign currency translation adjustments. Substantially all of the Company's
sales are made in U.S. dollars. In addition, a substantial portion of the
Company's costs are incurred in U.S. dollars. Since the U.S. dollar is the
primary currency in the economic environment in which the Company operates, the
U.S. dollar is its functional currency.
During the three months ended September 30, 2004 and 2003, certain assets and
liabilities were denominated in NIS (New Israeli Shekel) while the payments to
suppliers was linked to the U.S. dollar.
Nine months ended September 30, 2004 compared with nine months ended September
30, 2003(Amounts in thousands unless otherwise indicated).
Revenues
Revenues in 2004 of $4,531,000 increased by $1,722,000 (or 61%) from $2,809,000
in 2003. During the nine months ended September 30, 2004 and 2003, revenues from
customers in Israel amounted to $1,499 and $2,502, respectively. Revenues to
Italian, and other non-domestic costumers amounted to $3,032 and $307
respectively.
15
Cost of revenues
The following table sets forth a comparison of the costs of revenues for the
periods indicated:
Nine months ended
September 30,
2 0 0 4 2 0 0 3
--------- ---------
Cost of materials and inventory $ 1,063,000 $ 774,000
Salaries, subcontractors, and
related expenses 854,000 821,000
Cost of service abroad 144,000 85,000
Rent and taxes 132,000 101,000
Vehicles and transportation 156,000 204,000
Equipment maintenance and insurance 109,000 116,000
Depreciation 140,000 145,000
Miscellaneous 2,000 23,000
-------------- -------------
Cost of revenues $ 2,600,000 $ 2,269,000
============== =============
The ratio of cost of revenue to revenues has varied from 57% in 2004 in
comparison to 81% in 2003 mainly due to increase in revenues and improving
profitability.
Gross profit
Gross profit has increased by $1,391 to $1,931 in 2004 from $540 in 2003. The
increase in gross profit percentage to 43% in 2004 from 19% in 2003 is due to
the margins attained on revenues due to the pricing environment. During the nine
months ended September 30, 2004,a substantial portion of revenues were earned
out of Israel. A change in trend compared to the comparative nine month period.
Administrative & general expenses
The following table sets forth details regarding selling, general and
administrative expenses for the periods indicated:
Nine months ended
September 30,
2004 2003
---- ----
Salaries and related expenses $ 430,000 $ 281,000
Professional fees 435,000 363,000
Telephone and office maintenance 147,000 226,000
Travel vehicles and transportation 35,000 29,000
Depreciation 87,000 98,000
Sales and marketing 81,000 124,000
---------- ----------
$ 1,215,000 $ 1,121,000
============ ============
Administrative and general expenses have increased by $94 (or 8%) to $1,215,000
in 2004 from $1,121,000 in 2003.The increase is primarily attributable to the
increase volume of activities. Management has also instituted cost cutting
program to improve cash flow.
Interest expenses
Interest expense decreased by $251,000 to $223,000 in 2004 from $474,0000 in
2003. The decrease is primarily attributable to lower level of interest rates
and improve in profitability. Part of the decrease is also attributed to
conversion of convertible notes to common stock.
16
Other (expense) income
Expense decreased by $322,000 to $15,000 in 2004 from $337,000 in 2003.
Liquidity and Capital Resources
At September 30, 2004, the Company had cash and cash equivalents of $975,000 as
compared to $6,000 at September 30, 2003.
Net cash used in operating activities was $1,559,000 for the nine months ended
September 30, 2004 as compared to $368,000 for the nine months ended September
30, 2003. The use of net cash for operating activities is primarily attributable
to increases in accounts receivables.
Net cash used in investing activities was $35,000 and $6,000 for the nine months
ended September 30, 2004 and 2003, respectively.
Net cash provided by financing activities was $1,981,000 and $ 357,000 for the
nine month ended September 30, 2004 and 2003 respectively. The increase was
primarily due to the sale of common stock and new borrowings to support the
Company's working capital position in 2004 versus 2003.
The following summarizes certain financing outstanding as of September 30, 2004:
[a] Bank Guarantees - Certain customers require the Company to obtain bank
guarantees of a portion of the contract undertaken. The Company has an agreement
with the bank under which such guarantees are available. In the event the
Company is unable to perform all aspects of the contracts, the bank will make
contractual payments to customers and then seek reimbursement from the Company.
As of September. 30, 2004, the bank had extended approximately $95 in guarantees
to five customers.
Assuming there is the improvement and change in the business, the Company
believes that additional funding and improved cash flow from operations and will
be sufficient to fund its needs for at least the next twelve months.
In July 2004 the Company entered into a line of credit agreement for up to
$1,000,000. This line bears interest at LIBOR + 5%. The LIBOR rate at the date
of the Line was approximately 1.4%. This line is available through March 31,
2006, with prescribed repayments of principal and interest throughout the life
of the line of credit. This line is collateralized by the assignment of a
receivable from a customer of the Company's Italian subsidiary Clean Systems
Technology Italia S.r.l for approximately $983,000. In addition the Company has
placed into an escrow account 1,212,121 shares of its common stock with a value
of approximately $400,000, as security in the event of non-payment. The line
requires a credit extension fee of 2% of the available credit, or $20,000. This
fee has been recorded as a discount against net proceeds the line of credit, and
is being amortized as interest expense over the life of the line.
In the event of non-payment the lender may convert any unpaid portion of the
unpaid line of credit into shares of the Company's common stock at the lower of
$0.20 per share or 67% of quoted market price of the Company's common stock on
the date of conversion.
Through March 31, 2005, the Company has drawn approximately $850,000 under this
line of credit.
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Item 3. Controls and Procedures.
The Company maintains "disclosure controls and procedures," as such term is
defined in Rules 13a-15e and 15d-15e of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that are designed to ensure that information
required to be disclosed in its reports, pursuant to the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to its management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding the
required disclosures. In designing and evaluating the disclosure controls and
procedures, management has recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurances of
achieving the desired control objectives, and management necessarily is required
to apply its judgment in evaluating the cost benefit relationship of possible
controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures" as of the end of the period covered by this Quarterly Report on Form
10-QSB. Based on their evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date the controls were evaluated.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as previously disclosed in the Company's Form 10-KSB, and the
attached financial statements, the Company is not party to any other material
legal proceedings.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
We sold an aggregate of 11,080,000 shares of Common Stock for gross proceeds of
$1,088,000. The sales were made pursuant to Section 4(2) of the Securities Act
of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the quarter ended
June 30, 2004.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on behalf by the undersigned, thereunto duly
authorized.
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
Dated: April 12, 2005 By: /S/ JACOB LUSTGARTEN
------------------------
Jacob Lustgarten
Chief Executive Officer and
Chairman of the Board
Dated: April 12, 2005 By: /S/ YONA LIEBOWITZ
----------------------
Yona Liebowitz
Chief Financial Officer
20