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 MARCH 31, 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)
011 972 8 660 2108
------------------------------------------------
(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 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 [ ] No [X]
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........................................17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................18
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.....18
Item 3. Defaults upon Senior Securities................................18
Item 4. Submission of Matters to a Vote of Securities Holders..........18
Item 5. Other Information..............................................18
Item 6. Exhibits and Reports on Form 8-K...............................18
Signature Page
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of March 31, 2004 (Unaudited)...................4
Consolidated Statements of Operations for the three months
ended March 31, 2004 and 2003 (Unaudited)....................................5
Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003 (Unaudited)....................................6
Notes to the Consolidated Financial Statements (Unaudited).................7-11
3
Clean Systems Technology Group, Ltd
Consolidated Balance Sheet
March 31, 2004
(Unaudited)
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 1,150
Account receivable - net of allowance
for doubtful accounts of $114 1,556
Inventory 2,095
Other current assets 424
------------------
Total current assets 5,225
Property and equipment - net 1,171
Investment 178
Other assets 66
------------------
$ 6,640
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current potion long term debt - Lines of
credit and notes payable $ 1,231
Due to related parties 70
Accounts payable 1,901
Accrued expenses 558
Accrued compensation 550
Other liabilities 121
------------------
Total current liabilities 4,431
------------------
Long-term debt 760
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 (4,685)
------------------
Total shareholders' equity 1,449
------------------
$ 6,640
==================
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
------------------------------------
March 31, March 31,
2004 2003
--------------- ----------------
Revenues $ 1,564 $ 1,352
Cost of Revenues 894 779
--------------- ----------------
670 573
Administrative and general expenses 384 327
--------------- ----------------
Income from operations 286 246
--------------- ----------------
Other (expense) income
Interest expenses (62) (170)
Other (expense) income 65 (21)
--------------- ----------------
Total other (expense) income 3 (191)
--------------- ----------------
Income before provision for income taxes 289 55
Provision for income taxes 12 7
--------------- ----------------
Net income $ 277 $ 48
=============== ================
Net income per share - basic $ - $ -
=============== ================
Net income per share - diluted $ - $ -
=============== ================
Weighted average number of common shares - basic 78,395,857 42,766,087
=============== ================
Weighted average number of common shares - diluted 78,395,857 44,321,516
=============== ================
See notes to unaudited consolidated financial statements.
5
Clean Systems Technology Group, Ltd
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three months Ended
--------------------------------
March 31, March 31,
2004 2003
------------- --------------
Operating Activities:
Net income $ 277 $ 48
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 76 85
Gain from the sale of property and equipment - 10
Changes in operating assets and liabilities:
Account receivable (275) (802)
Inventory 120 (35)
Other assets (109) (5)
Accounts payable 27 363
Accrued expenses (19) 22
Accrued compensation (192) (95)
Other liabilities (161) 20
------------- --------------
Net cash used in operating activities (256) (389)
------------- --------------
Investing Activities:
Acquisition of property and equipment (9) -
Proceeds from sale of property and equipment - 44
------------- --------------
Net cash (used in) provided by investing activities (9) 44
------------- --------------
Financing Activities:
Proceeds from lines of credit and notes payable - 385
Repayments of lines of credit and notes payable (261) (48)
Proceeds from issuance of common stock 1,108 -
Offering costs associated with issuance of common stock (20) -
------------- --------------
Net cash provided by financing activities 827 337
------------- --------------
Net increase (decrease) in cash 562 (8)
Cash and cash equivalents at beginning of year 588 23
------------- --------------
Cash and cash equivalents at end of period $ 1,150 $ 15
============= ==============
Supplemental disclosure of cash flow information:
Cash Paid for:
Interest $ 62 $ 106
============= ==============
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 unaudited 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
three months ended March 31, 2004 are not necessarily indicative of the
results that may be expected for the year ended 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 options 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 March 31, 2004 and for the
three months ended March 31, 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.
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.
8
- 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 months ended March 31, 2004 and 2003, the shares
issued in the Transaction are treated as outstanding for all periods
presented. For the three months ended March 31, 2003, dilutive
potential common shares outstanding reflect shares issuable under
convertible notes, which were retired in the year ended December 31,
2003. As of March 31, 2004, there were no dilutive potential common
shares. Share and per share amounts reflect the effect of the one for
twenty reverse stock split in October 2001.
9
[5] ISSUANCE OF COMMON SHARES
During the three months ended March 31, 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 (INCOME) EXPENSE
Aggregate amounts in other (income) expense is 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 three months ended March 31, 2004, certain assets and
liabilities were denominated in NIS (New Israeli Shekel) while the
payments to suppliers were linked to the U.S. dollar.
[7] GEOGRAPHIC REPORTING
Revenues by geographic classifications are as follows:
[IN U.S. $ THOUSANDS]
ISRAEL ITALY INDIA FRANCE TOTAL
For the period ended March 31, 2004 $ 680 $ 884 $ -- $ -- $1,564
For the period ended March 31, 2003 $ 1,110 $ 15 $ -- $ 227 $1,352
Assets by geographic classifications are as follows:
[IN U.S. $ THOUSANDS]
ISRAEL ITALY INDIA FRANCE TOTAL
As of March 31, 2004 $ 6,144 $1,268 $ -- $ -- $6,640
[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
March 31, 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.
10
[9] SUBSEQUENT EVENTS
- 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.
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
SPECIAL NOTE REGARDING 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, five types of processing machines have been
developed to solve smooth fabrication and quality problems of the fibers. These
machines are to be manufactured for CSTI clients in the fiber industry. The
prototype of the first machine was launched in January 2005.
12
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
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 Estimate
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 is 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.
13
THREE MONTHS ENDED
MARCH 31,
2 0 0 4 2 0 0 3
------- -------
Revenues 100% 100 %
Cost of revenues 57% 58 %
Gross profit 43% 42 %
Selling, general and administrative 25% 24 %
Income from Operations 18% 18 %
Interest Expense (4)% (13)%
Other (expense) income 4% (2)%
Income before provision for income taxes 18% 3%
Provision for income taxes 1% 1%
------- --------
Net income 17% 4%
======= ========
REVENUES
Revenues in 2004 of $1,564,000 increased $212,000 (or 16%) from
$1,352,000 in 2003. Management's strategic decision is to continue its
operations in Israel as well as to continue to gain market share in the European
and Central Asian markets. During the three months ended March 31, 2004 and
2003, revenues from customers in Israel amounted to $680,000 and $1,110,000,
respectively. Revenues from non-domestic customers amounted to $884,000 and
$242,000 for the three months ended March 31, 2004 and 2003, 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
MARCH 31,
2004 2003
---- ----
Cost of materials and inventory $ 407,000 $ 243,000
Salaries, Subcontractors and related expenses 268,000 279,000
Cost of service abroad 18,000 55,000
Rent and taxes 41,000 49,000
Vehicles and transportation 53,000 53,000
Equipment maintenance and insurance 57,000 42,000
Depreciation and Amortization 48,000 52,000
Miscellaneous 2,000 6 ,000
--------- ----------
Cost of Revenues $ 894,000 $ 779,000
========= =========
14
Cost of revenues has increased by $115,000 (or 14.8%) to $894,000 in 2004 from
$779,000 in 2003. The increase is in line with the overall changes in the
revenues. The purchase cost of materials varied from 18% in 2003 to 26% in 2004
due to change in the scope of work and volume of revenues. Labor as a percentage
of revenues was 17% in 2004, as compared to 21% in 2003. The average number of
employees during 2004 was 60 as compared to 65 for 2003. Other costs such as
rent and taxes, transportation, equipment maintenance and insurance and
depreciation stayed relatively stable to the previous period.
GROSS PROFIT
Gross profit has increased by $97,000 (or 17%) to $670,000 in 2004 from $573,000
in 2003. Gross profit margins have remained stable - 43% in 2004 versus 42% in
2003.
ADMINISTRATIVE & GENERAL EXPENSES
The following table sets forth details regarding administrative and general
expenses for the periods indicated:
THREE MONTHS ENDED
MARCH 31,
2 0 0 4 2 0 0 3
------- -------
Salaries and related expenses $130,000 $78,000
Professional fees 155,000 105,000
Telephone and office maintenance 42,000 53,000
Travel vehicles and transportation 11,000 10,000
Depreciation 32,000 33,000
Sales and marketing 14,000 48,000
--------- --------
Total $384,000 $327,000
========= ========
Selling, General and Administrative Expenses ("SG&A") have increased $57,000 (or
17.4%) to $384,000 in 2004 from $327,000 in 2003. The increase is primarily
attributable to the relative change in revenues.
INTEREST EXPENSE
Interest expense decreased by $108,000 to $62,000 in 2004 from $170,000 in 2003.
The decrease is primarily attributable to a lower level of interest rate as
compared to 2003 and new investments from shareholders.
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 of $86,000 to $65,000 in 2004 as compared
to an expense of $(21,000) in 2003 is 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
15
economic environment in which the Company operates, the U.S. dollar is its
functional currency. During the three months ended March 31, 2004 and 2003,
certain assets and liabilities were denominated in NIS while the payments to
suppliers was linked to the U.S. dollar.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Company had cash and cash equivalents of
$1,150,000 as compared to $15,000 at March 31, 2003.
Net cash used in operating activities was $256,000 for the three months
ended March 31, 2004 as compared to $389,000 for the three months ended March
31, 2003.
Net cash (used in) provided by investing activities were $(9,000) and
$44,000 for the three months ended March 31, 2004 and 2003, respectively. The
$53,000 difference is primarily due to proceeds from the sale of property and
equipment of $44,000 in 2003, versus the acquisition of property and equipment
in 2004 of $9,000.
Net cash provided by financing activities was $827,000 and $337,000 for
the three months ended March 31, 2004 and 2003, respectively. The increase was
primarily due to sale of the Company's common stock to support the Company's
working capital position in 2004 versus 2003.
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.
Through March 31, 2005, the Company has drawn approximately $850,000
under this line of credit.
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.
The following summarizes certain financing outstanding as of March 31, 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 March 31, 2004, the bank had extended approximately $96,000 in guarantees
to one customers.
16
Assuming there is no significant change in the business, the Company believes
that additional funding such as described above and cash flow from operations
and will be sufficient to fund its needs for at least the next twelve months.
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.
17
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 March
31, 2004.
18
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