SONIC ENVIRONMENTAL SOLUTIONS INC.
(A Development Stage Company)
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
(Unaudited)
Sonic Environmental Solutions Inc. | Statement 1 |
(A Development Stage Company) | |
Interim Consolidated Balance Sheets | |
Canadian Funds |
March 31, | December 31, | |||||
2007 | 2006 | |||||
ASSETS | (Unaudited) | (Audited) | ||||
Current | ||||||
Cash and cash equivalents | $ | 422,234 | $ | 1,751,908 | ||
Interest receivable | 2,080 | 5,869 | ||||
Refundable deposit | 105,500 | 105,500 | ||||
Accounts receivable | 337,431 | 711,825 | ||||
GST receivable | 56,340 | 190,077 | ||||
Work in progress | 155,539 | 181,040 | ||||
Inventory | 365,910 | 260,855 | ||||
Prepaid expenses | 125,148 | 137,327 | ||||
1,570,182 | 3,344,401 | |||||
Property, Plant and Equipment(Note 4) | 3,332,752 | 3,470,938 | ||||
Deferred Development Costs(Note 5) | 857,574 | 883,633 | ||||
Patents and Other Intangible Assets(Note 6) | 2,998,136 | 3,075,633 | ||||
$ | 8,758,644 | $ | 10,774,605 | |||
LIABILITIES | ||||||
Current | ||||||
Accounts payable | $ | 954,104 | $ | 1,058,508 | ||
Accrued liabilities | 987,298 | 1,183,217 | ||||
Due to related parties(Notes 8 and 11) | 8,285 | 259,468 | ||||
Terra-Kleen acquisition payment(Note 8 and 11) | - | 35,000 | ||||
1,949,687 | 2,536,193 | |||||
Deferred Rent Inducement(Note 13b) | $ | 48,151 | $ | 52,528 | ||
Going Concern(Note 1) | ||||||
Commitments(Note 13) | ||||||
SHAREHOLDERS’ EQUITY | ||||||
Share Capital-Statement 2 (Notes 9 and 10) | ||||||
Authorized: | ||||||
Unlimited common shares without par value | ||||||
Issued, allotted and fully paid: | ||||||
31,260,068 (2006 – 31,260,068) | 22,953,387 | 22,953,387 | ||||
Contributed Surplus–Statement 2 | 3,539,442 | 3,419,708 | ||||
Deficit Accumulated During the Development Stage-Statement 2 | (19,732,023 | ) | (18,187,211 | ) | ||
6,760,806 | 8,185,884 | |||||
$ | 8,758,644 | $ | 10,774,605 |
The accompanying notes are an integral part of these consolidated financial statements
ON BEHALF OF THE BOARD:
“Adam Sumel” | , Director |
“Douglas B. Forster” | , Director |
Sonic Environmental Solutions Inc. | Statement 2 |
(A Development Stage Company) | |
Interim Consolidated Statements ofShareholders’ Equity | |
Canadian Funds | |
(Unaudited) |
Accumulated | ||||||||||||||||||
Common Shares | Other | |||||||||||||||||
Contributed | Comprehensive | Accumulated | ||||||||||||||||
Number | Amount | Surplus | Income | Deficit | Total | |||||||||||||
Balance - December 31, 2005 | ||||||||||||||||||
(Restatement – Note 14) | 19,839,350 | $ | 16,400,927 | $ | 2,158,614 | - | ($10,517,812 | ) | $ | 8,041,729 | ||||||||
Private placement | 2,797,223 | 2,224,818 | - | - | - | 2,224,818 | ||||||||||||
Private placement | 6,670,000 | 2,919,897 | - | - | - | 2,919,897 | ||||||||||||
Fair value of warrants issued | - | - | 707,786 | - | - | 707,786 | ||||||||||||
Fair value of agents’ warrants | ||||||||||||||||||
issued | - | - | 35,561 | - | - | 35,561 | ||||||||||||
Exercise of options – cash | ||||||||||||||||||
component | 20,000 | 10,000 | - | - | - | 10,000 | ||||||||||||
Acquisition of subsidiary(Note | ||||||||||||||||||
8) | 600,161 | 558,150 | - | - | - | 558,150 | ||||||||||||
Share issuance costs | - | (588,209 | ) | - | - | - | (588,209 | ) | ||||||||||
Stock-based compensation | - | - | 571,110 | - | - | 571,110 | ||||||||||||
Exercise of options – fair value | - | 2,548 | (2,548 | ) | - | - | - | |||||||||||
Loss for the period– | ||||||||||||||||||
Statement 3 | - | - | - | - | (7,299,328 | ) | (7,299,328 | ) | ||||||||||
Issued and outstanding at | ||||||||||||||||||
December 31, 2006 | 29,926,734 | $ | 21,528,131 | $ | 3,470,523 | $ | - | ($17,817,140 | ) | $ | 7,181,514 | |||||||
Shares allotted for debenture | ||||||||||||||||||
settlement | 1,333,334 | 1,425,256 | (50,815 | ) | - | (370,071 | ) | 1,004,370 | ||||||||||
Issued, outstanding and allotted | ||||||||||||||||||
at December 31, 2006 | 31,260,068 | $ | 22,953,387 | $ | 3,419,708 | $ | - | ($18,187,211 | ) | $ | 8,185,884 | |||||||
Stock-based compensation | - | - | 119,734 | - | - | 119,734 | ||||||||||||
Loss and comprehensive loss | ||||||||||||||||||
for the period– Statement 3 | - | - | - | - | (1,544,812 | ) | (1,544,812 | ) | ||||||||||
Issued and outstanding at March | ||||||||||||||||||
31, 2007 | 31,260,068 | $ | 22,953,387 | $ | 3,539,442 | $ | - | ($19,732,023 | ) | $ | 6,760,806 |
The accompanying notes are an integral part of these consolidated financial statements
Sonic Environmental Solutions Inc. | Statement 3 |
(A Development Stage Company) | |
Interim Consolidated Statements of Operations | |
Canadian Funds | |
(Unaudited) |
Three months | Three months | |||||
ended | ended | |||||
March 31, 2007 | March 31, 2006 | |||||
(Restatement – | ||||||
Note 14 | ) | |||||
Revenue | $ | 161,406 | $ | 243,574 | ||
Direct operating costs | 784,866 | 614,904 | ||||
(623,460 | ) | (371,330 | ) | |||
Expenses | ||||||
Advertising | 32,249 | 50,801 | ||||
Amortization of deferred | ||||||
development and other | ||||||
intangible asset costs | 109,744 | 114,949 | ||||
Amortization of property and | ||||||
office equipment | 30,096 | 39,833 | ||||
Automobile | 19,831 | 20,638 | ||||
Bank charges and interest | 908 | 924 | ||||
Insurance | 27,217 | 45,413 | ||||
Legal and accounting | 67,745 | 78,657 | ||||
Office, postage and printing | 15,634 | 20,242 | ||||
Rent | 64,988 | 58,978 | ||||
Research | 9,879 | 11,109 | ||||
Salaries and wages | 326,738 | 388,920 | ||||
Salaries and wages - Stock | ||||||
compensation(Note 10b) | 91,527 | 130,801 | ||||
Shareholder relations | 2,824 | 2,384 | ||||
Shareholder relations - Stock | ||||||
compensation(Note 10b) | 28,207 | 19,815 | ||||
Telephone and utilities | 20,649 | 22,134 | ||||
Trade shows | 17,524 | 9,007 | ||||
Transfer agent and regulatory | ||||||
fees | 13,298 | 8,420 | ||||
Travel and promotion | 49,746 | 68,984 | ||||
928,804 | 1,092,009 | |||||
Loss Before the Undernoted | (1,552,266 | ) | (1,463,339 | ) | ||
Interest income (expense) | 9,251 | (42,464 | ) | |||
Provision for income tax | (1,002 | ) | - | |||
Foreign exchange gain / (loss) | (795 | ) | (7,142 | ) | ||
Loss and comprehensive loss | ||||||
for the Period | $ | (1,544,812 | ) | $ | (1,512,945 | ) |
Deficit – beginning of period | (18,187,211 | ) | (10,517,812 | ) | ||
Deficit – End of Period | (19,732,023 | ) | (12,030,757 | ) | ||
Loss per Share – Basic and | ||||||
Diluted | $ | (0.05 | ) | $ | (0.09 | ) |
The accompanying notes are an integral part of these consolidated financial statements
Sonic Environmental Solutions Inc. | Statement 4 |
(A Development Stage Company) | |
Interim Consolidated Statements of Cash Flows | |
Canadian Funds | |
(Unaudited) |
Three months | ||||||
ended | ||||||
Three months | March 31, 2006 | |||||
ended | (Restatement – | |||||
March 31, 2007 | Note 14 | ) | ||||
Operating Activities | ||||||
Loss for the period | $ | (1,544,812 | ) | $ | (1,487,987 | ) |
Items not affecting cash: | ||||||
Amortization of deferred | ||||||
development and other | ||||||
intangible asset costs | 109,744 | 89,991 | ||||
Amortization of property, plant | ||||||
and equipment | 150,827 | 156,050 | ||||
Leasehold inducement | 4,377 | - | ||||
Deferred financing fees | - | 10,207 | ||||
Amortization of deferred costs | - | 2,138 | ||||
Stock-based compensation | 119,734 | 150,616 | ||||
(1,160,130 | ) | (1,078,985 | ) | |||
Net change in non-cash working | ||||||
capital(Note 3) | 83,592 | 372,758 | ||||
(1,076,538 | ) | (706,227 | ) | |||
Investing Activities | ||||||
Property, plant and equipment | ||||||
acquired | (167,801 | ) | (87,853 | ) | ||
Patents | (10,311 | ) | (12,427 | ) | ||
(178,112 | ) | (100,280 | ) | |||
Financing Activities | ||||||
Cash received for shares | - | 2,527,501 | ||||
Share issuance costs(Note 9b) | (75,024 | ) | (158,174 | ) | ||
(75,024 | ) | 2,369,327 | ||||
Net Increase (Decrease) in Cash and | ||||||
Cash Equivalents | (1,329,674 | ) | 1,562,820 | |||
Cash and cash equivalents - | ||||||
Beginning of period | 1,751,908 | 1,952,988 | ||||
Cash and Cash Equivalents – End of | ||||||
Period | $ | 422,234 | $ | 3,515,808 | ||
Supplemental Cash Flow | ||||||
Information | ||||||
Interest paid | $ | 791 | $ | 53,266 | ||
Taxes paid | $ | 1,002 | $ | - | ||
Supplemental Investing and | ||||||
Financing Schedule of Non- | ||||||
Cash Transactions | ||||||
Property, plant and equipment | ||||||
included in accounts payable | $ | 268,550 | $ | 59,536 | ||
Patent costs included in | ||||||
accounts payable | $ | 7,915 | $ | 2,303 | ||
Share issuance costs included | ||||||
in accounts payable | $ | - | $ | 16,113 |
The accompanying notes are an integral part of these consolidated financial statements
Sonic Environmental Solutions Inc. |
(A Development Stage Company) |
Notes to Interim Consolidated Financial Statements |
March 31, 2007 |
Canadian Funds |
(Unaudited) |
1. | Nature of Business and Going Concern |
The Company was incorporated February 4, 2000 in British Columbia, Canada and commenced trading on the TSX Venture Exchange on November 29, 2000. | |
The business of the Company is the commercialization of its patented sonic generator and related technologies in environmental process and other applications. The Company has focused primarily on commercial application of these technologies in the environmental sector to date and intends to apply the technology to other industry sectors reliant on process technologies. | |
The ability of the Company to realize the costs it has incurred to date on its technology is dependent on the Company being able to commercialize the technology and to operate its business without infringing on the proprietary rights of third parties or having third parties circumvent the Company’s rights. | |
As at March 31, 2007, the Company continues in the development stage. Although the Company has begun operations, significant revenues have not been generated. In addition, management continues to work on other development projects. | |
As at March 31, 2007, the Company has a working capital deficiency of $379,505. The Company has negative cash flows from operations, recorded a loss of $1,544,812 for the period ending March 31, 2007 and has an accumulated deficit of $19,732,023 as at March 31, 2007. The ability of the Company to continue as a going concern is dependent on the success of the Company’s Business Plan covering the periods of 2007 to 2010 and additional sources of capital. Subsequent to the end of the period, the Company closed a private placement for gross proceeds of $4,528,800(Note 15). While these interim consolidated financial statements have been prepared on the assumption that the Company is a going concern and will be able to realize its assets and settle its obligations in the ordinary course of business, significant adjustment to the carrying amounts of the Company’s assets and liabilities may be required if this assumption is not valid. | |
2. | Significant Accounting Policies |
These unaudited interim consolidated financial statements follow the same accounting policies and methods of their application as the most recent annual audited consolidated financial statements for the year ended December 31, 2006 with the exception of accounting for Financial Instruments and Comprehensive Income. On January 1, 2007, the Company adopted CICA Handbook Section 3855,Financial Instruments – Recognition and Measurement, Section 3861,Financial Instruments – Disclosure and Presentationand Section 1530,Comprehensive Income. | |
Sections 3855 and 3861 establish standards for classification, recognition, measurement, presentation and disclosure of financial instruments, including financial and non-financial derivatives in the financial statements. The standards prescribe when to recognize a financial instrument in the balance sheet and at what amount; depending on their classification, a fair value or cost-based measure is used. Based on financial instrument classification, gains and losses on financial instruments are recognized in net income or other comprehensive income. |
Sonic Environmental Solutions Inc. |
(A Development Stage Company) |
Notes to Interim Consolidated Financial Statements |
March 31, 2007 |
Canadian Funds |
(Unaudited) |
2. | Significant Accounting Policies -continued | |
The Company’s financial instruments consist of cash and cash equivalents, interest receivable, refundable deposit, accounts receivable, GST receivable, accounts payable and accrued liabilities, due to related parties, and Terra-Kleen acquisition payment. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from the financial instruments. As the carrying value of these financial instruments approximates their fair value due to their short-term maturity or capacity of prompt liquidation, the Company has determined the fair value of these instruments is represented by their carrying value. | ||
Section 1530 requires the presentation of comprehensive income and its components. Comprehensive income includes both net earnings and other comprehensive income. Other comprehensive income for the company may include holding gains and losses on investments designated as available for sale. | ||
The adoption of these standards does not have an impact on the financial statements. | ||
Basis of Presentation | ||
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: | ||
- | SESI Systems Inc. (“SESI”), incorporated January 9, 2001 under the Company Act of British Columbia, Canada. The Company acquired 100% of the shares of SESI on December 12, 2002(Note 7a). | |
- | Contech PCB Containment Technology Inc. (“Contech”), incorporated September 13, 1994 under the Company Act of British Columbia, Canada. Contech is involved in the non- proprietary business of collection, recycling and safe disposal of PCB contaminated ballasts and related waste products. The Company acquired 100% of the shares of Contech effective August 1, 2003(Note 7b). | |
- | Sonic Environmental Solutions Corp., (“Sonic Corp.”), incorporated September 15, 2005 in the State of California. The Company acquired 100% of the shares of Terra-Kleen Response Group, Inc. (“Terra-Kleen”) on December 21, 2005 and merged it with Sonic Corp.(Note 8). | |
- | SonoOil Inc., (“SonoOil”), incorporated June 2, 2006 under the Company Act of British Columbia, Canada. SonoOil was established to develop the Company’s core sonic generator technology in the oil sands industry. | |
Included in these consolidated financial statements are the results of operations of SESI, Contech and Terra-Kleen from their respective dates of acquisition, Sonic Corp. and SonoOil from date of incorporation. All intercompany transactions and balances have been eliminated on consolidation. | ||
Sonic Environmental Solutions Inc. |
(A Development Stage Company) |
Notes to Interim Consolidated Financial Statements |
March 31, 2007 |
Canadian Funds |
(Unaudited) |
3. | Non-cash Working Capital Components |
Details are as follows: |
For the three | For the three | ||||||
Net changes in non-cash | months ended | months ended | |||||
working capital components: | March 31, 2007 | March 31, 2006 | |||||
GST and amounts receivable | $ | 537,421 | $ | 268,627 | |||
Inventory | (238,623 | ) | 12,636 | ||||
Prepaid expenses | 12,179 | 53,725 | |||||
Accounts payable | 138,339 | 34,422 | |||||
Accrued liabilities | (79,541 | ) | (8,896 | ) | |||
Due to related parties | (286,183 | ) | 12,244 | ||||
$ | 83,592 | $ | 372,758 |
4. | Property, Plant and Equipment |
Details are as follows: |
Net Book | ||||||||||
Value | ||||||||||
Accumulated | March 31, | |||||||||
Cost | Amortization | 2007 | ||||||||
Computer equipment | $ | 196,049 | $ | 134,260 | $ | 61,789 | ||||
Furniture and office equipment | 237,836 | 138,999 | 98,837 | |||||||
Leasehold improvements | 78,489 | 16,848 | 61,641 | |||||||
Vehicles | 173,396 | 164,905 | 8,491 | |||||||
Machinery and equipment | 2,898,311 | 1,745,509 | 1,152,802 | |||||||
Plant One | 238,874 | 118,227 | 120,647 | |||||||
Plant Two | 2,253,831 | 425,286 | 1,828,545 | |||||||
$ | 6,076,787 | $ | 2,744,034 | $ | 3,332,752 |
Net Book | ||||||||||
Value | ||||||||||
Accumulated | December 31, | |||||||||
Cost | Amortization | 2006 | ||||||||
Computer equipment | $ | 196,049 | $ | 129,250 | $ | 66,799 | ||||
Furniture and office equipment | 237,836 | 133,687 | 104,149 | |||||||
Leasehold improvements | 82,866 | 15,622 | 67,244 | |||||||
Vehicles | 173,396 | 162,081 | 11,315 | |||||||
Machinery and equipment | 2,885,669 | 1,681,720 | 1,203,949 | |||||||
Plant One | 238,874 | 106,283 | 132,591 | |||||||
Plant Two | 2,253,831 | 368,940 | 1,884,891 | |||||||
$ | 6,068,521 | $ | 2,597,583 | $ | 3,470,938 |
Property, plant and equipment are amortized when available for use. | |
Sonic Environmental Solutions Inc. |
(A Development Stage Company) |
Notes to Interim Consolidated Financial Statements |
March 31, 2007 |
Canadian Funds |
(Unaudited) |
5. | Deferred Development Costs |
Deferred development costs consist of product development costs and existing product enhancement costs. | |
Details are as follows: |
March 31, | December 31, | ||||||
2007 | 2006 | ||||||
Balance – Beginning of period | $ | 883,633 | $ | 987,873 | |||
Current period costs: | |||||||
Deferred development costs | - | - | |||||
Less: Amortization | (26,059 | ) | (104,240 | ) | |||
Balance – End of period | $ | 857,574 | $ | 883,633 |
6. | Patents and other intangible assets |
Patents and other intangible assets consist primarily of amounts associated with the acquisitions of SESI, Contech and Terra-Kleen. The Company acquired patents for low frequency sonic energy generator technology and proprietary processes to remediate PCB contaminated soils. | |
Activities during the period are as follows: |
March 31, | December 31, | ||||||
2007 | 2006 | ||||||
Balance – Beginning of period | $ | 3,075,633 | $ | 3,387,921 | |||
Current period costs: | |||||||
Additions | 6,186 | 45,980 | |||||
Less: Amortization | (83,683 | ) | (358,268 | ) | |||
Balance – End of period | $ | 2,998,136 | $ | 3,075,633 | |||
Sonic Environmental Solutions Inc. |
(A Development Stage Company) |
Notes to Interim Consolidated Financial Statements |
March 31, 2007 |
Canadian Funds |
(Unaudited) |
7. | Acquisitions |
a) SESI Systems Inc.
Effective December 12, 2002, the Company acquired 100% of SESI by the issuance of 2,997,135 common shares of the Company valued at $998,302 (see note 14 for restatement). The shares were escrowed based on time over 6 years. The Company had a director in common with SESI at the time of the purchase. The primary reason for the purchase of SESI was to acquire the Sonic technology and Canadian and United States patents. The consideration has been allocated, based on fair value, as follows:
Cash | $ | (30 | ) | ||||
Accounts payable | (23,371 | ) | |||||
Deferred development costs | 178,819 | ||||||
Patents and other intangible assets | 992,927 | ||||||
Amounts advanced from Sonic | (150,043 | ) | |||||
$ | 998,302 |
b) Contech PCB Containment Technology Inc.
By agreement effective August 1, 2003, the Company acquired 100% of the issued and outstanding shares of Contech. The Company acquired Contech to utilize its licence for handling and disposal of the contaminated materials, facilities approved by the regulatory authorities, environmental risk insurance, knowledgeable staff and management, and its expertise in handling of hazardous waste. As consideration for Contech, the Company paid $67,375, $25,000 upon closing (paid) and 15 monthly payments of $3,000 (paid), having a present value of $42,375 using a 10% interest rate, and issued 100,000 escrow shares. The fair value of shares issued by the Company has been determined at $137,866, by taking the value of the shares ($1.55CDN) on the date of the agreement multiplied by the number of shares to be released over time, and discounted using a 10% interest rate, to take into account the time value of the consideration. The consideration has been allocated, based on fair value, as follows:
Current assets | $ | 79,159 | |||||
Property, plant and equipment | 34,065 | ||||||
Intangible assets | 137,866 | ||||||
Current liabilities | (45,848 | ) | |||||
$ | 205,242 |
This is a related party transaction as a major Contech shareholder was also an officer of the Company. | |
Sonic Environmental Solutions Inc. |
(A Development Stage Company) |
Notes to Interim Consolidated Financial Statements |
March 31, 2007 |
Canadian Funds |
(Unaudited) |
8. | Acquisition of Terra-Kleen Response Group Inc. | |
On December 21, 2005, the Company acquired 100% of the shares of United States based Terra- Kleen which subsequently merged with Sonic Corp. | ||
Terra-Kleen has proprietary and patented technologies for the remediation of contaminated soil through a solvent extraction process which removes and concentrates contaminants. Terra-Kleen also has an established operating history with the Environmental Protection Agency in the United States. | ||
The total consideration for the purchase of Terra-Kleen, as outlined in the original agreement and amended March 23, 2007, is as follows: | ||
i. | Upon the closing, December 21, 2005, US$500,000 was paid through the issuance of the Company’s common shares valued at CDN$2.50 per share which resulted in an issuance of 234,680 common shares. On this closing date, the Company’s share market price was $1.15, therefore the share issuance was valued at $269,882; | |
ii. | On June 21, 2006, US$500,000 was paid through the issuance of the Company common shares at a price equal to the 20-day average closing price of such shares preceding their issue date. The 20-day average closing price of such shares was $0.93. This resulted in an issuance of 600,161 common shares valued at $558,150; | |
iii. | On March 23, 2007, US$250,000 was paid to the controlling shareholder of Terra-Kleen. The amount related to a settlement for an earn out provision based on revenues in the original agreement. The amount earned to date according to the original agreement of was $35,000; this amount was recorded as part of the purchase and the balance of $256,785 was expensed in fiscal 2006 as a purchase settlement. |
Therefore, total consideration given up is as follows:
Share issuance upon closing | $ | 269,882 | ||
Share issuance June 21, 2006 | 558,150 | |||
Due diligence and cash closing costs | 217,271 | |||
Final payment | 35,000 | |||
$ | 1,080,303 |
The consideration has been allocated, based on fair value, as follows:
Current assets | $ | 168,924 | ||
Property, plant and equipment | 315,660 | |||
Patents and other intangibles | 2,565,655 | |||
Current liabilities | (462,489 | ) | ||
Long term liabilities | (865,446 | ) | ||
Due to Shareholder | (571,528 | ) | ||
Due to Sonic Environmental Solutions Inc. | (70,473 | ) | ||
Net identifiable assets and liabilities | $ | 1,080,303 |
Sonic Environmental Solutions Inc. |
(A Development Stage Company) |
Notes to Interim Consolidated Financial Statements |
March 31, 2007 |
Canadian Funds |
(Unaudited) |
8. | Acquisition of Terra-Kleen Response Group Inc.-Continued | |||
Terra-Kleen has two contracts as follows: | ||||
a) | Mitsubishi Agreement | |||
Per agreement dated January 1, 2001 and amended January 2, 2006, Terra-Kleen granted a license to Mitsubishi Heavy Industries, Ltd. (“MHI”) to use Terra-Kleen's soil remediation technology in Japan. | ||||
As consideration Terra-Kleen, before acquired by the Company, received US$500,000 and a royalty at 2.25% of Net Invoiced Value for “hydrocarbon and chlorinated organic contaminated soil” processed using the system. This royalty will be paid after MHI has had sales of approximately US$22,000,000. As of March 31, 2007, approximately US$9,800,000 has been completed by MHI. | ||||
b) | Veolia Agreement | |||
Per agreement dated June 10, 2005 with Veolia Environmental Services (“Veolia”), formerly known as Collex Pty Ltd., Terra-Kleen granted a license to Veolia to use Terra-Kleen’s soil remediation technology. | ||||
The considerations are as follows: | ||||
i) | A lump sum initial license fee of US$100,000 (received by Terra-Kleen before the Company purchased Terra-Kleen). | |||
ii) | A technology license fee of US$288,000 upon successful results of initial trial. | |||
iii) | A trial fee of AUS$298,732 as follows: | |||
• | AUS$150,000 on commencement date (received by Terra-Kleen before the Company purchased Terra-Kleen). | |||
• | AUS$74,366 within 21 days of receiving certain demonstration equipment in Australia | |||
• | AUS$74,366 on the date following the completion of initial test. | |||
iv) | After nine months of successful trial, Veolia will either pay rent on the demonstrator equipment at US$32,000 per month or buy the system at US$488,000. | |||
v) | To pay royalty of 50% of profit generated from using the technology. | |||
During the period, the initial trial was substantially complete; however subsequent to the end of the period, the Company entered into negotiations with Veolia to amend the contract. |
Sonic Environmental Solutions Inc. |
(A Development Stage Company) |
Notes to Interim Consolidated Financial Statements |
March 31, 2007 |
Canadian Funds |
(Unaudited) |
9. | Share Capital | |
a) | Authorized: unlimited common shares without par value. | |
b) | During the period, financing fees in the amount of $75,024 were paid. These financing fees related to a private placement in 2006. | |
c) | Options | |
i) The Company has established a share purchase option plan whereby the board of directors, may grant options to directors, officers, employees or consultants. Options granted must be exercised no later than five years from date of grant or such lesser period as determined by the Company’s board of directors. The exercise price of an option is not less than the closing price on the TSX-V on the last trading day preceding the grant date. The maximum aggregate number of Plan Shares that may be reserved for issuance under the Company’s Plan is 4,530,000 Common Shares. | ||
| ||
ii) A summary of the Company’s options at March 31, 2007 and the changes for the period are as follows: |
Outstanding | Outstanding | |||||||
Exercise | December 31, | March 31, | ||||||
Price | 2006 | Granted | Exercised | Forfeited | 2007 | Expiry date | ||
$0.50 | 402,000 | - | - | - | 402,000 | December 12, 2007 | ||
$1.00 | 200,000 | - | - | - | 200,000 | June 14, 2011 | ||
$1.00 | 855,000 | - | - | - | 855,000 | July 4, 2011 | ||
$1.00 | 335,000 | - | - | - | 335,000 | September 11, 2011 | ||
$1.10 | 200,000 | - | - | - | 200,000 | February 3, 2008 | ||
$1.70 | 400,000 | - | - | - | 400,000 | September 22, 2008 | ||
$2.30 | 50,000 | - | - | - | 50,000 | January 16, 2009 | ||
$2.30 | 50,000 | - | - | - | 50,000 | June 21, 2010 | ||
$2.37 | 85,000 | - | - | (10,000) | 75,000 | February 14, 2010 | ||
$2.40 | 250,000 | - | - | - | 250,000 | June 8, 2009 | ||
$2.50 | 35,000 | - | - | - | 35,000 | November 10, 2008 | ||
$2.60 | 20,000 | - | - | - | 20,000 | March 30, 2010 | ||
$2.75 | 115,000 | - | - | - | 115,000 | October 8, 2009 | ||
$2.95 | 200,000 | - | - | - | 200,000 | July 16, 2009 | ||
$3.15 | 145,000 | - | - | - | 145,000 | July 6, 2009 | ||
3,342,000 | - | - | (10,000) | 3,332,000 | ||||
Weighted average | ||||||||
exercise price | $1.50 | $- | $- | $2.37 | $1.50 |
Weighted | |||
Average | |||
Number of Options | Exercise Price | Expiry | |
December 12, 2007 | |||
Vested at March 31, 2007 | 2,365,743 | $1.71 | to September 11, 2011 |
Sonic Environmental Solutions Inc. |
(A Development Stage Company) |
Notes to Interim Consolidated Financial Statements |
March 31, 2007 |
Canadian Funds |
(Unaudited) |
9. | Share Capital -Continued | |
d) | Warrants | |
Details are as follows: |
Outstanding | Outstanding | |||||||
Exercise | December 31, | Expired or | March 31, | |||||
Price | 2006 | Issued | Exercised | Cancelled | 2007 | Expiry date | ||
$0.70 | 7,170,250 | - | - | - | 7,170,250 | November 9, 2008 | ||
$1.20 | 1,398,611 | - | - | - | 1,398,611 | March 27, 2008 | ||
$2.20 | 500,000 | - | - | - | 500,000 | December 21, 2007 | ||
$2.75 | 605,000 | - | - | - | 605,000 | September 28, 2007 | ||
9,673,861 | - | - | - | 9,673,861 | ||||
Weighted average | ||||||||
exercise price | $0.98 | $- | $- | $- | $0.98 |
e) | Escrow Shares | ||
As at March 31, 2007, there are 1,198,852 common shares held in escrow. Escrow shares have the same voting rights and rights to receive income distributions as regular shares of the Company. However, in general terms, escrow shares cannot be sold, transferred, assigned, mortgaged or be a subject to a derivative transaction. Details are as follows: | |||
i) | In 2002, 2,997,135 shares were issued for the acquisition of SESI and are held in escrow to be released every six months to 2008. As at March 31, 2007, a balance of 1,198,852 shares are held in escrow. | ||
ii) | There were 834,841 shares issued for the acquisition of Terra-Kleen and held in escrow. During the period, the Company entered into an agreement with the former controlling shareholder of Terra-Kleen which terminates this escrow agreement. During the period, the remaining shares pertaining to this agreement, 620,990, were released from escrow leaving a nil balance at March 31, 2007. | ||
Sonic Environmental Solutions Inc. |
(A Development Stage Company) |
Notes to Interim Consolidated Financial Statements |
March 31, 2007 |
Canadian Funds |
(Unaudited) |
10. | Stock Based Compensation | |
a) | Stock compensation expense is determined using the fair value method. For any options that have alteration in their conditions, compensation expense is based on the fair value of the options on the alteration date less the fair value of the original options based on the shorter of the remaining expanded life of the old option or the expected life of the modified option. | |
b) | Stock compensation expense recognized on options granted during the year is calculated using the Black-Scholes option pricing model with the following assumptions on the date of grant: |
Risk-free interest rate | 4.01% - 4.50% | |
Expected dividend yield | - | |
Expected stock price volatility | 49.18 - 50.55% | |
Expected option life in years | 5 |
Current period stock-based compensation expense was $119,734 (2006 - $150,616). Of this, $28,207 (2006 - $19,815) is included in shareholder relations expense, and $91,527 (2006 - $130,801) is included in salaries and wages expense, with the offsetting entry to contributed surplus. The value of unrecorded stock-based compensation related to non-vested options is $284,686. This amount will be expensed between April 1, 2007 and June 30, 2008. | ||
c) | Option pricing models require the input of highly subjective assumptions, particularly as to the expected price volatility of the stock. Changes in these assumptions can materially affect the fair value estimated. |
Options vest according to the length of service as follows:
Employees with service greater than six | |
months, Directors and Officers | Employment service less than six months |
33.3% of options vest after six months | 33.3% of options vest after twelve months |
33.3% of options vest after twelve months | 33.3% of options vest after eighteen months |
33.3% of options vest after eighteen months | 33.3% of options vest after twenty-four months |
11. | Related Party Transactions | |
Except as noted elsewhere in these financial statements, related party transactions are as follows: | ||
a) | As at March 31, 2007 $8,285 (2006 - $259,468) was owing to directors, officers, and related entities. These amounts are non-interest bearing, have no specific terms of repayment and were incurred in the normal course of operations, except the portion relating to Notes 8iii and 11b. | |
b) | As at March 31, 2007 nil (2006 - $35,000) was owing in relation to the acquisition of Terra-Kleen. This amount was owing to the controlling shareholder of Terra-Kleen.(Note 8iii) | |
Sonic Environmental Solutions Inc. |
(A Development Stage Company) |
Notes to Interim Consolidated Financial Statements |
March 31, 2007 |
Canadian Funds |
(Unaudited) |
12. | Segmented Information | |
a) | The Company and its subsidiaries operate in the environmental sector in two reportable business segments. The soil remediation segment is attributable to the treatment of contaminated soil and the waste management segment is attributable to the collection, consolidation and disposal of PCB contaminated wastes from transformers, ballasts and capacitors. Total assets by business segment are as follows: |
March 31, | December 31, | ||||||
2007 | 2006 | ||||||
Soil remediation | $ | 8,638,982 | $ | 10,654,954 | |||
Waste management | 119,663 | 119,651 | |||||
$ | 8,758,645 | $ | 10,774,605 |
Total revenues and direct costs for each business segment are as follows. The direct costs include labour, materials, chemicals, subcontractor costs and equipment amortization:
Soil | Waste | Corporate Total, | ||||||||
Remediation | Management | March 31, | ||||||||
2007 | ||||||||||
Revenues | $ | 95,801 | $ | 65,605 | $ | 161,406 | ||||
Direct Costs | 740,442 | 44,424 | 784,866 | |||||||
$ | (644,641 | ) | $ | 21,181 | $ | (623,460 | ) |
Soil | Waste | Corporate Total, | ||||||||
Remediation | Management | March 31, | ||||||||
2006 | ||||||||||
Revenues | $ | 157,009 | $ | 86,565 | $ | 243,574 | ||||
Direct Costs | 535,607 | 79,297 | 614,904 | |||||||
$ | (378,598 | ) | $ | 7,268 | $ | (371,330 | ) |
During the period, 56% (2006 – 65%) of consolidated revenue related to one customer. As at March 31, 2007 accounts receivable included $165,120 from this customer (2006 - $170,027).
Sonic Environmental Solutions Inc. |
(A Development Stage Company) |
Notes to Interim Consolidated Financial Statements |
March 31, 2007 |
Canadian Funds |
(Unaudited) |
12. | Segmented Information -Continued | |
b) | Geographic Information | |
All significant sales during the periods presented have been to customers domiciled in Canada. The tables below summarize property, plant and equipment by country and assets by country: |
March 31, | December 31, | ||||||
Property Plant and Equipment | 2007 | 2006 | |||||
Canada | $ | 3,174,854 | $ | 3,297,922 | |||
United States | 157,899 | 173,016 | |||||
$ | 3,332,753 | $ | 3,470,938 |
March 31, | December 31, | ||||||
Assets | 2007 | 2006 | |||||
Canada | $ | 8,581,312 | $ | 10,581,744 | |||
United States | 177,333 | 192,861 | |||||
$ | 8,758,645 | $ | 10,774,605 |
13. | Commitments | |
a) | The Company has premises, vehicle and photocopier operating lease agreements. The leases expire between January 2007 and June 2010. The future lease obligations are as follows: |
Amount | ||||
2007 | $ | 150,937 | ||
2008 | $ | 141,910 | ||
2009 | $ | 141,498 | ||
2010 | $ | 4,019 |
b) | During the year ended December 31, 2005, the Company received $87,547 for leasehold improvements to their office premises. In accordance with GAAP, this amount is being amortized against rent expense over the term of the 5 year lease. The total unamortized balance at March 31, 2007 is $48,151. | |
Sonic Environmental Solutions Inc. |
(A Development Stage Company) |
Notes to Interim Consolidated Financial Statements |
March 31, 2007 |
Canadian Funds |
(Unaudited) |
14. | Prior Period Restatement |
During the audit of the December 31, 2006 fiscal year, it was determined that an error had been made in the recording of the acquisitions of SESI and Contech (Note 7). These acquisitions were related party transactions that involved the issuance of shares, as either part of or as total consideration, for the purchase of these subsidiaries. The restatement is required after further consideration of EIC 62 as it has come to our attention that EIC 62 determines the share issuances to be monetary in nature, even though they were related party, and as such the transactions must be recorded at the exchange amount, equivalent to the value of the consideration given up (the shares at market value), at the time of the acquisitions. |
March 31, 2006 | March 31, 2006 | ||||||
As previously | Restated | ||||||
reported | |||||||
Patents and other | |||||||
intangible assets | $ | 2,636,660 | $ | 3,310,513 | |||
Deficit | $ | (11,568,441 | ) | $ | (12,030,757 | ) | |
Amortization of deferred | |||||||
development and other | |||||||
intangibles | $ | 89,991 | $ | 114,949 |
15. | Subsequent Events | |
a) | On April 30, 2007, the Company closed a private placement issuing 10,064,000 units of the Company at a price of $0.45 per unit for gross proceeds of $4,528,800. Each unit consisted of one common share and one half of one share purchase warrant, with a full share purchase warrant exercisable into one common share at a price of $0.60 for 24 months. | |
As part of the private placement, the Company paid a cash commission of $317,016, equal to 7% of the gross proceeds of the financing, together with a broker warrant exercisable to acquire 1,006,400 of the units sold under the offering, exercisable at a price of $0.45 per unit, equal to 10% of the units sold under the offering. | ||
b) | On May 24, 2007, the Company announced that it has entered into an agreement with PetroSonic Energy Systems Inc. (“PetroSonic”) for the development of a crude heavy oil upgrading and processing system utilizing Sonic’s patented technologies. Under the terms of the agreement, PetroSonic will collaborate and fund the initial development of a new heavy oil Sonoprocess for the upgrading and processing of heavy oil. The first stage of the agreement is designed to confirm the development concept, after which Petrosonic will engineer and install a complete prototype plant to optimize the design variables of the system. Following the successful completion of the first stage, Sonic will have a 40% interest in PetroSonic and will work together with PetroSonic on a prototype installation directly in the field. PetroSonic has an obligation to fund the creation of the prototype plant, subject to Sonic’s option to fund its pro rata share. | |