SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1999 Commission File Number 1-13737
SOLUCORP INDUSTRIES LTD.
(Exact Name of Registrant as Specified in its Charter)
Yukon N/A
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
250 West Nyack Road, West Nyack, New York 10994
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (914) 623-2333
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (no par value)
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (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 ninety (90) days. Yes [X ] No [ ]
As of May 17, 1999, there were 22,218,481 shares of the registrants common
stock, no par value, issued and outstanding.
The aggregate market value of voting stock held by non-affiliates of the
Registrant: $18,747,411.
PART 1 - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SOLUCORP INDUSTRIES LTD
CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
(UNAUDITED - PREPARED BY MANAGEMENT)
(IN U.S. DOLLARS)
Three Months Ended
March 31,
------------------------------
1999 1998
------------ ------------
Revenues
Environmental clean-up and waste disposal $ 1,135,335 $ 505,151
Training Institute 2,800 7,716
------------ ------------
1,138,135 512,867
------------ ------------
Cost of Sales and Revenue
Environmental clean-up and waste disposal 534,231 445,122
Training Institute 250 2,964
Inventory storage costs 29,643 96,815
------------ ------------
564,124 544,901
------------ ------------
Gross Margin 574,011 (32,034)
Investment and Other Income 34,271 63,546
License fees 500,000 545,454
------------ ------------
1,108,282 576,966
------------ ------------
Expenses
Administrative and general 940,889 652,904
Corporate development and marketing 3 114,026
Depreciation and amortization 74,867 69,516
------------ ------------
1,015,759 836,446
------------ ------------
Earnings (loss) from operations 92,523 (259,480)
------------ ------------
Earnings (loss) for the period 92,523 (259,480)
Deficit, beginning of period (16,797,947) (13,247,738)
------------ ------------
($16,705,451) ($13,507,218)
============ ============
Earnings (loss) per share $0.003 ($0.01)
============ ============
The accompanying notes are an integral part of this statement.
SOLUCORP INDUSTRIES LTD.
CONSOLIDATED BALANCE SHEET
(IN U.S. DOLLARS)
March 31, December 31,
1999 1998
(Unaudited)
------------ ------------
ASSETS
Current
Cash $ - $ -
Accounts receivable (Note 2) 1,237,049 2,399,401
License fees (Note 3) - 90,910
Due from related parties (Note 4) 1,721,193 1,690,482
Other receivables 47,966 66,635
Inventories (Note 5) 2,083,560 1,538,560
Prepaid expenses (Note 6) 2,710,827 247,238
------------ ------------
7,800,595 6,033,226
Long-term investment (Note 7) 263,824 265,421
Capital assets (Note 8) 249,369 311,124
------------ ------------
TOTAL ASSETS $ 8,313,788 $ 6,609,771
============ ============
LIABILITIES
Current
Bank indebtedness $ 57,421 $ 58,359
Accounts payable and accrued liabilities 2,877,654 1,708,195
Customer deposits 77,854 77,854
Loans payable (Note 9) 790,319 347,319
------------ ------------
3,803,248 2,191,727
------------ ------------
SHAREHOLDERS' EQUITY
Subscriptions received - 1,161,901
Share capital (Note 10) 21,215,991 20,054,090
Deficit (16,705,451) (16,797,947)
------------ ------------
4,510,540 4,418,044
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY 8,313,788 6,609,771
============ ============
Subsequent events (Note 12)
Contingencies (Note 14)
Commitments (Note 16)
The accompanying notes are an integral part of this statement.
SOLUCORP INDUSTRIES LTD
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED - PREPARED BY MANAGEMENT)
(IN U.S. DOLLARS)
Three Months Ended
March 31,
------------------------------
1999 1998
------------ ------------
CASH PROVIDED BY (USED IN)
Operating activities
Net profit (loss) for the period $ 92,523 $ (259,480)
Items not involving cash:
Depreciation and amortization $ 74,867 69,516
------------ ------------
Funds provided (used) from operations 167,390 (189,964)
Non-cash working capital changes (567,226) (485,002)
------------ ------------
Cash provided by (used in) operating activities (399,836) (674,966)
------------ ------------
Financing activities
Issue of common shares - 475,525
Due from related parties (30,711) 293,616
Loans receivable - 25,000
Loans payable 443,000 458
------------ ------------
Cash provided by (used in) financing activities 412,289 794,599
------------ ------------
Investment activities
(Increase) decrease in capital assets (13,112) (6,360)
(Increase) decrease in long-term investments 1,597 (5,094)
------------ ------------
Increase (decrease) in cash position 938 108,179
Cash position, beginning of period (58,359) 26,646
------------ ------------
Cash position, end of period (57,421) 134,825
============ ============
The accompanying notes are an integral part of this statement.
Solucorp Industries, Ltd.
Notes to Financial Statements
Three Month Periods Ended March 31, 1999 and 1998
1. Significant Accounting Policies
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in
accordance with generally accepted principles for interim financial
information without audit. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These unaudited
statements should be read in conjunction with the audited financial
statements of the Company and notes thereto included in the Company's
Report for the twelve months period ended December 31, 1998. The
results of operations for the three months ended March 31, 1999, are
not necessarily indicative of the results which may be expected for the
full year ending December 31, 1999.
FORWARD LOOKING STATEMENTS
Certain matters discussed herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995 and, as such, may involve risks and uncertainties.
These forward-looking statements relate to, among other things,
expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the
market and statements regarding the Company's mission and vision. The
Company's actual results, performance, or achievements may differ
significantly from the results, performance, or achievements expressed
or implied in such forward-looking statements.
(a) Generally Accepted Accounting Principles
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada, which may
differ in some respects from those in the United States. Except as
disclosed in note 21, no differences have been reported as they are not
considered significant.
(b) Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. At December 31, 1998, the Company's
subsidiaries and its percentage equity interest in each are as follows:
BSM Industries (Canada) Inc. 100%
World Travel Plaza Inc. 100%
World Tec Equities, Inc. 100%
EPS Environmental, Inc. 100%
Environmental Training Institute, Inc.
(incorporated in the US) 100%
(c) Cash and Cash Equivalents
For purposes of balance sheet classification and the statements of cash
flows, the Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.
(d) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(e) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable, loans and other receivables, accounts
payable and accrued liabilities and loans payable approximate fair
market value because of the immediate or short-term maturity of these
financial accounts. The fair value of the long-term investments are not
readily determinable due to uncertainties in their realization,
however, where available, the quoted market prices have been disclosed.
The fair value of the amount due on the waste disposal rights is not
determinable due to uncertainty regarding payment.
(f) Inventory
Inventory is valued at the lower of cost and net realizable value. Cost
is determined on a first-in, first-out basis.
(g) Long-term Investments
Investments are recorded at cost less a provision for permanent
impairment in value.
(h) Capital Assets
Capital assets are recorded at cost. Amortization is provided over the
estimated useful lives of the assets on the following basis:
Computer 30% declining balance
Furniture and office equipment 20% declining balance
Leasehold improvements 5 years straight-line
Remediation equipment 30% declining balance
Patent costs 10 years straight-line
(i) Reporting Currency and Translation of Foreign Currency
The Company has adopted the United States dollar as its reporting
currency for its financial statements prepared after March 31, 1996.
The United States dollar is the currency of the primary economic
environment in which the Company conducts its business, and is
considered appropriate functional currency for its operations.
Accordingly, the financial statements of the Company have been
translated using the temporal method with translation gains and losses
included in earnings. Under this method, the operations of the Company
have been converted into U.S. dollars at the following rates of
exchange:
(i) Monetary assets and liabilities - at the rate of exchange
prevailing at the balance sheet date.
(ii) All other assets and liabilities - at the exchange rate
prevailing at the time of the transactions.
(iii) Revenue and expenses - at the average exchange rates
prevailing during the period.
(j) Share Issue Costs
Share issue costs are charged directly to the deficit.
(k) Revenue Recognition
Revenue from on-site remediation projects is recognized using the
percentage of completion method of accounting. Under this method,
contract revenue is determined by applying to the total estimated
income on each contract, a percentage which is equal to the ratio of
contract costs incurred to date, to the most recent estimate of total
costs which will have to be incurred upon the completion of the
contract. Costs and estimated earnings in excess of billings represents
additional earnings over billings, based upon percentage completed, as
outlined above. Similarly, billings in excess of costs and estimated
earnings represent excess of amounts billed over income recognized.
Provision for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. As at December 31, 1998 and
1997, there were no on-site projects in process.
Revenue from in-line remediation projects is recognized using the
completed contract method. Under this method, revenue is recognized
when work is completed and invoiced.
Revenues from license fees, option payments and royalties are
recognized as they accrue in accordance with the terms of the relevant
agreements.
(l) Research and Development
Research and development expenditures less related government grants
are charged to operations.
(m) Earnings (Loss) Per Share
The earnings (loss) per share is computed using the weighted-average
number of common shares outstanding during the year.
2. Accounts Receivable
March 31, December 31,
1999 1998
------------ ------------
Smart International Ltd. - $ 2,006,984
Other 1,346,487 804,156
------------ ------------
$ 1,346,487 $ 2,811,140
Allowance for bad debts $ (109,438) $ (411,739)
------------ ------------
$ 1,237,049 $ 2,399,401
============ ============
3. License Fees
By a letter of intent dated June 4, 1997, and an agreement dated
September 15, 1997, the Company granted to Smart International Ltd.
(Smart) the right to manufacture chemicals for the Company and the
right to exclusively engage in remediation projects in China using the
Company's technology. The agreement is for a ten-year term commencing
June 1, 1997, with an option to renew for a further 10 years. As
consideration, Smart has agreed to pay an annual license fee of
$2,000,000 per year plus a royalty of $5 per ton for each ton of
processed material in excess of 100,000 tons per contract year. The
Company billed $500,000 towards the license fee for the period ended
March 31, 1999. No royalties were payable. An agreement with Smart
allows license payments to be offset against amounts due to Smart for
current and future inventory purchases. Pursuant to this agreement, and
with Smart's approval, the Company has offset both the amount recorded
as an account receivable from Smart at December 31, 1998, and the
license fee billed for the first quarter of 1999 against current and
future inventory purchases. Accordingly, these amounts are reflected in
either the total value of $2,083,560 for available inventory recorded
for the period, or in the pre-paid deposit on current and future
inventory purchases. In addition, the Company issued common share
valued at $481,193 to Smart as a further pre-paid deposit on 1999
production of inventory.
4. Due From Related Parties
Certain parties related to the Company are indebted to the Company.
This indebtedness was incurred primarily as a result of the issuance by
the Company of Common Stock upon the exercise of stock options, for
which the Company has not been paid to date. This indebtedness was
secured by marketable securities (market value at December 31, 1998 -
approximately $50,000). During the quarter ended March 31, 1999, the
Company received repayments of $14,980 from the proceeds of the sale of
the marketable securities and $25,600 direct from the related parties.
Additional options-related advances of $37,022 were made to the related
parties and interest of $34,269 was charged for the current quarter. As
at March 31, 1999, the value of the remaining security has remained at
approximately $50,000. Management expects that the value of the
security will recover and that the amounts due, including the current
accrued interest, will be fully recovered.
5. Inventories
March 31, December 31,
1999 1998
------------ ------------
Raw chemicals $ 2,078,496 $ 1,515,550
Blended chemicals 3,035 16,056
Goods for resale 2,029 6,954
------------ ------------
$ 2,083,560 $ 1,538,560
============ ============
6. Prepaid Expenses
March 31, December 31,
1999 1998
------------ ------------
Consulting agreements (Note 6a) $ 5,041 $ 5,041
Rental expense 36,360 36,360
Deposit on inventory purchases (Note 6b) 2,665,489 201,900
Other 3,937 3,937
------------ ------------
$ 2,710,827 $ 247,238
============ ============
a) Consulting Agreement
During the period ended December 31, 1998, the Company issued
85,556 shares at a value of $2.70 per share for payment of the
first year of a five-year consulting agreement expiring January
22, 2003.
b) Deposit On Inventory Purchases
Pursuant to the agreement with Smart, the Company may offset
license fee payments against amounts owed to Smart for inventory
purchases. Due to the anticipated, and now realized, increased
requirement for large volumes of chemical reagents for
remediation projects in 1999, the Company has offset Smart's fees
as either payments for, or deposits on current and future
inventory. In addition, the Company issued common shares valued
at $481,193 to submit a further pre-paid deposit on 1999
production of inventory.
7. Long-term Investments
March 31, December 31,
1999 1998
--------- ------------
(a) Shares of Earthworks Industries Inc. owned (see Note 9). $ 0 $ 0
(b) Shares of Earthworks Industries Inc. accrued. 46,598 46,598
(c) Convertible debenture from Travel Plaza Developments, Inc.
(Travel Plaza). The Company elected on December 28, 1994, to
convert the Cdn $50,000 debenture into 250,000 shares of Travel
Plaza. Final regulatory approval for this conversion from the
Alberta Stock Exchange is still pending subject to their acceptance
of a financing arrangement and the approval of minority
shareholders. On August 21, 1996, pending the finalization of
the required financing to complete the project, construction was
temporarily suspended and the stock of Travel Plaza has been
halted from trading. Due to these uncertainties, the Company has
written this down to a nominal value. 1 1
(d) Convertible loan to Cortina Integrated Waste Management, Inc.,
a subsidiary of Earthworks Industries, Inc. (public company), due
September 5, 2000, with interest at 15% per annum. The Company
is entitled to convert all or a portion of the loan into shares of
Earthworks Industries, Inc. at any time. During the term of this
loan, the Company has the right to offset royalty payments due to
Earthworks Industries, Inc. against the loan balance. 217,224 218,821
(e) A 25% interest in John Beech remediation Limited
(no market value). 1 1
(f) 70,000 shares of Global Technologies, Inc. (Note 9). 0 0
--------- ---------
$ 263,824 $ 265,421
========= =========
8. Capital Assets
March 31, December 31,
1999 1998
--------- ------------
Computers $ 24,047 $ 24,047
Furniture and office equipment 121,292 121,292
Remediation equipment 479,151 454,327
Leasehold improvements 15,927 15,927
Incorporation costs 688 688
Patent costs 70,583 70,583
--------- ---------
$ 711,688 $ 686,864
Less: Accumulated amortization 462,340 375,740
--------- ---------
$ 249,369 $ 311,124
========= =========
9. Loans Payable
March 31, December 31,
1999 1998
--------- ------------
(Unaudited)
IDM Environmental Corp., 10.25%, payable in monthly installments of
$22,008, including principal and interest, maturing on July 1, 1998,
secured by the Company's treasury stock, 100,500 shares of Earthworks
Industries, Inc. (Note 8a) and 70,000 shares of Global Technologies,
Inc. (Note 8f) held as investments by the Company. The Company has not
made any payments and IDM liquidated all of the collateral and
applied the proceeds towards the loan. $ 206,277 $ 206,277
Global Technologies, Inc., due on demand ($100,000 Cdn). 65,308 65,308
London Venture Capital Corp. 518,734 60,734
Other 0 15,000
--------- ---------
$ 790,319 $ 374,319
========= =========
10. Share Capital
a) Authorized:
200,000,000 common shares of no par value
b) Issued:
3-Month Period Ended 3-Month Period Ended
March 31, 1999 March 31, 1998
(Unaudited) (Unaudited)
Shares Amount Shares Amount
----------------------------- ----------------------------
Balance, beginning 19,566,197 $20,119,815 18,652,497 $18,135,240
---------- ----------- ---------- -----------
Issued pursuant to
Stock options 195,500 419,525
Prepaid Inventory 641,590 481,193
Private Placement 1,902,698 1,427,024
Consulting agreement 108,000 81,000
----------------------------- ----------------------------
22,218,485 $ 1,989,216 $ 419,525
Allotted for cash 1,443 2,525 32,000 56,000
Less unpaid shares
to be returned (39,000) (68,250)
----------------------------- ----------------------------
Balance, ending 22,180,928 $22,043,306 18,879,997 $18,610,765
============================= ============================
c) During the three-month period ended March 31, 1999, no stock
options were granted by the Company to employees, directors
and other associated individuals. At March 31, 1999, stock
options were outstanding as follows:
Shares Exercise Price Expiration Date
- ------------------------------------------------------------------------------------------------------
250,000 $1.38 December 21, 1999
47,500 $1.75 July 13, 2000
71,500 $1.75 September 12, 2000
47,000 $1.75 January 6, 2002
1,638,329 $1.75 June 9, 2002
872,210 $1.20 November 4, 2002
431,000 $1.20 February 19, 2003
1,985,000 $1.20 October 6, 2003
d) During the three-month period ended March 31, 1999, no
warrants were issued and outstanding warrants remained as
follows:
Shares Exercise Price Expiration Date
- ------------------------------------------------------------------------------------------------------
155,443 $1.75-$2.00 June 25, 1999
750,000 $2.75 September 10, 2000
25,000 $4.00 April 4, 2001
300,000 $7.50 June 3, 2002
1,902,698 $0.75 December 29, 2000
e) At March 31, 1999, 1,675,000 common shares were held in escrow
(December 31, 1998 - 1,675,000). Pursuant to an escrow
agreement dated April 30, 1998, these shares were subject to
release on or before June 22, 1998, in the event that the
Company attained certain cash-flow targets. Since these
cash-flow targets were not achieved, these escrowed shares are
in the process of being canceled.
11. Income Taxes
At December 31, 1998, the Company had accumulated tax losses
aggregating approximately $13,100,000, which may be carried forward and
applied against taxable income in future years up to 2003. The Company
does not record the income tax benefit of these losses.
12. Subsequent Events
On May 6, 1999, the Company announced that it had been awarded a
contract valued at $900,000 to perform various environmental services
associated with the purchase of a 15.49 acre "Brownfield" site in Cedar
Knolls, NJ. This is the first remediation and profit sharing project
associated with the Company's Brownfields Redevelopment Program. The
contract provides for payment of a 20% Mobilization Fee of $180,000
immediately after the property purchase is closed, currently scheduled
for June 14, 1999, and a twenty five percent (25%) limited liability
interest in any and all profits derived from the sale or redevelopment
of the property. On-site operations are expected to be completed in
approximately eight weeks after mobilization.
13. Segmented Information
US Services Consolidated Totals
& Products Canada Total
----------- ----------- -------------------
(a) Three Months Ended March 31, 1999:
(Unaudited)
Revenue $ 1,138,135 $ 0 $ 1,138,135
License Fees 500,000 0 500,000
Cost of Sales 564,124 0 564,124
Operating earnings (loss) 1,074,011 0 1,074,011
Administrative and general 915,798 25,091 940,889
Corporate development and marketing 0 3 3
Amortization 73,990 877 74,867
Segmented gain (loss) $ 84,223 $ (25,971) $ 58,252
----------- ----------- -----------
Unallocated:
Investment and other income 34,271 0 34,271
----------- ----------- -----------
GAIN (LOSS) FOR THE PERIOD 118,494 (25,971) $ 92,523
----------- ----------- -----------
IDENTIFIABLE ASSETS $ 7,786,574 $ 527,214 $ 8,313,788
=========== =========== ===========
(b) Three Months Ended March 31, 1998:
(Unaudited)
Revenue $ 512,867 $ 0 $ 512,867
License Fees 545,454 0 545,454
Cost of Sales 544,901 0 544,901
Operating earnings (loss) (513,420) 0 (513,420)
Administrative and general 610,353 42,551 652,904
Corporate development and marketing 100,665 13,361 114,026
Amortization 63,156 6,360 69,516
Segmented loss $ (260,754) $ (62,272) $ (323,026)
----------- ----------- -----------
Unallocated:
Investment and other income 63,546 0 $ 63,546
----------- ----------- -----------
LOSS FOR THE PERIOD $ (259,480)
----------- ----------- -----------
IDENTIFIABLE ASSETS $ 6,799,095 $ 798,521 $ 7,597,616
=========== =========== ===========
14. Contingencies
Legal Proceedings
As previously disclosed, the Company is a party to a number of legal
proceedings. Except as set forth below, no material developments have
occurred in any of these proceedings since the filing of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.
On May 19, 1999 the Company announced that it had settled its lawsuit
which it commenced against Tristate Restoration Company and its
principals in May 1998 in the U.S. District Court, District of New
Jersey. The lawsuit has been settled for the amount of $180,000 payable
by the Tristate Defendants on or before June 11, 1999 in exchange for a
complete release of all claims among the parties, their subsidiaries,
affiliates, employees, agents and assigns.
On May 1, 1998, the Securities Exchange Commission (SEC) suspended
trading in the Company's securities and initiated an investigation into
various matters concerning the Company. The suspension was based upon
questions that were raised concerning the accuracy and adequacy of the
public information about various aspects of the Company's business. The
Company has cooperated fullythe SEC investigation, making available to
the SEC Staff all of the Company's documents, producing its personnel
for sworn testimony, waiving its attorney-client privilege and
directing its auditors and attorneys to cooperate fully with SEC Staff.
The SEC has not yet concluded its investigation.
15. Related Party Transactions
During the three months ended March 31, 1999, the Company paid
consulting fees and salaries of $112,118 (March 31, 1998 - $109,107) to
directors, former directors and/or private companies controlled by
directors and/or individuals related to directors.
16. Commitments
a) The Company has two leases for buildings it presently occupies in
New Jersey and New York which require the following payments:
1999 $ 144,000
2000 $ 144,000
2001 $ 144,000
2002 and subsequent $ 24,000
b) The Company has entered into numerous non-exclusive finder's
agreements with third parties to promote the Company's
remediation process for soil and industrial wastes. The Company
will pay between 1% and 7% commission on gross revenues generated
by the third parties. These agreements expire within one and two
years.
c) The Company entered into a finder's agreement with a third party
to raise capital for the Company through private placements. The
Company will pay a 5% commission on private placements raised
directly or indirectly by the third party. The agreement expires
on September 27, 2000, with an option to renew for another five
years.
d) The Company has agreed to pay royalties to Earthworks Industries,
Inc. (Earthworks), a Canadian public company, based on Cdn
$1/tonne (metric ton) of soil remediated in Canada or the United
States ($1/tonne will be U.S. dollars if soil is remediated in
the USA). The Company will receive one share in Earthworks for
each $1of royalty paid, to a maximum of 200,000 shares, in
minimum blocks of 50,000. These shares are accrued as the soil is
remediated. An additional $1 (Cdn or U.S.) will be paid for each
tonne of soil remediated on contracts resulting from the efforts
of Earthworks. The Company has the right to offset royalty
payments against the convertible loan from Cortina Integrated
Waste Management, Inc. (Note 7d).
17. Economic Dependence
During the three-month period ended March 31, 1999, revenues of
$1,135,335 were earned from nine customers, of which $628,675 is
included in accounts receivable.
License fees of $500,000 (March 31, 1998 - $545,454) were recognized as
disclosed in Note 3.
18. Reconciliation to United States Generally Accepted Accounting
Principles
As discussed in Significant Accounting Policies (Note 1), these
consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada.
Differences in accounting principles as they pertain to these
consolidated financial statements are as follows:
Marketable Securities
Under GAAP, the accounting for marketable securities depends on the
classification of securities as held to maturity, trading or available
for sale. The classification would be based on management's intent.
Marketable securities included in long-term investments (Note 7) would
be classified as being available for sale. Under U.S. GAAP, such
securities would be recorded at fair value, with any changes recorded
in a separate component of shareholder's equity. Realized gains or
losses would be recorded on the income statements. At March 31, 1999,
the effect on the presentation of long-term investment for U.S. GAAP
purposes would not be material.
19. Uncertainties - Year 2000 Computer Issue
The effect of the Year 2000 Issue on the Company may be experienced
before, on, or after January 1, 2000, and, if not satisfactorily
addressed, the impact on operations and financial reporting may range
from minor errors to significant systems failure which could affect the
conduct of normal business operations. The Company's services do not
utilize equipment or systems that depend on computer software. The
Company's accounting systems are personal computer based and presently
utilize off-the-shelf accounting software. The Company plans to
purchase software upgrades from software vendors, and these purchases
are not expected to have a material impact on the Company's results of
operations. It is not possible, at the present time, to be certain of
all aspects of the Year 2000 Issue affecting the Company, including
those related to he efforts of customers, suppliers, or third parties,
will be satisfactorily resolved.
SOLUCORP INDUSTRIES LTD.
Schedule of Administrative and General Expenses (U.S. Dollars)
Three-month Periods Ended March 31, 1999 & 1998
March 31, March 31,
1999 1998
------------------------------------------- ---------
U.S. Canada Total Total
--------- --------- --------- ---------
Advertising and promotion $ 7,830 - 7,830 $ -
Automobile 14,122 - 14,122 11,009
Bad debts - - - -
Bank charges and interest 25,890 108 25,998 3,873
Consulting and management fees 112,118 - 112,118 109,107
Foreign exchange (gain) loss 19,678 - 19,678 77,419
Insurance 52,797 - 52,797 15,864
Investor and public relations 3,041 - 3,041 -
Legal, accounting and audit 112,235 - 112,235 83,170
Office, printing and related 101,965 838 101,965 42,627
Rent 4,562 1,700 6,262 28,453
Salaries and wages 392,563 20,600 413,163 243,971
Telephone 60,393 1,845 62,238 20,954
Transfer and filing fees - - - 403
Travel 8,604 - 8,604 16,054
--------- --------- --------- ---------
$ 915,798 $ 25,091 $ 940,889 $ 652,904
========= ========= ========= =========
Item 2: Management's Discussion and Analysis of Results of Operations
and Financial Conditions
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
Results of Operations
Three Months Ended March 31, 1999, Compared to the Three Months Ended
March 31, 1998.
Aggregate revenue (environmental clean-ups and waste disposal projects
and Training Institute fees) increased to $1,138,135 from $512,867; an increase
of $625,268, or 121.9%, for the three-month period ended March 31, 1999. This
resulted primarily from increased remediation activity as projects that were
initially obtained during 1998 reached their on-site start-up phases. The
Company views this as the establishment of a positive trend, which is currently
being reflected in a continuation of revenue growth in the second quarter of
1999. There can be no assurance that this trend will be maintained.
Cost of sales increased to $564,124, representing an increase of only
$19,223, or 3.5%, over the comparable 1998 period's $544,901, when revenues were
significantly lower. Attaining this relatively minor increase was primarily
attributable to the Company's increased efficiency derived from greater
economies of scale now that larger projects are running simultaneously. As the
period entailed costs associated with project start-ups, for which invoicing
will not be completed until the second quarter of 1999, and the high inventory
purchase costs incurred in preparation for these projects, the Company views
this result as another positive indicator of progress.
The Company reported a Gross Margin profit of $574,011 for the current
period, which was a significant increase versus the loss of $32,034 recorded in
the three-month period ended March 31, 1998. While the Company is pleased with
this profit and the increased revenues in 1999, it notes that the currently
non-billable project work and abnormally high inventory purchase costs, noted
above, have both restricted profitability. In addition, the Company believes
that project costs do not yet reflect the full economy of scale potential for
operations at this stage in its development.
Investment and other income decreased to $34,271 from $63,546 in the
comparable period in 1998, a decrease of $29,275. This decrease resulted
primarily from an equivalent change to the income received from interest on
related party loans. In addition, the Company's advances to Tristate Restoration
Company, Inc. for a joint venture project are reflected in the 1998 period, and
the Company's lawsuit pertaining to this and other matters at issue with
Tristate was not resolved until subsequent to March 31, 1999 (see Notes 7a and
14).
Selling, general and administrative expenses (SG&A) increased $179,313,
or 21.4%, to $1,015,759 in the three-month period ended March 31, 1999, versus
the 1998 comparable period's $836,446. Significant contributions to the 1999
expenses were made by legal costs incurred by the Company in relation to the
Legal Proceedings detailed in Note 14.
For the three-month period ended March 31, 1999, the Company is pleased
to report a profit from operations of $92,523, versus a loss of $259,480 in the
comparable period of 1998. This represents a significant improvement of
$352,003 and is viewed as a further indicator of the Company's achievements in
overcoming the large abnormal expenses experienced in the 1999 period, which are
discussed above. The Company views these expenses as an aberration which
obscures a true perspective on the growth and progress achieved in the first
quarter of 1999.
Liquidity and Capital Resources
At March 31, 1999, the Company had a working capital of $3,997,347, an
increase of $155,848, or 4.1% from the $3,841,499 reflected at December 31,
1998. Within the current liabilities, significant increases occurred in accounts
payable, accrued expenses and loans payable as a result of preparing for
projects which commenced during the first quarter of 1999.
The Company has successfully financed its operations through revenues
received from MBS sales, projects and related revenues. Extraordinary expenses
associated with the Legal Proceedings detailed in Note 16a are being financed
through the sale of the Company's securities pursuant to its stock option plan,
and to certain private investors. The Company expects to continue to provide for
its cash and capital needs in this manner until operations are sufficient to
meet these needs.
Cash Flows
During the three-month period ended March 31, 1999, the Company
decreased its cash deficit $938 versus the deficit recorded at the end of the
comparable period in 1998. In the current period, cash was provided mainly from
sales revenues, and from non-interest bearing demand loans. Cash-flow further
reflects the out-flow of monies required to finance work currently in progress
for which revenues and profits will not be fully realized until later in 1999,
and which should favorably affect future cash-flow demands placed on the Company
this year.
Other
In anticipation of significantly increased remediation in 1999, the
Company has been progressively increasing its inventory of the main chemical
ingredient in MBS since mid-1998, as the chemical has a relatively long
lead-time prior to availability. Although several major projects have commenced
in 1999, this build-up of inventory is still the primary reason for the value of
inventory increasing $545,000 to a total of $2,083,560 from the $1,538,560
recorded at December 31, 1998. The Company believes that demand for product for
contracts already issued, in process and pending in 1999 will result in a need
exceeding full utilization of the currently held inventory.
Year 2000 Issue
The Company's services do not utilize equipment or systems that depend
on computer software. The Company's accounting systems are personal computer
based and presently utilize off-the-shelf accounting software. The Company plans
to purchase software upgrades from software vendors, and these purchases are not
expected to have a material impact on the Company's results of operations.
Certain matters discussed herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and, as such, may involve risks and uncertainties. These forward-looking
statements relate to, among other things, expectations of the business
environment in which the Company operates, projections of future performance,
perceived opportunities in the market and statements regarding the Company's
mission and vision. The Company's actual results, performance, or achievements
may differ significantly from the results, performance, or achievements
expressed or implied in such forward-looking statements.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 14 for details.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None
(b) None
(c) None
(d) Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
Financial Data Schedule
(b) A report on Form 8-K was filed on March 17, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 20, 1999 SOLUCORP INDUSTRIES LTD.
By: /s/ PETER MANTIA
-------------------------------------------
Peter Mantia - President