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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Period Ended March 31, 1998
Commission File No. 0-29664
SOLUCORP INDUSTRIES LTD.
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(Exact name of Registrant as specified in its Charter)
YUKON N/A
------------------------------ -------------------
(State or jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
250 WEST NYACK ROAD, WEST NYACK, NY 10994
- --------------------------------------- ----------
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code:
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(914) 623-2333
Former name, former address and former fiscal year,
if changed since last report:
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None
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 12 months (or for a shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
,
As of May 19, 1998, there were 18,847,521 shares of Common Stock, no par value
outstanding.
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BASIS OF PRESENTATION
The following unaudited financial statements have been prepared in
accordance with generally accepted accounting 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 Transition Report for the six month period
ended December 31, 1997. The results of operations for the three months ended
March 31, 1998 are not necessarily indicative of the results which may be
expected for the full year ending December 31, 1998.
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, performances or achievements expressed or implied on such
forward-looking statements. For discussion of the factors that might cause such
a difference, see "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PART I-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,
----------------------------
1998 1997
------------ ------------
Revenues
Environmental clean-up and waste disposal $ 505,151 $ 279,191
Training Institute 7,716 5,830
------------ ------------
512,867 285,021
------------ ------------
Cost of Sales and Revenue
Environmental clean-up and waste disposal 445,122 266,078
Training Institute 2,964 2,230
Inventory storage costs 96,815 17,255
------------ ------------
544,901 285,563
------------ ------------
Gross Margin (32,034) (542)
Investment and Other Income 63,546 1,500
License fees 545,454 0
------------ ------------
576,966 958
------------ ------------
Expenses
Administrative and general 652,904 609,607
Corporate development and marketing 114,026 101,067
Depreciation and amortization 69,516 81,723
Research and development 52
------------ ------------
836,446 792,449
------------ ------------
Earnings (loss) from operations (259,480) (791,491)
------------ ------------
Earnings (loss) for the period (259,480) (791,491)
Deficit, beginning of period (13,247,738) (10,599,949)
------------ ------------
Deficit, end of period ($13,507,218) ($11,391,440)
============ ============
Earnings (loss) per share ($0.01) ($0.05S)
============ ============
The accompanying notes are an integral part of this statement.
SOLUCORP INDUSTRIES LTD
CONSOLIDATED BALANCE SHEET
(IN U.S. DOLLARS)
March December
31, 1998 31, 1997
------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash $ 134,825 $ 26,646
Accounts receivable 1,587,097 672,791
License fees 136,364 490,910
Loan receivable 25,000 50,000
Due from related parties 1,687,761 1,981,377
Other receivables 51,232 100,872
Inventories 1,194,894 784,815
Prepaid expenses 494,778 816,495
------------ ------------
5,311,951 4,923,906
Long Term Investments 373,939 368,844
Capital Assets 341,648 350,663
Waste Disposal Rights 1,570,078 1,624,219
------------ ------------
TOTAL ASSETS $ 7,597,616 $ 7,267,632
============ ============
LIABILITIES
Current Liabilities
Accounts payable & accrued liabilities $ 981,679 $ 868,198
Loans payable 271,180 270,722
------------ ------------
1,252,859 1,138,920
Due on waste disposal rights 1,265,625 1,265,625
------------ ------------
2,518,484 2,404,545
------------ ------------
SHAREHOLDERS EQUITY
Share capital 18,610,765 18,135,240
Deficit (13,507,218) (13,247,738)
------------ ------------
5,103,547 4,887,502
Less: Cost of 8,000 shares held by
company's subsidiary (24,415) (24,415)
------------ ------------
5,079,132 4,863,087
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY $ 7,597,616 $ 7,267,632
============ ============
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,
----------------------
1998 1997
--------- ---------
CASH PROVIDED BY (USED IN)
Operating activities
Net profit (loss) for the period ($259,480) ($791,491)
Items not involving cash:
Depreciation & amortization 69,516 81,723
--------- ---------
Funds provided (used) from operations (189,964) (709,768)
Non-cash working capital changes (485,002) (22,777)
--------- ---------
Cash provided by (used in) operating activities (674,966) (732,545)
--------- ---------
Financing activities
Issue of common shares 475,525 709,837
Due from related parties 293,616 (50,035)
Loans receivable 25,000
Loans payable 458
--------- ---------
Cash provided by (used in) financing activities 794,599 659,802
--------- ---------
Investment activities
(Increase) decrease in capital assets (6,360) (3,487)
(Increase) decrease in long-term investments (5,094) (3,212)
--------- ---------
Cash provided by (used in) investment
activities (11,454) (6,699)
--------- ---------
Increase (decrease) in cash position 108,179 (79,442)
Cash position, beginning of period 26,646 10,451
--------- ---------
Cash position, end of period $ 134,825 ($ 68,991)
========= =========
The accompanying notes are an integral part of this statement.
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
a) Generally Accepted Accounting Principles
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in
Canada, which 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 March 31, 1998 the Company's
subsidiaries and its percentage equity interest in each are as
follows:
ESM Industries (Canada) Inc. 100%
World Travel Plazas 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 values
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.
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
f) Inventory
Inventory is valued at the lower of cost or 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
bases:
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) Waste Disposal Rights
Waste disposal rights are recorded at cost net of amortization.
These rights are being amortized at the greater of $10 per ton of
waste delivered or $216,500 per year. The Company conducts an
annual review of the carrying value to ensure it is not in excess
of the estimated recoverable amount of this asset (see note 10).
Any excess amount identified as a result of this review is
charged to income in that year as a write-down of the carrying
value.
j) 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 the 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.
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
(iii) Revenue and expenses - at the average exchange rates
prevailing during the period.
k) Share Issue Costs
Share issue costs are charged directly to the deficit.
l) 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
the 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. At March 31, 1998 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.
Revenue from license fees, option payments and royalties are
recognized as the accrue in accordance with the terms of the
relevant agreements.
m) Research and Development
Research and development expenditures less related government
grants are charged to operations.
n) Earnings (Loss) Per Share
The earnings (loss) per share is computed using the
weighted-average number of common shares outstanding during the
year.
o) Accounting for Stock-Based Compensation
In October 1995 the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation". The statement encourages all entities
to adopt a new method of accounting to measure compensation cost
of all employee stock compensation plans based on the estimated
fair value of the award at the date it is granted. Companies are,
however, allowed to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting,
which generally does not result in compensation expense
recognition for most
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the
financial statement pro forma net income and,
if presented, earnings per share, as if SFAS No. 123 had been
adopted. The accounting requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years that
begin after December 15, 1995; however, companies are required to
disclose information for awards granted in their first fiscal
year beginning after December 15, 1995. Currently, the Company's
stock-based compensation plan is accounted for using Canadian
generally accepted accounting principles similar to the intrinsic
value method prescribed by APB No. 25. The Company is in the
process of computing the effect of adopting SFAS No. 123 and has
not yet made a decision on whether to adopt the U.S. accounting
policy for the fiscal period March 31, 1998. Management believes
the financial impact of adopting SFAS No. 123 would be
immaterial.
2. Accounts Receivable
March 31, December 31,
1998 1997
---------- --------
Tristate Restoration Company,
Inc. (note 7) $ 299,665 $293,361
Smart International Ltd. 1,125,734 203,796
Other 202,805 216,741
---------- --------
1,628,204 713,898
Allowance for bad debts (41,107) (41,107)
---------- --------
$1,587,097 $672,791
========== ========
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 from 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. At March 31, 1998 the
Company has received $500,000 of the $1,500,000 billed towards
the license fee and has accrued an amount receivable of $136,364
for license fees earned. No royalties were payable.
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
4. Loan Receivable
March 31, December 31,
1998 1997
------- -------
Loan receivable, 5% per annum, due
November 30, 1997 $50,000 $50,000
======= =======
Management expects the balance plus interest to be repaid in full
in 1998.
5. Due From Related Parties
Advances, primarily to directors, and employees related to
directors in the amount of $1,687,761 (December, 1997 -
$1,981,377) bear interest at 8.50%, are secured with marketable
securities (market value at March 31, 1998 - $ 880,416) and have
no specific terms of repayment.
6. Inventories
March 31, December 31,
1998 1997
---------- --------
Raw Chemicals $1,137,515 $731,576
Blended chemicals 53,562 13,626
Goods for resale 3,817 39,613
---------- --------
$1,194,894 $784,815
========== ========
7. Prepaid Expenses
March 31, December 31,
1998 1997
---------- --------
Employment agreement (note 7a) $250,000 $250,000
Deposit on inventory purchase (note 7b) -- 244,250
Consulting agreements (note 7c) 199,646 283,911
Rental expense 45,132 28,334
Other -- 10,000
---------- --------
$ 494,778 $816,495
========== ========
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
a) Employment agreement
During the fiscal year ended June 30, 1997 the Company was
negotiating with the shareholders of Tristate Restoration
Company, Inc. (Tristate) regarding the possible acquisition of
Tristate. Tristate is a New Jersey company specializing in the
removal of hazardous asbestos materials. As part of the
negotiations, the Company advanced 100,000 shares of its capital
stock. During the six months ended December 31, 1997 and
subsequent, negotiations continued resulting in the following:
(i) The Company made advances and provided other assistance to
Tristate to help it with its ongoing operations. These
advances are repayable on demand with interest at prime plus
1% and are secured by personal guarantees of the two
shareholders of Tristate and the assets of Tristate. As
further consideration, by an agreement dated November 7,
1997, Tristate agreed to pay the Company a portion of the
revenue collected from jobs for a period of two years from
June 1, 1997. As noted below, the agreement relating to the
revenue sharing was superseded after December 31, 1997.
However, Tristate has agreed to pay the Company $90,090 for
its share of the revenue which was included in operations
for that period. Subsequent to December 31, 1997, Tristate
made a direct assignment of one of its outstanding accounts
in the amount of $166,000 as further security for the
advances.
(ii) The Company entered into separate employment agreements with
each of the two shareholders of Tristate for a minimum term
of five years with an option to renew for another five
years. The 100,000 shares originally issued prior to June
30,1997, as noted above, are construed as part of the
compensation included under the terms of the employment
agreements. These employment agreements were dated April 8,
1998. The value of the shares issued ($250,000) will be
amortized over the five-year term commencing on April 8,
1998.
b) Deposits on Inventory Purchase
Subsequent to December 31, 1997 the $244,250 deposit was applied
to purchases of raw chemicals totaling $ 415,250.
c) Consulting Agreements
(i) The Company issued 50,000 shares at $4.50 per share related
to a consulting agreement which has a two-year term ending
November 19, 1999.
(ii) The Company issued 58,000 shares at a value of $101,000
related to a consulting agreement. The payment is for the
period June 1, 1997 to May 31, 1998.
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
8. Long-term Investments
March 31, December 31,
1998 1997
-------- --------
(a) 100,500 shares of Earthworks Industries Inc. plus accrued shares
of 40,259 (December 31, 1997 - 36,165) (note 11 and 18(d))
(Market value $66,438) $104,382 $ 99,287
(b) Convertible debenture from Travel Plaza Developments Inc. (Travel
Plaza). The Company elected on December 28, 1994 to convert the
Can $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 compute the project, construction has been
temporarily suspended and the stock of Travel Plaza has been
halted from trading. Due to these uncertainties, the Company has
written this investment down to a nominal value. 1 1
(c) 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. 208,821 208,821
(d) A 25% interest in John Beech Remediation
Limited (no market value). 1 1
(e) 70,000 shares of Global Technologies Inc.
(note 11). 60,734 60,734
-------- --------
$373,939 $368,844
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SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
9. Capital Assets
March 31, December 31,
1998 1997
-------- --------
Computers $ 24,047 $ 24,047
Furniture and office equipment 100,940 100,940
Remediation equipment 426,630 426,630
Leasehold improvements 15,927 15,927
Incorporation costs 688 688
Patent costs 53,177 53,177
-------- --------
621,409 621,409
Less: Accumulated amortization 279,761 270,746
-------- --------
$341,648 $350,663
======== ========
10. Waste Disposal Rights
During the year ended June 30, 1995, the Company entered into a one-year
agreement effective from August 1, 1994 with a non-related public company,
Thermo Tech Technologies inc. (Thermo Tech), to deliver 3,500 tons per
month of suitable organic waste to a bio-conversion facility located in
Corinth, New York at $55 per ton on a put or pay basis. The Company
delivered only approximately 5% of the waste contemplated under the
one-year agreement. The Corinth facility experienced technical start-up
problems and was shut down in July 1995 to correct an engineering design
problem. On September 14, 1995 and January 17, 1996 the Company and Thermo
Tech signed confirmation agreements which resulted in a ten-year extension
from the put or pay agreement to commence when either the Corinth facility
became operational, or as an alternative, when organic waste was delivered
to another Thermo Tech facility. The agreements obligated the Company to
pay an initial amount of $2,165,625 for the right to deliver 216,500 tons
of acceptable organic waste ($10 per ton) plus an additional $45 per ton
during the ten (10) year term of the agreement.
The Company paid Thermo Tech $900,000 of the initial amount leaving
$1,265,625 still to be paid. Thermo Tech was not able to renegotiate
acceptable lease terms with the landlord of the Corinth facility and is
currently planning to relocate the plant to a nearby site. The relocation
is not expected to be completed within the next year and as a result,
Thermo Tech has agreed that the unpaid amount of $1,265,625 is not due
until the relocated plant is operational. Accordingly the balance due is
reflected as a non-current payable. However, the Company expects to fully
recover the invested amount in waste disposal rights over the ten-year
contractual period by delivering waste to either the Corinth facility or an
alternative Thermo Tech facility.
The carrying value for the waste disposal rights represents a significant
portion of the Company's assets. Measurement of the recoverability of the
carrying value is based on an assessment of the waste disposal rates
currently existing in the New York and New Jersey areas, and at other areas
where Thermo Tech plants are located, and on the assumption that the
Corinth plant will be
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
successfully relocated and in operation in the near future. As of March 31,
1998, the Company has determined that no write-down is necessary. However,
it is reasonably possible, based on existing knowledge, that changes in
future conditions in the near term could require a material change in the
estimated recoverable amount.
11. Loans Payable
March 31, December 31,
1998 1997
-------- --------
(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 Ltd. (note 8a) and 70,000 shares of Global
Technologies Inc. (note 8a) held as investments by the Company.
$200,748 $200,748
Global Technologies Inc., due on demand ($100,000 Cdn). 70,432 69,974
-------- --------
$271,180 $270,722
======== ========
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
12. Share Capital
a) Authorized:
200,000,000 common shares of no par value
b) Issued:
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
(Unaudited) (Unaudited)
------------------------------- --------------------------------
Shares Amount Shares Amount
---------- ----------- ---------- -----------
Balance, beginning 18,652,497 $18,135,240 15,062,463 $11,472,295
Issued pursuant to
Stock options 195,500 419,525 375,000 652,140
Warrants -- -- 51,516 57,697
---------- ----------- ---------- -----------
419,525 426,516 709,837
Allotted for cash 32,000 56,000 -- --
Balance, ending 18,879,997 $18,610,765 15,488,979 $12,182,132
========== =========== ========== ===========
c) During the three-month period ended March 31, 1998 the Company
granted employees, directors and other individuals associated with
Company stock options to acquire up to 465,000 shares at $3.50 per
share. At March 31, 1998 stock options were outstanding as
follows:
Shares Exercise Price Expiration Date
-------------- --------------- --------------
250,000 $1.38 December 21, 1999
57,500 $1.75 July 13, 2000
83,500 $1.75 September 12, 2000
53,500 $1.75 January 6, 2002
1,889,329 $1.75 June 9, 2002
882,210 $3.47 November 4, 2002
465,000 $3.50 February 19, 2003
d) At March 31, 1998 warrants were outstanding as follows:
Shares Exercise Price Expiration Date
-------------- --------------- --------------
160,000 $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, 2001
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
e) At March 31, 1998, 1,675,000 (March 31, 1997 - 1,675,000) common
shares were held in escrow.
13. Income Taxes
At December 31, 1997, the Company had accumulated tax losses aggregating
$9,636,000, 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.
14. Subsequent Events
(a) On April 8, 1998, as part of a employment agreement (see note 7 (ii)),
the Company gave one of the shareholders of Tristate Restoration Company, Inc.
(Tristate) 300,000 Solucorp options at a price(s) to be determined.
(b) On May 1, 1998 the Company was informed by the Securities and Exchange
Commission (SEC) that it had temporarily suspended the over the counter trading
in the securities of the Company from May 1, 1998 through May 14, 1998. 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 is confident that it will demonstrate to the satisfaction
of the SEC that it acted properly.
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- ------------------------------------------------------------------------------------------------------------------------------------
15. Segmented Information
US Services & Consolidated Totals
Products Canada Total
------------- -------- -----------------
(a) Three Months Ended March 31, 1998:
(Unaudited)
Revenue $512,867 $ -- $ 512,867
License Fees 545,454 -- 545,454
Cost of sales 544,901 -- 544,901
Operating earnings (loss)
513,420 -- 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
----------
LOSS FOR THE PERIOD $ (259,480)
==========
IDENTIFIABLE ASSETS $6,799,095 $798,521 $7,597,616
========== ======== ==========
(b) Three Months Ended March 31, 1997:
(Unaudited)
Revenue $285,021 $ -- $285,021
Cost of sales 285,563 -- 285,563
---------- -------- ----------
Operating earnings (loss) (542) -- (542)
Administrative and general 562,171 47,436 609,607
Corporate development and marketing 95,939 5,128 101,067
Research and development -- 52 52
Amortization 81,723 -- 81,723
---------- -------- ----------
Segmented loss $(740,375) $(52,616) (792,991)
---------- --------
Unallocated:
Investment and other income 1,500
----------
LOSS FOR THE PERIOD $(791,491)
==========
IDENTIFIABLE ASSETS $2,817,389 $407,796 $3,225,185
========== ======== ==========
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
16. Contingencies
a) Pending Litigation
During May, 1998, the Company and two of its officers were served with
a putative class action complaint alleging purported violations of the
federal securities laws [GESTEN v. SOLUCORP INDUSTRIES LTD., et al.,
98 Civ. 3248 (LMM) (SDNY)]. The substantive allegations of the
complaint consist of no more than extensive quotations from prior
statements purportedly made by the Company and general allegations
that such statements were false and misleading. The Company has
reviewed its prior statements and is convinced that none of such
statements are false or misleading. The Company and the officers named
in the complaint, after consultation with their attorneys, believe
that the action filed against them has no merit and have determined to
vigorously defend the action.
b) Waste Disposal Rights
Recoverability of the waste disposal rights is subject to the
realization of management's assumptions as discussed in note 10.
17. Related party Transactions
During the three months ended March 31, 1998, the Company paid consulting
fees and salaries of $94,920 (March 31, 1997 - $ 89,673) to directors,
former directors and/or private companies controlled by directors and/or
individuals related to directors.
18. Commitments
a) The Company has a lease for the building it presently occupies in New
York which requires the following payments:
1998 $144,000
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 soil
remediation process. The company will pay between 1% and 7% for
commissions on gross revenues generated by the third parties. These
agreements expire between 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.
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
d) The Company has agreed to pay royalties to Earthworks Industries Inc.
(Earthworks) (a Canadian public company) based on Cdn $1/ton of soil
remediated in Canada or the United States ($1/ton will be U.S. dollars
if soil is remediated in the United States). The Company will receive
one share for each $1 of 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 US) will be paid for each ton
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
8(c)).
e) The Company entered into a consulting agreement with a third party to
provide business development and operational support. The Company will
pay the third party $3,000 per month plus any costs over and above the
monthly consulting fee. The agreement expires on October 1, 1998 with
an annual renewal option.
f) In October 1995 the Company entered into an exclusive licensing
agreement with a United Kingdom company for the U.K. company to
utilize the Company's soil remediation process and to market the
company's soil remediation technology in the U.K. The agreement
required an annual licensing fee and a royalty per ton of soil
remediated. This agreement will be superseded by a new agreement dated
August 1, 1997, when the U.K. company obtains an official listing on
the Alternative Investment Market. The Company also granted an option
for a twelve month period to the U.K. company for a similar licensing
agreement related to various European territories. Consideration
received for granting the option was $200,000. On December 10, 1997
the U.K. company advised its intention to exercise the option and to
proceed with agreements for France, Poland, Hungary and Portugal.
19. Comparative Figures
The Company changed its year-end to December 31. In accordance with SEC
guidelines the consolidated statement of operations and the consolidated
statement of cash flow for the three month period ended March 31, 1998 was
compared to the comparable period in 1997, whereas the consolidated balance
sheet at March 31, 1998 was compared to the previous year ended date of
December 31, 1997.
20. Economic Dependence
During the three months ended March 31, 1998, revenues of $ 183,355 and $
131,367 were earned from two customers, of which $51,638 and $Nil is
included in accounts receivable respectively.
License fees of $545,454 were recognized as disclosed in note 3.
21. Reconciliation to United States Generally Accepted Accounting Principles
As discussed in Significant Accounting Policies, these consolidated
financial statements are prepared in accordance with accounting principles
generally accepted in Canada.
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1998 & 1997
- --------------------------------------------------------------------------------
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 8) 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, 1998 the effect on the presentation of
long-term investment for U.S. GAAP purposes would not be material.
SOLUCORP INDUSTRIES LTD.
Schedule of Administrative and General Expenses (US Dollars)
Three Month Periods Ended March 31, 1998 & 1997
March 31, March 31,
1998 1997
------------------------------ --------
U.S. Canada Total Total
-------- ------- -------- --------
Automobile $ 11,009 $ 0 $ 11,009 $ 9,343
Bad Debts 0 0 0 0
Bank charges and interest 3,795 78 3,873 11,560
Consulting and management fees 109,107 0 109,107 46,406
Foreign exchange (gain) loss 77,419 0 77,419 28,322
Insurance 15,864 0 15,864 11,258
Legal, accounting and audit 77,226 5,944 83,170 34,683
Office, printing and related 38,833 3,794 42,627 32,373
Rent 26,670 1,783 28,453 61,426
Salaries and wages 224,131 19,840 243,971 317,713
Telephone 18,153 2,801 20,954 30,460
Transfer and filing fees 0 403 403 529
Travel 15,721 333 16,054 25,534
-------- ------- -------- --------
$617,928 $34,976 $652,904 $609,607
======== ======= ======== ========
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1997.
Aggregate revenue (environmental clean-ups and waste disposal projects, Training
Institute fees and license fees) increased to $1,058,321 from $285,021; an
increase of $773,300 or 271% for the three months ended March 31, 1998. This
resulted primarily from increased remediation activity and from the licensing
revenue for China.
Cost of sales increased $259,338 or 91%. Part of this increase was due to the
abnormally high inventory storage costs which increased from $17,255 to $96,815
or $79,560 due to the build-up in inventory for the anticipated increased
remediation activity in 1998. The remaining increase was essentially in line
with the volume related increases from environmental cleanups.
Gross Margin reflected losses of $32,034 and $542 for the three months ended
March 31, 1998 and 1997, respectively. At this point in the Company's
development, its project costs do not yet reflect the economy of scale needed
for a normal operation. In addition, the abnormal inventory storage costs and
non-billable treatability work at the current revenue level has hindered
profitability.
Investment and other income increased to $63,546 from $1,500; an increase of
$62,046. This increase resulted primarily from interest charged on related party
loans and from the Company's advances to Tristate for a joint venture project.
Selling, general and administrative expenses ("SG&A") increased $43,997 or 6% in
the three months ended March 31, 1998 when compared to the comparable period in
1997. This increase occurred primarily from increased legal activity related to
the Company's operations, and an increased foreign exchange loss; partially
offset by lower rent costs. The shift from in-house labor to outside consultants
essentially offset.
For the three months ended March 31, 1998 the Company reported a loss of
$259,480. However, this was $532,011 or 67% lower than the $791,491 loss
experienced in the comparable period in 1997. This reduced loss essentially
reflects the Company's attempt to bring its unit costs and other costs in line
with a more normal level of activity.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $4,059,092, an increase of
$274,106 or 7% from the $3,784,986 reflected at December 31, 1997. Within the
current
assets significant increases occurred in cash, accounts receivable, and
inventories; whereas significant decreases occurred in unbilled license fees,
due from related parties and prepaid expenses. Within the current liabilities,
accounts payable reflected the only significant increase.
CASH FLOWS
During the three months ended March 31, 1998, the Company increased its cash
position $108,179 versus a decreased cash position of $79,442 in the comparable
period in 1997. In the current period, cash was provided mainly from the
issuance of the Company's capital stock and the repayment of related party
loans. This was used primarily to fund the current loss and the other operating
activities.
OTHER
The carrying value of the waste disposal rights ($1,570,078) at March 31, 1998,
represented a significant portion of the Company's assets. Measurement of the
recoverability of the carrying value was based on an assessment of the waste
disposal rates currently existing in the New York and New Jersey areas, and at
other areas where Thermo Tech plants are located, and on the assumption that the
relocation of the Corinth plant and/or some other Thermo Tech plants will be in
operation in the near future. However, it is reasonably possible, based upon
existing knowledge, that changes in future conditions in the near term could
require a material change in the estimated recoverable amount. Accordingly, the
Company is currently amortizing these rights $216,500 per year, which has left a
net amount of $304,453 at March 31, 1998.
In anticipation of significantly increased remediation activity in 1998, and due
to the relatively long lead time required to purchase one of the main chemical
ingredients in MBS, the Company continued to increase its inventory of this
chemical in the three months ended March 31, 1998. This was the primary reason
for the inventory increasing $410,079 from the $784,079 at December 31, 1997.
On May 1, 1998, the Company was informed by the Securities and Exchange
Commission (SEC) that it had temporarily suspended the over the counter trading
in the securities of the Company from May 1, 1998 through May 14, 1998. 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 is confident that it will demonstrate to the satisfaction
of the SEC that it acted properly.
PENDING LITIGATION
During May 1998 the Company and two of its officers were served with a putative
class action complaint alleging purported violations of the securities laws
[GERSTEN v SOLUCORP INDUSTRIES LTD, et al., 98 Civ. 3248 (LMM)(SDNY)]. The
substantive allegations of the complaint consist of no more than extensive
quotations from prior statements purportedly made by the Company and general
allegations that such statements were false and misleading. The Company has
reviewed its prior statements and is convinced that none of the statements are
false or misleading. The Company and the officers named in the complaint, after
consultation with their attorneys, believe that the action filed against them
has no merit and have determined to vigorously defend the action.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During May 1998 the Company and two of its officers were served with a putative
class action complaint alleging purported violations of the securities laws
[GERSTEN v SOLUCORP INDUSTRIES LTD, et al., 98 Civ. 3248 (LMM)(SDNY)]. The
substantive allegations of the complaint consist of no more than extensive
quotations from prior statements purportedly made by the Company and general
allegations that such statements were false and misleading. The Company has
reviewed its prior statements and is convinced that none of such statements are
false or misleading. The Company and the officers named in the complaint, after
consultation with their attorneys, believe that the action filed against them
has no merit and have determined to vigorously defend the action.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None
(b) None
(c) During the period covered by this report, the Company sold an aggregate
of 195,500 shares of common stock to officers, directors, employees and
consultants for cash consideration of $419,525.00 upon the exercise of stock
options which were granted before the Company was subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended. No commission was paid upon the exercise of the options nor was any
person acting as underwriter with respect to the sales. The offers and sales are
claimed to be exempt pursuant to Rule 781 under the Securities Act of 1933, as
amended in that such sales were offered and sold:
(1) pursuant to written option agreements issued prior to the time the
Company was subject to reporting obligations under the Exchange Act;
(2) the compensation options were granted for bona fide services
rendered not related to capital raising transactions; and
(3) the number of shares issued does not exceed 15% of the shares of
the Company's common stock outstanding nor does the amount received upon
the exercise of the options exceed $5,000,000 during the preceding 12
months.
(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
On May 1, 1998, the Company was informed by the Securities and Exchange
Commission (SEC) that it had temporarily suspended the over the counter trading
in the securities of the Company from May 1, 1998 through May 14, 1998. 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 is confident that it will demonstrate to the satisfaction
of the SEC that it acted properly.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
4
11 Statement Re: Computation of Earnings Per Share
27 Financial Data Schedule
99.1 Licensing Agreement dated March 20, 1998 between KBF Pollution
Management, Inc. and EPS Environmental, Inc. d/b/a Solucorp
Industries.
99.2 Agreement dated April 8, 1998 between M.H. Meyerson & Co., Inc.
and Solucorp Industries Ltd.
99.3 Finders Agreement dated April 22, 1998 between EPS Environmental,
Inc. d/b/a Solucorp Industries and Scopus Evaluation Services,
Inc.
99.4 Letter Agreement dated May 18, 1998 between KBF Pollution
Management, Inc. and Solucorp Industries Ltd. and Sommer &
Schneider LLP
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
5
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 21, 1998
SOLUCORP INDUSTRIES LTD.
By: /s/ PETER MANTIA
----------------------------------
Peter Mantia, President
By: /s/ VICTOR HERMAN
----------------------------------
Victor Herman, CFO
(Principal Accounting Officer)
6
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
11 Statement Re: Computation of Earnings Per Share
99.1 Licensing Agreement dated March 20, 1998 between KBF Pollution
Management, Inc. and EPS Environmental, Inc. d/b/a Solucorp
Industries
99.2 Agreement dated April 8, 1998 between M.H. Meyerson & Co.,
Inc. and Solucorp Industries Ltd.
99.3 Finders Agreement dated April 22, 1998 between EPS
Environmental, Inc. d/b/a Solucorp Industries and Scopus
Evaluation Services, Inc.
99.4 Letter Agreement dated May 18, 1998 between KBF Pollution
Management, Inc. and Solucorp Industries Ltd. and Sommer &
Schneider LLP
27 Financial Data Schedule