10-Q
Form 10-Q
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 June 30, 1999 Commission File Number:0-29664
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:
--------------
Securities registered pursuant to Section 12 (b) 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 June 30, 1999, there were 22,218,481 shares of the registrant's
common stock, no par value, issued and outstanding.
The aggregate market value of the voting stock held by non-affiliates
of the registrant: $21,597,905.
<PAGE>
PAGE 2
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)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
1999 1998 1999 1998
------------------------- --------------------------
Revenues
Environmental clean-up and waste disposal $1,277,260 $ 481,412 $2,412,595 $986,563
Training Institute 1,190 680 3,990 8,396
-------------- ---------- ------------- -----------
1,278,450 482,092 2,416,585 994,959
-------------- ---------- ------------- -----------
Cost of Sales and Revenue
Environmental clean-up and waste disposal 1,862,553 410,588 2,396,784 855,710
Training Institute 65,220 0 65,470 2,964
Inventory storage costs - 42,931 29,643 139,746
-------------- ---------- ------------- -----------
1,927,773 453,519 2,491,897 998,420
-------------- ---------- ------------- -----------
Gross Margin (649,323) 28,573 (75,312) (3,461)
Investment and Other Income (Expense) 216,556 (483,140) 250,827 (419,594)
License fees 500,000 530,304 1,000,000 1,075,758
-------------- ---------- ------------- -----------
67,233 75,737 1,175,515 652,703
-------------- ---------- ------------- -----------
Expenses
Administrative and general 556,627 1,116,168 1,497,516 1,769,072
Corporate development and marketing 1,386 142,421 1,389 256,447
Depreciation and amortization 75,059 88,155 149,926 157,671
Research and development - - - -
-------------- ---------- ------------- -----------
633,072 1,346,744 1,648,831 2,183,190
-------------- ---------- ------------- -----------
Earnings (loss) from operations (565,839) (1,271,007) (473,316) (1,530,487)
-------------- ---------- ------------- -----------
Earnings (loss) for the period (565,839) (1,271,007) (473,316) (1,530,487)
Deficit, beginning of period (16,705,424)(13,507,218) (16,797,947) (13,247,738)
-------------- ---------- ------------- -----------
($17,271,263)($14,778,225) (17,271,263) (14,778,225)
========= ========= ========= =========
Earnings (loss) per share $(0.03) ($0.01) ($0.02) ($0.08)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
PAGE 3
SOLUCORP INDUSTRIES LTD.
CONSOLIDATED BALANCE SHEET
(IN U.S. DOLLARS)
<TABLE>
<S> <C> <C>
June 30, December 31,
1999 1998
(Unaudited)
--------------- -----------------
ASSETS
Current
Cash $ - $ -
Accounts receivable (Note 2) 1,365,939 2,399,401
License fees (Note 3) - 90,910
Due from related parties (Note 5) 1,798,600 1,690,482
Other receivables 64,345 66,635
Inventories (Note 6) 3,590,544 1,538,560
Prepaid expenses (Note 7) 1,247,275 247,238
--------------- -----------------
8,066,703 6,033,226
Long-term investment (Note 8) 342,343 265,421
Capital assets (Note 9) 230,274 311,124
--------------- -----------------
TOTAL ASSETS $ 8,639,320 $ 6,609,771
========= ==========
LIABILITIES
Current
Bank indebtedness $ 328,701 $ 58,359
Accounts payable and accrued liabilities 3,291,262 1,708,195
Customer deposits 77,854 77,854
Loans payable (Note 10) 996,775 347,319
--------------- -----------------
4,694,592 2,191,727
--------------- -----------------
SHAREHOLDERS' EQUITY
Subscriptions received - 1,161,901
Share capital (Note 11) 21,215,991 20,054,090
Deficit (17,271,263) (16,797,947)
--------------- -----------------
3,944,728 4,418,044
--------------- -----------------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY 8,639,320 6,609,771
========= ==========
Subsequent events (Note 13)
Contingencies (Note 15)
Commitments (Note 17)
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
PAGE 4
SOLUCORP INDUSTRIES LTD
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED - PREPARED BY MANAGEMENT)
(IN U.S. DOLLARS)
<TABLE>
<S> <C> <C>
Six Months Ended
June 30,
-----------------------------------
1999 1998
-----------------------------------
CASH PROVIDED BY (USED IN)
Operating activities
Net profit (loss) for the period $ (473,316) $ (1,530,487)
Items not involving cash:
Depreciation and amortization $ 149,926 157,671
--------------- --------------
Funds provided (used) from operations (323,390) (1,372,816)
Non-cash working capital changes (492,218) 202,122
--------------- --------------
Cash provided by (used in) operating activities (815,608) (1,170,694)
--------------- --------------
Financing activities
Issue of common shares - 1,135,350
Due from related parties (108,118) 555,158
Loans receivable - 10,021
Loans payable 649,456 (1,845)
--------------- --------------
Cash provided by (used in) financing activities 541,338 1,698,684
--------------- --------------
Investment activities
(Increase) decrease in capital assets 80,850 (13,027)
(Increase) decrease in deferred charges - (500,000)
(Increase) decrease in long-term investments (76,922) (8,854)
--------------- --------------
Increase (decrease) in cash position (270,342) 6,109
Cash position, beginning of period (58,359) 26,646
--------------- --------------
Cash position, end of period $ (328,701) $ 32,755
========== =========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
PAGE 5
SOLUCORP INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 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 (see also note 3). 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 and six months ended
June 30, 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.
(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 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. 100%
(incorporated in the USA)
(c) Cash and Cash Equivalents
For purposes of balance sheet clarification and the statements of cash
flows, the Company considers all highly liquid investments purchased
with an original maturity of three (3) months or less to be cash
equivalents.
<PAGE>
PAGE 6
(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 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.
(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 U.S. 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 the 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
PAGE 7
(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,
there were no on-site projects in progress.
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 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 period.
2. Accounts Receivable
June 30, December 31,
1999 1998
-------------- --------------
Smart International Ltd. - $ 2,006,984
Other $1,478,013 $ 804,156
-------------- --------------
$1,478,013 $ 2,811,140
Allowance for bad debts $( 112,074) $( 411,739)
-------------- --------------
$1,365,939 $ 2,399,401
======== ========
<PAGE>
PAGE 8
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 $1,000,000 towards the license fee for the period ended
June 30, 1999. Pursuant to the agreement with Smart which allows
payments to be offset against amounts owed to Smart for inventory
purchases, this amount is included in the deposit on inventory
purchases, and reflected in the total value of $1,583,560 for available
inventory recorded for the period. No royalties were payable.
The Company believes that it has been using the proper accounting
method, as accepted by its independent auditor, to report its
relationship with Smart (See also notes 2 and 7b). The staff of the
Securities and Exchange Commission (the "Staff") has expressed concern
about the propriety of the accounting method used by the Company. The
Company disagrees with the Staff's position. If the Company were to
disregard its relationship with Smart (including the $1,000,000 Smart
licensing fee), for the six month period ended June 30, 1999, its
statement of operations would show a net loss of $1,473,316. In
addition, on June 30, 1999, the Company's balance sheet would have
shown an inventory value of $2,590,544 and stockholders' equity in the
amount of $2,944,728.
4. Loans Receivable
Nil
5. Due From Related Parties
Advances, primarily to directors and employees related to directors in
the amount of $1,798,600 (December 31, 1998 - $1,690,482), bear
interest at 8.5% and have no specific term of repayment. These advances
were secured by marketable securities (market value at December 31,
1998 - approximately $50,000). During the quarter ended June 30, 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 advances of $40,851 were made to the related
parties and interest of $36,556 was charged for the current quarter. As
at June 30, 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.
6. Inventories
June 30, December 31,
1999 1998
-------------- --------------
Raw chemicals $3,585,480 $1,515,550
Blended chemicals 3,035 16,056
Goods for resale 2,029 6,954
-------------- --------------
$3,590,544 $1,538,560
======== ========
PAGE 9
7. Prepaid Expenses
June 30, December 31,
1999 1998
-------------- --------------
Consulting agreements (Note 7a) $ 0 $ 5,041
Rental expense 8,961 36,360
Deposit on inventory purchases (Note 7b)1,000,000 201,900
Other 238,314 3,937
-------------- --------------
$ 1,247,275 $ 247,238
======== ========
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 deposits on current and future
inventory.
<PAGE>
PAGE 10
8. Long-term Investments
<TABLE>
<S> <C> <C>
June 30, December 31,
1999 1998
(a) Shares of Earthworks Industries Inc. accrued (see Note 10). 46,598 46,598
(b) 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.
(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. 295,744 218,821
(d) A 25% interest in John Beech remediation Limited
(no market value).
(e) 70,000 shares of Global Technologies, Inc. (Note 10). 0 0
$ 342,343 $ 265,421
======== =========
</TABLE>
9. Capital Assets
June 30, December 31,
1999 1998
-------------- --------------
Computers $ 24,047 $24,047
Furniture and office equipment 121,292 121,292
Remediation equipment 448,703 454,327
Leasehold improvements 15,927 15,927
Incorporation costs 688 688
Patent costs 70,583 70,583
-------------- --------------
$ 681,240 $ 686,864
Less: Accumulated amortization 450,966 375,740
-------------- --------------
$ 230,274 $ 311,124
======== =========
<PAGE>
PAGE 11
10. Loans Payable
<TABLE>
<S> <C> <C>
June 30, 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 8e)
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. 725,190 60,734
Other 0 15,000
-------------- --------------
$ 996,775 $ 374,319
========= =========
</TABLE>
<PAGE>
11. Share Capital
a) Authorized:
200,000,000 common shares of no par value
b) Issued:
<TABLE>
<S> <C> <C> <C> <C>
6-Month Period Ended 6-Month Period Ended
June 30, 1999 June 30, 1998
(Unaudited) (Unaudited)
Shares Amount Shares Amount
------------------------------------------------
Balance, beginning 19,528,640 $20,054,640 18,652,497 $18,135,240
- --------------------------------------------------------------------------------------------
Issued pursuant to
Stock options 271,000 568,850
Private placement 2,689,841 1,161,901
Shares for debt settlement
Warrants 36,557 63,975
Finders agreement
Conversion of debentures
Employment agreement
License agreement 190,550 500,000
Consulting agreement
-------------------------- -------------------------
498,107 $ 1,132,825
Allotted for cash 1,443 2,525
Allotted for debt settlement
Less unpaid shares to be returned
-------------------------- -------------------------
Balance, ending 22,218,481 $21,215,991 19,152,047 $19,270,590
========================== =========================
</TABLE>
c) During the three-month period ended June 30, 1999, no stock options
were granted by the Company to employees, directors and other
associated individuals.
At June 30, 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
<PAGE>
d) During the six-month period ended June 30, 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
e) At June 30, 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.
12. 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.
13. Subsequent Events
As previously reported, since May 1, 1998, the Staff of the Securities
and Exchange Commission had been investigating the affairs of the
Company. Recently, the Staff advised the Company that it intended to
recommend to the Commission that it institute enforcement actions
against the Company and various individuals associated with it seeking
various forms of relief. The Company and the persons involved have
made a submission to the SEC arguing that the relief sought is not
necessary or appropriate but offering to consent to some but not all
of the relief contemplated. The Staff has indicated that it will not
recommend that the Commission accept the offer. The Commission has not
yet considered the matter or decided whether to institute enforcement
actions.
<PAGE>
PAGE 14
14. Segmented Information
<TABLE>
<S> <C> <C> <C>
US Services Consolidated Totals
& Products Canada Total
------------ ---------- --------------------
(a) Six Months Ended June 30, 1999:
(Unaudited)
Revenue $2,416,585 $ 0 $2,416,585
License Fees 500,000 0 500,000
Cost of Sales 2,491,897 0 2,491,897
Operating earnings (loss) 424,688 0 424,688
Administrative and general 1,443,158 54,358 1,497,516
Corporate development and marketing 1,386 3 1,389
Amortization 147,519 2,407 149,926
Segmented gain (loss) $ (667,375)$( 56,768) $ (724,143)
---------- --------- ---------
Unallocated:
Investment and other income 250,827 0 250,827
------------------
GAIN (LOSS) FOR THE PERIOD (416,548) (56,768) $ (473,316)
-----------------
IDENTIFIABLE ASSETS $8,032,618 $ 606,702 $8,639,320
========= ========== ==========
(a) Six Months Ended June 30, 1998:
(Unaudited)
Revenue $ 994,959 $ 0 $ 994,959
License Fees 1,075,758 0 1,075,758
Cost of Sales 1,020,358 0 1,020,358
Operating earnings (loss) 1,050,359 0 1,050,359
Administrative and general 1,677,370 91,702 1,769,072
Corporate development and marketing 202,655 53,792 256,447
Amortization 151,311 6,360 157,671
Segmented loss $ (980,977)$(151,854) $(1,132,831)
---------- -------- ----------
Unallocated:
Other income(expense) (521,039) 0 $ (521,039)
Investment and other Income 66,445 66,445
------------------
LOSS FOR THE PERIOD $ (1,587,425)
---------
IDENTIFIABLE ASSETS $7,108,528 $497,748 $ 7,606,276
========= ======== ==========
</TABLE>
<PAGE>
PAGE 15
15. Contingencies
a) Legal Proceedings
As previously disclosed, the Company is 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 settlement was completed by the payment of $180,000 to the
Company by the Tristate Defendants in June 1999 in exchange for a
complete release of all claims among the parties, their subsidiaries,
affiliates, employees, agents and assigns.
In the lawsuit between the Company and KBF Pollution Management, Inc.
("KBF"), the Company filed a Third Party Complaint against KBF's
principals, Lawrence Kreisler and Kevin Kreisler and against P&K
Partnership Limited Liability Company ("P&K") and its principals,
Herman Kong and Fred Wesson. The Third Party Complaint seeks
substantial damages emanating from, among other things, the Third
Party Defendants' conspiracy to circumvent the Licensing Agreement
between the Company and KBF and related misrepresentations and
falsehoods. The Court has denied a motion to dismiss on jurisdictional
and other grounds made by P&K and Messrs. Kong and Wesson. Pre-trial
discovery is about to proceed.
As previously reported, since May 1, 1998, the Staff of the Securities
and Exchange Commission had been investigating the affairs of the
Company. Recently, the Staff advised the Company that it intended to
recommend to the Commission that it institute enforcement actions
against the Company and various individuals associated with it seeking
various forms of relief. The Company and the persons involved have
made a submission to the SEC arguing that the relief sought is not
necessary or appropriate but offering to consent to some but not all
of the relief contemplated. The Staff has indicated that it will not
recommend that the Commission accept the offer. The Commission has not
yet considered the matter or decided whether to institute enforcement
actions.
16. Related Party Transactions
During the six months ended June 30, 1999, the Company paid consulting
fees and salaries of $137,960 (June 30, 1998 - $414,811) to directors,
former directors and/or private companies controlled by directors
and/or individuals related to directors.
17. Commitments
a) The Company has a lease for a building it presently occupies in New
York which requires 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 $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 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 8c).
<PAGE>
PAGE 16
e) In October 1995, the Company entered into an exclusive licensing
agreement with a United Kingdom company for the utilization and
marketing of the Company's remediation technology for soil and
industrial wastes in the U.K. The agreement required an annual
licensing fee and a royalty per ton of soil or waste 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, Hungary, Poland and Portugal.
Accordingly, the option payment received is included in licensing fees
for the period ended December 31, 1997.
18. Economic Dependence
During the three-month period ended June 30, 1999, revenues of
$1,278,450 were earned from four customers, of which $757,565 is
included in accounts receivable.
License fees of $1,000,000 (June 30, 1998 - $1,075,758) were recognized
as disclosed in Note 3.
19. 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 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, 1999,
the effect on the presentation of long-term investment for U.S. GAAP
purposes would not be material.
20. 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.
<PAGE>
PAGE 17
SOLUCORP INDUSTRIES LTD.
Schedule of Administrative and General Expenses (U.S. Dollars)
Six-month Periods Ended June 30, 1999 & 1998
<TABLE>
<S> <C> <C> <C> <C>
June 30, June 30,
1999 1998
------------------------------------
- -------------
U.S. Canada Total Total
------------- ---------- ---------- ---------
Advertising and promotion $ 11,112 - 11,112 $ -
Automobile 16,441 - 16,441 18,387
Bad debts - - - 86,600
Bank charges and interest 30,153 230 30,383 10,691
Consulting and management fees 137,960 - 137,960 414,811
Equipment Leasing 24,085 - 24,085 -
Foreign exchange (gain) loss 19,678 - 19,678 52,901
Insurance 71,855 - 71,855 20,261
Investor and public relations 3,791 - 3,791 -
Legal, accounting and audit 254,309 - 254,309 336,270
Office, printing and related 200,455 3,978 204,433 169,172
Rent 5,971 3,497 9,468 63,497
Salaries and wages 580,544 43,108 623,652 507,526
Telephone 79,175 3,635 82,810 41,298
Transfer and filing fees - - - 401
Travel 7,629 - 7,629 47,257
------------- --------- ---------- -------------
$1,443,158 $ 54,358 $1,497,516 $1,769,072
======== ======== ========= ========
</TABLE>
<PAGE>
PAGE 18
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
Six Months Ended June 30, 1999, Compared to the Six Months Ended June
30, 1998.
Aggregate revenue (environmental clean-ups and waste disposal projects
and Training Institute fees) increased to $2,416,585 from $994,959; a
significant increase of $1,421,626, or 142.88%, for the six-month period ended
June 30, 1999. This resulted primarily from increased remediation activity as
projects that were initially obtained during 1998 reached their on-site start-up
and operational phases. The Company is pleased with this positive trend. There
can be no assurance that this trend will be maintained.
Cost of sales increased to $2,491,897 representing an increase of
$1,493,477, or 149.58%, over the comparable 1998 period's $998,420 when revenues
were significantly lower. As the period entailed costs associated with large
project start-ups and simultaneous running, for which invoicing will not be
completed until the third quarter of 1999, and high inventory purchase costs
incurred in preparation for these projects, the Company views this result as a
positive indicator of progress.
The Company reported a Gross Margin Loss of $75,312 for the current
period, which was an increase versus the loss of $3,461 recorded in the
six-month period ended June 30, 1998. While the Company is not pleased with this
loss in the context of the increased revenues in 1999, it notes that the
currently non-billable project work and high costs associated with inventory
purchases and legal expenses have limited its profitability. In addition, the
Company believes that project costs do not yet reflect the full economy of scale
potential for operations at this stage of its development.
Investment and other income increased to $250,827 from $(419,594) in
the comparable period in 1998, a increase of $670,421. This increase resulted
primarily from an equivalent change to the income received from interest on
related party loans and a settlement payment from the Tristate Restoration
Company, Inc. lawsuit which was resolved during the past quarter (see Notes 5
and 15a).
Selling, general and administrative expenses (SG&A) decreased $534,359
or 24.4%, to $1,648,831 in the six-month period ended June 30, 1999, versus the
1998 comparable period's $2,183,190. While significant contributions to the 1999
expenses were made by legal costs incurred by the Company in relation to the
Legal Proceedings detailed in Note 15a, the Company is pleased by the budgetary
and economic restraint which the 1999 period reflects.
For the six-month period ended June 30, 1999, the Company is reporting
a loss from operations of $473,316, versus a loss of $1,530,487 in the
comparable period of 1998. Although this loss is disappointing, the significant
improvement of $1,057,171 or 69.1%, 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 half of 1999.
<PAGE>
Liquidity and Capital Resources
At June 30, 1999, the Company had a working capital of $3,372,111, a
decrease of $469,388 or 12.2% 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 half of 1999.
PAGE 19
The Company has financed its operations through revenues received from
MBS sales, projects and related revenues. Extraordinary expenses associated with
the Legal Proceedings detailed in Note 15a 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 six-month period ended June 30, 1999, the Company increased
its cash overdraft position $270,342 versus an overdraft cash position of
$58,359 in 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.
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 $45,000 to a total of $1,583,560 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 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
the efforts of customers, suppliers, or third parties, will be
satisfactorily resolved.
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.
<PAGE>
PAGE 20
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 15 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
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: August 19, 1999 SOLUCORP INDUSTRIES LTD.
By: /s/ PETER MANTIA
Peter Mantia - President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF SOLUCORP INDUSTRIES LTD FROM THE QUARTERLY PERIOD ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001051720
<NAME> SOLUCORP INDUSTRIES LTD.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,478,013
<ALLOWANCES> 112,074
<INVENTORY> 3,590,544
<CURRENT-ASSETS> 8,066,703
<PP&E> 1,247,275
<DEPRECIATION> 149,926
<TOTAL-ASSETS> 8,639,320
<CURRENT-LIABILITIES> 4,694,592
<BONDS> 0
0
0
<COMMON> 21,215,991
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,639,320
<SALES> 2,416,585
<TOTAL-REVENUES> 3,667,412
<CGS> 2,491,897
<TOTAL-COSTS> 4,140,728
<OTHER-EXPENSES> 1,648,831
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (473,316)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (473,316)
<EPS-BASIC> (0.02)
<EPS-DILUTED> 0
</TABLE>
