<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-9897
SOLV-EX CORPORATION
(Exact name of Registrant as specified in its charter)
NEW MEXICO 85-0283729
(State or other jurisdiction of (IRS employer identification)
incorporation or organization)
500 MARQUETTE, NW, SUITE 300, ALBUQUERQUE, NM 87102
(Address of principal executive offices)
(505)-243-7701
(Registrant's telephone number, including area code)
Former name, former address and former fiscal year, if changed since last
report: None
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON, CAPITAL STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
YES XX NO
---- ----
Indicate the number of shares outstanding of each of the Registrant's classes
of Common Stock, as of the latest practicable date: Common Stock, $.01 par
value, 24,339,180 shares outstanding as of May 1, 1997.
<PAGE>
SOLV-EX CORPORATION
(DEVELOPMENT STAGE ENTERPRISES)
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets,
March 31, 1997 and June 30, 1996 (Unaudited) 1
Consolidated Statements of Operations,
three months ended March 31, 1997 and 1996,
nine months ended March 31, 1997 and 1996,
and Cumulative from Inception (Unaudited) 2
Consolidated Statements of Stockholders' Equity,
nine months ended March 31, 1997 and
Cumulative from Inception (Unaudited) 3
Consolidated Statements of Cash Flows,
nine months ended March 31, 1997 and 1996,
and Cumulative from Inception (Unaudited) 4-5
Notes to Consolidated Financial Statements
(Unaudited) 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 10-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15-16
Item 6. There were no reports filed on Form 8-K during the quarter
ended March 31, 1997. An 8-K, dated April 2, 1997, was
filed on April 18, 1997, reporting under Item 9 sales of
equity securities pursuant to regulation D and S.
Each other item of information required under Part II is inapplicable for the
quarter ended March 31, 1997.
(i)
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND JUNE 30, 1996
(UNAUDITED)
MARCH 31, JUNE 30,
1997 1996
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,561,199 43,902,567
Accounts Receivable 2,723,513 2,154,135
Financing Receivable 9,459,974 -
Deferred financing costs 1,348,190 1,067,285
Notes Receivable - stockholder - 1,534,950
Prepaid Expenses 531,535 3,390,920
Other 21,895 44,358
------------ ----------
Total current assets 15,646,306 52,094,215
------------ ----------
Property, plant and equipment at cost:
Mineral lease 1,976,432 1,976,432
Pilot plant land 167,768 167,768
Buildings 8,087,229 2,774,171
Heavy Equipment 10,180,367 5,001,753
Field and laboratory equipment 3,657,937 2,124,058
Furniture, fixtures and leasehold
improvements 1,019,760 398,143
Construction in process 64,201,465 14,362,025
------------ ----------
89,290,958 26,804,350
Less accumulated depreciation
and amortization 2,273,041 1,078,871
------------ ----------
Net property, plant and equipment 87,017,917 25,725,479
------------ ----------
Patents, at cost, net of accumulated
amortization of $68,300 at
March 31, 1997, and $47,109 at
June 30, 1996 387,185 364,081
Deferred financing costs 1,223,633 1,613,353
Other assets, at cost 1,176,093 369,710
------------ ----------
$105,451,134 80,166,838
------------ ----------
------------ ----------
MARCH 31, JUNE 30,
1997 1996
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 10,533,563 4,468,605
Deferred compensation 99,000 99,000
Current installments of long-term debt 480,706 25,367
------------ ----------
Total current liabilities 11,113,269 4,592,972
------------ ----------
Long-term debt, excluding current
installments and including $2 million
from related party 47,265,512 33,057,000
------------ ----------
Total liabilities 58,378,781 37,649,972
------------ ----------
Stockholders' equity:
Common stock, $.01 par value
Authorized 30,000,000 shares;
issued and outstanding 24,335,680
shares at March 31, 1997, and
22,846,649 at June 30, 1996 243,357 228,466
Additional paid-in capital 80,509,847 67,556,328
Unearned compensation (206,250) -
Deficit accumulated during development
stage (33,474,601) (25,267,928)
------------ ----------
Total stockholders' equity 47,072,353 42,516,866
Commitments and contingencies
------------ ----------
$105,451,134 80,166,838
------------ ----------
------------ ----------
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
AND CUMULATIVE FROM JULY 2, 1980 (INCEPTION)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31, CUMULATIVE
------------------------- ------------------------- FROM JULY 2, 1980
1997 1996 1997 1996 (INCEPTION)
----------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract fees $ - - $ - - $ 5,278,637
Interest 97,140 83,221 796,229 126,117 3,139,096
Gain on sale of equipment - - - - 15,078
State grant - - - - 407,760
----------- ---------- ----------- ---------- ------------
97,140 83,221 796,229 126,117 8,840,571
----------- ---------- ----------- ---------- ------------
Expenses:
Research and development 1,092,374 811,954 3,792,315 2,123,512 23,179,885
Research and development
funded by others - - - - (2,032,956)
General and administrative 1,100,631 495,814 3,438,761 1,220,678 17,578,944
Interest expense, net of $1,501,230
capitalized during the period
ended 1997, and $1,452,541
during the period ended 1996 779,400 - 1,771,826 - 2,255,766
Write-off of mineral lease - - - - 1,447,453
----------- ---------- ----------- ---------- ------------
2,972,405 1,307,768 9,002,902 3,344,190 42,429,092
----------- ---------- ----------- ---------- ------------
Minority interest in loss
of subsidiary - - - - 113,920
----------- ---------- ----------- ---------- ------------
Net (loss) $(2,875,265) (1,224,547) $(8,206,673) (3,218,073) $(33,474,601)
----------- ---------- ----------- ---------- ------------
----------- ---------- ----------- ---------- ------------
Weighted average number of
common shares outstanding 23,274,269 21,213,722 20,543,624 21,213,722 14,697,777
----------- ---------- ----------- ---------- ------------
----------- ---------- ----------- ---------- ------------
(Loss) per common share $ (0.12) (0.06) $ (0.40) (0.15) $ (2.28)
----------- ---------- ----------- ---------- ------------
----------- ---------- ----------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 2, 1980 (INCEPTION)
THROUGH MARCH 31, 1997
(UNAUDITED)
<TABLE>
DEFICIT
ACCUMULATED
PRICE COMMON STOCK ADDITIONAL UNEARNED DURING
PER --------------------- PAID-IN COMPEN- DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL SATION STAGE TOTAL
----- ---------- -------- ---------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 22,846,649 $228,466 $67,556,328 $ - $(25,267,928) $42,516,866
Issued to employees as compensation - - 288,750 (206,250) - 82,500
Issued to individual as compensation
July 1, 1996 through September 30,
1996 4.92-8.00 25,653 257 179,868 - - 180,124
October 1, 1996 through December 31,
1996 6.94-7.66 4,900 49 35,845 - - 35,894
January 1, 1997 through March 31,
1997 10.625-17.50 7,166 72 112,532 - - 112,603
Due to GFL Advantage per private
placement agreement - - - (847,462) - - (847,462)
Converted Debentures
January 31, 1997 283,402 2,834 3,330,166 - - 3,333,000
February 25, 1997 139,761 1,398 1,761,935 - - 1,763,333
March 31, 1997 887,264 8,874 7,894,794 - - 7,903,668
Stock options exercised:
August 12, 1996 1.500 15,600 156 23,244 - - 23,400
September 3, 1996 2.560 500 5 1,275 - - 1,280
September 20, 1996 2.56-8.53 12,500 125 91,575 - - 91,700
September 24, 1996 2.560 12,500 125 31,875 - - 32,000
October 7, 1996 2.560 5,000 50 12,750 - - 12,800
October 16, 1996 2.560 5,000 50 12,750 - - 12,800
December 18, 1996 2.560 1,000 10 2,550 - - 2,560
January 30, 1997 2.560 1,000 10 2,550 - - 2,560
January 30, 1997 9.060 2,000 20 18,100 - - 18,120
March 31, 1997 2.560 500 5 1,275 1,280
Stock options exercised with stock:
October 17, 1996 1.500 85,285 853 (853) - - -
Net (loss) - - - - (8,206,673) (8,206,673)
---------- -------- ----------- --------- ------------ -----------
Balance at March 31, 1997 24,335,680 $243,357 $80,509,847 $(206,250) $(33,474,601) $47,072,353
---------- -------- ----------- --------- ------------ -----------
---------- -------- ----------- --------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
AND CUMULATIVE FROM JULY 2, 1980 (INCEPTION)
<TABLE>
NINE MONTHS ENDED
MARCH 31 CUMULATIVE
-------------------------------- FROM JULY 2, 1980
1997 1996 (INCEPTION)
------------ ----------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,206,673) $(3,218,073) $(25,267,928)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 1,215,361 145,928 1,369,577
Amortization of Financing Costs 659,997 -
Write-off of mineral leases and other - - 1,505,541
Gain on sale of equipment - - (15,078)
Issuance of stock, warrants, and options for -
services performed 411,121 127,959 2,416,417
Minority interest in loss of subsidiary - - (113,920)
Changes in certain assets and liabilities:
Receivables and other assets (6,272,552) (401,172) (7,122,971)
Accounts payable and accrued expenses 5,217,496 790,293 4,459,385
Accrued deferred interest - - 167,260
Deferred compensation - - 370,250
------------ ----------- -------------
Net cash provided by (used for) operating activities (6,975,250) (2,555,065) (22,231,467)
------------ ----------- -------------
Cash flows from investing activities:
Proceeds from short-term investments - - 2,296,745
Additions to property, plant and equipment (62,486,608) (5,455,839) (27,119,747)
Proceeds from sale of equipment - - 15,078
Expenditures for short-term investments - - (2,100,000)
Cash acquired in excess of payment for the purchase
of a majority interest in Can-Amera Oil Sands, Inc. - - 97,976
Expenditures for Patents (44,295) (41,149) (405,886)
Expenditures for other (697,568) - (256,569)
------------ ----------- -------------
Net cash (used for) investing
activities (63,228,471) (5,496,988) (27,472,403)
------------ ----------- -------------
Cash flows from financing activities:
Proceeds from issuance of short and long-term debt 26,540,886 165,938 34,515,282
Proceeds from loan from stockholder 2,000,000 1,000,000 -
Proceeds from issuance of common stock 13,198,502 43,710,541 63,227,522
Principal payments on short and long-term debt (13,877,035) (511,823) (1,416,016)
Payment of costs associated with proposed financing - (120,249) (2,738,726)
Other - - 18,375
------------ ----------- -------------
Net cash provided by financing activities 27,862,353 44,244,407 93,606,437
------------ ----------- -------------
Change in cash and cash equivalents $ (42,341,368) $36,192,354 $ 43,902,567
------------ ----------- -------------
------------ ----------- -------------
</TABLE>
(continued)
-4-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
AND CUMULATIVE FROM JULY 2, 1980 (INCEPTION)
<TABLE>
NINE MONTHS ENDED
MARCH 31 CUMULATIVE
-------------------------------- FROM JULY 2, 1980
1997 1996 (INCEPTION)
------------ ----------- --------------
<S> <C> <C> <C>
Change in cash and cash equivalents $ (42,341,368) $36,192,354 $ 43,902,567
Cash and cash equivalents at beginning of period 43,902,567 854,719 -
------------ ----------- -------------
Cash and cash equivalents at end of period $ 1,561,199 $37,047,073 $ 43,902,567
------------ ----------- -------------
------------ ----------- -------------
Supplemental disclosure of cash flow information:
Interest paid $ 18,438 $ 34,270 $ 217,937
------------ ----------- -------------
------------ ----------- -------------
Noncash investing and financing activities:
Issuance of stock for minerals lease $ - $ - $ 281,000
------------ ----------- -------------
------------ ----------- -------------
Acquisition of controlling interest in
Can-Amera Oil Sands, Inc. for cash of $150,000 and 75,000
shares of common stock valued at $122,250. In conjunction
with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ - $ - $ 1,659,211
Cash and stock paid for capital stock - - (272,250)
Minority interest - - (113,920)
------------ ----------- -------------
Liabilities assumed $ - $ - $ 1,273,041
------------ ----------- -------------
------------ ----------- -------------
Issuance of stock for deferred compensation $ - $ - $ 271,250
------------ ----------- -------------
------------ ----------- -------------
Issuance of subsidiary stock for redemption
of Can-Amera notes $ - $ - $ 1,447,980
------------ ----------- -------------
------------ ----------- -------------
</TABLE>
See accopmpanying notes to consolidated financial statements.
-5-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(Unaudited)
(1) BASIS OF NOTE PRESENTATION
The notes to the consolidated financial statements do not present all
disclosures required under generally accepted accounting principles but instead,
as permitted by Securities and Exchange Commission regulations, presume that
users of the interim financial statements have read or have access to the June
30, 1995, audited consolidated financial statements and that the adequacy of
additional disclosure needed for a fair presentation may be determined in that
context.
The accompanying consolidated interim financial statements include all
adjustments which are, in the opinion of management, necessary to fair
presentation of the consolidated results of operations for the periods
presented. All such adjustments are of a normal recurring nature.
(2) LEASE COMMITMENTS
The Company has leased certain facilities and heavy equipment under agreements
which are classified as either operating or capital leases.
At March 31, 1997, future minimum annual rental commitments under lease
obligations are as follows:
Capital Operating
Lease Lease
- -----------------------------------------------------------------------
June 30, 1997 $207,335 $713,846
June 30, 1998 207,335 492,350
June 30, 1999 207,335 405,049
June 30, 2000 207,335 245,360
(3) DEBT
The Company has entered into certain debt financing, consisting of a capital
lease, referred to in footnote 2 above, and certain short term insurance premium
financing with a balance of $81,485 as of March 31, 1997. The insurance
financing carries a Canadian annual rate of interest of 5.33 percent, and
terminates in June, 1997. During March, 1997, the Company entered into
additional short term insurance premium financing with a balance of $118,066 as
of March 31, 1997, and carries a Canadian annual rate of interest of 4.50
percent, and terminates in February, 1998.
-6-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(Unaudited)
In October, 1996, the Company acquired a 3,782 square foot office building in
Albuquerque, New Mexico, to allow for the expansion of technical and
professional staff. The Company acquired the building for $249,305, of which
$108,000 was financed by a mortgage payable to private individuals. The debt is
payable in monthly installments of $1,383, bears interest at a rate of 9.25%,
and matures October 31, 2006. The debt is secured by the acquired land and
building.
On November 15, 1996, the Company issued $13 million in debt which was
convertible into common stock of the Company at the option of the holder at a
price which is equal to the lesser of $14.50 per share or 82% of the closing bid
price per share at a date immediately preceding the date of the conversion. As
of March 31, 1997, the entire $13 million of debt had been converted by debt
holders into common stock of the Company, pursuant to the conditions of the
agreement.
As of March 31, 1997, the Company agreed to issue $12 million in debentures
which are convertible into shares of Common Stock. The Company received $12
million over the period through April 11, 1997. The Company has recorded the
$12 million obligation as outstanding on March 31, 1997, with a related
receivable for the amounts of the debentures, less fees. Approximately $2
million of the debentures were purchased by Solv-Ex Chairman and CEO John S.
Rendall. Pursuant to the subscription agreements, an additional $10 million
through issuance of additional debentures, will be due in installments of $5
million each from one of the investors on the 20th and 40th days respectively
after a registration statement to be filed with respect to the debentures and
underlying shares has become effective. The debentures are convertible at a
price which is equal to the lesser of 120% of market price per share on the
date of issuance or 80% of the closing bid price per share at a date
immediately preceding the date of conversion. The debentures mature on March
31, 1999 and bear interest at 5% per annum payable in arrears at maturity.
The company can require conversion of the debentures in certain
circumstances.
Principal maturities of long-term debt at each of the next five years are as
follows:
YEAR ENDED MARCH 31,
- ---------------------
1998 $ 624,125
1999 13,253,911
2000 33,462,772
2001 333,580
thereafter 10,356
-7-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(Unaudited)
As a condition of one of its long-term financings, the Company is required under
covenant to maintain certain financial ratios on a quarterly basis. As of March
31, 1997 the Company may be in non-compliance with one of the financial ratios
required in the debt covenants and has requested either a waiver or
clarification from the lender with respect to that covenant. The Company has
yet to receive a response from the lender with regards to the request. The
Company has not shown the debt as current, as under the terms of its most recent
financing, the Company can require debenture holders to convert their debt to
common stock of the Company and thereby cure any non-compliance issues with debt
company.
(4) CONTINGENCY
The Company had terminated a contract with Fort McKay Metis Corporation
("FMMC")and refused payment of certain invoices on the grounds that the
invoice were excessive and unsubstantiated. FMMC filed a Cdn$3,825,388 lien
against the Company's oil sands lease as a result of the withheld payments
and commenced an action for collection in the Province of Alberta courts. A
confidential settlement was reached on April 2, 1997. Although the matter is
settled, the settlement agreement provides for payment over several months,
and therefore the action will remain of record until the Company completes
the payment schedule, whereupon the lien will be released and the cause will
be dismissed.
(5) LEGAL PROCEEDINGS
The Company and certain officers of the Company are defendants in legal matters
pending in various jurisdictions. The matters do not specify any amount of
damages. The Company intends to vigorously defend the actions and believes that
the allegations made against the Company and its officers are without merit.
(6) SUBSEQUENT EVENTS
Subsequent to December 31, 1996, a limited partnership agreement was formalized
by Solv-Ex Canada Limited, a wholly-owned Canadian subsidiary of the Company,
and United Tri-Star Resources Ltd. ("UTS"). The partnership will be engaged in
the operation and management of the facility currently under construction on the
Bitumount Lease. UTS will hold a 10% interest in the partnership, with the
remaining partnership interest being held by a wholly-owned Canadian subsidiary
of the Company.
-8-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(Unaudited)
To date, the Company has received approximately $7.0 million from UTS as payment
of its portion of the construction costs of the initial stage plant pursuant to
the terms of the partnership agreement.
-9-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO. INFORMATION DISCUSSED HEREIN,
AS WELL AS OTHER ITEMS OF THE QUARTERLY REPORT ON FORM 10-Q, MAY INCLUDE
FORWARD-LOOKING STATEMENTS REGARDING FUTURE EVENTS OR THE FINANCIAL PERFORMANCE
OF THE COMPANY, AND ARE SUBJECT TO A NUMBER OF RISKS AND OTHER FACTORS WHICH
COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY
FORWARD-LOOKING STATEMENTS. AMONG SUCH FACTORS ARE: GENERAL BUSINESS AND
ECONOMIC CONDITIONS; NO REVENUES FROM OPERATIONS; COMMODITY PRICING; NEED FOR
ADDITIONAL FINANCING; THE COMPANY'S STATUS AS A DEVELOPMENT STAGE COMPANY; RISKS
INVOLVED IN COMMERCIALIZING THE TECHNOLOGY; THE COMPANY'S OVERALL ABILITY TO
DESIGN, CONSTRUCT AND OPERATE THE INITIAL STAGE PLANT ON A TIMELY BASIS AND THE
ABILITY OF THE PLANT TO PERFORM IN ACCORDANCE WITH EXPECTATIONS; COMPETITION;
LACK OF OR CHALLENGES TO PATENT PROTECTION OF KEY PROCESSES; POTENTIAL INABILITY
TO COMPLY WITH GOVERNMENT ENVIRONMENTAL REGULATIONS; DEPENDENCE ON KEY
PERSONNEL; HIGH VOLATILITY OF SHARE PRICE; LITIGATION IN WHICH THE COMPANY IS
CURRENTLY INVOLVED; AND OTHER RISK FACTORS LISTED FROM TIME TO TIME IN DOCUMENTS
FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.
OPERATIONS
Research and development expenditures for the quarter and nine months ended
March 31, 1997, of $1,092,374 and $3,792,315, respectively, compared to the same
periods a year ago, reflect costs associated with continued refinement of the
bitumen and minerals extraction process from tar sands and tar sands tailings,
development of the electrolytic cell for the production of aluminum metal and
development costs associated with TiO2S. Included in research and development
expenses are non-cash compensatory expenses of $126,978 and $357,371, for the
three and nine month periods ended March 31, 1997.
General and administrative expense for the quarter and nine months ended March
31, 1997, were $1,100,631 and $3,438,761, respectively, compared to $495,814 and
$1,220,678 for the same periods in 1996. Increases in 1997 from 1996 result
from significant legal expenditures associated with certain litigation (see Part
II - Other Information, Item 1), additions to personnel needed as construction
activities on the Bitumount Lease increase, and normal salary adjustments.
Included in general and administrative expenses are non-cash compensatory
expenses of $26,875 and $53,750, for the three and nine month periods ended
March 31, 1997.
-10-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Interest expense increased over the prior period as a result of project
financing. Interest expense included non-cash amounts of $48,689 and
$1,501,230, for the three and nine month periods ended March 31, 1997 to record
the amortization of financing costs.
The Company recorded a net loss of $2,875,265 and $8,206,673 for the three and
nine months ended March 31, 1997, respectively. These compare to a net loss of
$1,224,547 and $3,218,073 for the same periods ended March 31, 1996. The 1997
net losses are substantially greater than the losses in the previous year
because of the increased level of corporate activities during the periods ended
March 31, 1997, including continued construction activity on the Bitumount Lease
and expanded research and development efforts at the pilot plant.
Revenues were generated from interest earned on cash balances. Interest income
for the three and nine months ended March 31, 1997 was $97,140 and $796,229,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The primary requirement for working capital is to fund the continuing
construction of the initial stage plant and the acquisition of heavy equipment
and processing equipment to be used in association with the Company's
anticipated commercial oil sands processing.
The Company's net working capital was $4,533,037 at March 31, 1997, compared
to working capital of $47,501,243 at June 30, 1996. Expenditures exceeding
$62.5 million for property, plant and equipment, account for a majority of
the working capital used during the nine months ended March 31, 1997.
Included in the $62.5 million is $49.8 million spent on site preparation,
detailed engineering and procurement associated with the construction of the
initial stage plant on the Bitumount Lease, and $5.3 million for buildings
located on the Bitumount Lease and staging area sites. An additional $5.2
million has been spent to acquire heavy equipment to be used in the
construction effort, and will be used in commercial operations on the
Company's Bitumount Lease.
On November 15, 1996, the Company issued $13 million in debt which is
convertible into Common Stock of the Company at a price which is equal to the
lesser of $14.50 per share or 82% of the closing bid price per share at a date
immediately preceding the date of the conversion. As of March 31, 1997, the
entire debt had been converted into common stock of the Company pursuant to the
conditions of the agreement.
-11-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
As of March 31, 1997, the Company agreed to issue $12 million in debentures
which are convertible into shares of Common Stock. The Company received
approximately $12 million over the period through April 11, 1997. The
Company has reflected the $12 million obligation as outstanding on March 31,
1997, with a related receivable for the amount of the debentures, less fees.
Approximately $2 million of the debentures were purchased by Solv-Ex Chairman
and CEO John S. Rendall. Pursuant to the subscription agreement, an
additional $10 million through issuance of additional debentures, will be due
in installments of $5 million each from one of the investors on the 20th and
40th days respectively after a registration statement to be filed with respect
to the debentures and underlying shares has become effective. The debentures
are convertible at a price which is equal to the lesser of 120% of market
price per share on the date of issuance or 80% of the closing bid price per
share at a date immediately preceding the date of conversion. The debentures
mature on March 31, 1999 and bear interest at 5% per annum payable in arrears
at maturity. The company can require conversion of the debentures in certain
circumstances.
As a condition of one of its long-term financings, the Company is required
under covenant to maintain certain financial ratios on a quarterly basis. As
of March 31, 1997 the Company may not be in compliance with one of the
financial ratios required in the debt covenants and has requested either a
waiver or clarification from the lender with respect to that covenant. The
Company has yet to receive a response from the lender with regards to the
request. The Company has not shown the debt as current, as under the terms
of its most recent financing, the Company can require debenture holders to
convert their debt to common stock of the Company and thereby cure any
non-compliance issues with debt company.
Pursuant to the limited partnership agreement between Solv-Ex Canada Limited, a
wholly-owned Canadian subsidiary of the Company, and United Tri-Star Resources
Ltd. ("UTS") the Company has received approximately of $7.0 million from UTS as
payment of its portion of the costs of the initial stage plant. The partnership
will be engaged in the operation and management of the facility currently under
construction on the Bitumount Lease. UTS will hold a 10% interest in the
partnership, with the remaining partnership interest being held by a
wholly-owned Canadian subsidiary of the Company.
-12-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
The Company continues to record a receivable from UTS for 10% of the project
costs, along with certain monthly operating expenditures. Payment by UTS for
these expenditures allows UTS to maintain its 10% working interest in the
development of the Company's co-production process and associated projects using
the Company's technology.
As of March 31, 1997, total cash and receivables, including Canadian sales tax
refunds and funds due from UTS, totaled over $13.7 million.
The Company is in the process of commissioning and testing the first module
of the initial stage plant, as well as completing ancillary construction
matters in connection therewith. Although the Company has experienced normal
difficulties in commissioning and start-up, management believes that testing
to date has established that the primary bitumen extraction equipment has
performed at least as well as expected. Testing to date has also indicated
that certain modifications should be made to the water recirculation circuit
for the purpose of simplifying removal of fine clays from process water,
which was planned to occur in a large clarifier vessel after primary
extraction. The Company is implementing these modifications which, if
successful, will reduce the amount of capital required to expand the
facility, and will simplify the operation and permit better control of the
water circuit when processing lower grades of ore containing a higher percentage
of the fine clays.
The Company believes that most of the difficulties encountered in
commissioning and start-up, which are not considered serious, result from not
having a co-generation utilities plant in place to provide required
electricity and by-product heat for generation of steam. Commissioning
operations have been conducted to date with back-up boilers fired by diesel
fuel and with electric power purchased from Alberta Power Company. The
Company is working towards completion of natural gas hook-ups and
installation of its large boiler in order to provide steam at higher pressure
and temperature than the steam produced by the back-up boilers, which will
facilitate continuous operations. However, continuous operation of the
extraction process can be demonstrated, if required, before these items of
work have been completed.
The Company believes that demonstration of the bitumen extraction technology
on a continuous basis in the commercially sized module currently being
commissioned is extremely important for the purposes of (i) obtaining
additional capital which will be required to complete and expand the plant
and (ii) providing data to complete a feasibility study to significantly
expand the plant. In this regard, the Company and UTS are actively seeking
financial partners to participate in expanded operations.
The Company also believes that it will be necessary to raise additional
capital to complete the current commissioning and testing program in view of
changes being made to the plant as described above and additional
construction work being completed. Solv-Ex is currently in the process of
completing a revised estimate of the cost and time required to complete these
programs. There can be no assurance that the additional funding will be
available. The Company announced on April 30, 1997, that its objective was
to establish continuous operations by the end of May, 1997. However, minor
delays in ordering and receiving necessary parts for the equipment required
to complete the modifications to the water recirculation circuit, as well as
other work proceeding slower than expected, could extend this target into
mid-June.
The Company also believes its previously announced plans for expanding
production to 15,000 barrels per day of pipelineable oil could change as a
result of recent public announcements by and discussions with two pipeline
companies which have stated their intentions to construct new common carrier
pipeline capacity into the area north of Fort McMurray as early as late 1998.
If these plans proceed as described, Solv-Ex has announced that it will
endeavor to proceed with a much larger expansion (to 80,000 barrels per day)
supported by a feasibility study based upon the results of continuous
operation at the initial stage plant.
In this event, of which there can be no assurance, Solv-Ex does not believe
that installation of the utilities plant and upgrader for the 15,000 barrel
per day facility would be warranted because of: (i) the estimated cost --
previously reported at approximately $50 million; (ii) the utilities plant
and upgrader could not be readily expanded to accommodate the larger plant;
and (iii) the limited period of operation before the larger plant came on
line would not justify the additional capital expenditure even if required to
generate or enhance operating cash flow during the interim. In addition,
expenditure of capital required for truck haulage and tankage at 15,000
barrels per day cannot be justified if pipeline capacity will be available as
announced and operations at a lower level will probably be required within
the limits of available haulage equipment and tankage.
The Company will evaluate all alternatives available to it upon completion of
the current test program before making final decisions.
While the Company plans to undertake expansion of the initial stage oil plant
and complete the minerals extraction plant during 1997, its ability to do so
will depend upon the availability of additional capital and, to a large extent,
upon the successful operation of the initial stage plant. Although there can be
no assurance that any additional financing can be arranged or arranged upon
acceptable terms and conditions, the Company believes it will be able to do so
through a combination of
-13-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
efforts or methods, including joint ventures, licensing agreements for the
Company's technology, equity investors (public or private), venture capital
groups, institutions, issuance of convertible or subordinated debt or a form
of business combination, as well as operating cash flow which may be derived
from the initial stage bitumen plant.
-14-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and certain officers of the Company are defendants in securities
actions pending in the federal courts of New York and in the state courts of
New Mexico. In October 1996, the Company was served with a complaint in the
SEDITA V. SOLV-EX CORPORATION, BUTLER, CAMPBELL, RENDALL AND DEUTSCHE MORGAN
GRENFELL, INC., case #96CIV7575, U.S. District Court, Southern District of
New York, and in December 1996, the Company was also served with a complaint
in JOSEPH B. GROSSMAN AND STEPHEN DISCH V. BUTLER, RENDALL, CAMPBELL,
DEUTSCHE MORGAN GRENFELL, INC., CHARLES MAXWELL, AND SOLV-EX CORPORATION,
case #96CIV8744, United States District Court, Southern District of New York.
On December 23, 1996 the New York federal court consolidated the two actions.
The amended complaint in the consolidated action alleges, among other things,
damage to shareholders of the Company by acts or conduct of the Company and
its officers in violation of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder, and the New Mexico Securities Act
and negligent misrepresentation. The plaintiffs ask that the court accord class
action status to purchasers of the Company's common stock between February
15, 1995 and September 30, 1996. Two similar actions were filed in U.S.
District Court, District of New Mexico, and served upon the Company in
November, 1996. These two cases, FOURNIER V. SOLV-EX CORPORATION, BUTLER,
CAMPBELL, RENDALL AND DEUTSCHE MORGAN GRENFELL, INC., case #CIV961526JC, and
BOYER V. SOLV-EX CORPORATION, RENDALL AND DEUTSCHE MORGAN GRENFELL, INC., case
#CIV96602JC, have been dismissed without prejudice. Plaintiffs in those
actions have joined the pending consolidated actions in the U.S. District
Court, Southern District of New York.
In November 1996, the Company was served with a complaint in MURKEN V.
SOLV-EX CORPORATION, RENDALL, BUTLER, DEUTSCHE MORGAN GRENFELL, INC., case
CV9609869, Second Judicial District, Bernalillo County, New Mexico, in which
plaintiffs seek class action treatment for purchasers of the Company's shares
between February 15, 1995 and September 10, 1996, alleging that shareholders
suffered damage as a result of violations of New Mexico securities laws and
negligent misrepresentation.
In December 1996, the Company was served with a complaint in PHOENIX PACIFIC
PROPERTIES, LTD., JOHN C. PADELFORD III AND PATRICIA J. PADELFORD V. SOLV-EX
CORPORATION, RENDALL, AND CAMPBELL, case #CV96-20453, Superior Court, Maricopa
County, Arizona. The plaintiffs allege violation of the Arizona Securities Act,
fraud, consumer fraud, negligent
-15-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
misrepresentation, and breach of contract resulting from the Plaintiffs'
purchase of shares of Solv-Ex common stock in the open market and in a
private placement directly from Solv-Ex.
None of the foregoing actions specifies the amount of damages requested. The
Company has only recently received the complaints and the proceedings are
only in the initial stages of response and discovery. The Company intends to
vigorously defend the actions filed against it and believes that the
allegations made against the Company and its officers are without merit.
On May 12, 1997 the Company was served with a claim by Comco Pipe & Supply
Company, a division of Russel Metals, Inc. for unpaid equipment charges in
the courts of Alberta Province, Canada seeking the amount of CDN $112,901.02
and foreclosure of a builders' lien. The Company is evaluating the claim and
has made no evaluation of its validity.
The Company brought an action, SOLV-EX CORPORATION V. QUILLEN, QUILCAP
CORPORATION, ZWEIG, ZWEIG ADVISORS, WEIR JONES ENGINEERING CONSULTANTS, LTD.,
Cause # 96-6057(JSR), United States District Court, Southern District of New
York, on August 9, 1996. The Company's complaint alleges, among other things,
defendants breach of Confidentiality Agreements, interference with prospective
economic advantage, fraud, breach of trust and unjust enrichment, and defendants
used information gained from the Company to damage the Company and further their
own short selling schemes. Damages in excess of $12,000,000 are sought. The
action is in the early stages of discovery and the Company is unable to predict
the outcome of the litigation, except that to date discovery has supported the
Company's position concerning the conduct of defendants.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13, or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SOLV-EX CORPORATION
(Registrant)
By /s/ John S. Rendall
--------------------
John S. Rendall, Chief Executive Officer
By /s/ J. Brad Steward
-------------------
J. Brad Steward, Vice-President and
Chief Financial Officer
DATE: May 14, 1997
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,561,199
<SECURITIES> 0
<RECEIVABLES> 2,723,513
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,646,306
<PP&E> 89,290,958
<DEPRECIATION> 2,273,041
<TOTAL-ASSETS> 105,451,134
<CURRENT-LIABILITIES> 11,113,269
<BONDS> 47,265,512
0
0
<COMMON> 243,357
<OTHER-SE> 46,828,996
<TOTAL-LIABILITY-AND-EQUITY> 105,451,134
<SALES> 0
<TOTAL-REVENUES> 796,229
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,231,076
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,771,826
<INCOME-PRETAX> (8,206,673)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,206,673)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (8,206,673)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> 0
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