U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________________ to ______________
Commission file number: 1-14219
Stelax Industries Ltd.
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(Exact name of small business issuer as specified in its charter)
British Columbia None
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
4004 Beltline Road, Suite 107, Dallas TX 75244
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(Address of principal executive offices) (Zip Code)
(972) 233-6041
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(Registrant's telephone number)
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 X No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of September 30, 2001: 42,647,775
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.Stelax Industries Ltd
CONSOLIDATED BALANCE SHEETS
(Presented in United States dollars)
ASSETS
September 30, March 31,
2001 2001
Unaudited
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CURRENT ASSETS:
Cash and cash equivalents $ 45,327 $ 800,696
Note Receivable 141,480 141,480
Inventory-Raw materials 77,380 23,851
Work in process 28,151 35,128
Finished goods 22,698 121,530
Accounts Receivable-Trade, net (allowance for
doubtful accounts at Sept. 30 and March 31,
2001, $0 and $0, respectively) 137,942 111,981
Prepaids and other current assets 16,636 45,690
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Total Current Assets 469,614 1,280,356
PROPERTY & EQUIPMENT-AT COST:
Plant & Machinery 9,503,024 9,489,345
Building 848,843 848,843
Land 270,136 270,136
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10,622,003 10,608,324
Accumulated Depreciation (2,429,471) (2,186,221)
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Total Property & Equipment 8,192,532 8,422,103
INTANGIBLE ASSETS (accumulated amortization
Of $323,983 and $276,556 at Sept. 30 and
March 31, 2001, respectively) 518,708 566,135
OTHER ASSETS 162,569 201,804
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TOTAL ASSETS $ 9,343,423 $10,470,398
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See notes to financial statements
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Stelax Industries Ltd
CONSOLIDATED BALANCE SHEETS
(Presented in United States dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, March 31,
2001 2001
Unaudited
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CURRENT LIABILITIES:
Accounts payable $ 1,226,512 $ 767,707
Payable to related parties 794,342 960,328
Accrued interest 53,225 37,934
Note payable--short term 1,250,000 1,250,000
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Total Current Liabilities 3,324,079 3,015,969
NOTE PAYABLE--LONG TERM 2,395,833 2,916,666
STOCKHOLDERS' EQUITY:
Common stock - 50,000,000 shares
authorized, no stated par value;
issued and outstanding 42,674,775
& 39,240,175 shares at Sept. 30
& March 31, 2001, respectively. 25,107,342 24,183,962
Cumulative translation adjustments 210,990 222,132
Accumulated deficit (21,694,821) (19,868,331)
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Total Stockholders' Equity $ 3,623,511 $4,537,763
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 9,343,423 $ 10,470,398
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See notes to financial statements
2
Stelax Industries Ltd
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Presented in United States dollars)
Unaudited
Six Months Ended
-----------------------------------
September 30, September 30,
2001 2000
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OPERATING ACTIVITIES
Net loss $(1,826,490) $(1,146,310)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation & amortization 290,867 265,927
Foreign currency transaction gain (loss) (11,142) 64,569
Changes in operating assets and
liabilities:
Decrease (increase) in receivables (25,961) (26,902)
Decrease (increase) in inventory & other assets 120,569 (249,372)
Increase (decrease) in accounts
payable & accrued interest 308,110 (968,370)
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Net cash (used) provided by operating activities (1,144,237) (2,060,458)
INVESTING ACTIVITIES
Purchase of property, equipment & intangibles (13,679) (93,567)
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Net cash used by investing activities (13,679) (93,567)
FINANCING ACTIVITIES
Common stock issue 923,380 ------
Convertible note payable issue ----------- ------
Note payable issue (payment) (520,833) 4,920,833
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402,547 4,920,833
Increase (decrease) in cash and cash
equivalents (755,369) 2,766,808
Cash & cash equivalents at beginning
of period 800,696 44,660
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Cash & cash equivalents at end of period $ 45,327 $ 2,811,468
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Interest paid $ 124,513 $ 4,955
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Income taxes paid $------ $------
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See notes to financial statements.
3
Stelax Industries Ltd
CONSOLIDATED STATEMENTS OF OPERATIONS
(Presented in United States dollars)
Unaudited
Three Months Ended Six Months Ended
--------------------------------- -----------------------------
September 30, September 30, September 30, September 30,
-
2001 2000 2001 2000
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Sales $ 266,338 $ 55,824 $ 532,835 $ 188,993
Cost of sales 650,584 85,274 1,143,561 351,803
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Gross loss (384,246) (29,450) (610,726) (162,810)
Selling, general and administrative
Expenses (including depreciation
and amortization of $290,867
and $265,927 for the six months
ending Sept. 30, 2001 and 2000,
respectively) 560,590 502,737 1,013,502 816,376
----------- ----------- ----------- -----------
Loss from operations (944,836) (532,187) (1,624,228) (979,186)
Other income (expense):
Interest income 914 18,560 2,503 18,560
Interest expense (97,800) (163,687) (204,765) (185,684)
----------- ----------- ----------- -----------
Net loss $(1,041,722) $ (677,314) $(1,826,490) $(1,146,310)
=========== =========== =========== ===========
Weighted average shares of
common stock 39,693,036 37,521,442 39,497,234 37,521,442
=========== =========== =========== ===========
Net loss per share $(0.03) $(0.02) $(0.05) $(0.03)
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See notes to financial statements.
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STELAX INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Presented in United States Dollars)
Unaudited
(1) INTERIM FINANCIAL STATEMENTS
In the opinion of management, the interim financial statements reflect all
adjustments necessary to a fair statement of the results for the interim periods
presented. The results for the six months ended September 30, 2001 are not
necessarily indicative of results to be expected for the entire year. These
financial statements, notes and analyses should be read in conjunction with the
Company's annual financials for the fiscal year ended March 31, 2001.
(2) LOSS PER SHARE
Loss per share was based on the weighted average number of common shares of
39,497,234 and 37,521,442 outstanding during the six month period ended
September 30, 2001 and 2000, respectively.
(3) INCOME TAXES
The Company has net operating loss carry forwards of approximately $420,000 for
Canada and $6,200,000 for the U.K.
(4) RELATED PARTY TRANSACTIONS
As of September 30, 2001, funds are owed by the Company totaling $734,441 to the
President of the Company and his affiliates. As of March 31, 2001, the Company
owed the President $751,134. The president and a director of the subsidiary are
owed $59,901 and $209,194 as of September 30, 2001 and March 31, 2001,
respectively. During the quarter ending September 30, 2001, the President of the
Company and his affiliate and the president of the subsidiary converted debt
owed to each into common stock of the Company. The group exchanged $775,000 of
debt for 3,100,000 shares of the Company.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Information
The Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of the Form 10-Q contain forward-looking
information. The forward-looking information involves risks and uncertainties
that are based on current expectations, estimates, and projections about the
Company's business, management's beliefs and assumptions made by management.
Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks",
"estimates", and variations of such words and similar expressions are intended
to identify such forward-looking information. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking information due to numerous factors, including, but not limited
to, availability of financing for operations, successful performance of internal
operations, impact of competition and other risks detailed below as well as
those discussed elsewhere in this Form 10-QSB and from time to time in the
Company's Securities and Exchange Commission filings and reports. In addition,
general economic and market conditions and growth rates could affect such
statements.
General
For the fiscal years ended March 31, 1999, and March 31, 2000, the Company
developed the market for its Nuovinox product, a product that clads rebar with
stainless steel. Much of this product development involved extensive testing to
determine the product's utility for use in highways and bridges. This testing
occurred principally in the United States for federal and state transportation
authorities. By March 31, 2000, this testing process was completed sufficiently
to commence sales, and the Company's assets were, at that time, unencumbered.
In July 2000, the Company's United States subsidiary entered into a loan and
security agreement with Banc of America Commercial Finance Corporation (the
"Loan Agreement") whereby the Company obtained a term loan as well as a
revolving credit and credit accommodation. The maximum amount that can be
borrowed under the Loan Agreement is $5,750,000.
The Company shipped some product prior to entering into the Loan Agreement, but
the proceeds of the Loan Agreement were used to refine production processes so
that the Company could begin volume productions.
Six months ended September 30, 2001, compared to six months ended June 30, 2000
The Company's revenues increased to $532,835 in the later period compared to
revenues of $188,993 in the earlier period. The Company's revenues for the six
months ended September 30, 2001, reflect the first successful volume production
of the Nuovinox product. Revenues in each of the quarters since June 30, 2000,
to the end of fiscal 2001, which ended March 31, 2001, have been significantly
below $100,000, and revenues for fiscal 2001 were approximately $300,000. The
revenues for the six month period ended September 30, 2001, reflect the
Company's ability to produce Nuovinox successfully to meet demand for the
product.
Nonetheless, the Company lost $1,826,490 in the first six months of fiscal 2002.
Revenues only began to occur in the later part of the quarter. Consequently,
labor costs and other fixed costs that the Company had in place throughout the
quarter were absorbed by relatively small amounts of revenue. General and
administrative expenses increased significantly as the Company began to staff to
levels required to support full production. Finally, the Company incurred
significant interest expense of approximately in the June first six months of
fiscal 2002, essentially interest expense on the Loan Agreement.
Production of Nuovinox was limited in the second quarter 2002 because the
Company lacked financial resources to meet demand.
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Liquidity and Capital Resources
The proceeds from the Loan Agreement have been used to fund operational losses
to extent necessary to cover the start up period for Nuovinox sales and to
finance inventory and receivables to the extent that the Company need funds in
excess of borrowing under the Loan Agreement for inventory and receivables.
However, by the end of fiscal 2001 on March 31, 2001, the Company had used the
maximum amount available under the Loan Agreement. The Company has had to reduce
staffing and limit production in the second quarter of fiscal 2002 due
principally to the unavailability of capital to expand production and meet
demand.. The Company is seeking additional equity funding, nonetheless, to make
certain that operations are adequately supported.
Because of the losses incurred in fiscal 2001, at March 31, 2001, the Company
was in technical default under the Loan Agreement. During the first quarter of
fiscal 2002, the Company's operations were funded by sales of securities and
sales of product.
The Company's audit report for the fiscal year ended March 31, 2001, is
qualified because of the concern over the Company's ability to continue as a
going concern.
On October 30, 2001, the Company announced that it had entered a letter of
intent with Mitsubishi International Corporation to form a joint venture in the
development and distribution of the Nuovinox line of products. Under the terms
of the letter of intent Mitsubishi would provide global distribution of Stelax's
existing products and its to be developed product lines and aid in the
establishment of manufacturing facilities in the U. S. and elsewhere in the
world. Mitsubishi would also assist in general and strategic planning for the
growth and development of Stelax and its product lines.
7
Inflation
The Company's operations may be impacted by the effects of inflation and
changing prices as increased prices may reduce the demand for steel products.
Additionally, the price of nickel has direct impact on the Company as nickel is
an integral component to the price of the stainless steel utilized in Nuovinox.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not engage in any hedging activities. In particular, the
Company does not hedge its sales for currency fluctuations, and, accordingly,
does not acquire market risk sensitive instruments. Over the last two fiscal
years, market risks have been negligible because of the small amount of
operations in which the Company has engaged.
The Company's primary market risk is anticipated to be a currency exchange rate
risk and the Company does not, at the present time, anticipate engaging in
management of that risk. For the next fiscal year, the Company's operations will
be principally conducted in the United Kingdom with sales anticipated in the
United States and Canada. In addition to currency market risk resulting from
trade accounts receivable, the Company's loan with Bank of America is
denominated in U.S. Dollars. The amounts available to the Company under the Bank
of America loan agreement are principally based upon assets located in the
United Kingdom, and a large increase in the value of the Dollar relative to the
Pound could diminish the amounts that could be available under that loan
agreement. A significant increase in the Pound relative to Dollar would make
United States trade receivables worth less in the United Kingdom, decreasing
profit margins for products produced in the United Kingdom and sold in the
United States.
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PART - II
Item 6. Exhibits and Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities exchange Act of 1934, registrant
has duly caused this report to be signed on its behalf by the undersigned.
Stelax Industries, Ltd.
Dated: Novmber 21, 2001 /s/ Harmon S. Hardy
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Harmon S. Hardy, President and
Principal Financial Officer
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