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, 2002
[ ] 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)
4287-A Belt Line Rd. #195, Addison, TX 75001
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(Address of principal executive offices) (Zip Code)
(972) 233-6041
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(Registrant's telephone number)
4004 Beltline Road, Suite 107, Dallas TX 75244
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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, 2002: 47,948,038
Part 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.Stelax Industries Ltd.
Stelax Industries Ltd.
CONSOLIDATED BALANCE SHEETS
(Presented in United States dollars)
ASSETS
Sep-30 Mar-31
2002 2002
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( Unaudited )
CURRENT ASSETS
Cash and cash equivalents $ 2,655 $ 4,102
Note Receivable 141,480 141,480
Inventory-Raw Materials
Work in Progress 0 0
Finished Goods 0 0
Accounts Receivable- Trade 0 0
(Allowance for doubtful accounts at Sep 30 and
March 31 2002, $0 and $0 respectively )
Receivables from related parties 3,000 3,000
Prepaid and other current assets 10,687 0
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Total Current Assets 157,822 148,582
PROPERTY & EQUIPMENT - AT COST
Plant & Machinery 0 0
Building 0 0
Land 0 0
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0 0
Accumulated Depreciation 0 0
Total Property and Equipment 0 0
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INTANGIBLE ASSETS
(Accumulated amortisation of $0 and $0 at 0 0
Sept 30 and March 31 2002 respectively
OTHER ASSETS 0 102,934
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TOTAL ASSETS 157,822 251,516
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See notes to financial statements
1
Stelax Industries Ltd.
CONSOLIDATED BALANCE SHEETS
(Presented in United States Dollars)
LIABILITIES AND STOCKHOLDERS EQUITY
Sep-30 Mar-31
2002 2002
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(Unaudited)
CURRENT LIABILTIES
Accounts Payable $ 327,041 $ 206,653
Payable to Related Parties 488,295 1,035,730
Accrued Interest 600,711 433,998
Note Payable - short term 3,645,833 3,645,833
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5,061,880 5,322,214
NOTE PAYABLE - LONG TERM 0 0
STOCKHOLDERS EQUITY
Common stock - 50,000,000 shares authorized
no stated par value; issued and outstanding
47,948,038 & 43,184,775 shares at Sep 30
and March 31 2002 respectively. 26,353,178 25,281,717
Cumulative translation adjustments 83,684 83,684
Accumulated deficit (31,340,917) (30,436,099)
Total Stockholders Equity (4,904,058) (5,070,698)
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 157,822 $ 251,516
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See notes to financial statements
2
Stelax Industries Ltd
CONSOLIDATED STATEMENTS OF OPERATIONS
(Presented in United States dollars)
Unaudited
Three Months Ended Six Months Ended
--------------------------------- -----------------------------
Sep-30, Sep-30, Sep-30, Sep-30,
2002 2001 2002 2001
--------------- ------------- ------------- -------------
Sales $ 0 $ 266,338 $ 0 $ 532,835
Cost of Sales 0 650,584 0 1,143,561
------------- ----------- ------------ ------------
Gross Loss 0 (384,246) 0 (610,726)
Selling, general and administrative
Expenses (including depreciation
and amortisation of $0 and
$331,850 for the six months
ending Sept 30 2002
and Sept 30 2001 respectively ) 519,352 560,590 716,726 1,013,502
------------- ----------- ------------ ------------
Loss from operations (519,352) (944,836) (716,724) (1,624,228)
Other Income (Expense)
Interest income 0 914 0 2,503
Interest expense (94,662) (97,800) (188,094) (204,765)
------------- ----------- ------------ ------------
Net Loss $ (614,014) $(1,041,722) $ (904,818) $ (1,826,490)
============= ========== ============ ===========
Weighted average shares
of common stock 45,694,944 39,693,036 44,446,718 39,497,234
============= ========== ============ ============
Net loss per share $ (0.013) $ (0.026) $ (0.020) $ (0.046)
============= ========== ============ ============
See notes to financial statements
3
Stelax Industries Ltd
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Presented in United States dollars)
Unaudited
Six Months Ended
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Sep-30 Sep-30
2002 2001
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OPERATING ACTIVITY
Net Loss $ (904,818) $ (1,826,490)
Adjustments to reconcile net loss to net cash provided
by operating activities :
Depreciation & amortization 0 331,850
Foreign currency transaction gain (Loss) 0 (11,142)
Changes in operating assets and liabilities :
Decrease (increase) in receivables 0 (25,961)
Decrease (increase) in inventory & other assets 92,247 79,396
Increase (decrease) in accounts payable and
accrued iinterest (260,334) (308,110)
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Net Cash (used) provided by operating activities (1,072,905) (1,144,237)
INVESTING ACTIVITIES
Purchase of property, equipment and intangibles 0 (13,679)
Net cash used by investing activities 0 (13,679)
FINANCING ACTIVITIES
Common stock issue 1,071,458 923,380
Note Payable issue (payment) (520,833)
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1,191,079 402,547
Increase (decrease) in cash and cash equivalents (1,447) (755,369)
Cash & cash equivalents at beginning of period 4,102 800,696
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Cash equivalents at end of period 2,655 45,327
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Interest paid 0 124,513
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Income taxes paid 0 0
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See notes to financial statements
4
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, 2002 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, 2002.
(2) LOSS PER SHARE
Loss per share was based on the weighted average number of common shares of
44,446,718 and 44,575,256 outstanding during the six month period ended
September 30, 2002 and 2001, respectively.
(3) INCOME TAXES
The Company has net operating loss carry forwards of approximately $420,000 for
Canada and $0 for the U.K.
(4) RELATED PARTY TRANSACTIONS
As of September 30, 2002 funds are owed by the Company totaling $488,295 to the
President of the Company and his affiliates. As of March 31, 2002, funds owed by
the Company totaled $1,035,730 to the President of the Company and his
affiliates.
During the quarter ended September 2002, the President of the Company and his
affiliates converted $825,000 of debt into common stock of the Company which
resulted in issuing 3,750,000 shares.
(5) STOCKHOLDERS' EQUITY
During the quarter ended September 2002, 1,013,263 common shares were issued in
exchange for consulting services of $246,458.
(6) SUBSEQUENT TRANSACTION
The Company remains in discussion with Wells Fargo to acquire from Wells Fargo
the Aberdeen facility and technology for $1,750,000 plus a warrant to purchase
500,000 common shares. The Company is seeking up to $15,000,000 to pay this
obligation as well as purchase a facility in Alabama to commence additional
operations.
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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 - Liquidity and Capital Resources
In fiscal 1999 and 2000 the Company ceased production and sales of stainless
steel and developed the market for its Nuovinox product, much of which involved
extensive testing for United States federal and state transportation authorities
to demonstrate the utility of the Nuovinox product in bridges and highways. By
the end of fiscal 2000, this process was sufficiently successful and complete to
begin sales. With the Company's plant facilities unencumbered, in July 2000 the
Company's United States subsidiary entered into a Loan and Security Agreement
with Bank of America Commercial Finance Corporation (the "Loan Agreement")
whereby the Company obtained a Term Loan as well as Revolving Credit and Credit
Accommodations. The maximum amount that can be borrowed under the Loan Agreement
is $5,750,000.
The proceeds from the term loan were used to fund operational losses to the
extent necessary to cover the start up period for Nuovinox sales and to finance
inventory and receivables to the extent that the Company will need funds in
excess of borrowing under the Term Loan for inventory and receivables.
Financially, the Company had to achieve positive cash flow, including debt
service, from the capital provided from the Loan Agreement. This goal seemed
achievable because the Nuovinox product had received strong acceptance and a
large number of orders. Production of Nuovinox began in large quantities in the
first quarter 2001, the delay being caused by the development of processes
unique to the product, development that had not been completed and implemented
successfully when the Company's subsidiary entered into receivership in March
2002.
In fiscal 1999, at the end of which the Company ceased production of stainless
steel, the Company incurred a loss of $3,150,498 and in fiscal 2000 incurred a
loss of $2,279,926. These losses continued as increased production began on the
Nuovinox product in fiscal 2001 when the Company incurred a loss of $2,902,573.
Because the Company incurs a substantial amount of depreciation and
amortization, $506,050 in fiscal 1999 $538,673 in fiscal 2000, and $555,231 in
fiscal 2001, the cash losses for fiscal 1999, 2000 and 2001 were approximately
$2,640,000, $1,740,000 and $2,450,000, respectively.
In fiscal 1999 the cash loss of approximately $2,640,000 was principally funded
through the liquidation of current assets. Between March 31, 1998, and March 31,
1999, the Company's cash position decreased from $852,892 to $42,973,
receivables decreased from $597,426 to $19,505 and inventories decreased from
$948,093 to $195,663, a reduction in current assets of $2,140,271. The amount of
the cash loss that was not funded through the liquidation of current assets as
well as some increases in property were funded through sales of common stock
that netted $726,670.
In fiscal 2000 the cash loss of approximately $1,740,000 was funded through
financing activities. A related party loaned the Company approximately
$1,000,000 and the Company issued Common Stock, the sale of which resulted in
net proceeds to the Company of approximately $800,000.
In fiscal 2001, cash losses were funded through a line of credit.
In fiscal 2002, there were no other sources of funds to cover cash losses and in
March 2002, the U.K. subsidiary entered into receivership.
6
The Registrant has entered into a letter of intent with Wells Fargo Business
Credit, Inc. to acquire for $1,750,000 all of the assets of Wells Fargo Business
Credit Inc. which that entity acquired from the UK receivership of the Company's
then subsidiary. The letter of intent also contemplates granting to Wells Fargo
Business Credit Inc. a warrant to purchase 500,000 shares of the Registrant's
Common Stock. The Registrant anticipates entering into a formal agreement in
November or December 2002 to fund the reacquisition of these assets from Wells
Fargo and obtain operating capital and commence production soon thereafter.
Nonetheless, the Company's audit report is qualified because of the concern over
the Company's ability to continue as a going concern.
Six Months ended September 30, 2002, compared to six months ended September 30,
2001
The Company's revenues were $ zero in the six months ended September 30, 2002
due to the U.K. subsidiary being in receivership and not operational under the
control of Stelax Industries Ltd. Revenues in the quarter September 30, 2001 had
been $ 532,835.
The Company's losses arising within the remainder of the Group amounted to
$1,024,439 of which $188,094 was interest expense. In the six months ended
September 30, 2001 the respective figures were a loss of $1,826,490 and $204,765
interest.
Six Months ended June 30, 2001, compared to quarter 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.
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
9
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: November 19, 2002 /s/ Harmon S. Hardy
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Harmon S. Hardy, President and
Principal Financial Officer
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CERTIFICATION
I, Harmon S. Hardy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stelax Industries, Ltd.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 19, 2002
Harmon S. Hardy
/s/ Harmon S. Hardy
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President and Chief Financial Officer
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