Management DiscussionManagement Discussion For The THIRD Quarter Ended March 31, 2002
12/24/02
Management Discussion and Analysis
COMPANY DESCRIPTION
International Bio Recovery Corporation ('IBR') has developed an environmental technology, which processes organic material from municipal solid waste, agricultural manures and surplus organics from food production into innovative, environmentally progressive fertility products.
IBR operates a production facility in North Vancouver adjacent to its corporate offices where laboratory analysis and greenhouse trials are conducted.
CORPORATE FOCUS & OVERVIEW
The Company's short and medium term focus is to set the foundation for launching its technology sales and operations on a significant scale. The current focus is on providing the Company with intermediate term funding to give it the security and flexibility to support this goal. Secondly, it is working to establish a North American market for its fertility products, and thirdly, it is committed to research and development to better understand, control, and exploit its core process, including all aspects of plant operation. It is committed to further increase its understanding of, and increasing the value of the fertility products it produces.
IBR entered into a $7,000,000 technology sale for China in Q2 with International Bio-Fertilizer Corporation of Vancouver. The Company received a $2,000,000 private placement payment in Q3 as a part of this deal. The Company achieved its first significant successes in establishing the marketability and attractive pricing for its fertility products toward the end of this quarter. The Company had R & D success in defining and solving core plant/process challenges, especially in the area of odour control and further reducing its operational environmental impact.
It also improved its working knowledge of fertilizer treatments, especially in the area of fertilizer inoculation for added efficacy for plant growth enhancement. It added excellent and previously unknown benefits in its Asian growth trials.
OPERATIONS & FINANCIAL CONDITION
During the nine months ended March 31, revenues were 199,145 compared to last year's 1,104,445. This difference is due to lower technology fees of 580,000, reduced interest revenue of $48,810 and lower tipping fee revenue of $274,942. The reduced tipping fees were in accordance with our agreement to spin-off this division as of April 1, 2001. This resulted in lower tipping fee revenues, but also resulted in parallel lower expenses associated with the in-house collection. The anticipated revenues from out-sourcing did not materialize, with the result that IBR will be focussing on adding value to this potential revenue source in the future by either in- house or contract arrangements. The Company did not realize any technology fees in the fiscal year to March 31, 2002.
The Company's net loss for the quarter was $1,444,901 (2001: $1,211,860) and $4,909,635 year to date (2000: $3,276,426). This loss, with the exception of two one-time expenses, was $525,000 more than budgeted for the period. The largest single component of the loss was the accrual of $650,000 expense to re-purchase the Master License Agreement from CPST. The Company expected to recognize revenue of $5,000,000 in Q3 resulting from the sale of a royalty- free license to IBR's proprietary technology in the PRC including Taiwan and Macau. The company also incurred a foreign exchange loss of $129,043 as a result of a decline on the Canadian dollar versus the Hong Kong dollar on the Galaxy loan payable.
The departmental information will be presented as follows:
Operations
Operating expenditures for the year to date, 9-month period ended March 31, 2002 decreased $492,893 over the same period last year, from $2,176,417 to $1,683,524 with $201,322 of that reduction occurring in Q3.
During the first 3 weeks of February, plant operations were
minimized. The company voluntarily downgraded production to complete unscheduled maintenance and to comply with GVRD's notice of non-compliance because of excessive odours being produced outside of the plant perimeters. During the shutdown, the company undertook the design and installation of two scrubbing systems inserted prior to the bio filters, to treat the problematic compounds in the odour stream. Contracted waste deliveries were diverted to alternate waste receivers during this period. The company continued its operations at a limited production rate to gather the technical and operational information from the scrubbing systems to gain the confidence of the GVRD and the surrounding neighbourhood community association, that the odour problems previously experienced were being dealt with. Previously, in Q1, the plant was shut down for 6 weeks to accommodate warehouse being full.
At the end of this quarter the Company realized the first large scale sales of fertilizer in the Company's history. Major growers in the US and B. C. paid $400 to $525 per tonne for the solid fertilizer (before IBR's cost of sales are applied). Shipments and orders exceeded 600 tonnes.
Fertilizer sales are recognized upon shipping and therefore most of the revenues recognized from this surge in sales will accrue in Q4. This is a major milestone in IBR's focus on establishing a market and value for its fertility products. Most sales were in dry (solid) fertilizer. A budget focus of the Company, is to install a large-scale in-house evaporator to significantly increase production of the high-value liquid fertility products. During the first quarter of fiscal 2002, the Company shipped over 226 tonnes of solid fertility product to Singapore on a consignment basis.
Allocating wages to maintenance activities represents a change in the method of reporting over previous periods.
Salaries & wages have decreased $118,177 from the same period last year due to the decrease in production as explained above. Power, water & utilities were reduced from $305,797 to $229,022 mainly due to the reduced operating time.
Corporate
Corporate costs increased $586,198 over the previous year from $1,058,583 to $1,644,781. IBR recognized $129,043 in foreign exchange loss during the period resulting from a negative change in the exchange rate on the Hong Kong Dollar denominated loan payable.
Staffing costs, including wages & salaries and management fees paid totalled $497,140 representing an increase of $87,526 over the previous nine-month period representing the additional department heads added over the previous year. Legal, accounting and professional fees increased over the previous three month period by approximately $96,874 and interest expenses increased by $58,004.
The nine-month corporate costs were up $586,198, a majority part of this increase due to increased legal fees resulting from intellectual property and accounting issues raised by management in Q1 and Q2, as well as litigation initiated by Salcon Bio Technologies of Singapore in Q3.
Marketing
Marketing expenses decreased substantially by $282,020 from $609,239 to $327,219.
This reduction has resulted primarily from discontinuing the Frenz retail program and the associated staff, travel and marketing costs associated.
Research & Development
Expenditures for the period increased $161,424 over the previous nine-month period from $310,147 to $471,571. Of this increase, $48,512 represented increase in wages & salaries related to additional staffing. Subcontractor costs decreased $33,809 from $72,059 to $38,250 due to the increase in staff taking on these duties.
Investor Relations
Expenses decreased $97,024 over the previous period falling from $226,485 to $129,461, with the reduction of staff dedicated to this function. The Company has completed its revision of all of its marketing information and expects the new website to be finalized in Q3.
WORKING CAPITAL
At March 31, the Company had minimal cash holdings. The company's current ratio deficit increased from $1.2 million at year-end to $3.2 million at March 31. This negative change in working capital reflects the $4.9 million loss for the period, which was financed by a reduction in cash, an increase in payables and a capital injection of $2.0 million from a share capital purchase by International Bio-Fertilizer Corp. The next phase of this Agreement was expected to pay an additional $5,000,000 to IBR at the end of Q3.
NORTH VANCOUVER PLANT
The plant shut down for a period of 6 weeks in late summer, 2001 because of high inventory levels. Subsequent to re-opening the plant processed an average of 29.7 (at an average of 15% solid content) tonnes of waste per day up from the 27.9 tonnes per day average in previous fiscal year. During the period the company received 2,903 tonnes of waste that averaged less than 10% contaminants. Granular production decreased slightly to an average of 2.6 tonnes per day from an average of approximately 3 tonnes per day just prior to the shutdown. The plant shut down an additional three weeks as a result of voluntary compliance with the requested cessation of operation due to odours (see note 9, 'Notice to Financial Statements') It is IBR's intention to increase waste receiving volumes to achieve daily receiving capacity of 70 tonnes per day in the next 60 days.
RESEARCH & DEVELOPMENT
In 2000, IBR decided to address the issue of establishing large-scale marketability for its fertility products. In February, 2001, the Company commenced commercial growing trials on food crops in the United States utilizing both dry and liquid fertilizer produced from the IBR process. These trials were conducted with the cooperation of large commercial food growers in Washington, Oregon, California, and Idaho involving potatoes, carrots and tomatoes. During the period, the Company received its first written results from the potato trials using the granular fertility product. Management was pleased with the results of the trials, which indicated yield increases ranging from 9 - 16 % even when combined with reduced nitrogen inputs of up to 40% and reduced phosphorous inputs of up to 50% of the growers'standard treatment. These yield increases generated average additional revenue to the potato grower of $1,030US per acre in addition to the cost savings incurred from the reduced chemical inputs.
Trial results for potatoes using liquid only and liquid in combination with granular generated similar yield increases. The Company expects to use these results to generate commercial sales volumes in the commercial agriculture sector for the 2002 growing season. In the next two quarters, IBR will be focusing on expanded growing trials on a wide variety of crops, mostly in California and Arizona, with an increased focus on establishing the high value of liquid fertilizer.
SIGNIFICANT SUBSEQUENT EVENTS
Technology Sales - On May 24, IBR announced a technology sale for all of China, to CFO & Co., essentially along the terms of the Framework Agreement (see note 3, Notes to Financial Statements). The new agreement included the following revised payment schedule: - April 28, 2002 - $400,000 (received) - May 22, 2002 - $2,500,000 (received) - July 15, 2002 - $2,100,000
Galaxy Loan Payable - Further to note 5, 'Notes to Financial Statements, Galaxy Power Corp. filed a motion 'Intention to enforce security'in British Columbia Supreme Court because IBR exercised its right to demand certain security from Galaxy under the terms of its Loan Agreement with Galaxy prior to IBR agreeing to repay the loan. The parties achieved an agreement, which includes revised terms. IBR repaid one million, five hundred dollars of the loan on June 4, 2002, with the remaining one million due on August 2, 2002. The interest rate on the outstanding amount has been increased to 15 percent.
Legal actions - The Company as well as six directors are the subject of a legal action filed by Salcon Bio Technologies Pte Ltd ('Salcon') pursuant to the company's decision to terminate negotiations under the Memorandum of Understanding, previously signed. The Writ of Summons claims include among other things, damages, breach of contract, and injunctive relief against further proceedings under the Framework Agreement (see note 3 above). The Company believes the case to be without merit, and will vigorously defend against it. At this time it is not possible to determine whether there will be financial outcomes, if any, against the Company. On February 8, 2002 the Honourable Mr. Justice Tysoe, in his Reasons for Judgement, ruled against Salcon on all of its applications for injunctive relief and specific performance against IBR and its directors, and such applications were dismissed with costs against Salcon.
Loans Outstanding - On April 6, 2002, an arms-length shareholder provided a $43,000 bridging loan to IBR. The Company secured it with a General Security Agreement on some of its assets. It bears 8 percent interest per annum, and is payable on demand.
A further $200,000 bridge loan was provided by another arms-length minority shareholder on April 25. The loan was due on June 25, 2002, but has been extended another month. It attracts a 10% bonus and interest at 15 percent per annum, and is convertible into common shares at $0.50 per share if the loan is not repaid by IBR.
On April 10, a director provided a $4,000 non-secured bridge loan to the Company. It is a demand loan with an 8 percent per annum interest rate.
No security was provided.
Intellectual Property
In response to a complaint, the Company received letters from the CDNX and the BC Securities Commission requesting clarifications to ownership of intellectual property rights as a result of complaints received from shareholders. The Company satisfied the regulatory agencies that IBR does, in fact, have full technology rights to carry on its core business of operating and selling its technology under license, or utilizing other vehicles.
Tel: (604) 924-1023 International Bio Recovery Corporation Fax: (604) 924-1043 Email: ibrcorp@direct.ca Website: www.ibrcorp.com