Case Study: Phase Separations Solutions (PS2): The China Question (Aplusgrades)

Case Study: Phase Separations Solutions (PS2): The China Question (Aplusgrades)

Read the case study located on page 310 of the section titled Case Studies in your textbook and prepare a 4-6-page report in Microsoft, based on the following situation:

Entrepreneurial firm, PS2, has been presented with two opportunities to significantly expand their business in China. Paul Antle, President and CEO of PS2, has come to you asking for your advice regarding these opportunities. Review the information available to you in the case and write a response to Mr. Antle’s questions: •Should PS2 enter the Chinese market? •Which opportunity should PS2 pursue? •Could PS2 pursue both opportunities? Should they? •Did PS2 possess the required resources and capabilities to pursue an equity-based entry? •What ownership levels should PS2 assume for each option?

As you respond to each question, be sure that you explain the major issues that need to be considered. For example, what should be considered when thinking about entering the Chinese market?

Support your responses with examples. Don’t forget to add a conclusion to paper.

Cite any sources in APA format. Attached below is the Case Study.

Phase Separation Solutions (PS2): The China Question
In early 2008, Paul Antle, president and chief executive officer (CEO) of Phase Separation Solutions (PS2), received a call from the State Environmental Protection Agency of China, expressing interest in PS2’s Thermal Phase Separation (TPS) technology. PS2 was a small, Saskatchewan-based environmental solutions company that had grown, under Antle’s entrepreneurial direction, to become a North American leader in the treatment of soil, sludge and debris impacted with various organic contaminants. The company specialized in the cleanup of two waste streams using its TPS technology. The first was the remediation of soil contaminated with persistent organic pollutants (POPs), such as pesticides and poly-chlorinated biphenyls (PCBs). The second was recovering usable oil from industrial sludge generated in various industries, such as the oil and gas industry.
Despite Antle’s initial concerns that the call had been a scam, he soon visited China to learn more about the market in China and to build relationships. The Chinese inquiries were sincere. By mid-2010, nearly one and a half years after Antle’s first visit, potential cooperative opportunities had emerged with two separate Chinese organizations: one in soil remediation, and the other in oil recovery from oil sludge. The two potential opportunities were attractive to PS2. The international geographic diversification would transform PS2 from a domestic player to an international player, and in so doing, would significantly improve its growth potential.
The PS2 management team was no stranger to international markets. The TPS technology had been successfully employed in 14 countries in the past 15 years. However, the modes of international involvement had been on a non-equity basis, in the forms of equipment exporting, licensing and service contracts. Although the cooperative opportunities in China would bring PS2 to a higher level of internationalization, the decision was not to be taken lightly. A series of questions needed to be answered. Should PS2 enter the Chinese market? Which of the two opportunities should it pursue? Would it be feasible to pursue both? Did PS2 possess the required resources and capabilities to pursue an equity-based entry? What ownership levels should PS2 assume for each option? How would PS2 staff its Chinese operation(s) if PS2 decided to pursue the opportunities in China?
Company Overview
PS2 was founded in 2004 by a group of Canadian entrepreneurs who believed that the key to the safe management of environmental liability was the proper application of advanced clean technology, such as their TPS technology. By combining their extensive experience in the fields of hazardous waste management, remedial technology development and environmental engineering, they created PS2 to take advantage of the new opportunities in the Canadian environmental market. In the Government 310311of Canada’s 2004 budget, it had pledged $3.5 billion2 over the following 10 years for environmental cleanup.
In 2005, after securing an investment of $3 million from Golden Opportunities Fund Inc.3 in the form of senior secured debentures, the company constructed a fixed soil reclamation facility in Wolseley, Saskatchewan. This facility was capable of treating a wide variety of soil contaminated with POPs, industrial sludge and waste Pharmaceuticals. The location was chosen so that PS2 could target the markets in both Eastern and Western Canada, and in the United States. The facility, which had a capacity of 20,000 tons per year, was permitted to treat a wide variety of pollutants. It was one of only three fixed facilities in Canada permitted to treat PCB and dioxin/furan-impacted soil. In late 2005, the facility became operational and started generating revenue. It was fully commissioned in early 2006.
PS2 generated revenue by securing service “contracts” for the treatment of contaminated soil or on a “fee-for-service basis,” wherein small quantities of contaminated soil were accepted from customers. Its customer base comprised environmental service companies, utility companies and general industry. The number and size of contracts obtained each year for contaminated soil varied and depended on the funding that customers had budgeted for remedial projects.
PS2 went public in 2007 through a reverse merger with West Mountain Capital Corporation (WMT), a capital pool company (see more information in a later section). The reverse merger brought PS2 to an advanced level of growth by introducing more funds and professional management expertise.
In early 2008, PS2 diversified into pharmaceutical waste management by acquiring an Ontario firm. Later that year, however, PS2 decided to divest it to focus its resources on the Wolseley facility, in response to the contaminated soil market that had opened up significantly since the acquisition. The soil treatment market in Canada received a big boost in late 2008 when the federal government introduced new regulations that established deadlines for ending the use and long-term storage of both PCBs and products containing PCBs. The new regulations also required that these products be sent for destruction by the end of 2009 (later extended to 2011). Such a policy change resulted in a strong demand for PS2’s TPS technology; subsequent to this announcement, PS2 secured contracts for 2009 and into 2010, utilizing 80 percent of its capacity at its Wolseley facility.
As a result of the new regulations in 2008, PS2 posted record revenues of $5.88 million and net profits of $2.51 million in 2009 (see Exhibits 1, 2 and 3 for PS2’s 311312financial statements). In 2010, PS2 was expected to fulfill the contracts it had secured in 2008 and 2009. However, PS2’s ability to secure new contracts and source new business for its unused treatment capacity in 2010 and future years could be affected by the economic climate of the day. For example, if the economy was poor, potential customers might need to suspend their remedial projects, which could lead to delays in securing revenue.4 In addition, recent regulatory changes with regard to PCBs would provide PS2 with only a short-term momentum as PCB treatment was a declining market.
Exhibit 1: Phase Separation Solutions Income Statements (in Canadian Dollars)
Assets 2007 2008 2009 2010E 2011E
Revenue 255,633 – 5,884,361 4,900,000 7,233,333
Cost of goods sold 257,473 103,323 2,009,746 1,760,000 2,893,333
Gross profit expenses (1,840) (103,323) 3,874,615 3,140,000 4,340,000
General & administrative 415,567 608,493 886,620 822,312 904,543
Stock-based compensation 19,488 91,555 71,244 98,000 144,667
EBITDA (436,895) (803,371) 2,916,751 2,219,688 3,290,790
Amortization 335,609 393,091 420,941 407,448 361,331
EBIT (772,504) (1,196,462) 2,495,810 1,812,240 2,926,042
Interest & bank charges 31,783 17,682 9,745 8,980 3,417
Earnings from operations (804,287) (1,214,144) 2,486,065 1,803,259 2,926,042
Interest income 5,661 21,386 – – –
Interest on long-term debt (368,161) (44,484) (106,948) – –
EBT (1,166,787) (1,237,242) 2,379,117 1,803,259 2,926,042
Discontinued operations, net of income taxes (345,983) (193,516) 129,030 – –
Taxes – – – – 907,073
Net earnings for the period (1,512,770) (1,430,758) 2,508,147 1,803,259 2,018,969
Exhibit 2: Phase Separation Solutions Balance Sheets (in Canadian Dollars)
Assets 2007 2008 2009 2010E 2011E
Cash and cash equivalents 1,253,446 783,993 3,255,003 5,072,250 7,432,087
Accounts receivable 117,725 155,344 681,075 696,499 1,028,166
Income tax receivable – 177,861 – – –
Assets related to discontinued operations – 141,988 – – –
Prepaid expenses and deposits 2,750 12,094 9,144 8,843 13,053
Current assets 1,373,921 1,271,280 3,945,222 5,777,592 8,473,306
Restricted cash 145,301 167,383 217,394 217,394 217,394
Capital assets 2,970,732 2,982,937 2,716,322 2,408,874 2,147,543
Other assets 51,216 46,096 41,904 41,904 41,904
Total assets 4,541,170 4,467,696 6,920,842 8,445,763 10,880,146
Liabilities & shareholders’ equity

Bank loan – 107,000 – – –
Accounts payable & accrued liabilities 296,207 299,658 864,972 509,952 838,331
Deferred revenue 184,409 393,798 – – –
Convertible debentures – – 474,203 – –
Liabilities related to discontinued operations – 184,903 38,732 38,732 38,732
Current portion of Obligations under capital lease 5,570 56,412 61,318 97,631 –
Current liabilities 486,186 1,041,771 1,439,225 646,315 877,063
Obligations under capital lease – 158,652 97,631 – –
Convertible debentures – 464,274 – – –
Shareholders’loans – – – – –
Long-term debt – – – – –
Asset retirement obligations 93,431 102,775 113,052 153,052 193,052
Shareholders’ equity
Share capital 6,915,817 6,935,817 6,935,817 7,459,213 7,459,213
Contributed surplus 90,141 181,696 252,940 350,940 495,607
Equity component of convertible debentures – 57,874 49,193 – –
Deficit (3,044,405) (4,475,163) (1,967,016) (163,757) 1,855,212
Total liabilities & shareholders’ equity 4,541,170 4,467,696 6,920,842 8,445,763 10,880,146
Exhibit 3: Phase Separation Solutions Statements of Cash Flows (in Canadian Dollars)

2008 2009 2010E 2011E
Operating activities
Net earnings for the period (1,430,758) 2,508,147 1,803,259 2,018,969
Discontinued operations, net of income taxes 193,516 (129,030) – –
Items not involving cash
Asset retirement obligations 18,992 48,868 40,000 40,000
Amortization 390,017 410,664 407,448 361,331
Gain on settlement of debentures – (5,621) – –
Stock-based compensation 91,555 71,244 98,000 144,667
(736,678) 2,904,272 2,348,708 2,564,967
Changes in non-cash operating working capital 168,894 (173,404) (370,143) (7,499)
Cash from (used in) operating activities – discontinued operations (630,629) 24,847 – –
Cash from (used in) operations (1,198,413) 2,755,715 1,978,565 2,557,468
Financing activities
Cash acquired on reverse takeover – – – –
Repayment of long-term debt – – – –
Proceeds from bank loan 107,000 – – –
Repayment of bank loan – (107,000) – –
Payment of capital lease obligations (48,483) (56,115) – –
Proceeds (repayment) of debentures – net 500,000 (31,722) – –
Proceeds from issuance of common share & exercise of stock options 20,000 – – –
Cash provided by (used in) financing activities 578,517 (194,837) – –
Investing activities
Increase in restricted cash (22,082) (50,011) – –
Purchase of capital assets (322,076) (139,857) (61,318) (97,631)
Capital expenditures – – (100,000) (100,000)
Cash provided by investing activities – discontinued operations 494,601 100,000 – –
Cash provided by (used in) investing activities 150,443 (89,868) (161,318) (197,631)
Increase (decrease) in cash (469,453) 2,471,010 1,817,247 2,359,837
Cash beginning of period 1,253,446 783,993 3,255,003 5,072,250
Cash end of period 783,993 3,255,003 5,072,250 7,432,087
By mid 2010, the management team comprised Antle, Stephen Clarke as vice-president of Business Development and Paul Coombs as chief financial officer (see Exhibit 4 for a biography of Antle). The company had 15 employees.
Exhibit 4: Paul Antle, the Serial Entrepreneur: A Biography
Paul G. Antle, B.Sc., M. Eng., CCEP, was the president and chief executive officer of Phase Separation Solutions, Inc. A recognized leader in the Canadian environmental and waste management industries, he had over 25 years of experience and had started, operated, grown and sold numerous businesses.
Antle was born in St. John’s, Newfoundland and Labrador. He graduated from Memorial University in 1985 with a B.Sc. degree in Chemistry. With no desire to do research or teach, he went on to the University of New Brunswick (UNB) to pursue a master’s degree in Chemical Engineering, with an aim to apply his chemistry background in a practical application. Antle graduated from UNB with a master’s degree at the age of 22 in 1987. With resumés in hand and an eagerness for work, he journeyed to Toronto, Ontario. However, he was not successful in landing a job he wanted. Antle returned to Newfoundland, empty handed but not discouraged.
Two months later, Antle was hired to kick-start a newly opened waste management division for a local construction company that had encountered PCBs at its construction site. After working for the company for nine months and achieving all his goals, Antle determined that it was time for a new challenge. Armed with a bank loan and helped by some friends, he hung out his own shingle as an entrepreneur on July 14, 1988, when he founded the SCC Environmental Group (SCC) in Newfoundland and Labrador.
From its meager beginnings, SCC grew during the first half of the 1990s to become known for its advanced site remediation and integrated hazardous waste management. The company employed 150 Newfoundlanders and worked on four continents. In 1994, SCC launched the TPS Technology. The reputation of SCC grew to such a point that Stratos Global Corp., a satellite communications company, purchased SCC in September 1996 for $3.2 million.
Stratos Global invested in the TPS technology and financed the promotion of it to the international oil and gas sector. SCC soon started dealing in international contracts. During 1997/98, however, Stratos Global refocused its business and decided to divest any interests that were not related to telecommunications. Antle decided to buy the company back, and the transaction was completed on July 13, 1998. He then sold it to MI Drilling Fluids of Houston, Texas, on December 14, 1999, for $10.0 million. MI Drilling Fluids used the TPS technology for the treatment of drilling mud and cuttings generated by the oil and gas industry. Antle served as the president and CEO of SCC from 1988 to 1999, as vice president of Stratos Global Corporation from 1996 to 1998, and as vice president of Thermal Operations at MI Drilling Fluids from 1999 to 2001.
In 1995, Antle founded Island Waste Management Inc., which he sold for $5.6 million in August 2006. He joined PS2’s management/ownership team in 2005 to oversee its growth into a public company and its diversification into pharmaceutical waste management. Antle holds a majority equity interest in PS2 and runs it as president and CEO.
Antle was inducted into the Academy of Entrepreneurs in September 1995; was a finalist for Atlantic Canada’s Entrepreneur of the Year Award in 1995; received a World Young Business Achiever Award in 1997; was recognized for his contribution to the Newfoundland and Labrador Environmental Industry in 2002; in August 2002 was part of Canada’s official delegation to the United Nations World Summit on Sustainable Development held in Johannesburg, South Africa; in May 2003 was named one of Canada’s Top 40 Under 40™; and in November 2003 was named Alumnus of the Year for Gonzaga High School.
The Thermal Phase Separation (TPS) Technology5
The TPS technology is an indirectly heated thermal desorption process that adopts a closed-loop system 312313using non-incineration engineering principles. The mechanism of the technology is akin to a household clothes dryer, which is indirectly heated, vaporizing the water from laundry. In a TPS unit, the contaminated soil is indirectly heated to boil off the hazardous contaminants, which are subsequently captured as a vapor. The vapor is then re-condensed into a liquid so the contaminants don’t escape to the environment. The TPS technology was the only technology capable of extracting up to 90 percent of oil (by volume) from industrial sludge. It was also capable of separating hydrocarbons with boiling points up to 550°C. The technology had been internationally proven and was recognized as being world-class for its performance, lack of harmful air emissions, mobility and reliability. The technology had been used to treat hundreds of thousands of tons of contaminated material worldwide at many high-profile projects, such as the Sydney, Australia’s 2000 Olympic Games Site Restoration Project. The technology had been used or was permitted to be used in more than 10 countries.
313314
TPS technology was originally developed as a mobile, onsite remedial technology. However, because of its modular design, it could be easily deployed at a fixed facility if required due to cost considerations (e.g., to take advantage of economies of scale or to avoid prohibitive transportation costs). Compared with the traditional means of treating contaminated soil and industrial sludge, such as incineration or land filling, TPS technology had a series of advantages. First, the TPS process produced safe soil with an 85 percent decrease in volume that could be returned to the environment. This process was a better alternative to burying contaminated soil in landfills, which was only a temporary solution, as it did not destroy or remove contaminants. Second, the TPS process not only enabled the recovery of oil and other hydrocarbons for reuse or resale but also generated its own fuel source to fire the system. Third, compared with incineration and land filling, TPS technology produced no harmful air emissions and no land and water pollutants. Fourth, compared with incineration, the TPS process produces significantly fewer greenhouse gas emissions.
Although the TPS technology had significant advantages over the traditional technologies, the TPS technology could compete only in applications and regions where it was cost-competitive compared with the traditional technology, or where government regulations required the proper treatment of waste.

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