U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended December 31, 2001
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission File Number 33-17598-NY
THE TIREX CORPORATION
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 22-2824362
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3828 St. Patrick, Montreal, Quebec, Canada, H4E 1A4
---------------------------------------------------
(Address of Principal executive offices)
(514) 933-2518
------------------------------------------------
(Issuer's telephone number, including area code)
---------------------------------------------------------------
(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 issuer 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 for each of the issuer's classes of
common equity, as of February 15, 2002: 197,363,834 shares
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
The Tirex Corporation
(A Development Stage Company)
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited) Page
The Tirex Corporation and Subsidiaries
Consolidated Balance Sheets as of
December 31, 2001 and June 30, 2001............................ 3
Consolidated Statements of Operations
for the three and six month periods
ended December 31, 2001 and 2000............................... 4
Consolidated Statements of Cash Flows
for the three and six month periods
ended December 31, 2001 and 2000............................... 5
Notes to Financial Statements (Unaudited)........................ 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................ 23
Item 2 - Changes in Securities and Use of Proceeds........................ 26
Item 3 - Defaults Upon Senior Securities.................................. 27
Item 4 - Submission of Matters
to a Vote of Security Holders................................... 28
Item 6 - Exhibits and Reports on Form 8-K................................. 28
i
The financial statements are unaudited. However, pursuant to SEC requirements,
the consolidated financial statements have been reviewed by the Company's
independent auditor. Readers are cautioned that a review engagement does not
constitute an audit. Management of registrant believes that all necessary
adjustments, including normal recurring adjustments, have been reflected to
present fairly the financial position of registrant at December 31, 2001 and the
results of its operations and changes in its cash position for the three and six
month periods ended December 31, 2001 and 2000 and for the period from inception
of operations (March 26, 1993).
1
THE TIREX CORPORATION
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
2
THE TIREX CORPORATION
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2001
----------------------------------------
(Unaudited) (Audited)
December 31, June 30,
2001 2001
------------ ------------
ASSETS
------
Current Assets
Cash and cash equivalents 483 $ 1,356
Accounts receivable 1,625 --
Notes receivable 17,108 13,342
Sales taxes receivable -- 47,350
Inventory 72,377 75,959
Research and Experimental Development tax credits receivable 142,998 361,029
Prepaid expenses and deposits 97,077 126,639
------------ ------------
331,668 625,675
Property and equipment, at cost, net of
accumulated depreciation of $268,053 2,109,284 2,136,956
------------ ------------
Other assets
Investment, at cost 89,500 --
Prepaid expenses and deposits 209,000 309,614
------------ ------------
298,500 309,614
------------ ------------
$ 2,739,452 $ 3,072,245
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities
Accounts payable and accrued liabilties $ 1,153,485 $ 1,259,446
Current portion of long-term debt 25,538 381,111
------------ ------------
1,179,023 1,640,557
Other liabilities
Long-term deposits and notes 217,500 217,500
Government loans (net of current) 169,791 80,500
Capital lease obligations (net of current) 26,960 26,960
Convertible notes 750,000 750,000
Convertible note 185,556 185,556
Loans from related parties 1,038,551 1,204,663
------------ ------------
2,388,358 2,465,179
------------ ------------
3,567,381 4,105,736
------------ ------------
Stockholders' Equity (Deficit)
Common stock, $.001 par value, authorized
250,000,000 shares, issued and outstanding
197,363,834 shares (June 30, 2001 - 176,366,408 shares) 197,364 176,366
Additional paid-in capital 23,681,950 22,592,701
Deficit accumulated during the development stage (24,546,241) (23,622,329)
Unrealized gain (loss) on foreign exchange (161,002) (180,229)
------------ ------------
(827,929) (1,033,491)
------------ ------------
$ 2,739,452 $ 3,072,245
============ ============
3
THE TIREX CORPORATION
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
----------------------------------------
(Unaudited)
Three months ended Six months ended
December 31 December 31 Cumulative from
------------------------------ ------------------------------ March 26, 1993 to
2001 2000 2001 2000 December 31, 2001
------------- ------------- ------------- ------------- -----------------
Revenues $ 1,424 $ -- $ 1,424 $ -- $ 1,326,997
Cost of Sales 854 -- 854 -- 1,018,948
------------- ------------- ------------- ------------- -------------
Gross profit 570 -- 570 -- 308,049
------------- ------------- ------------- ------------- -------------
Operations
General and administrative 308,601 409,242 598,553 840,199 10,044,546
Depreciation and amortization 13,718 15,111 27,672 32,358 315,073
Research and development 154,175 190,149 242,015 433,205 12,891,403
------------- ------------- ------------- ------------- -------------
Total Expense 476,494 614,502 868,240 1,305,762 23,251,022
------------- ------------- ------------- ------------- -------------
Loss before other expenses (income) (475,924) (614,502) (867,670) (1,305,762) (22,942,973)
------------- ------------- ------------- ------------- -------------
Other expenses (income)
Interest expense 28,185 5,794 54,279 41,533 489,561
Interest income -- -- -- -- (45,443)
Income from stock options -- -- -- -- (10,855)
Loss on disposal of equipment -- 2,309 -- 2,309 4,549
------------- ------------- ------------- ------------- -------------
28,185 8,103 54,279 43,842 437,812
------------- ------------- ------------- ------------- -------------
Net loss (504,109) (622,605) (921,949) (1,349,604) (23,380,785)
------------- ------------- ------------- ------------- -------------
Other comprehensive loss
Loss (gain) on foreign exchange 882 (21,471) 1,963 77,643 108,100
------------- ------------- ------------- ------------- -------------
Net loss and comprehensive loss $ (504,991) $ (601,134) $ (923,912) $ (1,427,247) $ (23,488,885)
============= ============= ============= ============= =============
Basic and Diluted net loss and comprehensive
loss per common share $ (0.00) $ (0.00) $ (0.00) $ (0.01) $ (0.55)
============= ============= ============= ============= =============
Weighted average shares of common
stock outstanding 186,865,121 157,675,396 186,865,121 157,675,396 42,609,654
============= ============= ============= ============= =============
4
THE TIREX CORPORATION
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------
(Unaudited)
Three months ended Six months ended
December 31 December 31 Cumulative from
--------------------------- --------------------------- March 26, 1993 to
2001 2000 2001 2000 December 31, 2001
------------ ------------ ------------ ------------ -----------------
Cash flows from operating activities:
Net loss $ (504,991) $ (601,134) $ (923,912) $ (1,427,247) $(23,488,885)
------------ ------------ ------------ ------------ ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 13,718 15,111 27,672 32,358 313,821
(Gain) loss on disposal and abandonment of assets -- 2,309 -- 2,309 (25,153)
Stock issued in exchange for interest -- -- -- -- 169,142
Stock issued in exchange for services and expenses -- -- 367,273 1,437,122 10,565,670
Stock options issued in exchange for services -- -- -- 15,966 3,083,390
Unrealized (loss) gain on foreign exchange (4,931) (25,431) 19,227 25,983 (161,022)
Changes in assets and liabilities:
(Increase) decrease in:
Account receivable (1,625) (52) (1,625) (117,933) (1,111)
Inventory 654 2,147 3,582 4,132 (72,377)
Sales tax receivable 6,610 (291) 47,350 (7,612) (35,565)
Research and experimental development tax credits
receivable 185,675 (80,536) 218,031 (165,021) (142,998)
Other assets 39,604 25,209 130,176 16,027 (316,197)
(Decrease) increase in :
Accounts payables and accrued liabilities 265,875 270,719 (149,114) (188,566) 1,483,192
Accrued salaries -- -- (12,374) -- 186,824
Due to stockholders -- -- -- -- 5,000
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities 589 (391,949) (273,714) (372,482) (8,436,269)
------------ ------------ ------------ ------------ ------------
Cash flow from investing activities:
Increase in notes receivable (4,280) -- (3,766) -- (255,274)
Reduction in notes receivable -- -- -- -- 237,652
Investment -- -- (89,500) -- (89,500)
Equipment -- 1,695 -- (321,567)
Equipment assembly costs -- -- -- -- (1,999,801)
Organization cost -- -- -- -- 6,700
Reduction in security deposit -- -- -- -- (1,542)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (4,280) 1,695 (93,266) -- (2,423,332)
------------ ------------ ------------ ------------ ------------
Cash flow from financing activities:
Loans from related parties -- -- -- -- 3,150,412
Deferred financing costs 26,968 -- 53,936 -- 133,879
Proceeds from deposits -- -- -- -- 143,500
Payments on notes payable -- -- -- -- (409,939)
Proceeds from convertible notes -- -- -- -- 754,999
Proceeds from notes payable -- -- -- -- 409,939
Payments on lease obligations -- (7,137) -- (14,539) (95,860)
Proceeds from issuance of convertible subordinated
debentures -- -- -- -- 1,035,000
Proceeds from loan payable -- -- -- -- 591,619
Payments on loan payable (256,940) -- (256,940) -- (350,473)
Proceeds from issuance of stock options -- -- -- -- 20,000
Proceeds from grants 236,988 395,683 569,111 395,683 3,348,641
Proceeds from issuance of common stock -- -- -- -- 75,449
Proceeds from additional paid-in capital -- -- -- -- 2,052,661
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 7,016 388,546 366,107 381,144 10,859,827
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents 3,325 (1,708) (873) 8,662 226
Cash and cash equivalents - beginning of period (2,842) 13,163 1,356 2,793 257
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents - end of period $ 483 $ 11,455 $ 483 $ 11,455 $ 483
============ ============ ============ ============ ============
5
Supplemental Disclosure of Non-Cash Activities:
During the six month period ended December 31, 2001 and the year ended
June 30, 2001, the Company recorded an increase in common stock and in
additional paid-in capital of $231,001 and $1,559,101, respectively,
which was in recognition of the payment of debt. During the six month
period ended December 31, 2001 and the year ended June 30, 2001, stock
was issued in exchange for services performed and expenses in the
amount of $367,273 and $872,215, respectively. During the year ended
June 30, 2001, stock options were issued in exchange for services
totalling $512,377. No stock options were issued for services performed
and expenses during the six month period ended December 31, 2001.
Convertible debentures were exchanged into common stock totaling $20,000 during
the year ended June 30, 2001. Accrued interest of $4,200 was also
converted into common stock during the year ended June 30, 2001. For
the six month period ended December 31, 2001, there were no convertible
debentures or accrued interest converted into common stock.
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 7,219 $ 4,893 $ 33,313 $ 12,349 $185,581
========== ========== =========== =========== ========
Income taxes paid $ -- $ -- $ -- $ -- $ --
========== ========== =========== =========== ========
6
THE TIREX CORPORATION
A DEVELOPMENT STAGE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Unaudited)
----------------------------------------
Note 1 - SUMMARY OF ACCOUNTING POLICIES
CHANGE OF NAME
On July 11, 1997, the Company changed its name from Tirex America,
Inc. to The Tirex Corporation.
NATURE OF BUSINESS
The Tirex Corporation and Subsidiaries (the "Company") was
incorporated under the laws of the State of Delaware on August 19,
1987. The Company was originally organized to provide comprehensive
health care services, but due to its inability to raise sufficient
capital, was unable to implement its business plan. The Company became
inactive in November 1990.
REORGANIZATION
On March 26, 1993, the Company entered into an acquisition agreement
(the "Acquisition Agreement") with Louis V. Muro, currently a director
of the Company, and former Officers and Directors of the Company
(collectively the "Seller"), for the purchase of certain technology
owned and developed by the Sellers (the "Technology") to be used to
design, develop and construct a prototype machine and thereafter a
production quality machine for the cryogenic disintegration of used
tires. The Technology was developed by the Seller prior to their
affiliation or association with the Company.
Currently, the Company's Board of Directors has three members, John L.
Threshie, Jr., Louis V. Muro and Loius A. Sanzaro.
DEVELOPMENTAL STAGE
At December 31, 2001, the Company is still in the development stage.
The operations consist mainly of raising capital, obtaining financing,
developing equipment, obtaining customers and supplies, installing and
testing equipment and administrative activities.
BASIS OF CONSOLIDATION
The consolidated financial statements include the consolidated
accounts of The Tirex Corporation, Tirex Canada R&D Inc., The Tirex
Corporation Canada Inc., Tirex Advanced Products Quebec Inc. and Tirex
Acquisition Corp. Tirex Canada R&D Inc. is held 51% by certain
shareholders of the Company. The shares owned by the certain
shareholders are held in escrow by the Company's attorney and are
restricted from transfer thereby allowing for a full consolidation of
this Company. The Tirex Corporation Canada Inc., Tirex Advanced
Products Quebec Inc. and Tirex Acquisition Corp. are 100% held by the
Company. All subsidiary companies except Tirex Canada R&D Inc. are
dormant. All inter-company transactions and accounts have been
eliminated in consolidation.
7
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, all highly liquid debt
instruments purchased with a maturity of three months or less, were
deemed to be cash equivalents.
INVENTORY
The Company values inventory, which consists of finished goods and
equipment held for resale, at the lower of cost (first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of five years.
Repairs and maintenance costs are expensed as incurred while additions
and betterments are capitalized. The cost and related accumulated
depreciation of assets sold or retired are eliminated from the
accounts and any gains or losses are reflected in earnings.
INVESTMENT
An investment made by the Company, in which the Company owns less than
a 20% interest, is stated at cost value. The cost value approximates
the fair market value of the investment.
ESTIMATES
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
ADOPTION OF STATEMENT OF ACCOUNTING STANDARD NO. 123
In 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation.
SFAS 123 encourages, but does not require, companies to record
stock-based compensation and other costs paid by the issuance of stock
at fair value. The Company has chosen to account for stock-based
compensation, stock issued for non-employee services and stock issued
to obtain assets or in exchange for liabilities using the fair value
method prescribed in SFAS 123. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount
an employee must pay to acquire the stock.
ADOPTION OF STATEMENT OF ACCOUNTING STANDARD NO. 128
In 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings per Share. SFAS 128 changes the
standards for computing and presenting earnings per share (EPS) and
supersedes Accounting Principles Board Opinion No. 15, Earnings per
Share. SFAS 128 replaces the presentation of Primary EPS with a
presentation of Basic EPS and replaces the presentation of Fully
Diluted EPS with a presentation of Diluted EPS. It also requires dual
presentation of Basic and Diluted EPS on the face of the income
statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the
Basic EPS computation to the numerator and denominator of the Diluted
EPS computation. SFAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods.
SFAS 128 also requires restatement of all prior-period EPS data
presented.
8
As it relates to the Company, the principal differences between the
provisions of SFAS 128 and previous authoritative pronouncements are
the exclusion of common stock equivalents in the determination of
Basic Earnings Per Share and the market price at which common stock
equivalents are calculated in the determination of Diluted Earnings
Per Share.
A Basic Earnings per Share is computed using the weighted average
number of shares of common stock outstanding for the period. Diluted
Earnings per Share is computed using the weighted average number of
shares of common stock and dilutive common equivalent shares related
to stock options and warrants outstanding during the period.
The adoption of SFAS 128 had no effect on previously reported loss per
share amounts for the year ended June 30, 1997. For the years ended
June 30, 2001 and 2000, Primary Loss per Share was the same as Basic
Loss per Share and Fully Diluted Loss per Share was the same as
Diluted Loss per Share. A net loss was reported in 2001 and 2000, and
accordingly, in those years, the denominator for the Basic EPS
calculation was equal to the weighted average of outstanding shares
with no consideration for outstanding options and warrants to purchase
shares of the Company's common stock because to do so would have been
anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which
principally include cash, note receivable, accounts payable and
accrued expenses, approximates fair value due to the relatively short
maturity of such instruments.
The fair values of the Company's debt instruments are based on the
amount of future cash flows associated with each instrument discounted
using the Company's borrowing rate. At December 31, 2001 and June 30,
2001, respectively, the carrying value of all financial instruments
was not materially different from fair value.
INCOME TAXES
The Company has net operating loss carryovers of approximately $24.5
million as of December 31, 2001, expiring in the years 2004 through
2017. However, based upon present Internal Revenue Service regulations
governing the utilization of net operating loss carryovers where the
corporation has issued substantial additional stock and there has been
a change in control as defined by the Internal Revenue Service
regulations, a substantial portion of this loss carryover may not be
available to the Company.
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes, effective July 1993.
SFAS No. 109 requires the establishment of a deferred tax asset for
all deductible temporary differences and operating loss carryforwards.
Because of the uncertainties discussed in Note 2, however, any
deferred tax asset established for utilization of the Company's tax
loss carryforwards would correspondingly require a valuation allowance
of the same amount pursuant to SFAS No. 109. Accordingly, no deferred
tax asset is reflected in these financial statements.
The Company has research and experimental development tax credits
receivable from the Canadian Federal government and the Quebec
Provincial government amounting to $142,998 at December 31, 2001
compared to $361,029 as of June 30, 2001. These are the result of tax
credits for research and experimental development expenditures made by
the Company which are not contingent upon any offset against any
income taxes otherwise payable.
9
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of non-U.S. subsidiaries that operate in a
local currency environment are translated to U.S. dollars at exchange
rates in effect at the balance sheet date for monetary items and
historical rates of exchange for non-monetary items with the resulting
translation adjustment recorded directly to a separate component of
shareholders' equity. Income and expense accounts are translated at
average exchange rates during the year. Currency transaction gains or
losses are recognized in current operations.
REVENUE RECOGNITION
Revenue from the sale of TCS Systems will be recognized when the
installed product is accepted by the customer. All other revenue from
other products will be recognized when shipped to the customer.
Note 2 - GOING CONCERN
As shown in the accompanying financial statements, the Company
incurred a net loss of $3,112,138 during the year ended June 30, 2001
and an additional net loss for the six month period ended December 31,
2001 in the amount of $925,336.
In March 1993, the Company had begun its developmental stage with a
new business plan. As of March 2000, the Company had developed a
production quality prototype of its patented system for the
disintegration of scrap tires, but nonetheless continued its research
and development efforts to improve the machine's performance and to
permit greater flexibility in design for specific customer
applications. While the Company has engaged the process of marketing
the TCS System to numerous potential clients since the beginning of
the fiscal year commencing July 1, 2000, as of December 31, 2001, the
Company had not yet consumated an unconditional purchase order for a
TCS System. Until such an unconditional purchase order will have been
received, Management considers the Company to still be in the
developmental stage.
The Company is dependent on the success of its marketing of its TCS
Plants, and/or raising funds through equity sales, bank or investor
loans, governmental grants or a combination of these, to continue as a
going concern. The Company's uncertainty as to its productivity and
its ability to raise sufficient capital, raise substantial doubt about
the entity's ability to continue as a going concern. The financial
statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
Note 3 - FINANCING COSTS
During the year ended June 30, 1999, the Company incurred costs of
$158,255 in connection with debt financing. These costs have been
capitalized in other assets and are being amortized over the terms of
the financing. Amortization of financing costs for the year ended June
30, 2000 was $125,291, reducing this account balance to zero. During
the year ended June 30, 2001, the Company incurred costs of $180,557
in connection with debt financing. These costs have been capitalized
in other assets and are being amortized over the terms of the
financing. Amortization of financing costs for the year ended June 30,
2001 was $79,943. Amortization of financing costs for the six month
period ended December 31, 2001 was $53,936.
10
Note 4 - PROPERTY AND EQUIPMENT
As of December 31, 2001, plant and equipment consisted of the
following:
Furniture, fixtures and equipment $ 159,889
Leasehold improvements 175,161
Construction in progress - equipment 2,000,000
----------
2,335,050
Less: Accumulated depreciation and amortization 225,766
----------
$2,109,284
==========
Depreciation and amortization expense charged to operations for the
year ended June 30, 2001 was $147,611. Depreciation and amortization
expense charged to operations for the six month period ended December
31, 2001 was $27,672.
Note 5 - GOVERNMENT LOANS
Canada Economic Development
- Loan payable under the Industrial Recovery Program for Southwest Montreal
amounting to 20% of certain eligible costs incurred (maximum loan $333,300)
repayable over four years commencing March 31, 1999 and ending March 31,
2002, unsecured and non-interest bearing. (If the Company defaults, the loans
become interest bearing.) $ --
- Loans payable under the Program for the Development of Quebec SMEs based
on 50% of approved eligible costs for the preparation of market development
studies in certain regions. Loans are unsecured and non-interest bearing. (If the
Company defaults, the loans become interest bearing.)
- Loan repayable over five years commencing June 30, 2000
and ending June 30, 2004 51,828
- Loan repayable over five years commencing June 30, 2001
and ending June 30, 2005 56,775
- Loan repayable in amounts equal to 1% of annual sales in Spain and
Portugal through June 30, 2007, to a maximum of the balance of the
loan outstanding. If no sales occur on or before this date in Spain and
Portugal, the loan will become non-repayable. 14,000
- Loan repayable in amounts equal to 11/2% of annual sales in Spain and
Portugal through June 30, 2004, to a maximum of the balance of the
loan outstanding. If no sales occur on or before this date in Spain and
Portugal, the loan will become non-repayable. 66,500
---------
189,103
Less: Current portion 19,312
---------
Long-term portion $ 169,791
=========
11
Principal repayments are as follows:
June 30, Amount
-------- --------
2002 $ 19,311
2003 30,083
2004 105,129
2005 20,580
2006 --
2007 14,000
--------
$189,103
========
During the six-month period ended December 31, 2001, the Company was
declared in default, with respect to the loan under the Industrial
Recovery Program for Southwest Montreal, as a result of a late
instalment repayment and as such was obligated to repay the entire
remaining balance due on the loan.
Note 6 - CAPITAL LEASE OBLIGATIONS
The Company leases certain manufacturing equipment under agreements
classified as capital leases. The cost and the accumulated
amortization for such equipment as of June 30, 2001 was $62,400 and
$24,960, respectively. The cost and accumulated amortization for such
equipment as of December 31, 2001 was $62,400 and $31,200,
respectively. The equipment under capital leases has been included in
property and equipment on the balance sheet.
The following is a schedule by years of future minimum lease payments
under capital leases of equipment together with the obligations under
capital leases (present value of future minimum rentals) as at
December 31, 2001:
Years ended
June 30, Amount
----------- --------
2002 $ 7,757
2003 15,513
2004 15,513
--------
Total minimum lease payments 38,783
Less: Amount representing interest 5,597
--------
Total obligations under capital lease 33,186
Less: Current portion of obligations
under capital leases 6,226
--------
Long-term obligation portion of under capital
leases, with interest rate of 10% $ 26,960
========
12
Note 7 - CONVERTIBLE SUBORDINATED DEBENTURES
Convertible subordinated debentures consist of the following:
Type B
--------
Balance at December 31, 2001 and June 30, 2001 $ --
Interest rate 10%
Maturity Earlier of (i) - two years from the issue
date, or (ii) - the completion of a public
offering of its securities by the Maker.
These debentures are subordinated
to all current and future bank debt.
Redemption rights If not converted, the holder may require
the Company to redeem at any time
after maturity for the principal amount
plus interest.
Conversion ratio $.20 per share.
During the year ended June 30, 2000, $305,000 of convertible
debentures were converted into common stock. During the year ended
June 30, 2001, $20,000 of convertible debentures were converted into
common stock. At December 31, 2001, $55,000 of convertible debentures
had matured and were not converted into common stock and have been
included in long term deposits and notes. These convertible debentures
were originally issued between December 1997 and February 1998.
Note 8 - CONVERTIBLE NOTES
Convertible notes consist of an investment arrangement with a group of
institutional investors involving a multi-stage financing under which
the Company may obtain, at its option, up to $5,000,000. A first
tranche of $750,000 has been completed and, under the terms of the
investment arrangement, further tranches may be completed under
certain conditions and as required by the Company.
Balance at December 31, 2001 and June 30, 2001 (First tranche) $ 750,000
Interest rate 8%, payable quarterly, commencing
June 30, 2001.
Issue date February 26, 2001
Maturity date February 26, 2003
Redemption rights If not converted, the holder may require
the Company to redeem at any time
after maturity for the principal amount
plus interest.
13
Conversion ratio Lower of (i) - 80% of the average of the three
lowest closing bid prices for the thirty trading
days prior to the issue date, which equals
$.073, or (ii) - 80% of the average of the three
lowest closing bid prices for the sixty trading
days prior to the conversion date.
Common stock warrants The Convertible notes carry an option to
purchase Common stock warrants at the rate
of one Warrant for each $1.25 of purchase
price. The exercise price on the first tranche
of $750,000 is $.077 per share.
Certain Directors and Officers of the Company have pledged
approximately 12,000,000 of their personal shares of Common stock of
the Company as security for the Convertible notes until such time as
the Company files with the Securities and Exchange Commission a
Registration Statement on Form SB-2, to register common stock and
warrants issuable upon the conversion of the notes, no later than 150
days after the issue date of the Convertible notes. This deadline was
not met and, as such, the investors served a notice of default to the
Company on July 19, 2001. The matter is currently under negotiation
with the investors to attempt to resolve the various issues. During
the three-month period ended December 31, 2001 and in January 2002,
the Company authorized the investors to sell 1,800,000 of the shares
held as security. The Registration Statement has still not been
declared effective by the Securities and Exchange Commission and until
such occurs, the Convertible notes cannot be converted to Common stock
nor may the Common stock warrants be exercised.
Note 9 - CONVERTIBLE NOTE
A Convertible note, under a private arrangement, consists of the following:
Balance at December 31, 2001 and June 30, 2001 $ 185,556
Interest rate 8%
Issue date July 19, 2000
Maturity date January 19, 2002
Redemption rights If not converted, the holder may require
the Company to redeem at any time
after maturity for the principal amount
plus interest.
Conversion ratio Not convertible prior to July 19, 2001, at 20%
discount to market between July 19, 2001 and
January 19, 2002 or at 25% to market if held
to maturity, to a maximum of not more than
2,500,000 shares.
14
Note 10 - RELATED PARTY TRANSACTIONS
Convertible loans include amounts primarily from Directors, Officers
and employees that will ordinarily be repaid through the issuance of
stock. At December 31, 2001 and June 30, 2001, the balances owing to
Directors and Officers was $964,843 and $1,120,828, respectively.
These amounts are without interest or terms of repayment.
Various Notes Receivable from Officers, separately reported on the
audited Balance Sheet of June 30, 2000, plus accrued interest thereon,
were offset against amounts due to these Officers as of June 30, 2001.
Long-term deposits and notes included an amount of $118,500 at
December 31, 2001, which is payable to Ocean Tire Recycling &
Processing Co., Inc., a company owned by a Director of the Company.
Subsequent to June 30, 2000, the Company modified an agreement with
Ocean Tire Recycling & Processing Co., Inc. to clarify various terms
of the parties' prior agreements and to obtain a commitment by Ocean
Tire Recycling & Processing Co., Inc. to pay, when necessary, lease
payments on the prototype TCS System. As part of the agreement, the
Company will repay Ocean Tire Recycling & Processing Co., Inc. in cash
or through the issuance of stock. The lease payments, under the
accounting provisions for an operating lease, have been recorded as a
Research and Development expense and the debt obligation included in
loans from related parties. During the year ended June 30, 2001,
6,500,000 common shares were issued under the agreement as a partial
settlement and, pursuant to Ocean Tire Recycling & Processing Co.,
Inc.'s request, were issued to its principal shareholder and
President, who is also a Director of the Company. During the six month
period ended December 31, 2001, an additional 4,553,102 common shares
were issued under the agreement to a designated person assigned by
Ocean Tire Recycling & Processing Co., Inc.
Note 11 - EXCHANGE OF DEBT FOR COMMON STOCK
During the year ended June 30, 2001, the Company recorded an increase
in common stock and additional paid-in capital of $1,905,838
representing issuances of stock in lieu of cash payments for debts
owed. During the six month period ended December 31, 2001, the Company
recorded increases in common stock and paid-in capital of $772,596,
which was in recognition for the exchange of common stock for debts
owed.
Note 12 - COMMON STOCK
During the six month period ended December 31, 2001 and the year ended
June 30, 2001, the Company issued common stock in exchange for
services performed totalling $367,273 and $1,388,792, respectively.
Included in these amount are payments to Officers of the Company in
exchange for salary and expenses in the amount of $56,337 and
$1,115,784, respectively. The dollar amounts assigned to such
transactions have been recorded at the fair value of the services
received, because the fair value of the services received was more
evident than the fair value of the stock surrendered.
15
On January 31, 2001, the Company's stockholders approved an amendment
to the Articles of Incorporation of the Company to increase the number
of authorized shares of common stock, par value $0.001, from
165,000,000 shares to 250,000,000 shares.
As at December 31, 2001, the Company had 197,363,834 Common shares
issued and outstanding.
Note 13 - STOCK PLAN
The Company established a Stock Plan in June of 2000 whereby key
personnel of the Company, consultants and other persons who have made
substantial contributions to the Company are afforded the opportunity
to acquire or increase their proprietary interest in the Company by
the issuance to such individuals of Awards, Options or Grants under
the terms set forth in the Stock Plan. The Stock Plan originally
called for the issuance of a maximum of 7,000,000 shares of stock as
Awards, the issuance of a maximum of 7,000,000 shares of stock to
underlie Options and the issuance of a maximum of 7,000,000 shares of
stock that may be issued as Grants. Awards and Options can only be
given to individuals who have been either in the employ of the
Company, an Officer, Director or consultant for the preceding six
months. Awards are not fully vested until the end of three years with
one-twelveth of the aggregate award vesting at the end of each
quarter. If the Awardee is terminated for cause or resigns, the
unvested portion of the award is forfeited. Options can be exercised
at any time and upon exercise, the underlying stock is fully vested
with the purchaser. The Options are not transferable and are
exercisable for two years after which time they expire. If the
Optionee is terminated for cause or resigns, all unexercised options
are forfeited. A Grant can only be given to persons who have made a
substantial contribution to the Company and the shares are not
forfeitable. On January 31, 2001, the Company amended the Stock Plan
providing for an additional 3,000,000 shares being allocated as Grants
and an additional 2,000,000 shares allocated to be given as Options.
On May 30, 2001, the Stock Plan was further amended reallocating the
7,000,000 shares to be given as Awards to allow 5,000,000 of the
shares to be used for Options and 2,000,000 of the shares to be used
as Grants. There were no stock issuances under the Stock Plan for the
year ended June 30, 2000.
During the year ended June 30, 2001, the Company issued 9,300,000
shares as Grants under the Stock Plan at an average stock price of
$.093 for an aggregate consideration of $867,374. During the six month
period ended December 31, 2001, the Company issued 750,000 shares as
Grants under the Stock Plan at an average stock price of $.016 for an
aggregate consideration of $12,031.
During the year ended June 30, 2001, the Company had the following
transactions as Options under the Stock Plan:
Number of Avg. Exercise Aggregate
Shares Price Consideration
----------------------------------------
Granted and unexercised at
beginning of year Nil -- --
Granted and exercised
during the year 9,698,228 $ 0.13 $ 1,273,334
Granted and unexercised at
end of year Nil -- --
16
The exercise price at the time the Options were granted and exercised
was approximately equal to the market price at that time.
There were no Options granted or exercised during the six month period
ended December 31, 2001.
Note 14 - ACQUISITION BY MERGER OF RPM INCORPORATED
During November 1997, the Company entered into a merger agreement with
RPM Incorporated ("RPM"). The Company acquired all of the assets and
liabilities of RPM by acquiring all of the outstanding common stock of
RPM in exchange for common stock in the Company on a unit for unit
basis. RPM ceased to exist following the exchange.
The assets and liabilities acquired by the Company from RPM consisted
of the proceeds from the sale of debentures of $535,000. The financing
fees on the issuance of the debentures, totaling $61,755, were
included as an expense in the statement of operations for the year
ended June 30, 1998. A total of 535,000 shares were issued as a result
of the merger valued at $16,050. A total of $16,050 was received for
this stock.
The Company entered into an additional agreement with the former
shareholders of RPM for consulting services for a period of 5 years
expiring in June 2002. Pursuant to this consulting agreement,
3,000,000 shares of common stock were issued valued at $240,000. Other
than the consulting agreement and the issuance of the debentures, RPM
was inactive.
For accounting purposes, the Company recorded the merger as a purchase
and not as a pooling of interests.
Note 15 - GOVERNMENT ASSISTANCE
The Company is eligible for and has made claims for tax credits
related to scientific research and experimental development
expenditures made in Canada. These amounts, under Canadian Federal and
Provincial tax law in conjunction with its annual tax return filings,
need not be offset against taxes otherwise payable to become
refundable to the Company at the end of its fiscal year. As such,
during the year ended June 30, 2001, the Company received
approximately $353,725 which has been recorded as an increase in
stockholders' equity paid-in capital. Also, during the six month
period ended December 31, 2001, the Company received approximately
$569,111 which has also been recorded as an increase in stockholders'
equity paid-in capital. During the six month period ended December 31,
2001, the Company recorded additional tax credits in the amount of
$142,998, bringing the reported receivable balance from these
governments from $361,029 as of June 30, 2001 to $142,998 as of
December 31, 2001.
Note 16 - COMMITMENTS
The Company leases office and warehouse space at an annual minimum
rent of $80,000 for the first year, $160,000 for the second year and
$200,000 per year for the third through the fifth years. The lease
expires in 2003. The Company is responsible for its proportionate
share of any increase in real estate taxes and utilities. Also under
the terms of the lease, the Company is required to obtain adequate
public liability and property damage insurance. The minimum future
rental payments under this lease are as follows:
17
June 30, Amount
-------- --------
2002 $ 94,174
2003 141,261
--------
$235,435
========
Rental expense for the year ended June 30, 2001 amounted to $215,237.
Rental expense for the three month period ended December 31, 2001
amounted to $98,237.
The lease contains a second ranking moveable hypothec in the amount of
$300,000 on the universality of the Company's moveable property.
At December 31, 2001, the Company was in arrears of rent of $238,015.
Note 17 - LITIGATION
An action was instituted by Plaintiffs, a Canadian resident and a
Canadian corporation, in a Canadian court alleging a breach of
contract and claims damages of approximately $508,600 representing
expenses and an additional approximate amount of $1,874,000 in loss of
profits. The current action follows two similar actions taken in
United States courts, the first of which was withdrawn and the second
of which was dismissed based on forum non convenience and other
considerations. An detailed answer has been filed by the Company
denying all liability, stating further that Plaintiffs failed to
comply with their obligations. Counsel for the Company believes that
the Company has meritorious defenses to all of the Plaintiff's claims.
The action is still pending.
An action was brought by a Plaintiff against the Company, alleging
that the Company had agreed to issue 1,000,000 shares of its Common
stock to the Plaintiff in consideration for expenses allegedly paid by
the Plaintiff in the amount of approximately $150,000. These expenses
allegedly were incurred in relation to the rental of certain office
space and performance of administrative services. The Plaintiff's
complaint seeks to impose an equitable trust or lien on 1,000,000 of
unissued shares of the Company, demands the issuance of 1,000,000
shares to the Plaintiff and seeks for breach of contract, monetary
damages of $1,400,000. Counsel for the Company believes that the
Company has valid defenses to all of the Plaintiff's claims and has
denied all of the Plaintiff's allegations. The Plaintiff is presently
in default of its production of documents and the Company intends to
enforce its rights, including moving to dismiss Plaintiff's complaint,
if appropriate. The case is in the pretrial discovery stage.
An action was instituted by a Plaintiff, a Canadian corporation, in
August 2001 in a Canadian court claiming approximately $63,000 is due
and owing for the manufacture and delivery of tire disintegrators. The
Company is preparing its defense and a cross claim against the
Plaintiff as the product delivered was defective and the Company
believes it is entitled to a reimbursement of sums paid. The action is
still pending.
Note 18 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The deficit accumulated during the development stage included
accumulated comprehensive other income totaling $103,396.
18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of significant factors,
which have affected the Company's financial position and operations during the
six-month period ended December 31, 2001. This discussion also includes events
which occurred subsequent to the end of the last quarter and contains both
historical and forward-looking statements. When used in this discussion, the
words "expect(s)", "feel(s)","believe(s)", "will", "may", "anticipate(s)"
"intend(s)" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those projected.
Results of Operations
Since the spring of 2000 business conditions have been very difficult as a
result of the reduced availability of capital. The tragic events of September
11th further exacerbated our lack of access to capital and reduced liquidity.
While in general since September 11th, there appears to be renewed interest in
companies operating in the defense sector and in businesses relating to
security, this interest has not extended to other business sectors, including
ours, with the result our business conditions and access to capital has
continued to be very problematic.
Further, customer concerns with respect to the effectiveness of our TCS
Technology and its long-term durability, combined with the capital cost of
buying such a system, has resulted in a lack of Purchase and Sales Agreements.
In the absence of contractual performance guarantees or bonds, which heretofore
we have been unable to supply, customers have consistently deferred the
conclusion of Purchase and Sales Agreements. With our deteriorating liquidity
position in the second quarter of fiscal 2002, our ability to deliver TCS
Systems has been questioned. To alleviate these market impediments, we have
sought the assistance of certain corporations owned by the Government of Canada
whose mandates focus on the development of export markets. These corporations
can take the position as the prime contractor for a foreign contract, thus
greatly increasing the security on the part of the customer. We believe that
this approach could result in a Purchase and Sales Agreement and the
implementation of a joint venture arrangement with respect to the production and
marketing of products incorporating recycled rubber crumb with Puerto Rican
interests with whom we signed a Memorandum of Understanding in the spring of
2001. Should a Canadian government owned corporation choose to intervene on our
behalf for the potential sale of a TCS System to the Purto Rican interests, we
would become the prime sub-contractor. We are of the opinion that our
association with a corporation owned by the Government of Canada would satisfy
the Puerto Rican financial institutions financial security concerns. While we
are optimistic that the assistance of the Federal Government corporations may be
obtained, the final decisions thereon are in the hands of these corporations and
no assurances can be given that such assistance will actually materialize.
19
A similar approach is being attempted in an effort to conclude Purchase and
Sales Agreements with Italian interests with whom we have been negotiating for
several months. As with the Puerto Rican opportunity, our heretofore inability
to provide financial security with respect to contract performance has appeared
to be the primary stumbling block to consummating the agreement. We cannot
provide any guarantees that any of the prospective customers which whom we have
had discussions or negotiations will actually conclude an unconditional Purchase
and Sales Agreement with us.
Although we had been approved to receive our research and development tax
credits for the fiscal year ended June 30, 2001, the federal government agency,
Canada Economic Development for Quebec Regions (CEDQR), having declared us in
default with respect to the repayment terms under our loan under the Industrial
Recovery Program for Southwest Montreal, seized the entire amount of the refund.
The amount seized, Cdn$461,998 (approximately US$291,000) was approximately
Cdn$252,000 (approximately US$158,800) in excess of the amounts then past due
plus interest thereon. This unexpected seizure by CEDQR seriously damaged our
liquidity and our ability to complete the final additions to the prototype TCS-1
to meet market demands, and to operate our TCS system producing and selling
rubber crumb.
As previously reported, in an effort to generate cash flow and to demonstrate
the viability of the TCS system and markets for rubber crumb, in the first half
of Fiscal 2002 we converted our prototype TCS-1, located in Montreal, into a
commercial recycling operation. Concurrent with the conversion, we negotiated
supply contracts to take the output of the converted prototype TCS-1. While the
quality of the rubber crumb produced by the TCS prototype met the expectations
of our customers, the system configuration did not permit the production of such
quantities of the finer mesh sizes demanded by these customers. Additional
finishing equipment to obtain large quantities of finer mesh rubber crumb was
required. Much of this was installed prior to the end of December but two
additional pieces of equipment remain to be acquired and installed before the
system configuration would fully respond to market demands. Lack of cash to
acquire this equipment, largely due to the seizure of our research and
development Tax Credit check by CEDQR, has meant that we have been unable to
complete the final equipment installations and, to date, we have not recommenced
tire recycling operations following the holiday season shutdown. As a result, we
have been unable to deliver the quantities of rubber crumb requested by our
customers.
During the second quarter of Fiscal 2002, our continuing weak financial position
further eroded our ability to meet our financial obligations toward management
and consultants. Historically, in such circumstances, we have issued stock to
such persons in lieu of cash compensation. However, due to the low current
20
market price of our common stock, such issuances in lieu of cash compensation
would have required the issuance of very large numbers of shares. In an effort
to conserve the number of shares available for issuance vis-a-vis our total
share authorization of 250 million, and as a measure to protect the interests of
our shareholders, we have deferred the issuance of shares to management and
consultants with the expectation that our management and consultants will remain
loyal and cooperative during this difficult period and that commercial success
will afford us with sufficient cash flow to meet our obligations.
We have always been cognizant of the fact that any technological advantage has a
limited lifespan and that it is necessary to employ all available resources to
attempt to effect as rapid a penetration of the market as possible. Given our
limited financial resources, this has required us to embark on a strategy of
using partnerships and alliances to maximize our marketing effort and alleviate
customer concerns. These partnerships and alliances were explained in the
quarterly report for the period ended September 30, 2002 and continue to be in
effect.
In February of 2001, we concluded a private financing with an investor group
managed by a New York-based company. Under the terms of the Agreement, we had
the contractual right to require the Investor to purchase up to US$5,000,000 of
put notes. To date, we have drawn down US$750,000 of this amount. The initial
$750,000 was provided in the form of a Convertible Note. In addition to the
conversion feature, warrants were also issuable as a function of the actual
amount of the funds drawn down by the Company. Under the terms of the Agreement,
we were required to file and have declared effective a Registration Statement on
Form SB-2 within 150 days of the Closing Date of the Agreement. As of June 25,
2001, the Company was in technical default for failing to have an effective
Registration Statement on record with the SEC. We were unofficially advised of
the default in mid-July 2001. We have maintained regular communications with the
New York management company of the investor group and have been working with
them to arrive at a mutually acceptable resolution. We are continuing to redraft
the SB-2 Registration Statement in such a fashion as to address all of the
questions and comments communicated to the Company by the SEC as a result of the
first filing of the SB-2 Registration Statement. Corporate Counsel for the
Company has indicated that the revised SB-2 will be completed shortly. It is
possible that further modifications to the SB-2 may be required either as a
result of additional questions and comments from the SEC, or as a result of
negotiations with the investor group. Management cannot, at this point, predict
with any reasonable degree of certainty, the ultimate outcome of negotiations
with the investor group or whether the SB-2 Registration Statement, currently in
revision, will ever become effective.
Because of the lengthy delay preceding the commencement of commercial
operations, particularly with respect to the sale and manufacturing of TCS
Systems, we have had to, and in the foreseeable near future, will be forced to
continue to cover a substantial part of our overhead costs from sources other
21
than revenues from operations. Typically, in the early stages of rubber crumb
production our monthly overhead costs were approximately $100,000 per month,
prior to any revenues generated from the sales of rubber crumb and from tire
recycling subsidies. We anticipated these costs to be early stage offset by
revenues from the sale of rubber crumb and tire recycling subsidies of between
$60,000 and $75,000 per month. Since the shutdown during the holiday season, our
monthly overhead costs have been reduced to approximately $35,000. However,
rubber crumb is not being produced and thus there are no revenues to reduce the
monthly overhead cost. We are unable to predict when rubber crumb operations and
tire recycling subsidies will resume, or when the revenues therefrom will be
adequate to cover monthly overhead costs.
Liquidity and Capital Resources
The activities of the Company, since its formation in 1987, and the inception of
its current business in 1993 have been financed by sources other than
operations. Such financing was principally provided by the sale of securities in
private transactions and by additional capital investments by directors,
officers and employees. During the six month period ended December 31, 2001,
directors, officers, employees and consultants made direct cash investments into
the Company for an amount of $421,342, of which the amount of $157,172 was
invested during the second quarter of Fiscal 2002. During the Fiscal year ended
June 30, 2001, direct cash investments made by the directors, officers,
shareholders and consultants amounted to $950,713
As of December 31, 2001, the Company had total assets of $2,739,453 as compared
to $3,297,211 at December 31, 2000 reflecting a decrease of $557,758, and a
decrease of $332,792 versus total assets as of the last fiscal year end, June
30, 2001, which amounted to $3,072,245. Management attributes the decrease from
December 31, 2000 to December 31, 2001 primarily to the following factors: (i) a
decrease of $497,244 in Tax Credits Receivable from the balance as of December
31, 2000 in the amount of $640,242 to the December 30, 2001 balance of $142,998,
and (ii) a decrease of $33,452 in Inventory from the balance as of December 31,
2000 in the amount of $105,829 to the December 31, 2001 balance of $72,377, and
(iii) a decrease of $26,900 in Sales Tax Receivable from the balance as of
December 31, 2000 in the amount of $26,900 to the December 31, 2001 balance of
zero, and (iv) a decrease of $81,138 in Property and Equipment from the balance
as of December 31, 2000 in the amount of $2,190,422 to the December 31, 2001
balance of $2,109,284, and (v) an increase of $89,500 in an Investment from the
zero balance as of December 31, 2000 to the December 31, 2001 balance of
$89,500. Management attributes the decrease from June 30, 2001 to December 31,
2001 primarily to the following factors: (i) a decrease of $218,031 in Tax
Credits Receivable from the balance as of June 30, 2001 in the amount of
$361,029 to the December 31, 2001 balance of $142,998 and, (ii) a decrease of
22
$130,176 in Prepaid Expenses and Deposits from the balance as of June 30, 2001
in the amount of $436,253 to the December 31, 2001 balance of $306,077, and
(iii) a decrease of $47,350 in Sales Tax Receivable from the balance as of June
30, 2001 in the amount of $47,350 to the December 31, 2001 balance of zero, and
(iv) an increase of $89,500 in an Investment from the zero balance as of June
30, 2001 to the December 31, 2001 balance of $89,500.
As of December 31, 2001, the Company had total liabilities of $3,567,381 as
compared to $3,432,342 at December 31, 2000, reflecting an increase of $135,039,
and reflecting a decrease of $538,355 versus total liabilities as of the last
fiscal year end, June 30, 2001, which total amounted to $4,105,736. The increase
in total liabilities from December 31, 2000 to December 31, 2001 is primarily
attributable to an increase of $935,556 in Convertible Securities offset by a
decrease in Loans from Related Parties in the amount of $619,971. The decrease
in total liabilities from June 30, 2001 to December 31, 2001 is primarily
attributable to a decrease of $461,534 in Current Liabilities through the use of
Government tax credits received during the six month period ended December 31,
2001, and to a decrease of $166,112 in Loans from Related Parties which was the
result of conversions of debt obligations into common stock.
Reflecting the foregoing, the financial statements indicate that as at December
31, 2001, the Company had a working capital deficit (current assets minus
current liabilities) of $847,355 compared to a working capital deficit of
$286,486 as at December 31, 2000, reflecting an increase of $560,869. The
working capital deficit of $847,355 as at December 31, 2001 compares to a
working capital deficit of $1,014,882 as at June 30, 2001, reflecting a decrease
of $167,527.
The financial statements which are included in this report reflect total
operations and other expenses of $921,949 for the six month period ended
December 31, 2001 versus $1,349,604 for the comparative six month period ended
December 31, 2000, reflecting a decrease of $427,655. The primary reasons for
this decrease relate to decreased personnel expenses, a decrease in the amount
relating to foreign exchange losses and to a decrease in the amount recorded for
Research and Development.
PART II: OTHER INFORMATION
Item 1:
-------
We are presently a party in the following legal proceedings:
IM2 Merchandising and Manufacturing, Inc and David B. Sinclair v. The Tirex
Corporation, Tirex Corporation Canada, Inc., et al.
23
The Plaintiffs, a Canadian resident and a Canadian corporation sued in
the Delaware, U.S. Federal District Court claiming fraud, breach of contract,
unjust enrichment and other allegations, that the alleged Defendants, which
include Tirex Corporation Canada and The Tirex Corporation, jointly conspired to
profit from their failure to comply with terms of a manufacturing agreement. The
monetary demand of this complaint was unspecified. We were prepared to move to
dismiss Plaintiffs' Complaint, but after consultations with the Plaintiffs'
Attorneys, the Plaintiffs' withdrew this complaint voluntarily. Plaintiffs later
filed a second action in the Chancery Court of Delaware alleging certain of the
same allegations; fraud, breach of contract, unjust enrichment, breach of
fiduciary duty and misrepresentation, but eliminated other counts including the
securities fraud allegations. The Defendants in the State Court action are the
same named in the Federal Court action, and again the monetary damages were
unspecified. We moved to dismiss the State Court Chancery case alleging
defective service of process and asserting that the Court had no jurisdiction
over the Defendants in Delaware and for removal of the case to Canada based on
forum non convenience and other considerations. Our motion was granted and the
case dismissed.
Subsequently, on or about April 25, 2001, the Plaintiffs instituted a
lawsuit in Superior Court, judicial district of Montreal alleging breach of
contract and claims damages of Canadian$794,690 (approximately US$508,600)
representing expenses and an additional Canadian$5,411,158 (approximately
US$1,874,000) in loss of profits. We have filed a detailed answer denying all
liability, stating further that Plaintiffs failed to comply with their
obligations. We believe we have meritorious defenses to all of the Plaintiffs'
claims. The action is still pending.
Surgent v. The Tirex Corporation
An action was brought by the Plaintiff against us, alleging that we
had agreed to issue 1,000,000 shares of our Common Stock to the Plaintiff in
consideration for expenses allegedly paid by the Plaintiff on our behalf in the
amount of approximately $150,000. These expenses allegedly were incurred in
relation to the rental of certain office space and performance of administrative
services. The Plaintiff's complaint sought to impose an equitable trust or lien
on 1,000,000 of our unissued common shares, demanded the issuance of the
1,000,000 shares and alleged breach of contract and claimed damages of
$1,400,000.
We moved to dismiss the case on various procedural grounds and in
September 2000 the Court granted our motion based upon the lack of venue in
Union County, New Jersey. A new action was instituted by Plaintiff in the
Superior Court of New Jersey, Bergen County in April 2001 alleging similar
claims as set forth in the previous action. We denied all of plaintiff's
allegations. We believe we have valid defenses to all of Plaintiff's claims and
the case is in the pretrial discovery stage, with the Court recently ordering
that the Plaintiff provide additional documents and that all depositions be
taken within ninety days.
24
Lefebvre Freres Limited v. The Tirex Corporation
Lefebvre Freres Limited instituted an action against us on August 13,
2001 in the Superior Court, judicial district of Montreal claiming Canadian
$98,513 (approximately US$63,000) is due and owing for the manufacture and
delivery of car tire disintegrators. We are preparing a defense and cross claim
against Plaintiff as the product delivered was defective and we believe we are
entitled to a reimbursement of sums paid. The action is still pending.
Tri-Steel Industries Inc. v. The Tirex Corporation
Our landlord Tri-Steel Industries Inc. instituted an action against
us, and our subsidiaries Tirex Canada and Tirex Canada R & D Inc., on or about
June 22, 2001 for arrears of rent in the amount of Canadian$230,050
(approximately US$144,932 using a 63(cent) exchange rate). Since instituting the
action, the amount of arrears has risen to approximately Cdn$373,831
(approximately US$235,514 using a 63(cent) exchange rate). Management has
continued to have substantial and harmonious dialogue with the landlord, and the
latter continues to demonstrate patience and understanding of the Company's
liquidity difficulties, through his continuing to defer the exercise of the
rights and remedies available.
No director, officer, or affiliate of the Company, or any associate of
any of them, is a party to or has a material interest in any proceeding adverse
to us.
25
Item 2: - Changes in Securities and Use of Proceeds
---------------------------------------------------
Share Issuance Continuity Schedule
---------------------------------------------------------------------------------------
Shares issued and outstanding as of June 30, 2001 176,366,408
---------------------------------------------------------------------------------------
Issued during First Quarter- Fiscal 2002, as reported 20,997,426
---------------------------------------------------------------------------------------
Issued during Second Quarter - Fiscal 2002 0
---------------------------------------------------------------------------------------
Issued from January 1, 2002 to 10-QSB report date 0
---------------------------------------------------------------------------------------
Total Issuances during current Fiscal Year 20,997,426 20,997,426
----------- -----------
---------------------------------------------------------------------------------------
Total Outstanding as of February 15, 2002 197,363,834
===========
---------------------------------------------------------------------------------------
26
With respect to sales and other issuances of restricted securities, which
Registrant claims to have been exempt from the registration requirements of
Section 5 of the Securities Act by reason of Section 4(2) thereof:
(i) Registrant did not engage in general advertising or general
solicitation and paid no commission or similar remuneration, directly or
indirectly, with respect to such transactions.
(ii) The persons who acquired restricted securities were executive officers
and directors, employees or consultants of the Registrant, all of whom are
sophisticated investors; Such persons had continuing access to all relevant
information concerning the Registrant and/or have such knowledge and experience
in financial and business matters that they are capable of evaluating the merits
and risks of such investment and are able to bear the economic risk thereof.
(iii) The persons who acquired restricted securities advised Registrant that
the Shares were purchased for investment and without a view to their resale or
distribution unless subsequently registered and acknowledged that they were
aware of the restrictions on resale of the Shares absent subsequent registration
and that an appropriate legend would be placed on the certificates evidencing
the Shares reciting the absence of their registration under the Securities Act
and referring to the restrictions on their transferability and resale.
Item 3 - Defaults Upon Senior Securities
During 1998, the Company issued an aggregate of $535,000 of two (2) year
convertible, subordinated debentures bearing interest at the rate of 10%.
Interest thereon was due and payable semi-annually commencing six months from
the date of issuance. All debentures have either been converted or repaid,
except for debentures in the principal amount of US$55,000, which remain
outstanding and on which principal and interest, which has accrued since the
issuance of the debentures, are now due. On debentures converted subsequent to
December 1999, interest was capitalized and converted to equity. Although the
conversion option on the outstanding debentures has lapsed, the Company intends
to extend the conversion dates of these debentures upon the request of the
holders.
As indicated above, In February of 2001, we concluded a private financing with
an investor group managed by a New York-based company. Under the terms of the
Agreement, we had the contractual right to require the Investor to purchase up
to US$5,000,000 of put notes. To date, we have drawn down US$750,000 of this
amount. The initial $750,000 was provided in the form of a Convertible Note. In
addition to the conversion feature, warrants were also issuable as a function of
the actual amount of the funds drawn down by the Company. Under the terms of the
Agreement, we were required to file and have declared effective a Registration
27
Statement on Form SB-2 within 150 days of the Closing Date of the Agreement. As
of June 25, 2001, the Company was in technical default for failing to have an
effective Registration Statement on record with the SEC. We were unofficially
advised of the default in mid-July 2001. We have maintained regular
communications with the New York management company of the investor group and
have been working with them to arrive at a mutually acceptable resolution. We
continuing to redraft the SB-2 Registration Statement in such a fashion as to
address all of the questions and comments communicated to the Company by the SEC
as a result of the first filing of the SB-2 Registration Statement. Corporate
Counsel for the Company has indicated that the revised SB-2 will be completed
shortly. It is possible that further modifications to the SB-2 may be required
either as a result of additional questions and comments from the SEC, or as a
result of negotiations with the investor group. Management cannot, at this
point, predict with any reasonable degree of certainty, the ultimate outcome of
negotiations with the investor group or whether the SB-2 Registration Statement,
currently in revision, will ever become effective.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters have been submitted to the Company's shareholders for vote during
Fiscal 2002 to date.
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
No exhibits are being filed as a part of this Report.
Form 8-K
No reports on Form 8-K were filed during the quarterly period ended December 31,
2001.
28
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
THE TIREX CORPORATION
Date: February 15, 2001 By /s/ JOHN L. THRESHIE, JR.
--------------------------------------
John L. Threshie, Jr. President
Date: February 15, 2001 By /s/ MICHAEL ASH
--------------------------------------
Michael Ash, Treasurer and
Chief Accounting and Financial Officer
29