U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 2002
[ ] 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 May 10, 2002: 216,808,072 shares
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
The Tirex Corporation
(A Development Stage Company)
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
The Tirex Corporation and Subsidiaries
Consolidated Balance Sheets as of
March 31, 2002 and June 30, 2001............................... 2
Consolidated Statements of Operations
for the three and nine month periods
ended March 31, 2002 and 2001.................................. 3
Consolidated Statements of Cash Flows
for the three and nine month periods
ended March 31, 2002 and 2001.................................. 4
Notes to Financial Statements (Unaudited)........................ 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 17
PART II B OTHER INFORMATION
Item 1 - Legal Proceedings................................................ 23
Item 2 - Changes in Securities and Use of Proceeds........................ 25
Item 3 - Defaults Upon Senior Securities.................................. 26
Item 4 - Submission of Matters
to a Vote of Security Holders.................................... 27
Item 6 - Exhibits and Reports on Form 8-K................................. 27
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 March 31, 2002 and the
results of its operations and changes in its cash position for the three and
nine month periods ended March 31, 2002 and 2001 and for the period from
inception of operations (March 26, 1993).
THE TIREX CORPORATION
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
THE TIREX CORPORATION
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 2002
---------------------------------------------------
(Unaudited) (Audited)
March 31, June 30,
2002 2001
------------ ------------
ASSETS
------
Current Assets
Cash and cash equivalents $ -1,343 $ 1,356
Accounts receivable 1,623 --
Notes receivable 17,093 13,342
Sales taxes receivable -- 47,350
Inventory 72,313 75,959
Research and Experimental Development tax credits receivable 170,445 361,029
Prepaid expenses and deposits 72,712 126,639
------------ ------------
332,844 625,675
Property and equipment, at cost, net of
accumulated depreciation of $239,393 2,095,657 2,136,956
------------ ------------
Other assets
Investment, at cost 89,500 --
Prepaid expenses and deposits 209,000 309,614
------------ ------------
298,500 309,614
------------ ------------
$ 2,727,001 $ 3,072,245
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities
Accounts payable and accrued liabilties $ 1,254,273 $ 1,259,446
Current portion of long-term debt 22,447 381,111
------------ ------------
1,276,720 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 1,257,535 1,204,663
------------ ------------
2,607,342 2,465,179
------------ ------------
3,884,062 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 23,709,525 22,592,701
Deficit accumulated during the development stage (24,904,900) (23,622,329)
Unrealized gain (loss) on foreign exchange (159,049) (180,229)
------------ ------------
(1,157,061) (1,033,491)
------------ ------------
$ 2,727,001 $ 3,072,245
============ ============
2
THE TIREX CORPORATION
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
--------------------------------------
(Unaudited)
Three months ended Nine months ended
March 31 March 31 Cumulative from
------------------------------ ------------------------------ March 26, 1993 to
2002 2001 2002 2001 March 31, 2002
------------- ------------- ------------- ------------- -------------
Revenues $ -- $ -- $ 1,424 $ -- $ 1,326,997
Cost of Sales -- -- 854 -- 1,018,948
------------- ------------- ------------- ------------- -------------
Gross profit -- -- 570 -- 308,049
------------- ------------- ------------- ------------- -------------
Operations
General and administrative 198,665 745,338 797,219 1,587,847 10,243,211
Depreciation and amortization 13,627 68,071 41,299 100,430 328,700
Research and development 120,791 359,282 362,805 792,487 13,012,194
------------- ------------- ------------- ------------- -------------
Total Expense 333,083 1,172,691 1,201,323 2,480,764 23,584,105
------------- ------------- ------------- ------------- -------------
Loss before other expenses (income) (333,083) (1,172,691) (1,200,753) (2,480,764) (23,276,056)
------------- ------------- ------------- ------------- -------------
Other expenses (income)
Interest expense 25,401 21,623 79,680 63,155 514,962
Interest income -- -- -- -- (45,443)
Income from stock options -- -- -- -- (10,855)
Loss on disposal of equipment -- -- -- -- 4,549
------------- ------------- ------------- ------------- -------------
25,401 21,623 79,680 63,155 463,213
------------- ------------- ------------- ------------- -------------
Net loss (358,484) (1,194,314) (1,280,433) (2,543,919) (23,739,269)
------------- ------------- ------------- ------------- -------------
Other comprehensive loss
Loss (gain) on foreign exchange 175 (67,773) 2,139 9,869 108,275
------------- ------------- ------------- ------------- -------------
Net loss and comprehensive loss $ (358,659) $ (1,126,541) $ (1,282,572) $ (2,553,788) $ (23,847,544)
============= ============= ============= ============= =============
Basic and Diluted net loss and comprehensive
loss per common share $(0.00) $(0.01) $(0.01) $(0.02) $(0.53)
============= ============= ============= ============= =============
Weighted average shares of common
stock outstanding 192,114,478 163,831,175 192,114,478 163,831,175 45,069,514
============= ============= ============= ============= =============
3
THE TIREX CORPORATION
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
---------------------------------------------------------
(Unaudited)
Three months ended Nine months ended
March 31 March 31 Cumulative from
---------------------------- ---------------------------- March 26, 1993 to
2002 2001 2002 2001 March 31, 2002
------------ ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (358,659) $ (1,126,541) $ (1,282,572) $ (2,553,788) $(23,847,544)
------------ ------------ ------------ ------------ ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 13,627 68,071 41,299 100,430 327,448
(Gain) loss on disposal and abandonment of assets -- -- -- 2,309 (25,153)
Stock issued in exchange for interest -- -- -- -- 169,142
Stock issued in exchange for services and expenses -- 444,235 367,273 1,881,357 10,565,670
Stock options issued in exchange for services -- -- -- 15,966 3,083,390
Unrealized (loss) gain on foreign exchange 1,953 (49,213) 21,180 (65,653) (159,069)
Changes in assets and liabilities:
(Increase) decrease in:
Account receivable 2 -- (1,623) -- (1,109)
Inventory 64 5,175 3,646 9,307 (72,313)
Sales tax receivable -- 4,455 47,350 (3,157) (35,565)
Research and experimental development tax credits
receivable (27,447) 239,674 190,584 (165,021) (170,445)
Other assets 24,365 (166,597) 154,541 (150,570) (291,832)
(Decrease) increase in :
Accounts payables and accrued liabilities 100,788 (199,253) 7,201 (387,820) 1,583,980
Accrued salaries -- -- (12,374) -- 186,824
Due to stockholders -- -- -- -- 5,000
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (245,307) (779,994) (463,495) (1,316,640) (8,681,576)
------------ ------------ ------------ ------------ ------------
Cash flow from investing activities:
Decrease (Increase) in notes receivable 15 (5,144) (3,751) 112,789 (255,259)
Reduction in notes receivable -- -- -- -- 237,652
Investment -- -- (89,500) -- (89,500)
Equipment -- -- -- -- (321,567)
Equipment assembly costs -- -- -- -- (1,999,801)
Organization cost -- -- -- -- 6,700
Reduction in security deposit -- -- -- -- (1,542)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities 15 (5,144) (93,251) 112,789 (2,423,317)
------------ ------------ ------------ ------------ ------------
Cash flow from financing activities:
Loans from related parties 231,163 (198,343) 210,990 (152,112) 3,381,575
Deferred financing costs 12,303 52,975 66,239 52,975 146,182
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 -- (3,583) -- (18,122) (95,860)
Proceeds from issuance of convertible subordinated
debentures -- 935,556 -- 935,556 1,035,000
Proceeds from loan payable -- -- -- -- 591,619
Payments on loan payable -- -- (292,293) -- (350,473)
Proceeds from issuance of stock options -- -- -- -- 20,000
Proceeds from grants -- -- 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 243,466 786,605 554,047 1,213,980 11,103,293
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,826) 1,467 (2,699) 10,129 (1,600)
Cash and cash equivalents - beginning of period 483 11,455 1,356 2,793 257
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents - end of period $ (1,343) $ 12,922 $ (1,343) $ 12,922 $ (1,343)
============ ============ ============ ============ ============
4
Supplemental Disclosure of Non-Cash Activities:
During the nine month period ended March 31, 2002 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 nine month period
ended March 31, 2002 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 nine month
period ended March 31, 2002.
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 nine month
period ended March 31, 2002, there were no convertible debentures or
accrued interest converted into common stock.
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 7,191 $ 10,347 $ 40,504 $ 48,987
======== ======== ======== ========
Income taxes paid $ -- $ -- $ -- $ --
======== ======== ======== ========
5
THE TIREX CORPORATION
A DEVELOPMENT STAGE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(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 an officer and 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
Seller (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.
DEVELOPMENTAL STAGE
At March 31, 2002, 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.
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.
6
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.
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.
7
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 March 31, 2002 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 $24.9 million as
of March 31, 2002, 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 $170,445 at March 31, 2002 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.
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.
8
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 nine month period ended March 31, 2002 in the amount of $1,282,572.
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. Due to the Company's lack of working capital during the three
month period ended March 31, 2002 all rubber crumb production has ceased and
research and development efforts have been hampered. Pending receipt of funding
from operations, government assistance, loans or equity financing, crumb rubber
production and previous research and development efforts will not be resumed.
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 March 31, 2002, the Company had not yet consummated an
unconditional purchase order for a TCS System.
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 ability to generate revenue 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 COST
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 nine month period ended March
31, 2002 was $66,239.
Note 4 PROPERTY AND EQUIPMENT
As of March 31, 2002, plant and equipment consisted of the following:
Furniture, fixtures and equipment $ 159,889
Leasehold improvements $ 175,161
Construction in progress-equipment $ 2,000,000
-----------
Subtotal $ 2,335,050
Less: Accumulated depreciation and amortization $ 239,393
===========
Total $ 2,095,657
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 nine month period ended March 31, 2002 was $41,299.
9
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 $ 51,811
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 / or Portugal throughout 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 / or Portugal through June 30, 2004 to a maximum of
the balance of the loan outstanding. If no sales occur before
this date in Spain and Portugal, the loan will become
non-repayable. 66,5000
---------
189,086
Less: Current portion 19,295
---------
Long-term portion $ 169,791
=========
Principal repayments are as follows:
June 30 Amount
------- ---------
2002 $ 19,295
2003 30,082
2004 105,129
2005 20,580
2006 --
2007 14,000
189,086
=========
During the nine month period ended March 31, 2002, 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 installment repayment and as such was
obligated to repay the entire remaining balance due on the loan.
10
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 March 31, 2002 was $62,400 and
$34,320, respectively. The equipment under capital leases has been included in
property and equipment on the balance sheet. The Company is in arrears on
payment of these leases but default has not been declared. The leased equipment
is not part of the Company's TCS System prototype.
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 March 31, 2002:
Years ended June 30 Amount
------------------- --------
2002 3,879
2003 15,513
2004 15,513
--------
Total minimum lease payments 34,905
Less: Amount representing interest 4,793
--------
Total obligations under capital lease 30,112
Less: Current portion of obligations under capital leases 3,152
--------
Long-term obligation portion of under capital leases, with
interest rate of 10% 26,960
========
Note 7 CONVERTIBLE SUBORDINATED DEBENTURES
The Company issued Type B Convertible Subordinated Debentures between December
1997 and February 1998. These debentures bore interest at 10% and were
convertible into common shares of the Company at $0.20 per share. The conversion
privilege on the remaining $55,000 of these debentures expired and the amount is
now included on the Balance Sheet in Long term deposits and notes.
Note 8 CONVERTIBLE NOTES
The Convertible Notes appearing on the balance sheet as of March 31, 2002
consisted of an investment arrangement with a group of institutional investors
involving a multi-stage financing under which the Company had access to, at its
option, up to $5,000,000. A first tranche of $750,000 was completed but no
further draw downs were made. The terms of the convertible note were:
Balance at March 31, 2002 and June 30, 2001 $ 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 pus interest.
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.
11
Common stock warrants The Convertible Notes carried 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 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 Registration Statement has still not been declared effective by
the Securities and Exchange Commission as of this date, and until such occurs,
the Convertible Notes cannot be converted to Common Stock nor may the Common
Stock warrants be exercised.
On April 24, 2002 the Company entered into a Settlement Agreement with the Note
holders, the terms of which are described in Note 19 Subsequent Event. In the
event of a default under the Settlement Agreement, the term of the Convertible
Notes would become effective once again. The conclusion of the Settlement
Agreement has negated the default.
During the nine month period ended March 31, 2002, the Company authorized the
investors to sell 1,800,000 of the shares held as security.
Note 9 CONVERTIBLE NOTE
A convertible note, under a private arrangement, consists of the following:
Balance at March 31, 2002 and June 30, 2001 $ 185,556
Interest rate 8%
Issue date July 19th, 2000
Maturity date January 19th, 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
19th, 2001, at 20% discount to
market between July 19th, 2001
and January 19th, 2002 or at 25%
to market if held to maturity, to
a maximum of not more than
2,500,000 shares.
Note 10 RELATED PARTY TRANSACTIONS
Convertible loans include amounts primarily due to Directors, Officers and
employees. Historically, such amounts due have been repaid through the issuance
of stock. At March 31, 2002 and June 30, 2001, the balances owing to Directors
and Officers was $1,121,432 and $1,120,828, respectively. These amounts are
without interest or terms of repayment.
12
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 March 31, 2002,
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. During the nine month period
ended March 31, 2002, 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 fiscal 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 nine month period
ended March 31, 2002, the Company recorded increases in common stock and paid-in
capital of $772,596, reflecting the exchange of common stock for debts owed.
Note 12 COMMON STOCK
During the nine month period ended March 31, 2002 and the year ended June 30,
2001, the Company issued common stock in exchange for services performed
totaling $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.
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 March 31, 2002, 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 may be issued shares as compensation and incentives
through 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-twelfth 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
13
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. There were no
stock issuances under the Stock Plan for the three months ended March 31, 2002.
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 Nil -- --
beginning of year
Granted and exercised during 9,698,228 $ 0.131 $ 1,273,334
the year
Granted and unexercised at end Nil -- --
of year
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 nine month period ended
March 31, 2002.
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
14
$353,725 which has been recorded as an increase in stockholders' equity paid-in
capital. Also, during the nine month period ended March 31, 2002, the Company
received approximately $569,111 which has also been recorded as an increase in
stockholders' equity paid-in capital. During the nine month period ended March
31, 2002, the Company recorded additional tax credits in the amount of $170,445,
bringing the reported receivable balance from these governments from $361,029 as
of June 30, 2001 to $170,445 as of March 31, 2002.
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:
June 30, Amount
-------- --------
2002 $ 47,087
2003 141,261
--------
$188,348
========
Rental expense for the year ended June 30, 2001 amounted to $215,237. Rental
expense for the nine month period ended March 31, 2002 amounted to $148,879.
The lease contains a second ranking moveable hypothec in the amount of $300,000
on the universality of the Company's moveable property.
At March 31, 2002, the Company was in arrears of rent, including interest and
related charges, in the amount of $323,019.
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. A 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 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.
15
Note 18 ACCUMULATED OTHER COMPREHENSIVE INCOME
The deficit accumulated during the development stage included accumulated
comprehensive other income totaling $103,396.
Note 19 SUBSEQUENT EVENTS
On April 24th, 2002, the Company entered into a Settlement Agreement with an
Investor Group with respect to Convertible Notes for which a default had been
declared. (See Note 8: Convertible Notes). The main terms of the Settlement
Agreement are as follows:
Amount due including interest calculated
to June 30, 2002 and penalties to date,
and deducting proceeds from the sale of
collateral shares in the amount of $16,260 $ 932,240
Interest rate on the debt 8%
Repayment terms $1,000 on May 15, 2002
$1,000 on June 15, 2002
$38,843.33 each month for up to
twenty-four months starting
August 1, 2002
Warrants for purchase of common shares 500,000 three-year warrants
exerciseable immediately at a
price of $0.01 per share.
500,000 two-year warrants
exerciseable one year from the
date of the Settlement Agreement
at a price of $0.05 per share.
500,000 one-year warrants
exerciseable two years from the
date of the Settlement Agreement
at a price of $0.10 per share.
Right to sell collateral shares and
Rule 144 shares The Investors have the right to
sell up to 600,000 collateral
shares and / or Rule 144 shares
per month, with proceeds to be
first applied against interest
and fees and thereafter against
principal.
Right of prepayment The Company has the right to pay
amounts in excess of the
prescribed monthly amount,
without penalty.
Collateral shares As of the date of signing of the
Settlement Agreement, the
Investors had 10,790,885
Collateral Shares in their
possession.
16
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
nine-month period ended March 31, 2002. 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
We have deferred the re-starting of rubber crumb production operations at our
Montreal facility following the Christmas 2001 period shutdown due to the lack
of working capital. In addition research and development efforts have been
hampered. The Company's financial instability, low share price and general
nervousness in the stock market with respect to technology stocks has made the
securing of the required capital a very difficult task.
With a view to minimizing the dilutive effect of securing the necessary working
capital through issuances of capital stock, we attempted to secure the necessary
funds from public and private sources in the form of loans, such as a bank
credit line secured by a government-backed loan guarantee and supported
operations by estimated research and development tax credits for our current
fiscal year actually in progress. We have had several meetings with a major
Canadian bank and have secured a commitment to establish a line of credit
conditional upon our being able to obtain government-backed loan guarantees.
Consultants engaged by us initiated contact with the appropriate Quebec
Government agency and the first face-to-face meeting involving Management took
place on April 9, 2002. While we have a good track record with this Quebec
Government agency with respect to the two previous occasions when we availed
ourselves to their Loan Guarantee Program, this by itself does not provide any
assurance that the Loan Guarantee will be available this time and that the bank
line of credit will be activated.
Customer concerns with respect to the effectiveness of our TCS Technology and
its long-term performance, 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 we have heretofore been
unable to supply, customers have consistently deferred the conclusion of
Purchase and Sales Agreements. With our deteriorating liquidity position in the
second and third quarters of fiscal 2002, our ability to deliver TCS Systems has
been questioned.
17
To alleviate these market impediments, in collaboration with a major
international insurance brokerage and risk management company, we are currently
seeking the assistance of certain corporations owned by the Government of Canada
whose mandates focus on the development of export markets. These corporations
can provide performance guarantees, which we believe could be satisfactory to
our customers and thus establish the conditions necessary for us to conclude our
first sale. We have been notified that one of these federal government
corporations would be willing to participate in a performance guarantee provided
that another guarantor would also commit for a like amount. Management and our
consultants are currently attempting to find such other guarantor. Once we have
concluded our first Purchase and Sales Agreement backed by a performance
guarantee, we believe that this approach could result in additional Purchase and
Sales Agreements with other customers. However, there can be no assurance that
we will be successful in obtaining a performance guarantee or that it will ever
be made available to our potential customers. Furthermore, although we believe
that the performance guarantee being sought will allay customer concerns, there
can be no assurance that the strength of the guarantee will, in fact, be
adequate for this end.
As a further measure to allay customer concerns and to provide additional
incentive to those Government of Canada corporations to provide the requisite
loan guarantees, we initiated discussions with a large, Canadian-based,
international engineering construction company with a view to establishing a
working relationship similar to the one we have already established with Simpro
for the European market. Based on a first possible installation for Puerto Rico,
we received a letter from this engineering construction company offering their
services to set up a turnkey facility for our potential Puerto Rican customer.
We believe that their offer of service is reasonable and can provide the basis
for a longer-term relationship between our companies. This engineering
construction company is a multi-disciplined firm, which has been in existence
for over thirty years, has undertaken over 3000 projects in approximately forty
countries and currently has operating centers in five countries above and beyond
their Quebec-based headquarters.
In the event that we secure satisfactory performance guarantees and conclude a
Purchase and Sales Agreement with the Puerto Rican interests referred to
earlier, then following the commissioning of the System in Puerto Rico, we
intend to proceed to implement a joint venture arrangement with respect to the
production and marketing of products incorporating recycled rubber crumb, in
accordance with the Memorandum of Understanding signed in the spring of 2001. We
estimate the timing of such implementation at approximately one year from the
date the signing of the Purchase and Sales Agreement. We cannot, however,
provide any assurance that the implementation of a joint venture manufacturing
operation with these Puerto Rican interests will, in fact, ever be realized.
18
Management and its consultants and market development partners have identified
numerous potential customers with whom there is a potential to sign Purchase and
Sales Agreements if a performance guarantee was in place. These include several
opportunities in Central and South America as well as in the Caribbean and in
Europe. We are of the opinion, however, that most, if not all of these
opportunities depend on the performance guarantee. Furthermore, some of these
possible customers may not have the required human and financial resources nor
experience in the recycling industry to be able to effectively put together a
development project involving the TCS technology. Thus, these additional
possible sales should be viewed as speculative, and 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.
As reported in our previous quarterly report, in an effort to generate cash flow
and to demonstrate the viability of the TCS system and markets for rubber crumb,
we converted our prototype TCS-1, located in Montreal, into a commercial
recycling operation in the first half of Fiscal 2002. 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 also installed prior to
the end of December but two additional pieces of equipment remained to be
acquired and installed before the system configuration would fully respond to
market demands. Our inability so far to secure the necessary working capital to
acquire this equipment, has meant that we have been unable to complete the final
equipment installations and to re-engage rubber crumb production operations. As
a result, we have been unable to deliver the quantities of rubber crumb
requested by our customers. In the event that a sufficiently large bank Line of
Credit supported by a Loan Guarantee can be established, as referred to above,
we intend to use part of the available funds to complete modifications to the
TCS-1 and re-engage rubber crumb manufacturing operations.
During the second and third quarters 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 market price of our common stock, such issuances in lieu of cash
compensation would have required the issuance of very large numbers of shares.
19
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 deferred throughout both quarters the issuance
of shares to management and consultants. An issuance was undertaken in April of
2002 with respect of such persons for approximately one-quarter of the number of
shares which would ordinarily been issuable. Management hopes that our staff and
consultants will continue to demonstrate their loyalty and commitment 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. Beyond those alliances previously noted, which continue to be
in effect, the Company has negotiated and continues to negotiate new alliances
to cover regions such as Central and South America as well as the Caribbean.
As previously reported, 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 Group to
invest up to US$5,000,000 in the Company. We drew down US$750,000 of this amount
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 U.S. Securities and Exchange Commission (the "SEC"). We were
unofficially advised of the default in mid-July 2001. We maintained regular
communications with the New York management company representing the investor
group and worked with them to arrive at a mutually acceptable Settlement
Agreement. A Settlement Agreement was concluded in late April of 2002, following
the period covered by this report, and is attached as an exhibit to this Report.
Regardless of the Settlement Agreement, 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 us by the SEC as a result of the first filing of the
SB-2 Registration Statement. While clearly the document will now require
additional modifications, this filing is being pursued to answer SEC questions
not only about the Year 2001 filing but also with respect to the SB-2 filing of
1998 which had been withdrawn prior to the Company's having answered all of the
20
SEC questions at that time. Management believes that the completion of the
current SB-2 filing will be beneficial to its relations with the SEC and with
our shareholders. Corporate Counsel for the Company has indicated that a revised
SB-2 will be completed in the near future. It is possible that further
modifications to the SB-2 may be required should the SEC have additional
questions requiring responses. We cannot predict with any reasonable degree of
certainty at this point, 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
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 offset by early stage
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 nine month period ended March 31, 2002,
directors, officers, employees and consultants made direct cash investments into
the Company for an amount of $529,566, of which the amount of $108,224 was
invested during the third 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 March 31, 2002, the Company had total assets of $2,727,001 as compared to
$3,208,452 at March 31, 2001 reflecting a decrease of $481,451, and a decrease
of $345,244 versus total assets as of the last fiscal year end, June 30, 2001,
which amounted to $3,072,245. Management attributes the decrease from March 31,
2001 to March 31, 2002 primarily to the following factors: (i) a decrease of
$230,123 in Tax Credits Receivable from the balance as of March 31, 2001 in the
21
amount of $400,568 to the March 31, 2002 balance of $170,445, and (ii) a
decrease of $28,341 in Inventory (Inventory is surplus equipment held for
resale) from the balance as of March 31, 2001 in the amount of $100,654 to the
March 31, 2002 balance of $72,313, and (iii) a decrease of $22,445 in Sales Tax
Receivable from the balance as of March 31, 2001 in the amount of $22,445 to the
March 31, 2002 balance of zero, and (iv) a decrease of $82,102 in Property and
Equipment from the balance as of March 31, 2001 in the amount of $2,177,759 to
the March 31, 2002 balance of $2,095,657, and (v) a decrease of $195,750 in
Prepaid expenses and deposits from the balance as of March 31, 2001 in the
amount of $477,462 to the March 31, 2002 balance of $281,212, and (vi) an
increase of $89,500 in an Investment from the zero balance as of March 31, 2001
to the March 31, 2002 balance of $89,500. Management attributes the decrease
from June 30, 2001 to March 31, 2002 primarily to the following factors: (i) a
decrease of $190,584 in Tax Credits Receivable from the balance as of June 30,
2001 in the amount of $361,029 to the March 31, 2002 balance of $170,445 and,
(ii) a decrease of $154,541 in Prepaid Expenses and Deposits from the balance as
of June 30, 2001 in the amount of $436,253 to the March 31, 2002 balance of
$281,712, 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 March 31, 2002
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 March 31, 2002, the Company had total liabilities of $3,884,062 as
compared to $3,388,635 at March 31, 2001, reflecting an increase of $495,427,
and reflecting a decrease of $221,674 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 March 31, 2001 to March 31, 2002 is attributable to an
increase of $343,503 in Loans from related parties and to an increase of
$454,382 in Accounts payable and accrued liabilities offset by a decrease in
Government loans in the amount of $348,417. The decrease in total liabilities
from June 30, 2001 to March 31, 2002 is primarily attributable to a decrease of
$269,373 in Government loans through the use of Government tax credits received
during the nine month period ended March 31, 2002.
Reflecting the foregoing, the financial statements indicate that as at March 31,
2002, the Company had a working capital deficit (current assets minus current
liabilities) of $943,876 compared to a working capital deficit of $243,432 as at
March 31, 2001, reflecting an increase of $700,444. The working capital deficit
of $943,876 as at March 31, 2002 compares to a working capital deficit of
$1,014,882 as at June 30, 2001, reflecting a decrease of $71,006.
The financial statements which are included in this report reflect total
operations and other expenses of $1,280,433 for the nine month period ended
March 31, 2002 versus $2,543,919 for the comparative nine month period ended
22
March 31, 2001, reflecting a decrease of $1,263,486. The primary reasons for
this decrease relate to decreased personnel expenses and to a decrease in the
amount recorded for Research and Development.
PART II: OTHER INFORMATION
Item 1:
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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.
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 Cdn$794,690 (approximately US$508,600)
representing expenses and an additional Cdn$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
23
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 still in the pretrial discovery stage.
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 Cdn$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 634 exchange rate). At March 31, 2002 the Company was in
arrears in the payment of rent in the amount of US$323,019. 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.
24
Item 2: - Changes in Securities and Use of Proceeds
---------------------------------------------------
Share Issuance Continuity Schedule
--------------------------------------------------------------------------------
Shares issued as of June 30, 2001 176,366,408
--------------------------------------------------------------------------------
Shares issued First Quarter of Fiscal 2002, as 20,997,426
reported
--------------------------------------------------------------------------------
Shares issued Second Quarter of Fiscal 2002, as 0
reported
--------------------------------------------------------------------------------
Shares issued Third Quarter of Fiscal 2002, as 0
reported
--------------------------------------------------------------------------------
Shares issued subsequent to Third Quarter 19,444,238
--------------------------------------------------------------------------------
Total Shares outstanding as of May 10, 2002 216,808,072
--------------------------------------------------------------------------------
Share Issuance in April 2002 by nature of expense
--------------------------------------------------------------------------------
Nature of Expense Restricted Unrestricted Total
----------------- ---------- ------------ -----
--------------------------------------------------------------------------------
In lieu of salaries, bonuses and 54,000 6,750,000 6,804,000
expenses
--------------------------------------------------------------------------------
Consulting Agreements 1,000,000 3,390,238 4,390,238
--------------------------------------------------------------------------------
Professional Fees 4,250,000 4,250,000
--------------------------------------------------------------------------------
Loans 1,750,000 1,750 000
--------------------------------------------------------------------------------
Expenses 2,250,000 2,250,000
--------------------------------------------------------------------------------
TOTAL 2,804,000 16,640,238 19,444,238
--------------------------------------------------------------------------------
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) Except as noted following, the persons who acquired restricted
securities were executive officers and directors, employees or consultants of
the Registrant. Restricted shares numbering 1,750,000 in total were issued to
six different persons who made loans to the Company. An additional 1,000,000
restricted shares were issued to a consultant under the terms of his consulting
contract and a total of 54,000 restricted shares were issued to fourteen
employees (no directors or officers) as bonuses applicable to their efforts in
Calendar 2001. With the exception of the fourteen employees who received a total
25
of 54,000 restricted shares at no cost, all of the other persons to whom
restricted shares were issued 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 for cash or under
consulting agreements 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. The fourteen
employees who received a total of 54,000 restricted shares were advised as to
the implications of restricted stock, including trading restrictions, the legal
requirements for them to acquire trading rights and of the implications of the
Restrictive Legend affixed to their certificates.
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. The conversion
option on the outstanding debentures has lapsed.
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 Convertible Notes. 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 U.S. Securities and Exchange
Commission (the "SEC"). We were unofficially advised of the default in mid-July
2001. We maintained regular communications with the New York management company
26
of the investor group and worked with them to arrive at a mutually acceptable
resolution. A Settlement Agreement was reached in April 2002, subsequent to the
period covered by this report. The Settlement Agreement is attached as an
Exhibit to this report.
Despite having concluded a Settlement Agreement with the Investor Group, we are
continuing to redraft the SB-2 Registration Statement, with appropriate changes
to reflect the new circumstances occasioned by the Settlement Agreement, 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, as well as questions and comments which had remained unanswered from
the 1998 SB-2 filing which was withdrawn. Corporate Counsel for the Company is
continuing to work on the revised SB-2 and has informed Management that they
expect to complete this task as soon as possible. It is possible that further
modifications to the SB-2 may be required as a result of additional questions
and comments which could come from the SEC. Management cannot, at this point,
predict with any reasonable degree of certainty 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
Exhibit 1. Settlement Agreement
Form 8-K
No reports on Form 8-K were filed during the quarterly period ended March 31,
2002.
27
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: May 15, 2002 By /s/ JOHN L. THRESHIE, JR.
--------------------------------------
John L. Threshie, Jr. President
Date: May 15, 2002 By /s/ MICHAEL ASH
--------------------------------------
Michael Ash, Treasurer and
Chief Accounting and Financial Officer
28