<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act 0f
1934 for the quarterly period ended October 31, 1998.
[ ] Transition report under section 13 or 15(d) of the Exchange Act For the
transition period from _____ to _____
Commission file number 0-29248
SmarTire Systems Inc. (Formerly UniComm Signal Inc.)
(Exact Name of Small Business Issuer as Specified in Its Charter)
British Columbia, Canada Not Applicable
(State or Other Jurisdiction of (I.R.S. Employer
Incorporated or Organization) Identification No.)
150-13151 Vanier Place, Richmond, British Columbia, V6V 2J1
(Address of Principal Executive Offices)
(604) 276-9884
(Issuer's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 30, 1998, the Company had 9,564,742 shares of common stock issued
and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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SMARTIRE SYSTEMS INC.
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) -
OCTOBER 31, 1998 AND JULY 31, 1998
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
(UNAUDITED) - THREE MONTHS ENDED OCTOBER 31,
1998 AND OCTOBER 31, 1997.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(UNAUDITED) - THREE MONTHS ENDED OCTOBER 31, 1998 AND OCTOBER
31, 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - THREE
MONTHS ENDED OCTOBER 31, 1998 AND OCTOBER 31, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS
The unaudited consolidated financial statements of SmarTire Systems Inc. and its
subsidiaries (the "Company" or "SmarTire") as of October 31, 1998 for the three
month periods ended October 31, 1998 and October 31, 1997 are attached hereto.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENTS
Statements contained in this Report that are not based on historical facts are
forward-looking statements subject to uncertainties and risks including, but not
limited to, product demand and acceptance, economic conditions, the impact of
competition and pricing, results of financing efforts, and other risks.
OVERVIEW
The following discussion of the financial condition, changes in financial
condition and results of operations of the Company for the three months ended
October 31, 1998 and 1997 should be read in conjunction with the consolidated
financial statements of the Company.
The Company's consolidated financial statements are stated in Canadian Dollars
(CDN$) and are prepared in accordance with Canadian Generally Accepted
Accounting Principles (GAAP), the application of which, in the case of the
Company, conforms in all material respects for the periods presented with United
States GAAP except as indicated in the notes to the financial statements. All
per share amounts reflect an 8 to 1 reverse split effected on December 24, 1997.
Herein all references to the "$" and "CDN$" refer to Canadian Dollars; and all
references to "US$" refer to United States Dollars.
In this Report, unless otherwise specified, all dollar amounts are expressed in
Canadian Dollars. The Government of Canada permits a floating exchange rate to
determine the value of the Canadian Dollar against the U.S. Dollar.
Set forth below is the rate of exchange for the Canadian Dollar at the end of
the most recent fiscal year ended July 31, 1998 and the three months ended
October 31, 1998 and 1997, average rates for the periods, and the range of high
and low rates for the periods. For purposes of this table, the rate of exchange
means the noon buying rate in New York City for the cable transfers in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of
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New York. The table sets forth the number of Canadian Dollars required under
that formula to by one U.S. dollar. The average rate means the average of the
exchange rates on the last day of each month during the period.
U.S. Dollar/Canadian Dollar
<TABLE>
<CAPTION>
Average Close High Low
------- ----- ---- ----
<S> <C> <C> <C> <C>
Three Months Ended 10/31/98 1.53 1.54 1.58 1.50
Three Months Ended 10/31/97 1.39 1.41 1.41 1.37
Fiscal Year Ended 7/31/98 1.43 1.51 1.51 1.37
</TABLE>
Since its inception, the Company has reported net losses arising from general
expenses and research/development expenditures. The Company has sustained itself
during the last several years through the sale of securities, including common
shares and convertible debentures, and the exercise of share purchase warrants
and share purchase options.
SmarTire is engaged in the development and marketing of a line of Tire
Monitoring Systems (TMS) incorporating proprietary patented technology designed
to improve the tire life, fuel efficiency, vehicle productivity and safety.
During the three months ended October 31, 1998, the Company earned revenues from
the sale of TMS for passenger cars, racing applications and industrial
applications.
The passenger car TMS are sold to two distinct and separate markets: the
Replacement Tire Market (Aftermarket) and the Original Equipment Manufacturer
(OEM) Market. The Company sells OEM passenger car systems to Ford Motor Company,
where they are packaged as an optional accessory with run-flat tires and other
safety features on the Lincoln Continental. Aftermarket systems may be added to
existing vehicles as an accessory and are distributed primarily through
independent tire dealers and distributors, and automotive service centers.
Run-flat tires allow drivers to drive up to 50 miles on a tire that has lost all
its air pressure. Run-flat tires perform so well without any air pressure that
an approved tire pressure monitoring system is required with the purchase of
each set of tires. Otherwise, the operator may unknowingly drive on the tire
until it fails or is no longer repairable. The Company's advanced tire
monitoring system is currently the only tire monitoring system that has been
approved for sale with run-flat tires by Goodyear, Michelin, and
Bridgestone/Firestone.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1998 AND OCTOBER 31, 1997
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Gross revenue for the three months ended October 31, 1998 was $693,386 compared
to $320,774 for the three months ended October 31, 1997. There is some
seasonality to product sales which matches the advertising and promotion
programs of the major tire manufacturers. During the fall months, a number of
advertising programs switch from conventional and run-flat tires to the
promotion of winter tires.
Sales of Aftermarket passenger car systems were $552,965 for the quarter ended
October 31, 1998 compared to $141,273 sales for the three months ended October
31, 1997. Sales of the OEM passenger car system decreased to $115,080 for the
quarter ended October 31, 1998 compared to $167,439 for the comparable period of
the previous year. Sales of the Racing TMS product increased to $16,030 for the
three months ended October 31, 1998 from $5,797 in the three months ended
October 31, 1997. Sales of Industrial TMS systems increased to $9,311 during the
three months ended October 31, 1998 from $6,265 in the comparable period of the
previous year.
Gross margin decreased from 25% for the three months ended October 31, 1997 to
15% for the three months ended October 31, 1998 due to an increasing proportion
of sales from the passenger car market. The Company's passenger car product
lines earn a lower profit margin than the Company's industrial systems.
Expenses increased to $2,119,638 for the three months ended October 31, 1998
from $1,123,922 for the comparable period of the previous fiscal year, due to
increases in depreciation and amortization, general and administration and
marketing expenses. Marketing expenses increased from $236,194 for the three
month period ended October 31, 1997 to $701,136 for the comparable period of
1998 as a result of increased expenditures on point of sale materials, technical
manuals, trade shows, and advertising and promotion relating to the Aftermarket
passenger car product, which the Company began selling in May 1997. Marketing
compensation increased as a result of additional employees hired or assigned to
marketing functions. Marketing travel increased as a result of increased
activity relating to the marketing of the Aftermarket passenger car product line
and participation in trade shows. The creation and operation of the Company's
European marketing subsidiary, SmarTire (Europe) Limited, contributed to the
increase in the above marketing expenses.
General and Administrative expenses increased to $940,033 for the three months
ended October 31, 1998 as compared to $348,819 for the three month period ended
October 31, 1997. The increase was attributed to increases in public relations,
compensation, legal, insurance and travel expenses. Compensation increased from
$156,920 in the three months ending October 31, 1997 to approximately $353,785
for the three months ended October 31, 1998 due to increases in the number of
administrative staff and increases in
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administrative wage levels. Professional fees increased to $127,970 for the
three months ended October 31, 1998 compared to $17,603 for the three months
ended October 31, 1997, as a result of the Company's U.S. securities filings and
Nasdaq listing application, recruitment costs for staff of SmarTire (Europe) and
product approval costs in Europe. The creation and operation of SmarTire
(Europe) also contributed to the increase in general and administrative
expenses.
Interest income of $105,919 resulted from the cash balances generated from the
Company's financing activities in 1998. This compares with interest expense of
$301,488 for the three months ended October 31, 1997.
Research and Development expenses decreased to $274,388 for the three months
ended October 31, 1998 from $377,109 for the three months ended October 31, 1997
due to a reduction in costs for prototype development and technical services and
consulting.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities through revenue from operations and the
placement of securities. Financing has been accomplished in the form of private
placements of common shares and common share purchase warrants; private
placements of convertible debentures; the exercise of incentive stock options;
the exercise of common share purchase warrants; and issuance of common stock in
exchange for satisfaction of liabilities.
The Company's cash position at October 31, 1998 was $6,864,613 as compared to
$8,718,258 at July 31, 1998. This decrease was due to funding of the Company's
operating, financing and investing activities described herein.
The Company used $2,213,757 for operating activities during the three months
ended October 31, 1998 as compared with $1,208,305 for the three months ended
October 31, 1997. This difference was attributed to an increase in the loss for
the period and a $607,991 decrease in non-cash operating working capital,
including a $241,256 decrease in payables and accruals, a $213,303 decrease in
receivables, a $47,608 decrease in supplier prepayments, a $466,714 increase in
inventory and a $160,932 increase in prepaids.
For the three months ended October 31, 1998, the Company received $454,928 from
the exercise of stock options and warrants.
Investing Activities consisted of $94,816 during the three months ended October
31, 1998 for the purchase of capital assets.
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The Year 2000 Issue arises because many computerized systems use two digits
rather than four digits to identify a year. Data-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when information
using Year 2000 dates is processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other
than a date. The effects of the Year 2000 Issue may be experienced before, on or
after January 1, 2000, and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect an entity's ability to conduct normal business operations. It
is not possible to be certain that all aspects of the Year 2000 Issue affecting
the Company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On August 26, 1998, the Company applied for a listing on the NASDAQ Small Cap
Market. The application was approved on December 9, 1998. The Company expects
its common shares to be listed for trading as of the opening of trading on
December 16, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
The following exhibits are filed hereunder:
27 Financial Data Schedule (electronic filing only)
(b) Reports of Form 8-K - Three months ended October 31, 1998:
None.
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SIGNATURES
In accordance with the requirements for the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SMARTIRE SYSTEMS INC.
----------------------------------
(Registrant)
Date December 14, 1998 /s/ ROBERT V. RUDMAN
----------------------------------
Robert V. Rudman
President and
Chief Executive Officer
Date December 14, 1998 /s/ KEVIN A. CARLSON
----------------------------------
Kevin A. Carlson
Chief Financial Officer (Principal
Financial Officer)
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SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
<TABLE>
<CAPTION>
(Unaudited)
October 31, July 31,
1998 1998
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash $ 6,864,613 $ 8,718,258
Receivables 588,890 802,193
Inventory 2,151,400 1,684,686
Prepaids 267,889 106,957
Supplier prepayments 1,419,183 1,466,791
------------ ------------
11,291,975 12,778,885
Capital assets 664,765 614,612
Other assets 633,194 792,612
------------ ------------
$ 12,589,934 $ 14,186,109
============ ============
Liabilities and Shareholders' Equity
Current liabilities
Payables and accruals $ 560,576 $ 801,832
Shareholders' equity
Share capital 31,124,181 30,669,253
Equity component of warrants 4,015,000 4,015,000
Deficit (23,109,823) (21,299,976)
------------ ------------
12,029,358 13,384,277
------------ ------------
$ 12,589,934 $ 14,186,109
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
On behalf of the Board
/s/ Robert V. Rudman Director /s/ John I. Bolegoh Director
-------------------- -------------------
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SMARTIRE SYSTEMS INC.
Consolidated Statements of Loss and Deficit
(Expressed in Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended October 31
1998 1997
------------ ------------
<S> <C> <C>
Revenue $ 693,386 $ 320,774
Cost of goods sold 589,237 240,494
------------ ------------
104,149 80,280
Expenses
Marketing 701,136 236,194
General and administrative 940,033 348,819
Research and development 274,388 377,109
Depreciation and amortization 204,081 161,800
------------ ------------
2,119,638 1,123,922
------------ ------------
Loss from operations 2,015,489 1,043,642
------------ ------------
Other expense (income)
Interest and finance charges (105,919) 301,488
Foreign exchange (99,723) --
------------ ------------
(205,642) 301,488
------------ ------------
Net loss 1,809,847 1,345,130
Deficit, beginning of period 21,299,976 14,607,211
------------ ------------
Deficit, end of period $ 23,109,823 $ 15,952,341
============ ============
Loss per share $ 0.19 $ 0.37
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-2
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SMARTIRE SYSTEMS INC.
Consolidated Statements of Changes in Financial Position
(Expressed in Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended October 31
1998 1997
----------- -----------
<S> <C> <C>
CASH PROVIDED BY (USED IN)
Operations
Net loss $(1,809,847) $(1,345,130)
Depreciation and amortization 204,081 161,800
Changes in non-cash working capital (607,991) (24,975)
----------- -----------
(2,213,757) (1,208,305)
Financing
Convertible debentures -- 1,024,322
Share capital issued 454,928 353,190
----------- -----------
454,928 1,377,512
Investing
Capital assets (94,816) (71,963)
Other assets -- (98,759)
----------- -----------
(94,816) (170,722)
----------- -----------
Increase (decrease) in cash (1,853,645) (1,515)
Cash, beginning of period 8,718,258 69,761
----------- -----------
Cash, end of period $ 6,864,613 $ 68,246
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-3
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SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
(Unaudited)
Three Months ended October 31, 1998 and 1997
1. UNITED STATES ACCOUNTING PRINCIPLES
The Company's financial statements have been prepared in accordance with
Canadian generally accepted accounting principles. A reconciliation of
financial statement amounts from Canadian generally accepted accounting
principles to United States generally accepted accounting principles is as
follows:
(a) Research and development costs
Under Canadian generally accepted accounting principles the expenditures
relating to the acquisition of technology and patent rights may be
deferred and amortized to expense in a rational and systematic manner.
United States generally accepted accounting principles require that all
development costs be charged to expense when incurred.
The effects of the above difference between Canadian and United States
generally accepted accounting principles are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Total assets in accordance with Canadian generally
accepted accounting principles $ 12,589,934 $ 2,943,077
Deferred development costs (34,236) (185,076)
------------ ------------
Total assets in accordance with United States generally
accepted accounting principles $ 12,555,698 $ 2,758,001
============ ============
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Shareholders' equity in accordance with Canadian generally
accepted accounting principles $ 12,029,358 $ (2,958,917)
Deferred development costs (34,236) (185,076)
------------ ------------
Shareholders' equity in accordance with United States
generally accepted accounting principles $ 11,995,122 $ (3,143,993)
============ ============
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net loss in accordance with Canadian generally
accepted accounting principles $ (1,809,847) $ (1,345,130)
Deferred development costs 37,710 37,710
------------ ------------
Net loss in accordance with United States generally
accepted accounting principles $ (1,772,137) $ (1,307,420)
============ ============
</TABLE>
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SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
(Unaudited)
Three Months ended October 31, 1998 and 1997
2. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
financial statement presentation adapted for the current year.
F-5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1.54
<CASH> 6,864,613
<SECURITIES> 0
<RECEIVABLES> 588,890
<ALLOWANCES> 0
<INVENTORY> 2,151,400
<CURRENT-ASSETS> 11,291,975
<PP&E> 1,143,212
<DEPRECIATION> 478,447
<TOTAL-ASSETS> 12,589,934
<CURRENT-LIABILITIES> 560,576
<BONDS> 0
0
0
<COMMON> 35,139,181
<OTHER-SE> (23,109,823)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 693,386
<TOTAL-REVENUES> 693,386
<CGS> 589,237
<TOTAL-COSTS> 589,237
<OTHER-EXPENSES> 1,913,996
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,809,847)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,809,847)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,809,847)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
