<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 of
1934 for the quarterly period ended October 31, 1999.
[ ] 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.
(Exact Name of Small Business Issuer as Specified in Its Charter)
<TABLE>
<S> <C>
British Columbia, Canada Not Applicable
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
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)
As of November 30, 1999, the Company had 12,547,447 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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) -
OCTOBER 31, 1999 AND JULY 31, 1999
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
(UNAUDITED) - THREE MONTHS ENDED OCTOBER 31, 1999 AND
OCTOBER 31, 1998.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -
THREE MONTHS ENDED OCTOBER 31, 1999 AND OCTOBER 31,
1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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ITEM 1. FINANCIAL STATEMENTS
The unaudited consolidated financial statements of SmarTire Systems Inc. and its
wholly owned subsidiaries, SmarTire USA Inc., SmarTire (Europe) Limited and
SmarTire Technologies Inc. (the "Company" or "SmarTire") as of October 31, 1999
and for the three month periods ended October 31, 1999 and October 31, 1998 are
attached hereto.
SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
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October 31, July 31,
1999 1999
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<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 4,054,773 $ 422,982
Short-term investments -- 2,062,013
Receivables 295,542 1,104,456
Inventory 148,901 225,514
Prepaid expenses 450,079 128,988
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4,949,295 3,943,953
Capital assets 669,870 523,481
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$ 5,619,165 $ 4,467,434
================================================================================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 934,684 $ 1,892,503
Shareholders' equity
Share capital 42,744,555 38,640,478
Equity component of warrants 2,420,677 2,420,677
Deficit (40,480,751) (38,486,224)
- --------------------------------------------------------------------------------
4,684,481 2,574,931
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$ 5,619,165 $ 4,467,434
================================================================================
</TABLE>
On behalf of the Board
/s/ Robert V. Rudman Director /s/ Kevin A. Carlson Director
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SMARTIRE SYSTEMS INC.
Consolidated Statements of Loss and Deficit
(Expressed in Canadian Dollars)
(Unaudited)
Three Months ended October 31
<TABLE>
<CAPTION>
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1999 1998
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<S> <C> <C>
Revenue $ 294,926 $ 693,386
Cost of goods sold 166,797 589,237
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128,129 104,149
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Expenses and other
Marketing 695,056 701,136
General and administrative 992,162 940,033
Engineering, research and development 399,540 274,388
Depreciation and amortization 42,550 204,081
Foreign exchange loss (gain) 16,226 (99,723)
Interest Income (22,878) (105,919)
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2,122,656 1,913,996
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Net loss 1,994,527 1,809,847
Deficit, beginning of period 38,486,224 21,299,976
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Deficit, end of period $ 40,480,751 $ 23,109,823
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Loss per share $ 0.18 $ 0.19
================================================================================
</TABLE>
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SMARTIRE SYSTEMS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
(Unaudited)
Three Months ended October 31
<TABLE>
<CAPTION>
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1999 1998
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<S> <C> <C>
Cash flows from operating activities
Net loss $(1,994,527) $(1,809,847)
Items not affecting cash
Changes in non-cash working capital
Depreciation and amortization 42,550 204,081
Receivables 808,914 213,303
Inventory 76,613 (466,714)
Prepaid expenses (321,091) (160,932)
Supplier prepayments -- 47,608
Accounts payable and accrued liabilities (957,819) (241,256)
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(2,345,360) (2,213,757)
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Cash flows from financing activities
Redemption of short-term investments 2,062,013 --
Share capital issued 4,104,077 454,928
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6,166,090 454,928
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Cash flows from investing activities
Capital assets (188,939) (94,816)
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(188,939) (94,816)
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Net increase (decrease) in cash 3,631,791 (1,853,645)
Cash, beginning of period 422,982 8,718,258
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Cash, end of period $ 4,054,773 $ 6,864,613
================================================================================
</TABLE>
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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, 1999 and 1998 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$) and are prepared in accordance with Canadian Generally Accepted
Accounting Principles (GAAP), the application of which, in the case of the
Company, conforms in all material respects for the periods presented with United
States GAAP.
Herein all references to "$" 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, 1999 and the three months ended
October 31, 1999 and 1998, 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 below sets forth the number of Canadian Dollars required
under that formula to buy one U.S. dollar. The average rate means the average of
the exchange rates on the last day of each month during the period.
<TABLE>
<CAPTION>
Average Close High Low
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<S> <C> <C> <C> <C>
Three Months Ended 10/31/99 1.48 1.47 1.51 1.46
Three Months Ended 10/31/98 1.53 1.54 1.58 1.50
Fiscal Year Ended 7/31/99 1.43 1.51 1.51 1.37
</TABLE>
SmarTire is engaged in developing and marketing technically advanced Tire
Monitoring Systems (TMS) designed for improved vehicle safety, performance,
reliability and fuel efficiency. During the three months ended October 31, 1999,
the Company earned revenues from the sale of TMS for passenger cars and
motorsport applications.
The Company is focused on developing and marketing technically advanced tire
monitoring products in response to an increasing demand from the transportation
industry for improved vehicle safety, performance, reliability and fuel
efficiency. After developing its proprietary TMS technology for application in
the industrial and commercial vehicle markets plus a specialized tire monitoring
product for motorsports, the Company turned to developing its technology for use
by the automotive industry to address the escalating demand for passenger car
TMS. In support of the tire industry's introduction of the innovative run-flat
or extended mobility tire, the Company developed the SmarTire(TM) system and
established North American and European sales, marketing and distribution
networks. The Company plans to complete the development and launch of its next
generation of TMS products, including a new commercial TMS product.
The Company is promoting the SmarTire(TM) system to both run-flat and
conventional tire aftermarkets worldwide. Additional target markets included in
the Company's plans are commercial, industrial and recreational vehicles as well
as expanded product lines for the motorsport industry. The Company's alliance
partner, TRW Inc., is marketing TMS to the original equipment vehicle
manufacturers of passenger vehicles.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1999 AND OCTOBER 31, 1998
Gross revenue for the three months ended October 31, 1999 was $294,926 compared
to $693,386 for the three months ended October 31, 1998. The decrease in revenue
for the three months ended October 31, 1999 over the three months ended October
31, 1998 was a result of the following:
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Sales of aftermarket passenger car systems decreased to $199,781 for the three
months ended October 31, 1999 compared to $552,965 sales for the three months
ended October 31, 1998. The 1998 revenues reflect initial sales into the
European market after establishing the Company's European subsidiary. Revenue in
1999 remains below the expectations shared with the Company by tire
manufacturers. Sales of OEM passenger car systems decreased to $49,647 for the
three months ended October 31, 1999 compared to $115,080 for the three months
ended October 31, 1998. Sales of the motorsport TMS product increased to $45,498
for the three months ended October 31, 1999 from $16,030 in the three months
ended October 31, 1998. Sales of industrial TMS systems decreased to $nil during
the three months ended October 31, 1998 from $9,311 in the comparable period of
the previous year.
Gross margin on product sales increased to 43% for the three months ended
October 31, 1999 from 15% for the three months ended October 31, 1998. The
Company's profit margin on passenger car systems increased in 1999 due to the
reduction of the carrying value of inventory in the third quarter of the 1999
fiscal year.
Expenses and other increased to $2,122,656 for the three months ended October
31, 1999 from $1,913,996 for the three months ended October 31, 1998, as
increases in general and administrative and engineering, research and
development expenses were partially offset by reduced marketing expenses.
Marketing expenses decreased marginally to $695,056 for the three months ended
October 31, 1999 from $701,136 for the three months ended October 31, 1998.
Increases in wages and public relations costs were more than offset by decreases
in advertising, travel and market development costs.
General and administrative expenses increased to $992,162 for the three months
ended October 31, 1999 as compared to $940,033 for the three month period ended
October 31, 1998. The increase was attributed to increases in investor relations
activities and professional fees for legal and other consulting services.
Engineering, research and development expenses were $399,540 for the three
months ended October 31, 1999 as compared to $274,388 for the three month period
ended October 31, 1998. The increase was attributed to increased expenditures on
prototype development including supplies and materials and higher engineering
wages, reflecting increased staff for product development activities.
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The Company earned interest income of $22,878 for the three months ended October
31, 1999 as compared to $105,919 for the three months ended October 31, 1998.
This decrease was due to lower average cash balances being maintained during the
current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities primarily through the issuance and sale
of securities. The Company has incurred net losses in each year since inception
and, as of October 31, 1999, had an accumulated deficit of $40,480,751.
Shareholders' equity was $4,684,481 and the Company's working capital was
$4,014,611 at October 31, 1999.
The Company's cash position at October 31, 1999 was $4,054,773 as compared to
$422,982 at July 31, 1999. This increase was due to the net of funding of the
Company's operating, financing and investing activities described below.
For the three months ended October 31, 1999, the Company raised $6,166,090 from
financing activities. The Company received net proceeds of $4,104,077 from the
issuance of 1,505,000 shares of common stock through a private placement and
$2,062,013 from the redemption of short-term investments. The Company used
$188,939 for investing activities during the three months ended October 31, 1999
for the purchase of capital assets. The Company used $2,345,360 for operating
activities during the three months ended October 31, 1999. The net loss of
$1,994,527 was reduced by non-cash charges of $42,550 for depreciation and
amortization and a $393,383 decrease in non-cash working capital.
Uncertainty due to the Year 2000 Issue
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-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 the Company's ability to conduct normal business operations.
In 1999 the Company initiated a Year 2000 program to review operating and
business systems to identify any potential problems and to ensure that all key
systems will not be materially affected by the Year 2000 issue. The Company's
program has several phases and is structured to prioritize critical systems and
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minimize business risk. Based on progress to date and plans for the balance of
1999, the Company expects that its business operating systems should be Year
2000 ready in advance of December 31, 1999.
The Company also depends on the Year 2000 readiness of third parties with whom
it conducts business, such as suppliers of goods and services, customers and
governments. As part of its Year 2000 program, the Company is assessing the Year
2000 readiness of key third parties to mitigate the potential risks of the Year
2000 issue.
Because of the uncertainties surrounding the Year 2000 issue, including third
party readiness, notwithstanding the program and steps taken by the Company,
there can be no assurance that Year 2000 issues will not have a material adverse
impact on the Company.
The costs of the Year 2000 program have not been and are not expected to be
material. These costs are expensed as incurred.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The Company issued 1,505,000 shares of common stock at a price of US$2.00 per
share, resulting in net proceeds of US$ 2,799,300 after payment of finder's
fees. The shares were issued to three institutional investors located in Europe
in an unregistered private placement. The offer and sale of these securities was
made in reliance on the exemption from registration under Section 4(2) of the
Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
The following exhibits are filed hereunder:
11 Statement re: computation of per share earnings
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K - Three months ended October 31, 1999:
Form 8-K, filed on October 8, 1999, pursuant to Item 5 attaching press release
regarding private placement.
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SIGNATURES
In accordance with the requirements of 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 15, 1999 /s/ ROBERT V. RUDMAN
------------------------ -----------------------------------
Robert V. Rudman
President and
Chief Executive Officer
Date December 15, 1999 /s/ KEVIN A. CARLSON
------------------------ -----------------------------------
Kevin A. Carlson
Chief Financial Officer (Principal
Financial Officer)
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EXHIBIT 11
SMARTIRE SYSTEMS INC.
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
Oct. 31, 1999 Oct. 31, 1998
-----------------------------------
($000's except per share data)
<S> <C> <C>
Net loss (1,995) $(1,809)
========== =========
Weighted average number
of common shares 11,209,530 9,426,028
========== =========
Basic loss per share $(0.18) $(.019)
========== =========
</TABLE>
The stock options and warrants outstanding are anti-dilutive. Accordingly,
diluted loss per share does not differ from basic loss per share for the years
presented herein.
<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, 1999
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-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<EXCHANGE-RATE> 1.47
<CASH> 4,054,773
<SECURITIES> 0
<RECEIVABLES> 295,542
<ALLOWANCES> 0
<INVENTORY> 148,901
<CURRENT-ASSETS> 4,949,295
<PP&E> 1,119,157
<DEPRECIATION> 449,287
<TOTAL-ASSETS> 5,619,165
<CURRENT-LIABILITIES> 934,684
<BONDS> 0
0
0
<COMMON> 45,165,232
<OTHER-SE> (40,480,751)
<TOTAL-LIABILITY-AND-EQUITY> 5,619,165
<SALES> 294,926
<TOTAL-REVENUES> 294,926
<CGS> 166,797
<TOTAL-COSTS> 166,797
<OTHER-EXPENSES> 2,122,656
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,994,527)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,994,527)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,994,527)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
