<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, 2000.
[ ] 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)
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, 2000, the Company had 14,667,697 shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE> 2
SMARTIRE SYSTEMS INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS -
OCTOBER 31, 2000 (UNAUDITED) AND JULY 31, 2000
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT (UNAUDITED) --
THREE MONTHS ENDED OCTOBER 31, 2000 AND OCTOBER 31, 1999.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -- THREE
MONTHS ENDED OCTOBER 31, 2000 AND OCTOBER 31, 1999.
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
<PAGE> 3
THIS QUARTERLY REPORT ON FORM 10-QSB, INCLUDING EXHIBITS THERETO, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THESE FORWARD-LOOKING STATEMENTS ARE TYPICALLY IDENTIFIED BY THE
WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FORECASTS", "PLANS",
"FUTURE", "STRATEGY", OR WORDS OF SIMILAR MEANING. VARIOUS FACTORS COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING
STATEMENTS. THE COMPANY ASSUMES NO OBLIGATIONS TO UPDATE THESE FORWARD-LOOKING
STATEMENTS TO REFLECT ACTUAL RESULTS, CHANGES IN ASSUMPTIONS, OR CHANGES IN
OTHER FACTORS, EXCEPT AS REGULATED BY LAW.
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, 2000
and for the three month periods ended October 31, 2000 and October 31, 1999 are
attached hereto.
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SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
October 31, July 31,
2000 2000
-------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 12,978,571 $ 14,512,558
Receivables 203,797 114,278
Inventory (note 3) 259,652 265,190
Prepaid expenses 256,263 155,178
-------------------------------------------------------------------------------------------
13,698,283 15,047,204
Capital assets (note 4) 941,447 919,169
-------------------------------------------------------------------------------------------
$ 14,639,730 $ 15,966,373
===========================================================================================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 1,048,028 $ 739,155
Shareholders' equity
Share capital (note 5) 48,370,648 47,980,411
Contributed surplus 2,420,677 2,420,677
Deficit (37,199,623) (35,173,870)
-------------------------------------------------------------------------------------------
13,591,702 15,227,218
-------------------------------------------------------------------------------------------
$ 14,639,730 $ 15,966,373
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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)
<TABLE>
<CAPTION>
Three Months ended October 31, 2000 and 1999
-----------------------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 268,644 $ 294,926
Cost of goods sold 89,756 166,797
-----------------------------------------------------------------------------------------
178,888 128,129
-----------------------------------------------------------------------------------------
Expenses and other:
Marketing 867,995 695,056
General and administrative 1,091,343 992,162
Engineering, research and development 516,352 399,540
Depreciation and amortization 73,735 42,550
Foreign exchange loss (gain) (147,781) 16,226
Interest income (197,003) (22,878)
-----------------------------------------------------------------------------------------
2,204,641 2,122,656
-----------------------------------------------------------------------------------------
Net loss 2,025,753 1,994,527
Deficit, beginning of period 35,173,870 38,486,224
-----------------------------------------------------------------------------------------
Deficit, end of period $ 37,199,623 $ 40,480,751
-----------------------------------------------------------------------------------------
Basic and diluted loss per share $ 0.14 $ 0.18
-----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
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SMARTIRE SYSTEMS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended October 31, 2000 and 1999
---------------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in):
Operating activities:
Net loss $ (2,025,753) $ (1,994,527)
Items not affecting cash:
Depreciation and amortization 73,735 42,550
Changes in non-cash working capital:
Receivables (89,519) 808,914
Inventory 5,538 76,613
Prepaid expenses (101,085) (321,091)
Accounts payable and accrued liabilities 308,873 (957,819)
---------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,828,211) (2,345,360)
---------------------------------------------------------------------------------------------------
Investing activities:
Purchase of capital assets (96,013) (188,939)
---------------------------------------------------------------------------------------------------
Financing activities:
Redemption of short-term investments -- 2,062,013
Issuance of common shares 390,237 4,104,077
---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 390,237 6,166,090
---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,533,987) 3,631,791
Cash and cash equivalents, beginning of period 14,512,558 422,982
---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 12,978,571 $ 4,054,773
===================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
(Unaudited)
Three Months ended October 31, 2000 and 1999
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
These interim consolidated financial statements have been prepared using
generally accepted accounting principles in Canada. The interim financial
statements include all adjustments, consisting of normal recurring
adjustments which in management's opinion are necessary for a fair
presentation of the financial results for the interim periods.
The disclosures in these statements do not conform in all respects to the
requirements of generally accepted accounting principles for annual
financial statements. These statements follow the same accounting
policies and methods of their application as the most recent annual
financial statements. These statements should be read in conjunction with
the Company's most recent annual financial statements.
2. OPERATIONS:
The Company and its subsidiaries develop and market products
incorporating wireless data transmission and processing technologies,
primarily for the automotive markets. The Company's primary product is a
wireless tire monitoring system which it currently markets for use on
passenger vehicles and other pneumatic tire applications. All sales of
its product are made in this industry segment.
The Company has incurred recurring operating losses and has a deficit of
$37,199,623 as at October 31, 2000. The Company will ultimately be
required to generate profitable operations in order to continue as a
going concern.
3. INVENTORY:
<TABLE>
<CAPTION>
-----------------------------------------------------
October 31, July 31,
2000 2000
-----------------------------------------------------
<S> <C> <C>
Raw materials $239,948 $239,852
Finished goods 19,704 25,338
-----------------------------------------------------
$259,652 $265,190
=====================================================
</TABLE>
4. CAPITAL ASSETS:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
October 31, 2000 July 31, 2000
-------------------------------------- ------------------------------------------
Accumulated Net Book Accumulated Net Book
Cost Depreciation Value Cost Depreciation Value
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computers and software $ 512,368 $ 311,203 $ 201,165 $ 509,052 $ 295,010 $ 214,042
Office and shop equipment 1,026,800 362,255 664,545 941,430 312,205 629,225
Leasehold improvements 136,329 60,592 75,737 129,002 53,100 75,902
--------------------------------------------------------------------------------------------------------------------------
$1,675,497 $ 734,050 $ 941,447 $1,579,484 $ 660,315 $ 919,169
==========================================================================================================================
</TABLE>
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<PAGE> 8
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
(Unaudited)
Three Months ended October 31, 2000 and 1999
--------------------------------------------------------------------------------
5. SHARE CAPITAL:
(a) Authorized:
(i) Common shares 199,818,749 without par value
(ii) Preferred shares 20,000 with par value of $1,000 per share
(b) The subscribed and issued share capital of the Company is as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Common
Shares Amount
----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at July 31, 2000 14,497,797 $ 47,980,411
Issued during the period ended October 31, 2000
Exercise of stock options 9,900 29,532
Exercise of warrants 160,000 360,705
----------------------------------------------------------------------------------------------
Balance at October 31, 2000 14,667,697 $ 48,370,648
==============================================================================================
</TABLE>
(c) A summary of fixed stock option transactions and balances during
the period ended October 31, 2000 is as follows:
<TABLE>
<CAPTION>
Weighted
average
Options exercise
Outstanding price
----------------------------------------------------------------------------------------
<S> <C> <C>
Balance at July 31, 2000 997,625 $ 4.58
Options granted 41,000 4.12
Options exercised (9,900) (3.05)
Options forfeited (15,200) (3.05)
----------------------------------------------------------------------------------------
Balance at October 31, 2000 1,013,525 $ 4.64
========================================================================================
</TABLE>
(d) Warrants:
As at October 31, 2000, warrants were outstanding for 309,717
(July 31, 2000 -- 469,717) common shares of the Company. The
warrants entitle the holders to purchase common shares of the
Company at prices ranging from US$1.50 to US$2.00 per share and
expire on various dates until March 31, 2003.
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<PAGE> 9
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
(Unaudited)
Three Months ended October 31, 2000 and 1999
--------------------------------------------------------------------------------
6. RELATED PARTY TRANSACTIONS:
During the period ended October 31, the Company:
(a) Paid $27,303 (1999 - $74,826) for consulting services to a company
in which a director of the Company has significant influence.
(b) Paid $36,032 (1999 - $59,480) for legal fees to a legal firm in
which a director of the Company is a partner.
7. SEGMENTED INFORMATION:
The Company operates in the wireless tire monitoring technology industry.
Management of the Company makes decisions about allocating resources
based on this one operating segment. Substantially all revenue is derived
from sales to North American and European customers. Geographic
information is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Revenue from external customers
2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
North America $ 207,747 $ 172,342
Europe 60,897 122,584
-------------------------------------------------------------------------------
$ 268,644 $ 294,926
===============================================================================
</TABLE>
Major customers, representing 10% or more of total sales, include:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Customer A $ 62,136 $ 49,647
Customer B 31,929 45,499
Customer C 51,162 --
Customer D 50,600 --
-----------------------------------------------------------------------------
</TABLE>
-7-
<PAGE> 10
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
(Unaudited)
Three Months ended October 31, 2000 and 1999
--------------------------------------------------------------------------------
8. UNITED STATES ACCOUNTING PRINCIPLES:
The Company's financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). A
reconciliation of financial statement amounts from Canadian generally
accepted accounting principles to United States generally accepted
accounting principles is as follows:
(a) Loss and deficit:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------------------
(thousands of dollars)
<S> <C> <C>
Net loss in accordance with Canadian GAAP $ 2,026 $ 1,995
Net loss in accordance with United States GAAP 2,026 1,995
Beginning deficit in accordance with United States GAAP 36,379 39,102
----------------------------------------------------------------------------------------------
Ending deficit in accordance with United States GAAP $ 38,405 $ 41,097
==============================================================================================
</TABLE>
-8-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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, 2000 and 1999 should be read in conjunction with the Company's most
recent annual financial statements.
The Company's consolidated financial statements are stated in Canadian Dollars
(CDN$) and are prepared in accordance with Canadian Generally Accepted
Accounting Principles (GAAP), the application of which, in the case of the
Company, conforms in all material respects for the periods presented with United
States GAAP, except as described in note 8 to the interim consolidated financial
statements.
Herein all references to the "$" and "CDN$" refer to Canadian Dollars; and all
references to "US$" refer to United States Dollars.
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<PAGE> 12
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, 2000 and the three months ended
October 31, 2000 and 1999, 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 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.
U.S. Dollar/Canadian Dollar
<TABLE>
<CAPTION>
Average Close High Low
------- ----- ---- ---
<S> <C> <C> <C> <C>
Three Months Ended 10/31/00 1.49 1.53 1.53 1.47
Three Months Ended 10/31/99 1.48 1.47 1.51 1.46
Fiscal Year Ended 7/31/00 1.47 1.49 1.51 1.44
</TABLE>
SmarTire Systems Inc. (together with its subsidiaries, the "Company" or
"SmarTire") is engaged in developing and marketing technically advanced tire
monitoring systems designed for improved vehicle safety, performance,
reliability and fuel efficiency. During the three months ended October 31, 2000,
the Company earned revenues primarily from the sale of tire monitoring systems
for passenger cars and motorsport applications.
The Company, in conjunction with its strategic partners, is focused on
developing and marketing technically advanced tire monitoring systems in
response to an increasing demand from the transportation industry for improved
vehicle safety, performance, reliability and fuel efficiency. After developing
its proprietary tire monitoring technology for application in the industrial and
commercial vehicle markets plus a specialized tire monitoring system for
motorsports, the Company turned to developing its technology for use by the
automotive industry to address the escalating demand for passenger car tire
monitoring systems. 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 tire monitoring systems,
including new passenger and commercial tire monitoring systems. The Company is
also working on the development of new technologies for tire monitoring systems.
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<PAGE> 13
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. The
Company's alliance partner, TRW Inc., is marketing tire monitoring systems to
the original equipment vehicle manufacturers.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 2000 AND OCTOBER 31, 1999
Gross revenue for the three months ended October 31, 2000 was $268,644 compared
to $294,926 for the three months ended October 31, 1999. The decrease in revenue
for the three months ended October 31, 2000 over the three months ended October
31, 1999 was a result of the following:
Sales of aftermarket passenger car systems decreased to $174,578 for the three
months ended October 31, 2000 compared to $199,781 sales for the three months
ended October 31, 1999. Sales of OEM passenger car systems increased to $62,136
for the three months ended October 31, 2000 compared to $49,647 for the three
months ended October 31, 1999. Sales of the motorsport tire monitoring systems
decreased to $31,930 for the three months ended October 31, 2000 from $45,498 in
the three months ended October 31, 1999.
Gross margin on product sales increased to 67% for the three months ended
October 31, 2000 from 43% for the three months ended October 31, 1999. The
increase occurred as the product mix of aftermarket systems sold in 2000 had
higher gross margins than the product mix of aftermarket systems sold in 1999.
The gross margins continue to be significantly affected by the reduction in
carrying value of inventory in the 1999 fiscal year. Gross margins on sales of
aftermarket products would be substantially lower if the write down of inventory
had not occurred.
Expenses and other increased to $2,204,641 for the three months ended October
31, 2000 from $2,122,656 for the three months ended October 31, 1999, as
increases in marketing, general and administration, and engineering, research
and development expenses were partially offset by higher foreign exchange gains
and interest income.
Marketing expenses increased to $867,995 for the three months ended October 31,
2000 from $695,056 for the three months ended October 31, 1999. The increase was
a result of increased expenditures on promotional materials in anticipation of
the launch of the Company's second generation products and increased trade show
expenditures as the Company attended Automechanika, a major European automotive
trade show held once every two years.
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<PAGE> 14
General and administrative expenses increased to $1,091,343 for the three months
ended October 31, 2000 from $992,162 for the three month period ended October
31, 1999. The increase was due to higher investor relations costs as the Company
undertook a comprehensive investor relations program to increase corporate
awareness. Wages also increased due to increases in the number of administrative
staff and higher wage levels. These increases were partially offset by a
decrease in professional fees.
Engineering, research and development expenses were $516,352 for the three
months ended October 31, 2000 as compared to $399,540 for the three month period
ended October 31, 1999. The increase was attributed to increased expenditures on
prototype development including product testing on the next generation products
and higher engineering wages, reflecting increased staff for product development
activities. These increases were partially offset by a decrease in consulting
fees.
The Company earned interest income of $197,003 for the three months ended
October 31, 2000 as compared to $22,878 for the three months ended October 31,
1999. This increase was due to higher average cash balances being maintained
during the current fiscal period.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities primarily through the issuance and sale
of securities. The Company has incurred net operating losses in each year since
inception and, as of October 31, 2000, had an accumulated deficit of
$37,199,623. Shareholders' equity was $13,591,702 and the Company's working
capital was $12,650,255 at October 31, 2000.
The Company's cash position at October 31, 2000 was $12,978,571 as compared to
$14,512,558 at July 31, 2000. This decrease 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, 2000, the Company received proceeds of
$360,705 from the exercise of 160,000 warrants and $29,532 from the exercise of
9,900 stock options. The Company used $96,013 for investing activities during
the three months ended October 31, 2000 for the purchase of capital assets. The
Company used $1,828,211 for operating activities during the three months ended
October 31, 2000. The net loss of $2,025,753 was reduced by non-cash charges of
$73,735 for depreciation and amortization and a $123,807 increase in non-cash
working capital.
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<PAGE> 15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On October 2, 2000, the Company issued 160,000 shares of common stock to Bank
Vontobel, A.G., a non-U.S. entity, upon exercise of warrants previously granted
to it. In exchange for the issuance, the Company received total consideration of
$360,705. These securities were issued under an exemption provided by Rule 903
of Regulation S promulgated under the Securities Act of 1933, as amended. The
common stock issued to this non-U.S. entity was legended to reflect these
restrictions and the Company has the right to refuse to register any transfer of
these securities not made in accordance with Regulation S.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
The following exhibits are filed hereunder:
<TABLE>
<S> <C>
27 Financial Data Schedule (electronic filing only)
11 Computation of loss per share
</TABLE>
(b) Reports of Form 8-K -- Three months ended October 31, 2000:
October 16, 2000 -- News release issued October 16, 2000 regarding supply
agreement with Honeywell
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<PAGE> 16
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, 2000 /s/ ROBERT V. RUDMAN
------------------------- ----------------------------------------
Robert V. Rudman
Director, President and
Chief Executive Officer
(Principal Executive Officer)
Date December 14, 2000 /s/ KEVIN A. CARLSON
------------------------- ----------------------------------------
Kevin A. Carlson
Director, Chief Financial Officer,
Managing Director and Corporate Secretary
(Principal Financial Officer and
Principal Accounting Officer)
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