<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 April 30, 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)
British Columbia, Canada Not Applicable
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation 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)
As of May 31, 2000, the Company had 14,497,797 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) - APRIL 30, 2000 AND
JULY 31, 1999
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND DEFICIT
(UNAUDITED) - THREE MONTHS AND NINE MONTHS ENDED APRIL 30,
2000 AND APRIL 30, 1999.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - NINE
MONTHS ENDED APRIL 30, 2000 AND APRIL 30, 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
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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 April 30, 2000
for the three month and nine month periods ended April 30, 2000 and April 30,
1999 are attached hereto.
SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
<TABLE>
<CAPTION>
April 30, July 31,
2000 1999
----------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 12,916,575 $ 422,982
Short-term investments 3,305,529 2,062,013
Receivables 93,463 1,104,456
Inventory 30,613 225,514
Prepaid expenses 134,186 128,988
----------------------------------------------------------------------------------
16,480,366 3,943,953
Capital assets 846,952 523,481
----------------------------------------------------------------------------------
$ 17,327,318 $ 4,467,434
==================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 613,081 $ 1,892,503
Shareholders' equity
Share capital 47,980,411 38,640,478
Contributed surplus 2,420,677 --
Equity component of warrants -- 2,420,677
Deficit (33,686,851) (38,486,224)
----------------------------------------------------------------------------------
16,714,237 2,574,931
----------------------------------------------------------------------------------
$ 17,327,318 $ 4,467,434
==================================================================================
</TABLE>
On behalf of the Board
"ROBERT V. RUDMAN" "KEVIN A. CARLSON"
/s/ Robert V. Rudman, Director /s/ Kevin A. Carlson, Director
--------------------- ---------------------
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SMARTIRE SYSTEMS INC.
Consolidated Statements of Income (Loss) and Deficit
(Expressed in Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
April 30, April 30, April 30, April 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 226,963 $ 696,840 $ 816,116 $ 1,920,821
Cost of goods sold 118,438 577,169 431,899 1,583,863
---------------------------------------------------------------------------------------------------------
108,525 119,671 384,217 336,958
---------------------------------------------------------------------------------------------------------
Expenses and other
Marketing 970,426 1,288,400 2,470,958 2,861,463
General and administrative 1,195,164 1,085,818 3,420,980 3,125,255
Engineering, research and
development (note 1) 620,551 7,649,323 1,830,112 8,321,426
Depreciation and amortization 62,901 164,834 185,865 571,553
Foreign exchange loss (gain) (101,000) 82,932 (20,061) 267,417
Interest income (53,034) (49,522) (101,178) (240,943)
---------------------------------------------------------------------------------------------------------
2,695,008 10,221,785 7,786,676 14,906,171
---------------------------------------------------------------------------------------------------------
Income (loss) from operations (2,586,483) (10,102,114) (7,402,459) (14,569,213)
Other income
Gain on sale of investment (note 2) 12,201,832 -- 12,201,832 --
---------------------------------------------------------------------------------------------------------
Net income (loss) 9,615,349 (10,102,114) 4,799,373 (14,569,213)
Deficit, beginning of period (43,302,200) (25,767,075) (38,486,224) (21,299,976)
---------------------------------------------------------------------------------------------------------
Deficit, end of period $(33,686,851) $(35,869,189) $(33,686,851) $(35,869,189)
=========================================================================================================
Basic income (loss) per share $ 0.69 $ (1.02) $ 0.38 $ (1.49)
=========================================================================================================
Fully diluted income
(loss) per share $ 0.64 $ (1.02) $ 0.36 $ (1.49)
=========================================================================================================
</TABLE>
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SMARTIRE SYSTEMS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Nine Months Ended
April 30, April 30,
2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in)
Operating activities
Net income (loss) $ 4,799,373 $(14,569,213)
Items not affecting cash
Special charges in research and product development -- 7,280,299
Depreciation and amortization 185,865 571,553
Remuneration in shares 33,011 --
Gain on sale of investment (12,201,832) --
Changes in non-cash working capital
Receivables 1,010,993 (97,117)
Inventory 194,901 (5,936,943)
Prepaid expenses (5,198) (323,103)
Supplier prepayments -- 1,447,159
Accounts payable and accrued liabilities (1,279,422) 2,913,354
-----------------------------------------------------------------------------------------------------
Net cash used in operating activities (7,262,309) (8,714,011)
-----------------------------------------------------------------------------------------------------
Investing activities
Purchase of capital assets (509,336) (287,939)
Purchase of investment (1,392,330) --
Purchase of short-term investments (3,305,529) --
Redemption of short-term investments 2,062,013 --
Net proceeds on sale of investment 13,649,607 --
-----------------------------------------------------------------------------------------------------
Net cash from (used) in investing activities 10,504,425 (287,939)
-----------------------------------------------------------------------------------------------------
Financing activities
Issuance of common shares 9,251,477 6,033,126
-----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 9,251,477 6,033,126
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 12,493,593 (2,968,824)
Cash and cash equivalents, beginning of period 422,982 8,718,258
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 12,916,575 $ 5,749,434
=====================================================================================================
Supplementary information:
Non-cash investing and financing activities
Purchase of investment through issuance of common shares 55,445 --
Conversion of the equity component of warrants to common shares
upon exercise or contributed surplus upon expiration 2,420,677 1,594,323
Remuneration in shares 33,011 --
</TABLE>
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SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
(Unaudited)
1. SPECIAL CHARGES - WRITE-DOWN OF INVENTORY AND IMPAIRMENT OF LONG-LIVED
ASSETS
During the third quarter of 1999, the Company assessed the future business
prospects and sales for its existing tire pressure monitoring products,
the forecasted sales levels and the introduction of the Company's next
generation of tire pressure monitoring products. The Company's assessment
did not support the carrying value of certain assets, including
inventories (including purchase commitments), production equipment and
deferred development costs associated with the current generation of tire
pressure monitoring systems. The company recorded special charges of
$7,280,299 during the third quarter of 1999 primarily to reduce the
recorded value of these assets to their estimated net realizable values.
2. GAIN ON SALE OF INVESTMENT
During the current fiscal year the Company made an investment in Transense
Technologies plc ("Transense") through the issuance of 25,000 common
shares of the Company valued at $55,445 plus cash of $238,380 in exchange
for 250,000 common shares and 250,000 share purchase warrants of
Transense. The Company exercised the Transense warrants at a cost of
$1,153,950 and sold all its Transense common shares for net cash proceeds
of $13,649,607.
3. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted for the current year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENTS
Statements contained in this Report that are not based on historical facts are
forward-looking statements subject to uncertainties and risks including, but not
limited to, product demand and acceptance, economic conditions, the impact of
competition and pricing, results of financing efforts, and other risks.
OVERVIEW
The following discussion of the financial condition, results of operations and
cash flows of the Company for the three months and nine months ended April 30,
2000 and 1999 should be read in conjunction with the consolidated financial
statements of the Company.
The Company's consolidated financial statements are stated in Canadian Dollars
(CDN$) 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 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, 1999 and the nine months ended April
30, 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
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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>
Nine Months Ended 04/30/00 1.47 1.48 1.51 1.44
Nine Months Ended 04/30/99 1.51 1.46 1.58 1.46
Fiscal Year Ended 07/31/99 1.43 1.51 1.58 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 nine months ended April 30, 2000,
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 APRIL 30, 2000 AND APRIL 30, 1999
Gross revenue for the three months ended April 30, 2000 was $226,963 compared to
$696,840 for the three months ended April 30, 1999. Sales of aftermarket
passenger car systems decreased to $97,954 for the three months ended April 30,
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2000 compared to $433,041 for the comparable period of the prior year. Sales of
OEM passenger car systems decreased to $41,164 for the three months ended April
30, 2000 compared to $80,710 for the three months ended April 30, 1999. Sales of
motorsport TMS decreased to $87,845 for the three months ended April 30, 2000
from $178,659 in the three months ended April 30, 1999. Sales of industrial TMS
systems decreased to $nil during the three months ended April 30, 2000 from
$4,430 in the comparable period of the previous year.
Gross margin on product sales increased to 48% for the three months ended April
30, 2000 from 17% for the three months ended April 30, 1999. The Company's
profit margin on passenger car systems increased in 2000 due to the reduction in
carrying value of inventory in the third quarter of the 1999 fiscal year.
Expenses and other decreased to $2,695,008 for the three months ended April 30,
2000 from $10,221,785 for the three months ended April 30, 1999. Included in
expenses for fiscal 2000 is $430,000 of costs associated with the closure of the
Company's office in Bourne, Massachusetts effective March 31, 2000. Of this
amount, approximately $360,000 relates to payments on termination of a
management agreement. These costs have been allocated on a departmental basis
within the financial statements.
Included in expenses for fiscal 1999 is a special charge to engineering,
research and development expense to reduce the recorded value of certain assets
to their estimated net realizable values. During the third quarter of 1999, the
Company assessed the future business prospects and sales for its existing tire
monitoring products, the forecasted sales levels and introduction of the
Company's next generation of tire pressure monitoring products. The Company's
assessment did not support the carrying value of certain assets, including
inventories (including purchase commitments), production equipment and deferred
development costs associated with the current generation of the pressure
monitoring systems, resulting in a charge of $7,280,299.
Marketing expenses decreased to $970,426 for the three months ended April 30,
2000 from $1,288,400 for the three months ended April 30, 1999 due to reductions
in advertising and travel costs.
General and administrative expenses increased to $1,195,164 for the three months
ended April 30, 2000 as compared to $1,085,818 for the three month period ended
April 30, 1999. The increase was attributed to increases in investor relations
activities, professional fees for legal and other consulting services, and
wages.
Engineering, research and development expenses were $620,551 for the three
months ended April 30, 2000 as compared to $369,024 (before special charges of
$7,280,299) for the three month period ended April 30, 1999. The increase was
due to higher wage costs for additional staff and increased expenditures for
prototype
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development and testing for the Company's next generation of tire pressure
monitoring systems.
Depreciation and amortization expense decreased to $62,901 for the three months
ended April 30, 2000 from $164,834 for the same period in the prior year. The
reduction reflects the write-down of certain assets in the third quarter of the
1999 fiscal year.
The company earned interest income of $53,034 for the three months ended April
30, 2000 as compared to $49,522 for the three months ended April 30, 1999.
The Company recorded a gain on sale of investment of $12,201,832 for the period
ended April 30, 2000. During the current fiscal year, the Company made an
investment in Transense Technologies plc ("Transense") through the issuance of
25,000 common shares of the Company valued at $55,445 plus cash of $238,380 in
exchange for 250,000 common shares and 250,000 share purchase warrants of
Transense. The Company exercised the warrants at a cost of $1,153,950 and
disposed of all of the Transense common shares for net cash proceeds of
$13,649,607. The Company still retains its rights under the September 30, 1999
license agreement with Transense.
NINE MONTHS ENDED APRIL 30, 2000 AND APRIL 30, 1999
Gross revenue for the nine months ended April 30, 2000 was $816,116 compared to
$1,920,821 for the nine months ended April 30, 1999. Sales of aftermarket
passenger car systems were $432,635 for the nine months ended April 30, 2000
compared to $1,198,022 for the nine months ended April 30, 1999. Sales of the
OEM passenger car system decreased to $130,373 for the nine months ended April
30, 2000 compared to $368,239 for the comparable period of the previous year.
Sales of motorsport TMS decreased to $253,108 for the nine months ended April
30, 2000 from $329,014 in the nine months ended April 30, 1999. Sales of
industrial TMS decreased to $nil during the nine months ended April 30, 2000
from $25,546 in the comparable period of the previous year.
Gross margin increased from 18% for the nine months ended April 30, 1999 to 47%
for the nine months ended April 30, 2000. The Company's profit margin on
passenger car systems increased in 2000 due to the reduction in carrying value
of inventory in the third quarter of the 1999 fiscal year.
Expenses and other decreased to $7,786,676 for the nine months ended April 30,
2000 from $14,906,171 for the comparable period of the previous fiscal year.
Included in expenses for fiscal 2000 is $430,000 of costs associated with the
closure of the Company's office in Bourne, Massachusetts effective March 31,
2000. Of this amount, approximately $360,000 relates to payments on termination
of a
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management agreement. These costs have been allocated on a departmental basis
within the financial statements.
Included in expenses for fiscal 1999 is a special charge to engineering,
research and development expense to reduce the recorded value of certain assets
to their estimated net realizable values. During the third quarter of 1999, the
Company assessed the future business prospects and sales for its existing tire
monitoring products, the forecasted sales levels and introduction of the
Company's next generation of tire pressure monitoring products. The Company's
assessment did not support the carrying value of certain assets, including
inventories (including purchase commitments), production equipment and deferred
development costs associated with the current generation of the pressure
monitoring systems, resulting in a charge of $7,280,299.
Marketing expenses decreased from $2,861,463 for the nine month period ended
April 30, 1999 to $2,470,958 for the comparable period of 2000. Increases in
wages and public relations costs were more than offset by decreases in
advertising, travel and market development costs.
General and administrative expenses were $3,420,980 for the nine months ended
April 30, 2000 as compared to $3,125,255 for the nine month period ended April
30, 1999. Increases in investor relations activities and professional fees for
legal, other consulting services, and wages were partially offset by decreases
in travel costs and filing fees.
Engineering, research and development expenses were $1,830,112 for the nine
months ended April 30, 2000 as compared to $1,041,127 (before special charges of
$7,280,299) for the nine months ended April 30, 1999. The increase was due to
higher wage costs for additional staff and increased expenditures for prototype
development and testing for the Company's next generation of tire pressure
monitoring systems.
Depreciation and amortization expense decreased to $185,865 for the nine months
ended April 30, 2000 from $571,553 for the same period in the prior year. The
reduction reflects the write-down of certain assets in the third quarter of the
1999 fiscal year.
The Company earned interest income of $101,178 for the nine months ended April
30, 2000 as compared to $240,943 for the nine months ended April 30, 1999. This
decrease was due to lower average cash balances during the current fiscal year.
The Company recorded a gain on sale of investment of $12,201,832 for the period
ended April 30, 2000. During the current fiscal year, the Company made an
investment in Transense Technologies plc ("Transense") through the issuance of
25,000 common shares of the Company valued at $55,445 plus cash of $238,380 in
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<PAGE> 12
exchange for 250,000 common shares and 250,000 share purchase warrants of
Transense. The Company exercised the warrants at a cost of $1,153,950 and
disposed of all of the Transense common shares for net cash proceeds of
$13,649,607. The Company still retains its rights under the September 30, 1999
license agreement with Transense.
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 April 30, 2000, had an accumulated deficit of $33,686,851.
Shareholders' equity was $16,714,237 and the Company's working capital was
$15,867,285 at April 30, 2000.
The Company's cash and short-term investments at April 30, 2000 were $16,222,104
as compared to $2,484,995 at July 31, 1999. This increase was due to the net of
the Company's operating, financing and investing activities described below.
The Company used $7,262,309 for operating activities during the nine months
ended April 30, 2000. The Company raised $9,251,477 from financing activities
through the issuance of 3,415,250 shares of common stock through a private
placement. The Company used $509,336 for the purchase of capital assets and used
a net amount of $1,243,516 to purchase additional short-term investments. The
Company generated a net amount of $12,257,277 from the purchase and sale of the
investment in Transense Technologies plc.
The Company has not experienced any difficulties as a result of the Year 2000
issue.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Between March 27 and April 3, 2000 the Company issued 1,910,250 shares of common
stock to certain accredited European investors at a price of US $2.00 per share.
Gross proceeds of the placement were CDN$5,575,569 resulting in net proceeds of
CDN $5,195,735 after payment of finder's fees. The offer and sale of these
securities was made in reliance on the exemption from the registration under
section 4(2) of the securities act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) EXHIBITS:
The following exhibits are filed hereunder:
<TABLE>
<S> <C>
11 Statement re: computation of per share earnings
27 Financial Data Schedule (electronic filing only)
</TABLE>
(b) Reports on Form 8-K - Three months ended April 30, 2000:
Form 8-K, filed on April 5, 2000, pursuant to Item 5 attaching press release
regarding private placement
Form 8-K, filed on April 5, 2000, pursuant to Item 5 attaching press release
regarding sale of shares of Transense Technologies plc.
Form 8-K, filed on April 10, 2000, pursuant to a Item 5 attaching press release
regarding corporate restructuring.
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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 June 13, 2000 /s/ ROBERT V. RUDMAN
-------------------------------- -------------------------------------
Robert V. Rudman
President and
Chief Executive Officer
Date June 13, 2000 /s/ KEVIN A. CARLSON
-------------------------------- -------------------------------------
Kevin A. Carlson
Chief Financial Officer (Principal
Financial Officer)
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