U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended December 31, 1998
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ____________ to ____________
Commission File Number 33-17598-NY
THE TIREX CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 22-2824362
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
740 St. Maurice, Montreal, Quebec H3C 1L5
(Address of Principal executive offices)
(514) 878-0727
(Issuer's telephone number, including area code)
__________________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of __________________:_____________ shares
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
The Tirex Corporation
(A Development Stage Company)
------------
TABLE OF CONTENTS
PART I
Item 1 - Financial Information (unaudited) Page
----
The Tirex Corporation and Subsidiaries
Consolidated Balance Sheets as of
December 31, 1998.......................................... 3
Consolidated Statements of Operations
for the three and six month periods
ended December 31, 1998 and 1997........................... 4
Consolidated Statements of Cash Flows
for the six-month periods
ended December 31, 1998 and 1997........................... 5
Notes to Financial Statements (unaudited)...................... 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 18
PART II
Item 2 - Changes in Securities and Use of Proceeds...................... 31
Item 3 - Defaults Upon Senior Securities................................ 34
Item 4 - Submission of Matters
to a Vote of Security Holders...............................
Item 6 - Exhibits and Reports on Form 8-K............................... 34
------------
The financial statements are unaudited. However, the management of the
issuer believes that all necessary adjustments (which include only normal
recurring adjustments) have been reflected to present fairly the financial
position of registrant at December 31, 1998 and the results of its operations
and changes in its financial position for the three and six month periods ended
December 31, 1998 and 1997 and for the period from inception (July 15, 1987).
2
<PAGE>
The Tirex Corporation
A Development Stage Company
Consolidated Balance Sheet
as at December 31
Assets
(Unaudited) (audited)
1998 June 30 1998
---- ------------
$ $
Current Assets
Cash and cash equivalents 129,699 398,971
Account receivables 150,000
Notes receivable 334,984 225,969
Sales taxes receivable 54,374 133,868
R&D tax credit receivable 1,105,651 855,818
Prepaid expenses and deposits 488,214 618,266
--------- ---------
2,262,922 2,232,892
Property and equipment, at cost, net of
accumulated depreciation of $27,757 1,535,011 977,288
Other assets
Licence 19,602
Prepaids 239,880 445,677
Organization costs net of accumulated amortization
of $ 826 515 536
Deferred financing fees 119,981 158,255
--------- ---------
379,978 604,468
========= =========
4,177,911 3,814,648
========= =========
Liabilities and Stockholders' Equity
Current liabilities
Notes payable 328,346 407,926
Accrued liabilties 1,466,021 1,274,150
Deposits payable 34,500 143,500
Current portion of long-term debt 34,120 34,118
----------- -----------
1,862,987 1,859,694
Other liabilities
Long term deposits 128,000
Loan from investor 93,516
Long-term debt (net of current portion 551,170 465,894
Convertible subordinated debentures
long-term portion 1,035,000 1,035,000
----------- -----------
1,807,686 1,500,894
----------- -----------
3,670,673 3,360,588
----------- -----------
Stockholders' equity
Common stock, $.001 par value, authorized
120,000,000 shares, issued and outstanding
78,378,307 shares 78,378 63,642
Class A stock; .001 par value, authorized 5,000,000
shares; issued and outstanding, 0 shares
Additional paid-in capital 12,539,943 10,258,116
Deficit accumulated during the development stage (12,364,501) (10,051,483)
Unrealized gain on foreign exchange 253,418 183,785
----------- -----------
507,238 454,060
4,177,911 3,814,648
=========== ===========
3
<PAGE>
The Tirex Corporation
A development stage corporation (unaudited)
<TABLE>
<CAPTION>
Consolidated Statement of Operations (unaudited)
------------------------------------ ------------------------------------ ----------------
Three months Six months Three months Six months Cumulative from
ending ending ending ending March 26, 1993
December 31, December 31, December 31, December 31, to December 31,
1998 1998 1997 1997 1998
----------------------------- --------------------------------- ----------------
1998 1998 1997 1997 1998
---- ---- ---- ---- ----
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
Revenues 300,000 300,000 0 0 1,234,725
Cost of Sales 130,676 130,676 0 0 941,518
----------- ----------- ----------- ----------- -----------
Gross profit 169,324 169,324 0 0 293,207
----------- ----------- ----------- ----------- -----------
Operations
General and administrative 443,757 1,890,805 430,948 917,513 4,847,145
Depreciation and amortization 84,657 410,793 77 4,786 434,821
Research and development 1,750 13,590 179,968 358,856 6,059,690
----------- ----------- ----------- ----------- -----------
Total Expense 530,164 2,315,188 610,993 1,281,155 11,341,656
----------- ----------- ----------- ----------- -----------
Loss before other income and expenses (360,840) (2,145,864) (610,993) (1,281,155) (11,048,449)
----------- ----------- ----------- ----------- -----------
Other income (expenses)
Interest expense (34,062) (54,097) (3,358) (3,998) (118,103)
Interest income 0 0 0 0 2,540
Income from stock options 0 0 0 0 10,855
Loss on disposal of equipment 0 0 0 0 (2,240)
Gain (Loss) on foreign exchange (17,902) (121,672) 19,012 15,353 (160,363)
----------- ----------- ----------- ----------- -----------
(51,964) (175,769) 15,654 11,355 (267,311)
----------- ----------- ----------- ----------- -----------
Net Loss (412,804) (2,321,633) (595,339) (1,269,800) (11,315,760)
=========== =========== =========== =========== ===========
Net loss per common share (0.03) (0.03) (0.03) (0.03) (0.61)
=========== =========== =========== =========== ===========
Weighted average shares of common
stock outstanding 72,400,002 72,400,002 38,607,926 38,607,926 18,286,063
=========== =========== =========== =========== ===========
</TABLE>
4
<PAGE>
The Tirex Corporation
A Development Stage Company
Consolidated statement of cash flow (unaudited)
As of December 31,
Six months ended
December 30,
-------------------------
1998 1997
---- ----
$ $
Operating activities
Net loss 2,321,633 1,269,800
---------- ----------
Adjustments to reconcile net loss to net cash
used in operating activities:
depreciation and amortization 410,793 4,786
Proceeds from grants 446,571 433,539
stock issued in exchange for services 996,255 403,049
stock issued in conversion and pmts 853,737
Unrealized gain on foreign exchange 69,633
Change in assets & Liabilities
increase in Notes receivable (109,015) (30,000)
decrease Sales tax receivables 79,494 21,192
increase in Tax credit receivable (249,833) (225,000)
increase in Prepaid expenses (18,972)
increase in Accrued expenses 240,878 56,362
increase in Loan payable 64,685
increase in Deposit payable 19,000
increase in Accounts receivables (150,000)
increase in Loan director 93,516 39,727
---------- ----------
Total Adjustments 2,765,714 684,683
Net cash operating Activities 444,081 (585,117)
---------- ----------
Investing Activities
Property & equipment (673,279) (256,160)
licence (19,602)
---------- ----------
Net cash investing activities (692,881) (256,160)
Financing activities
Proceeds from notes payables 71,070
Repayment of notes payables (133,340) (98,551)
Proceeds from loan payable 48,131 237,081
Proceeds from deposits payable 483,500
Repayment of long term debt (6,333)
---------- ----------
Net cash financing activities (20,472) 622,030
---------- ----------
Net Decrease in cash (269,272) (219,247)
Cash beginning of period 398,971 155,037
---------- ----------
Cash end of period 129,699 (64,210)
========== ==========
5
<PAGE>
The TIREX CORPORATION INC. AND SUBSIDIARY
(A Developmental Stage Company)
Notes to Consolidated Financial Statements
Note 1 - Summary of Accounting Policies
Change of Name
In June, 1998 the Company changed its name from Tirex America, Inc.
to The Tirex Corporation.
Nature of Business
The Tirex Corporation (the "Company") was incorporated under the
laws of the State of Delaware on August 19, 1987. The Company
originally planned to provide comprehensive health care services to
persons with Acquired Immune Deficiency Syndrome, however due to its
inability to raise sufficient capital it was unable to implement its
business plan. The Company had been inactive since it ceased
operations in November 1990.
In the Fall of 1992, a group of shareholders lead by Edward Mihal
and including 16 other shareholders acting in concert with Mr. Mihal
along with Patrick McLaren and George Fattell, individuals without
any prior affiliation with the Company, became interested in the
Company as an entity potentially suitable for merger or similar
transaction with an operating private company seeking to become
public in this manner. This group approached the Company's incumbent
management with a proposal whereby they agreed to assume management
control, make all delinquent filings with the Securities and
Exchange Commission, restore service by transfer agent and pay all
other expenses required to enable the Company to begin trading its
stock and completing a merger or similar transaction.
In furtherance of the foregoing, on November 5, 1992, J. Richard
Goldstein, MD, Peter R. Stratton and Robert Kopsack resigned from
their positions as officers and directors of the Company. From June
1989 until the date of such resignations, Dr. Goldstein was the
Company's President and Chief Executive Officer, Mr. Stratton was
Vice-President, Chief Operating Officer, Secretary and Treasurer,
and Mr. Kopsack was the Company's Vice President. In resigning their
positions, Dr. Goldstein and Messrs. Stratton and Kopsack
acknowledged that they acceded to their respective positions and had
received compensation in consideration of their representations that
they would, and their best efforts to, implement a business plan for
the Company which would encompass, among other things, the
establishment and operating of skilled nursing care facilities for
patients with Acquired Immune Deficiency Syndrome. Compensation
received by Dr. Goldstein and Messrs. Stratton and Kopsack consisted
of cash payments, stock issuances, and the grants of stock options
and/or stock purchase warrants. As part of their resignations, Dr.
Goldstein and Messrs. Stratton and Kopsack each executed releases
whereby the Company was released and forever discharged from all
debts, obligations, covenants, agreements, contracts, claims or
demands in law or in equity, including but not limited to any stock
options or stock purchase warrants granted or promised to them,
which against the Company, each ever had, or thereafter may have for
or by reason of any matter, cause or thing up to and through
November 5, 1992. Each of Dr. Goldstein and Messrs. Stratton and
Kopsack also acknowledged the termination and rescission of their
respective employment agreements with the Company to such persons as
the Company should direct for the purpose of satisfying certain of
the Company's obligations to third
6
<PAGE>
parties. In consideration of the resignations and releases executed
by Dr. Goldstein and Messrs. Stratton and Kopsack, Edward Mihal and
each of the sixteen shareholders of the Company acting in concert
with Mr. Mihal executed and delivered reciprocal personal releases
to and on behalf of Dr. Goldstein and Messrs. Stratton and Kopsack.
In connection with the foregoing resignations, Dr. Goldstein and
Messrs. Stratton and Kopsack appointed, as an interim board of
directors, Patrick McLaren, Gerge Fattell, and Edward Mihal (the
"Interim Management"). It was the goal of the Interim Management to
find suitable acquisition and/or development by the Company. On
December 29, 1992, Edward Mihal resigned his position as an officer
and a director of the Company and Louis V. Muro was appointed as an
officer and director of the Company to fill the vacancy created
thereby.
Reorganization
On March 26, 1993, the Company entered into an acquisition agreement
(the "Acquisition Agreement") with Louis V. Muro, Patrick McLaren
and George Fattell, officers and directors of the Company
(collectively the "Sellers"), for the purchase of certain technology
owned and developed by the Sellers (the "Technology") and extensive
and detailed plans (the "Business Plan") for a business which will
engage in the exploitation of the Technology. The Technology will be
used to design, develop and construct a prototype machine and
thereafter a production quality machine for the cryogenic
disintegration of used tires. Pursuant to the Acquisition Agreement,
Sellers agreed to assign, transfer and sell to the Company all of
their right, title and interest in the Technology and Business Plan
in exchange for fifteen million nine hundred thousand (15,900,000)
shares of the Company's common stock, $.001 par value per share (the
"Sellers' Stock") of which eleven million nine hundred thousand
(11,900,000) shares were put into escrow. The Business Plan and
Technology were developed by the Sellers prior to their affiliation
or association with the Company. The Sellers were engaged as the
Company's officers and directors for the purpose of implementing the
Business Plan with the Technology or such other technology which
they believed could reasonably satisfy the requirements of the
Business Plan.
Effective with the March 26, 1993, closing date of the Acquisition
Agreement (the "Closing Date"), the Company authorized an increase
in the number of directors of the Company from three to six.
Pursuant thereto, the Company appointed Messrs. Kenneth Forbes,
Nicholas Campagna, and Alfred J. Viscido to fill the vacancies
created in the size of the board. As an inducement to Messrs.
Forbes, Campagna and Viscido to join the board of directors, the
Company issued 250,000 shares of its common stock, $.001 par value
to each of them. The Acquisition Agreement also provided for stock
issuances in the form of finders fees. Pursuant thereto, the Company
issued 300,000 and 1,700,000 shares of its common stock, $.001 par
value, to Joseph Territo and Edward Mihal, respectively.
Effective March 24, 1994, George Fattell resigned as an officer and
director of the Company. Per the terms of his resignation any future
shares of the Company's common stock issued to Mr. Fattell are to be
equally distributed to Louis V. Muro and Patrick McLaren.
Effective January 18, 1995, Louis V. Muro and Patrick McLaren resign
their positions as officers and directors of the Company. In
addition to their resignations they acknowledged that none of the
requisite performance levels for the release of any of the
11,900,000 escrow shares had been met and renounced all rights to
such shares.
7
<PAGE>
Developmental Stage
At June 30, 1998 the Company is still in the development stage. The
operations consist mainly of raising capital, obtaining financing,
developing equipment, obtaining customers and supplies, installing
and testing equipment and administrative activities.
Basis of Consolidation
The consolidated financial statements include the consolidated
accounts of The Tirex Corporation and its subsidiaries and Tirex
Canada, Inc.. Tirex Canada, Inc. is held 49% by the Company and 51%
by the shareholders of the Company. The shares owned by the
shareholders are held in escrow by the Company's attorney and are
restricted from transfer . All intercompany transactions and
accounts have been eliminated in consolidation. Cash and Cash
Equivalents For purposes of the statement of cash flows all
certificates of deposits with maturities of 90 days or less, were
deemed to be cash equivalents
Property and Equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed provided using the
straight-line method over the estimated useful lives of five years.
Repairs and maintenance costs are expensed as incurred while
additions and betterments are capitalized. The cost and related
accumulated depreciation of assets sold or retired are eliminated
from the accounts and any gain or losses are reflected in earnings.
Estimates
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Adoption of Statement of Accounting Standard No. 123
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 encourages, but does not required companies to
record at fair value compensation cost for stock-based compensation
plans. The Company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date
of the grant over the amount an employee must pay to acquire the
stock. The difference between the fair value method of SFAS-123 and
APB 25 is immaterial.
8
<PAGE>
Organization Costs
Organization costs are being amortized on a straight-line basis over
a sixty month period.
Adoption of Statement of Accounting Standard No. 128
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128). SFAS 128 changes the standards for
computing and presenting earnings per share (EPS) and supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share."
SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all
entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. SFAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim
periods. This Statement requires restatement of all prior-period EPS
data presented.
As it relates to the Company, the principal differences between the
provisions of SFAS 128 and previous authoritative pronouncements are
the exclusion of common stock equivalents in the determination of
Basic Earnings Per Share and the market price at which common stock
equivalents are calculated in the determination of Diluted Earnings
Per Share.
Basic earnings per common share is computed using the weighted
average number of shares of common stock outstanding for the period.
Diluted earnings per common share is computed using the weighted
average number of shares of common stock and dilutive common
equivalent shares related to stock options and warrants outstanding
during the period.
The adoption of SFAS 128 had no effect on previously reported loss
per share amounts for the year ended June 30, 1997. For the years
ended June 30, 1998 and 1997, primary loss per share was the same as
basic loss per share and fully diluted loss per share was the same
as diluted loss per share. A net loss was reported in 1998 and 1997,
and accordingly, in those years the denominator was equal to the
weighted average outstanding shares with no consideration for
outstanding options and warrants to purchase shares of the Company's
common stock, because to do so would have been anti-dilutive. Stock
options for the purchase of 9,212,673 and 2,000,000 shares at June
30, 1998 and 1997, respectively, and warrants for the purchase of
2,000,000 shares at June 30, 1998 and 1997 were not included in loss
per share calculations, because to do so would have been
anti-dilutive.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, which
principally include cash, note receivable, accounts payable and
accrued expenses, approximates fair value due to the relatively
short maturity of such instruments.
The fair value of the Company's debt instruments are based on the
amount of future cash flows associated with each instrument
discounted using the Company's borrowing rate. At June 30, 1998 and
1997, respectively, the carrying value of all financial instruments
was not materially different from fair value.
9
<PAGE>
Income Taxes
The Company has net operating loss carryovers of approximately $4
million as of June 30, 1998, expiring in the years 2004 through
2011. However, based upon present Internal Revenue regulations
governing the utilization of net operating loss carryovers where the
corporation has issued substantial additional stock, most of this
loss carryover may not be available to the Company.
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes, effective July 1993.
SFAS No.109 requires the establishment of a deferred tax asset for
all deductible temporary differences and operating loss
carryforwards. Because of the uncertainties discussed in Note 2,
however, any deferred tax asset established for utilization of the
Company's tax loss carryforwards would correspondingly require a
valuation allowance of the same amount pursuant to SFAS No. 109.
Accordingly, no deferred tax asset is reflected in these financial
statements.
The Company has research and development investment tax credits
receivable from Canada and Quebec amounting to $1,105,651.
Foreign Exchange
Assets and liabilities of the Company which are denominated in
foreign currencies are translated at exchange rates prevailing at
the balance sheet date. Revenues and expenses are translated at
average rates throughout the year.
Note 2 - Going Concern
As shown in the accompanying financial statements, the Company
incurred a net loss of $2,232,136 for the six-month period ended
December 31, 1998.
In March 1993, the Company, which was still in the development
stage, developed a new Business Plan. The Company is in the process
of constructing a production quality machine for the cryogenic
disintegration of used tires. The Company also plans to recycle used
tires using ambient temperature disintegration equipment. At
December 31, 1998, the Company is still in the development stage.
Fees generated from tipping and culling were insufficient to fund
the current operations of the Company. All of these factors create
an uncertainty about the Company's ability to continue as a going
concern.
The Company is currently in the process of formulating a plan to
obtain capital through an additional public offering, which will
provide working capital while the Company constructs its cryogenic
disintegration machine. The ability of the Company to continue as
going concern is dependent on the success of the plan. The financial
statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
10
<PAGE>
Note 3 - Financing Costs
During the six months ended December 31, 1998 the Company incurred
$50,006 in connection with debt financing . Amortization of
financing costs capitalized as of June 30, 1998 amounted to $38,274
and this figure is included in the figure of $143,130 for
depreciation and amortization for the three-month period ended
September 30, 1998.
Note 4- Property and Equipment
Financing Costs
As of December 31, 1998 plant and equipment consisted of the
following:
Furniture, fixtures and equipment $ 98,915
Leasehold improvements 142,817
Construction in progress 1,321,036
----------
1,562,765
Less accumulated depreciation and amortization 27,757
----------
$1,535,011
==========
Depreciation and amortization expense charged to operations was
$27,757 for the six months ended December 31 1998.
Note 5- Notes Payable
The Company has available a $700,000 line of credit which bears
interest at the Canadian prime rate plus 1.25% . At December 31,
1998, $328,347 was outstanding against this line of credit. The note
is collateralized by the personal guarantees of certain officers,
certain equipment of Tirex Canada and guaranteed by The Tirex
Corporation. The loan is guaranteed at a rate of 80% by the Societe'
de Developpement industriel du Quebec and is repayable from the
research and developmental investment tax credits received. The
Canadian prime rate of interest at June 30, 1998 was 8%.
Note 6- Long-Term Debt
1998
----
Federal Office of Regional Development (Ford-Q)
Loan payable under the Industrial Recovery Program
amounting to 20% of certain eligible costs
incurred (maximum loan $500,000) repayable in
annual installments over a forty-eight month
period following completion of the project,
unsecured and non-interest bearing. (If the
Company defaults the loans become interest bearing) $341,180
Loans payable under the Program for the
Development of Quebec SME's based on 50% of
approved eligible costs for the preparation of
market development studies in certain regions.
Loans are unsecured and non-interest bearing.
(If the Company defaults the loans become
interest bearing).
11
<PAGE>
- Loan payable over five years commencing
June 2000 due June 2004 $ 64,823
- Loan payable over five years, commencing
June 2001, due 2005 $ 60,187
- Loan payable in amounts equal to 1% of the annual
sales in India through June 30, 2002 $ 13,647
- Loan payable in amounts equal to 1% of annual
sales in Spain through June 30, 2007 $ 13,647
- Loan payable in amounts equal to 11/2% of annual
sales in Spain and Portugal through June 30, 2004 $ 64,823
--------
$558,307
Less: current portion 34,118
--------
$524,189
========
Minimum principal repayments of each of the next five years as
follows:
1999 $ 34,118
2000 90,415
2001 129,517
2002 168,617
2003 32,581
Thereafter 44,764
--------
$500,012
========
12
<PAGE>
Note 7 - Convertible Subordinated Debentures
Convertible subordinated debentures consist of the following:
-------------------------------------------------------------------
Type A Type B
-------------------------------------------------------------------
Balance as of $500,000 $500,000
September 30, 1998
-------------------------------------------------------------------
Interest Rate 10% 10%
--------------------------------------------------------------------
Maturity Earlier of (i) - the Earlier of (i)- two
completion of a public years from the issue
offering yielding gross date or (ii) - the
proceeds of not less completion of a public
than $8,000,000, (ii) - offering of its
the closing on financing securities by the Maker
in excess of $4,500,000,
(iii)- December 31, 1999
--------------------------------------------------------------------
Redemption rights If not converted, the If not converted, the
holder may require the holder may require the
Company to redeem at any Company to redeem at
time after maturity at a any time after maturity
premium of 125% of the at a premium of 125% of
principal amount plus the principal amount
interest plus interest
--------------------------------------------------------------------
Conversion ratio 75% of the average of $0.20 per share
the closing bid price
of the common stock as
reported by NASDAQ during
the five-day period
preceding the Company's
receipt of a notice of
conversion by a debenture
holder.
--------------------------------------------------------------------
Warrants As part of the debenture
package, the Company
issued 2,000,000 warrants
to purchase a like number
of shares of common stock
at $.001 per share.
--------------------------------------------------------------------
Note 8 - Related Party Transactions
On July 22, 1994, 3,000,000 shares of The Tirex Corporation, Inc.
were released from escrow and issued to Louis V. Muro and Patrick
McLaren (1,500,000 shares each) in accordance with the terms and
provisions of the Acquisition Agreement dated March 26, 1993.
13
<PAGE>
The Company entered into various employment agreements with the
executive officers and general Counsel whereby the Company will pay
a total of $565,000 a year plus benefits. All of the employment
agreements call for terms ranging from 3 - 8 years. In addition to
the employment services, the officers agree not to compete with the
Company for the two year period following the termination of
employment. If an officer is terminated other than for cause or for
"good reason", the terminated officer will be paid twice the amount
of their base salary for twelve months.
Note 8 - Related Party Transactions
Included in accrued expenses at September 30, 1998 is $111,658 of
salary to officers which the company subsequently issued common
stock for.
At December 31, 1998, the Company had notes receivable from various
officers in the amount of $74,405. One note in the amount of $70,405
bears interest at an annual rate of 8% above prime through September
1998 and 2% above prime through September 1999 (the due date).The
remaining notes are non-interest bearing and will be repaid during
the year ending June 30, 1999.
At September 30, 1998 the Company had a note receivable for $30,000
from a Company in which a director has a financial interest. The
note bears interest at prime plus 2% and is due on demand.
Deposits payable included an amount of $118,500 which are payable to
companies which are owned by a director of the Company.
Note 9 - Common Stock
During the six months ended December 31, 1998, the Company issued
common stock to individuals in exchange for services performed
totaling $1,508,196. Included in these amounts are payments to
officers of the Company in exchange for financial accommodations and
other services rendered without benefit of cash payment in the
amount of $1,115,696. The dollar amounts assigned to such
transactions
14
<PAGE>
have been recorded at the fair value of the services received,
because the fair value of the services received was more evident
than the fair value of the stock surrendered.
Note 10 - Stock Option
On May 19, 1995, the Company sold to a director of the Company an
option to purchase 20,000 shares of Cumulative Convertible Preferred
Stock at an exercise price of $10 per share, exercisable during the
two year period beginning May 19, 1995, and ending May 18, 1997. The
director paid $20,000 for the option. The terms of the Preferred
Stock purchasable under the option call for cumulative cash
dividends at a rate of $1.20 per share and conversion into shares
2,000,000 of common stock. The conversion to common stock ratio
varies depending on when the conversion is made. At May 29, 1997,
the exercise period was extended until May 18, 1999.
Compensatory Common Stock Options
Compensation
For the Year Ended
Number of Shares June 30, 1998
---------------- ------------------
Balance July 1, 1998 - $
Stock options granted during
the year ended June 30, 1998 15,712,673 2,185,413
Stock options exercised during
the year ended June 30, 1998 (6,500,000) (948,500)
---------- ----------
Balance at June 30, 1998 9,212,673 $1,236,913
========== ==========
The options expire at various dates through April 2000. The exercise
price ranges from .001 to .40 with the weighted average exercise
price equal to .1177.
Note 12 - Acquisition by Merger of RPM Incorporated
During November 1997, the Company entered into a merger agreement
with RPM Incorporated ("RPM"). The Company acquired all of the
assets and liabilities of RPM by acquiring all of the outstanding
common stock of RPM in exchange for common stock in the Company on a
unit for unit basis. RPM ceased to exist following the exchange.
15
<PAGE>
Note 12 - Acquisition by Merger of RPM Incorporated
The assets and liabilities acquired by the Company from RPM consist
of the proceeds from the sale of debentures as well as the
debentures of $535,000. The financing fees on the issuance of the
debentures totaling $61,755 is included in the statement of
operations for the year ended June 30, 1998. A total of 535,000
shares were issued as a result of the merger valued at $16,050. A
total of $16,050 was received for this stock.
The Company entered into an additional agreement with the former
shareholders of RPM for a consulting agreement for a period of 5
years expiring in June, 2002. In exchange for this consulting
agreement, 3,000,000 shares of common stock were issued valued at
$240,000. Other than the consulting agreement and the issuance of
the debentures, the Company was inactive.
For accounting purposes the Company recorded the merger as a
purchase and not as a pooling of interests.
Note 13 - Government Assistance
The Company receives financial assistance from Revenue Canada and
Revenue Quebec in the form of scientific research tax credits.
During the year ended June 30, 1998, the Company received
approximately $670,000 which has been recorded as paid in capital.
No additional amounts were received during the six-month period
ended December 31, 1998.
Note 14 - Commitments
The Company leases office space under an agreement for a term from
July 1, 1997 to June 30, 2000. The Company has an option to renew
this lease for an additional three years. Minimum rentals in each of
the next three years is as follows:
June 30, Amount
-------- ------
1999 $18,967
2000 18,967
-------
$37,934
=======
The Company also leases warehouse space at an annual minimum rent of
$82,000 for the first year, $169,000 for the second year and
$211,000 per year for the third through the fifth year. The lease
expires 2003. The Company is also responsible for its proportionate
share of any increase in real estate taxes and utilities. Under the
terms of the lease, the Company is required to obtain adequate
public liability and property damage insurance. The minimum future
rental payments under this lease are as follows:
June 30, Amount
-------- ------
1999 $108,800
2000 176,900
2001 204,100
2002 204,100
2003 170,100
--------
$864,000
========
16
<PAGE>
Rental expense for the year ended June 30, 1998 amounted to $55,532.
Note 15 - Subsequent Event
Subsequent to the year end, the Company received an additional
$55,000 Program for the Development of Quebec SME's.
Note 16 - Warrants
Note 6 and note 10 address stock warrants and options that are
outstanding at June 30, 1998. The Company also has warrants and
options outstanding to purchase 843,750 shares of common stock which
expire at various dates through July 1999. These rights can be
exercised at various rates from .125 through .40
17
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is management's discussion and analysis of significant
factors which have affected the Company's financial position and operations
during the three and six months periods ended December 31, 1998. This discussion
also includes events which occurred subsequent to the end of such quarter and
contains both historical and forward- looking statements. When used in this
discussion, the words "expect(s)", "feel(s)","believe(s)", "will", "may",
"anticipate(s)" "intend(s)" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected.
The Company is in the very early stages of the business of manufacturing
its patented cryogenic scrap tire recycling equipment (the "TCS-1 Plant"). It is
also currently in the process of establishing and initiating operations in a
second business segment which will involve owning and operating, directly or
indirectly, on exclusive or joint venture bases, product manufacturing plants
which will manufacture finished products out of recycled rubber crumb. The first
of such operations will involve the establishment of a rubber mat molding and
flocking plant at the Company's Montreal facility for the production of rubber
floor mats. Management presently estimates that commencement of both full-scale
commercial manufacture of TCS-1 Plants and the commencement of rubber mat
molding operations will occur in April of 1999.
The Company will be required to make new capital investments and
expenditures over the next twelve months in connection with the establishment at
the Company's Montreal facility of rubber mat molding operations. Management
estimates that costs for the entire project will aggregate to approximately
$925,000. Because of the lengthy delays in the commencement of commercial
operations, the Company has also had to, and may in the near future be forced to
continue to, cover its overhead costs from sources other than revenues from
operations. Subsequent to the period covered by this Report, as at January 15,
1999, the Company estimated that overhead costs, which will be incurred prior to
the generation of revenues adequate to cover them, will aggregate to
approximately $250,000.
Liquidity and Capital Resources
The activities of the Company since its formation in 1987 and the
inception of its current business in 1993 have been financed by sources other
than operations. Such financing was principally provided by the sale of
securities in private transactions, including three private placements to a
limited number of accredited investors, which the Company completed on May 11,
1998, and which yielded aggregate net proceeds of $2,063,795 (see "The Company -
Material Financing Activities"). In total, funds raised by the Company from
private sales of its securities are as follows:
Proceeds From
Year Ended Sales of
June 30th Securities
---------- -------------
1998 $2,063,795
1997 345,391
1996 80,872
1995 22,316
1994 237,430
1993 76,055
1990 80,812
1989 77,000
18
<PAGE>
During the fiscal years ended June 30, 1997 and June 30, 1998 and the
interim six-month period ended December 31, 1998, the Company received
additional funding from Quebec and Canadian government grants, loans, loan
guarantees and refundable tax credits for purposes of completing the development
of the TCS-1 Plant and for the international marketing of such plants (see Item
1. of this Report, "Existing and Proposed Businesses - Canadian Operations -
Canadian Financial Assistance - Grants, Loans, and Commitments"). Canadian and
Quebec government research and development tax incentives take the form of both
tax deductions from otherwise taxable income and tax credits respecting the
eligible research and development expenditures of the Company (see "Existing and
Proposed Businesses - Canadian Operations"). Insofar as tax credits for
scientific research and experimental development are concerned, such credits are
offered by both the governments of Canada and of Quebec. The tax credits are
calculated as a percentage of research and development expenditures deemed
eligible by the Revenue Departments of each government. The percentages vary
according to the size of the company (defined according to the asset base and
revenues generated by the company), the residency of the majority of the voting
control and other factors. In the case of both the provincial and the federal
governments, where the amount of the tax credit exceeds other tax liabilities,
such as taxes on income and on capital, and subject to certain other conditions
which a company meets, the amount of any difference is paid to the company, thus
the term, "Refundable Tax Credits". The effective rate of the credit varies from
one company to another as a function of a number of factors, not least of which
are: (i) the nature of the costs being claimed such as labor costs versus
non-labor costs (the credit for labor costs is higher than for non-labor costs);
and (ii) the proportion of expenditures which can be attributed to research and
development but which are not deemed eligible for the tax credits by their
nature. Insofar as the Company is concerned, the tax credits have varied from
approximately 25% to 30% of total research and development expenditures,
including certain types of expenditures deemed ineligible for tax credits.
During the last three fiscal years, virtually all of the activities connected
with the development and construction of the First Production Model of the TCS-1
Plant have qualified as expenses eligible for refundable tax credits.
As a further measure to stimulate research and development, the Quebec
Government, through the Societe de developpement industriel du Quebec, a public
sector corporation wholly owned by the Government of Quebec, (the "SDI") (a
former English version of this name was the Quebec Industrial Development
Corporation), has put into place a loan guarantee program (the "SDI Loan
Guarantee Program") which provides the SDI's guarantee of repayment of 75% of
the amount of bank loans made to companies in anticipation of such companies
receiving refundable tax credits. The SDI Loan Guarantee Program therefore
enhances a company's ability to borrow from financial institutions up to 75% of
the amount of the anticipated tax credit for expenditures already incurred
("Allowable Post-Expenditure Loans"), prior to the receipt of the anticipated
tax credit. Alternatively, the SDI Loan Guarantee Program allows companies to
borrow, prior to making any expenditures, up to 60% of the amount of the
anticipated tax credit based on budgeted expenditures not yet incurred (80% of
the amount of an Allowable Post-Expenditure Loan). This provides the cash flow
essential to the research and development efforts. In the absence of any tax
liabilities, these tax credits have functioned as monetary grants and
constituted receivables which were used, prior to their being paid to the
Company, to secure conventional bank financing, supported in part by the SDI
guarantee noted above.
In connection with the Refundable Tax Credits, during the first quarter of
1998, the Bank of Montreal ("BOM") approved a loan to the Company of up to
Cdn$937,000, or approximately US$655,900 ("the BOM Tax Credit Loan") to be used
to pay expenses which would then be eligible for refundable tax credits. As at
June 30, 1998, Cdn.$828,230 (approximately US$579,761) had been lent to the
Company pursuant to the BOM Tax Credit Loan. Subsequent to the period covered by
this Report, during the six-months ended December 31, 1998, the Company borrowed
an additional Cdn.$108,770 (approximately
19
<PAGE>
US$76,139) under the BOM Tax Credit Loan. As at June 30, 1998 and December 31,
1998, respectively, the outstanding balance payable on the BOM Tax Credit Loan
was Cdn$597,820 (approximately US$418,474) and Cdn$502,520 (approximately
US$351,764). The BOM Tax Credit Loan was secured by: (i) a first-ranking lien on
all of the assets, tangible and intangible, present and future of the Company's
Canadian subsidiary, Tirex R&D; (ii) a lien on the Company's patent for the
cryogenic tire disintegration process and apparatus of the TCS-1 Plant; and
(iii) personal guarantees of two officers and directors of the Company.
The SDI, under its above described Loan Guarantee Program, guaranteed
repayment of 75% of the BOM Tax Credit Loan ("the SDI Guarantee"). The SDI
Guarantee was secured by a lien on the Company's projected tax credit
receivables.
Borrowings drawn down under the BOM Tax Credit Loan bear interest, from
the date the funds are drawn down until the outstanding principal and all
accrued and unpaid interest thereon are repaid, at an annual rate equal to the
Bank of Montreal Prime Rate (which, for reasons of inter-bank competition, is
usually equivalent to Canadian Prime Rate) plus 1.25%. Interest on the
outstanding balance of the BOM Tax Credit Loan is due and payable monthly. The
outstanding principal amount is repayable upon the Company's receipt of tax
credit refunds from the Canadian and/or Quebec tax authorities and the release
of the funds by SDI to the Bank of Montreal. During the last three fiscal years,
and the six-month interim period ended December 31, 1998, the Company made
research and development expenditures, generated tax credit claims, and received
funds by way of borrowings under the BOM Tax Credit Loan, as set forth in the
following table:
20
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Period Amount of R&D Amount of R&D Amount of Tax Amount Borrowed Amount of Tax Cumulative
R&D Expenses Were Expenditures Expenditures Credits Estimated Against Estimated Credit Received Outstanding Balance
Incurred Incurred Eligible for by BOM and SDI Tax Credits of Loan as at End
Tax Credits of Period
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
July 1, 1995 to -0- -0- -0- -0- -0- -0-
June 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
July 1, 1996 to Cdn$1,576,761 Cdn$1,576,761 Cdn$579,305 -0-(1) -0-(2) -0-
June 30, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
July 1, 1997 to Cdn$2,723,443 Cdn$2,723,443 Cdn$982,113 Cdn$828,230(1) Cdn$307,208(2) Cdn$597,820
June 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Interim Period Cdn$1,167,892 (3) (4) Cdn$108,770(1) Cdn$245,517(5) Cdn$502,520
July 1, 1998 to (6)
December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to this table appear on the following page.
21
<PAGE>
(1) Prior to June 30, 1998, the Company received three disbursements from the
BOM in the aggregate amount of Cdn$828,230 (approximately US$579,761) with
the first of these disbursements received on January 30, 1998. These
amounts were based upon estimated tax credit receivables in the following
amounts: (i) Cdn$579,305 (approximately US$405,514) for research and
development expenditures made by the Company during the fiscal year ended
June 30, 1997; and (ii) a portion of the Cdn$982,113 (approximately
US$687,479) for research and development expenditures made by the Company
during the fiscal year ended June 30, 1998. Subsequent to June 30, 1998,
the Company received a further cash disbursement of Cdn$108,770
(approximately US$76,139), in respect of eligible tax credit expenditures
incurred prior to June 30, 1998, effecting the complete draw down of the
entire authorized loan amount of Cdn$937,000 against tax credit
receivables for the cumulative period ended June 30, 1998.
(2) All funds by way of Tax credits received by the Company during fiscal 1998
were attributable to research and development expenditures made by the
Company during fiscal 1997.
(3) As of February 17, 1999, and in accordance with the tax laws and
procedures of the Revenue Departments of the governments of Canada and of
Quebec, the Company had not yet submitted a claim for tax credits based
upon any research and development expenditures made since July 1, 1998.
The Company expects that a portion of such expenditures will be eligible
for Refundable Tax Credits. In connection therewith, the Company will seek
credit facilities similar to the BOM Tax Credit Loan, with one or more
lending institutions, based upon estimated tax credit receivables.
(4) Although the Company made research and development expenditures in the
amount of Cdn$1,167,892 during the six-month period, July 1, 1998 through
December 31, 1998, and while the Company believes that a portion of such
expenditures will be eligible for Refundable Tax Credits, it should be
noted that no credit facilities were or have yet been made available to
the Company to finance these expenditures. The SDI Loan Guarantee Program,
which guaranteed repayment of 75% of the BOM Tax Credit Loan, was
available only for bank loans based on estimated tax credit receivables
for research and development expenditures made on or before June 30, 1998.
It should be noted further that the entire amount available to the Company
under the BOM Tax Credit Loan has already been borrowed by the Company in
connection with research and development expenditures made by the Company
during the years ended June 30, 1997 and 1998. However, the SDI Loan
Guarantee Program is still in existence and may be available to guarantee
new loans which may be made to the Company by other Canadian lending
institutions. Accordingly, (as noted above in footnote 3 to this table),
the Company intends to seek new credit facilities, similar to the BOM Tax
Credit Loan, to finance research and development expenditures made after
June 30, 1998.
(5) Tax credits received by the Company during this interim period, July 1,
1998 through December 31, 1998, are attributable to research and
development expenditures made by the Company during the fiscal year ended
June 30, 1997. As at December 31, 1998, the Company had not yet received
any tax credits for research and development expenditures made from July
1, 1997 through December 31, 1998. However, as described below in footnote
6 to this table, subsequent to December 31, 1998, some funds were received
in
22
<PAGE>
respect of research and development expenditures made during the fiscal
year ended June 30, 1998, on a "preliminary advance payment" basis.
(6) The annual Canadian federal government audit of eligible research and
development expenditures for the fiscal year ending June 30, 1998 took
place in January 1999. Results of the audit are expected prior to March
31, 1999. However, as a result of a preliminary, cursory review of the
accounts, a preliminary advance payment check in the amount of
Cdn$320,000, representing approximately half of the amount of the Canadian
federal tax credit claimed on the Government of Canada, was received by
the Company in January 1999, of which amount, the sum of Cdn$175,000 was
used to reduce the outstanding balance of the BOM Tax Credit Loan, in
accordance with the terms and conditions of the SDI Loan Guarantee.
During the last three fiscal years and the six month interim period ended
December 31, 1998, the Company also received additional financial assistance by
way of loans and grants from Quebec governmental agencies, for the design and
development of the TCS-1 Plant and for export market development as follows:
1. In March of 1996, the Company qualified for an interest-free, unsecured
loan (the "FORD-Q Loan") of up to $500,000 (Canadian), or approximately $
350,000 (U.S.). This loan was made available by the Government of Canada under
the Industrial Recovery Program for Southwest Montreal, which is administered by
the federal government agency, Canada Economic Development for Quebec Regions
("CEDQR"), which was previously known as the Federal Office of Regional
Development - Quebec or "FORD-Q". Under the terms of the loan, the Company
received funds in the total amount of Cdn$500,000 or approximately US$350,000,
representing 20% of eligible expenditures made by the Company to design,
develop, and manufacture the first full-scale model of the TCS-1 Plant. The loan
money was disbursed pursuant to the submission of claims of eligible expenses
incurred. The Company did not have funds available to expend for these purposes
until February of 1997. Because of the limited funds available to the Company at
that time, the Bank of Montreal agreed to make short-term loans (the "BOM
Secured Loans") to the Company, secured by CEDQR's acceptance of the Company's
claims for reimbursement of expenditures. All of the BOM Secured Loans were
repaid by the Company as funds were released to the Company under the CEDQR
Loan.
The proceeds of the CEDQR Loan were paid to the Company during the fiscal
years ended June 30, 1997 and 1998, as follows:
Canadian Dollars US Dollar Approximation
---------------- -----------------------
Fiscal 1997 $246,752 $172,725
Fiscal 1998 $253,248 $177,275
Under the terms of the CEDQR Loan, repayment must commence twelve months
from the date CEDQR declares that the project has been completed. This occurred
on March 31, 1998. The repayment schedule therefore calls for four, graduated
annual payments as follows:
23
<PAGE>
Canadian Dollars US Dollar Approximation
---------------- -----------------------
March 31, 1999 $ 50,000 $ 35,000
March 31, 2000 $100,000 $ 70,000
March 31, 2001 $150,000 $105,000
March 31, 2002 $200,000 $140,000
The terms and purposes of the CEDQR Loan are discussed in more detail in
"Existing and Proposed Businesses - Canadian Operations - Canadian Financial
Assistance - Grants, Loans, and Commitments".
2. In April of 1996, the Company qualified for a grant from Societe
Quebecoise de Recuperation et de Recyclage ("Recyc-Quebec"), a self-financed,
Quebec Government-owned corporation established to facilitate and promote
materials recovery and recycling. The amount of such grant was $75,000 Canadian
(approximately $52,500 U.S.). Of this amount, the Company received $50,000
Canadian (approximately $35,000 US) during the fiscal year ended June 30, 1997.
The terms of the grant provide that the Company will receive the balance of
$25,000 Canadian (approximately $17,500 U.S.) when the Company files a final
report on the completion of the project. The Company anticipates that such
report will be filed in or about February 1999. The terms and purposes of this
grant are discussed in more detail in "Existing and Proposed Businesses -
Canadian Operations - Canadian Financial Assistance - Grants, Loans, and
Commitments".
3. The Company has also qualified for five interest-free, unsecured loans
from the Government of Canada in the aggregate amount of $ 232,773 Canadian
(approximately $ 162,900 U.S.). These loans were made available by CEDQR, under
the Innovation, Development, Entrepreneurship Assistance - Small and Medium
Enterprises Program ("IDEA-SME Program"). Under these loan agreements, during
Fiscal 1997 and 1998, the Company received $30,000 Canadian (approximately $
21,000 U.S.) and $ 202,773 Canadian (approximately $ 141,900 U.S.) respectively.
The IDEA-SME Program loans represent up to 50% of approved Company expenditures,
based on submitted claims, subject to maximum amounts for each loan.
Expenditures are required to have been made for the purposes of identifying and
developing export markets for Canadian products. All of the projects which gave
rise to these loans have been declared completed by CEDQR and the repayment
terms have accordingly been established. The following table identifies the
nature of the projects for which these loans were granted, the maximum amount of
the loans approved the government agency, the aggregate amounts received by the
Company as of October 31, 1998 and the repayment terms of each loan.
24
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================
Amount of
Funds
Received By
Maximum Company as of Rate of
Amount December 31, Interest
of Loan 1998
Nature of Project Repayment Terms
--------------------------------------------
Amount of Payment
Date Due
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Market Research Feasibility Cdn $20,000 Cdn At the end of any 1% of gross annual None
Study for Iberian Peninsula $20,000 fiscal year in which revenue from sales
the Company has revenues in Iberia
from sales of TCS-1
Plants in the
Iberian Peninsula
- -----------------------------------------------------------------------------------------------------------------
Market Research Feasibility Cdn $20,000 Cdn At the end of any 1% of gross annual None
Study for India $20,000 fiscal year in which revenue from sales
the Company has revenues in India
from sales of TCS-1
Plants in India
- -----------------------------------------------------------------------------------------------------------------
Market Research Respecting Cdn $95,000 Cdn June 30, 2001 Cdn$6,333 None
Potential United States $95,000 June 30, 2002 Cdn$12,666
Markets for Rubber Crumb June 30, 2003 Cdn$18,999
June 30, 2004 Cdn$25,333
June 30, 2005 Cdn$31,666
- -----------------------------------------------------------------------------------------------------------------
Iberian Market Development Cdn $95,000 Cdn At the end of any 1.5% of gross None
Activities Related to $95,000 fiscal year in which annual revenue
Positioning the Company to the Company has revenues from sales in
Market TCS-1 Plants, Rubber from sales of TCS-1 Iberia
Crumb, and Related Products Plants in Iberia
in Iberia
- -----------------------------------------------------------------------------------------------------------------
Market Research Activities Cdn $98,000 $98,000 June 30, 2001 Cdn $ 6,533.33 None
Respecting the Feasibility Cdn June 30, 2002 Cdn $13,066.66
of using Rubber Crumb in June 30, 2003 Cdn $19,600.00
Thermoplastic Elastomer June 30, 2004 Cdn $26,133.33
Compounds in the United June 30, 2005 Cdn $32,666.66
States and Canada.
=================================================================================================================
</TABLE>
These loans and the projects which they supported are discussed in more
detail in "Existing and Proposed Businesses - Canadian Operations" and "Existing
and Proposed Businesses - Sales and Marketing".
25
<PAGE>
The Company believes it will be able to cover the balance of the capital
investments and expenditures which it will be required to make in connection
with: (i) modifications which were made to the TCS-1 Plant; (ii) the
establishment, and commencement of operations, of the rubber mat molding and
flocking plant; (iii) commencement of full scale, commercial manufacture of
TCS-1 Plants; and (iv) meeting its overhead on a level sufficient to sustain the
Company for at least the next twelve months, from a combination of some or all
of the following sources: (i) expected cash flow from sales of four TCS-1 Plants
to ENERCON America Distribution Limited ("Enercon") of Westerville, Ohio. (see
Item 1 of this Report "Existing and Proposed Businesses - Sales and Marketing -
The Enercon Agreements"); (ii) Canadian and Quebec government and governmental
agency grants, loans, and refundable tax credits; (iii) sale and lease back
financing on inventory and equipment owned by the Company; (iv) conventional
asset based debt financing against receivables and inventory; (v) refunds of all
of the 15% sales taxes paid by the Company on all goods and services purchased
in connection with the Company's manufacturing activities, which the Company, as
a manufacturer and exporter of goods is entitled to (in September 1998, the
Company received Cdn $200,000 by way of such tax refunds for the quarter ended
June 30, 1998); (vi) subcontractor financing; (vii) vendor financed equipment
purchases and/or (viii) a research and development tax credit facility from the
Bank of Montreal for the 1999 calendar year. The Company is presently actively
pursuing all of the foregoing avenues of financing. In addition, management
believes that the Company will be able to obtain sufficient production financing
to cover the costs of constructing subsequent TCS-1 Plants, using the
constituent components of the Plant to be financed, as collateral for debt
financing to cover its construction costs.
Whether the funds, which the Company obtains, from any of the above
proposed sources, will be sufficient to enable the Company to reach a profitable
operating stage, will be entirely dependent upon: (i) the amount of such
financing which the Company is actually able to raise; (ii) Enercon's receipt of
its funding; (iii) the as yet unproven ability of the TCS-1 Plant to operate
continuously on a long-term commercial basis in accordance with its anticipated
performance specifications; and (iv) the ability of the proposed rubber mat
molding facility to operate profitably (see, below, in this Item 6, "Risk Factor
No. 2 - "Need For Substantial Additional Capital" and Item 1 of this Report,
"Existing and Proposed Businesses - Equipment Manufacturing - The TCS-1 Plant",
and "Existing and Proposed Businesses - Equipment Manufacturing - Sales and
Marketing - The Enercon Contracts").
Any failure or delay in the Company's receipt of the required financing
would be directly reflected in a commensurate delay or failure in the
commencement of: (i) full scale manufacturing of TCS-1 Plants; and (ii) the
commercial operation of the First Production Model and the establishment and
initiation of rubber mat molding operations. It should be noted also that the
period of time during which any funds raised will be available to cover normal
overhead costs could be significantly reduced if the Company is required to make
substantial, presently unanticipated, expenditures to correct any further flaws
or defects in the design or construction of the First Production Model, which
may become apparent when it is subjected to continuous operation on a long term,
commercial basis. Moreover, given the early stage of development of the Company,
it is impossible at this time to estimate with any certainty the amount of
income from operations, if any, during the next twelve months.
There can be no assurance that the Company will be able to obtain outside
financing on a debt or equity basis on terms favorable to it, if at all. In the
event that there is a failure in any of the finance-related contingencies
described above, the funds available to the Company may not be sufficient to
cover the costs of its operations, capital expenditures and anticipated growth
during the next twelve months. In such case, it would be necessary for the
Company to raise additional equity capital. During Fiscal 1998, in an effort to
put such funding into place, the Company entered into a non-binding letter of
intent with H.J. Meyers & Co., Inc. ("Meyers"), for a proposed public offering
of its securities in an amount of not less than
26
<PAGE>
$8,000,000. On or about September 16, 1998, however, Meyers abruptly ceased
doing business. Therefore, if the Company should wish to raise funds through a
public offering, it will berequired to locate another broker-dealer, ready,
willing, and able to underwrite a public offering of the Company's securities.
At this time, the Company is not able to give any assurances that, in such
event, it will be successful in locating an underwriter or that its efforts will
ultimately result in a public offering. If the proceeds from the above described
potential sources of funding should be insufficient for the Company's
requirements and it is not able to effect a public offering of its securities
within the next twelve months, or find other sources of outside funding, the
Company's financial position and its prospects for beginning and developing
profitable business operations could be materially adversely affected.
As at December 31, 1998, the Company had total assets of $4,177,911, as
compared to $3,814,648 as at the end of the last fiscal year (June 30, 1998) and
$1,782,096 at the end of the analogous period ending December 31, 1997.
Management attributes the increase of $363,263 in total assets during the
six-month period ended December 31, 1998 principally to the following: (i) an
increase in R&D tax credits receivable which, as of December 31, 1998 totaled
$1,105,651 as compared to $855,818 at June 30, 1998, reflecting an increase of
$249,883; and (ii) an increase in property, plant and equipment, which was
$1,535,011 at December 31, 1998 as compared to $977,288 at June 30, 1998.
Management attributes the increase of $2,395,815 in total assets during
the twelve-month period ended December 31, 1998 principally to the following:
(i) prepaid expenses and deposits in the aggregate amount of $728,094,
reflecting an increase of $798,622 over prepaid expenses and
deposits of $18,972 at December 31, 1997; Such increase primarily
reflects the attributed value of stock and stock options issued by
the Company as compensation under certain pre-paid consulting
agreements which has been recorded as prepaid expenses on the
Balance Sheet in the approximate amount of $970,000; all
compensation payable under these consulting agreements was paid by
way of the issuance of an aggregate of 4,000,000 share of Common
Stock to two consultants and the granting of an option to CG TIRE,
Inc (the "CGT Option);(1)
(ii) Property and Equipment in the amount of $1,535,011 which represents
an increase of $493,469 over Property and Equipment of $1,041,542 at
December 31, 1997;
(iii) cash assets in the amount $129,699 at December 31, 1998 as compared
to no cash assets at December 31, 1997;
(iv) research and development tax credit receivables in the amount of
$1,105,651 at December 31, 1998, which reflects an increase over
$494,918 in such tax credit receivables at December 31, 1997.
Research and development tax credit receivables at
------------
(1) The terms of the CGT Option are discussed in Risk Factor No. 6
"Dilutive and Other Adverse Effects of Presently Outstanding
Debentures, Warrants, and Options", included in Item 6.
"Management's Discussion and Analysis" in the Company's annual
report on Form 10-KSB for the fiscal year ended June 30, 1998, which
is incorporated herein by reference.
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<PAGE>
December 31, 1997 had, in turn, represented an increase over the
previous year, when the Company had no research and development tax
credit receivables as at December 31, 1996; and
(v) the recognition of deferred financing costs in the amount of
$119,981, net of accumulated amortization in the amount of $38,274.
As at December 31, 1998, the Company had total liabilities of $3,670,673,
reflecting an increase of $310,084 over total liabilities of $3,360,588 at June
30, 1998 (the end of the last fiscal year), and an increase of $1,232,721 over
$2,437,952 on December 31, 1997. Accordingly, the increase of $1,232,721 in
total liabilities since December 31, 1997, was primarily attributable to
increases which occurred during the six-months ended June 30, 1998. Management
attributes increases in total liabilities over the three and six month periods
ended December 31, 1998, principally to the following:
(i) the issuance during Fiscal 1998, in two of the Private Placements
(including debentures assumed in the merger with RPM) of 10%
Convertible Subordinated Debentures in the aggregate principal
amount of $1,035,000;
(ii) notepayable in the amount of $328,347, which represents a decrease
of $79,579 in bank indebtedness from $407,926 at June 30, 1998 and a
net increase of $264,137 over bank indebtedness of $64,210 at June
30, 1997. These amounts reflect a decrease of $929,000 in short-term
notes payable from $963,500 at December 31, 1997 to $34,500 at
December 31, 1998
(iii) an increase of $191,871 in accrued expenses from $1,274,150 at June
30, 1998 to 1,466,021 at December 31, 1998; and
(iv) advances from the Canadian federal government agency, Canada
Economic Development-Quebec Regions (CEDQR), formerly known as, and
sometimes referred to herein as, the Federal Office for Regional
Development-Quebec (FORD-Q), pursuant to loans contributed by such
agency under the Industrial Recovery Program for Southwest Montreal
(IRPSWM) and the Innovation, Development, Entrepreneurship and
Access Program for Quebec Small and Medium-Size Enterprises
(IDEA-SME) in the amount of $558,943, which represents an increase
of $58,931 over CEDQR balances of $500,012 at June 30, 1998, and an
aggregate increase of $121,317 over CEDQR balances of $437,626 at
December 31, 1997;
(v) an increase of $85,276 in long-term debt from $465,894 at June 30,
1998 to $551,170 (net of current portion in the amount of $34,120)
Reflecting the foregoing, the financial statements indicate that as at
December 31, 1998, the Company had a working capital surplus (current assets
minus current liabilities) of $399,935, reflecting an increase of $26,737 over
working capital of $373,198 at June 30, 1998, and an increase of $1,660,454 from
December 31, 1997, when the Company had a working capital deficit of
($1,260,519). The primary causes of the aggregate increase in net working
capital since December 31, 1997 were:
(i) an aggregate increase since December 31, 1997, in research and
development tax credits receivable in the amount of $610,733;
28
<PAGE>
(ii) an increase of prepaid expenses and deposits respecting on-going
consulting agreements included on the balance sheet in the amount of
$728,094; and
(iii) a decrease in short-term deposits payable in the amount of $929,000.
The Company currently has limited material assets. The success of the
Company's tire recycling equipment manufacturing business, its proposed rubber
mat molding business, and its ability to continue as a going concern will be
dependent upon the Company's ability to obtain adequate financing to commence
profitable, commercial manufacturing and sales activities and the TCS-1 Plant's
ability to meet anticipated performance specifications on a continuous, long
term, commercial basis.
Results of Operations
As noted above, the Company is presently in the very early stages of the
business of manufacturing and selling TCS-1 Plants and is also currently engaged
in establishing a complete rubber mat molding and flocking facility in which it
intends to utilize the First Production Model of the TCS-1 Plant. The Company
intends to begin manufacturing TCS-1 Plants and operating its rubber mat molding
facility on commercial bases by March of 1999. The Company had no income from
operations during Fiscal 1997; It generated $880,000 in revenues during fiscal
1998 from the sale of the single front-end module and the single fracturing mill
of the First Production Model of the TCS-1 Plant. However, unless and until the
Company successfully develops and commences TCS-1 Plant manufacturing and sales
operations and/or profitable rubber mat molding operations on a full-scale
commercial level, it will continue to generate no or only limited revenues from
operations. Except for the foregoing, the Company has never engaged in any
significant business activities.
The financial statements which are included in this Report reflect total
general and administrative expenses of $443,757 and $1,890,805, respectively,
for the three and six-month periods ended December 31, 1998. These amounts
reflect increases of $12,809 and $973,292 over general and administrative
expenses of $430,948 and $917,513 for the analogous three and six-month periods
ended December 31, 1997. The Company's total operating expenses for the three
and six-month periods ended December 31, 1998 were $582,128 and $2,490,957,
respectively. These amounts reflect a decrease of $13,851 over total operating
expenses for the analogous three month period in 1997 and an increase of
$1,221,151 over total operating expenses of $595,979 and $1,269,806 for the
analogous three and six-month periods ended December 31, 1997. These increases
are attributed primarily to the following factors:
(i) $980,000 in values attributed to stock issuances in exchange for
services (excluding amounts paid in stock rather than cash as part
of salaries) during the three month period ended September 30, 1998,
reflecting an increase of $786,419 over the analogous three month
period ended September 30, 1997 when such amount was $193,581; These
stock issuances were made to a corporate officer and corporate
counsel in recognition of certain financial accommodations made by
them for, and on behalf of, the Company during the approximately
three-year period preceding the date of payment of such stock
bonuses and signing bonuses paid to two corporate officers in
connection with their respective employment agreements with the
Company. For a discussion of the details respecting these stock
issuances, including the consideration received by the Company for
the shares issued, reference is made to Part 2, Item 2 "Changes in
Securities and Use of Proceeds - Recent Sales of Unregistered
Securities" in the Company's quarterly report on Form 10-QSB for the
fiscal quarter ended September 30,
29
<PAGE>
1998. Management believes that the amounts accrued in respect of the
shares issued to compensate the executive officers and corporate
counsel reflect the fair value of the services rendered, and that
the recipients of such shares accepted such numbers of shares as a
function of a combination of their perceived valuation of both
present and possible future value of the shares, rather than the
actual value of the stock at the time it was issued. Management
believes that, as of the dates such shares were issued in lieu of
cash compensation, their actual and potential value, if any, could
not be determined, and that any attempt to specify a current
valuation with any reasonable assurance, would be flawed, without
substance, and highly contingent upon, and subject to, extremely
high risks including but not limited to the following factors: (i)
the absence of a reliable, stable, or substantial trading market for
the Company's common stock, the possibility that such a market might
never be developed, and the resultant minimal, or total absence of,
market value for any substantial block of common stock; (ii) the
very high intrinsic risks associated with early development stage
businesses, such as the Company's; (iii) the Company's lack of
sufficient funds, as at such issuance dates, to implement its
business plan and the absence of any commitments, at such times,
from potential investors to provide such funds; (iv) the
restrictions on transfer arising out of the absence of registration
of such shares; and (v) the uncertainty respecting the Company's
ability to continue as a going concern;
(ii) $406,000 in value attributed to stock issued in consideration for
the release of certain exclusive distributor rights;
(iii) $174,157 for the three months, and $317,287 for the six months,
ended December 31, 1998 in depreciation and amortization, a non-cash
charge, as compared to depreciation and amortization totalling $77
and $4,786 for the analogous three and six month period ended
December 31, 1997;
(iv) Interest expenses of $34,062 for the three months, and $54,097 for
the six months, ended December 31, 1998, as compared to interest
expenses of $3,358 and $3,996 for the analogous three and six month
periods ended December 31, 1997; and
(iv) Losses on foreign exchange in the amounts of $17,902 for the three
months, and $121,672 for the six months, ended December 31, 1998, as
compared to gains on foreign exchange in the respective amounts of
$19,012 and $15,353 for the analogous three and six month periods
ended December 31, 1997.
From inception (July 15, 1987) through December 31, 1998, the Company has
incurred a cumulative net loss of $12,364,501, $2,321,633 of which was incurred
during the six months ended December 31, 1998. Approximately $1,057,356 of such
cumulative net loss was incurred, prior to the inception of the Company's
present business plan, in connection with the Company's discontinued proposed
health care business and was due primarily to the expending of costs associated
with the unsuccessful attempt to establish such health care business. The
Company never commenced its proposed health care operations and therefore,
generated no revenues therefrom.
30
<PAGE>
PART II
OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the fiscal quarter ended December 31, 1998, Registrant made the
following sales of its common stock, $.001 par value, per share ("Common Stock")
without registration under the Securities Act of 1933, as amended (the
"Securities Act"). The following sets forth information respecting the dates,
purchasers, and consideration involved in such sales and the bases for
Registrant's claim that all such sales were exempt from the registration
provisions of Section 5 of the Securities Act by reason of Section 4(2) thereof.
Sale Pursuant to Settlement Agreement
On or about November 12, 1998, Registrant authorized the issuance of one
hundred ninety two thousand, eight hundred fifty seven (192,857) shares of
Common Stock to Terry Bentley pursuant to the terms of a negotiated settlement
agreement, dated as of October 13, 1998, arising out of an action which Mr.
Bentley had brought against the Company with respect to a claim against the
Company for approximately US$40,000.
Sales to Executive Officers in Respect of Services Rendered
During the quarter ended December 31, 1998, Registrant authorized the
following stock issuances to its executive officers and employees in
consideration of unpaid salaries and unreimbursed expenses, due and owing to
them under their respective employment agreements with Registrant:
1. On December 1, 1998, in consideration of unpaid executive services
rendered to, and unreimbursed expenditures made for and on behalf of, the
Company during the fiscal quarter ended June 30, 1998, the Company authorized
the issuance of an aggregate of 626,524 shares to five of its executive officers
and its in-house corporate counsel at a per share price of approximately $0.152,
representing 50% of the average of the bid and ask price for the Common Stock of
approximately $0.305 per share, as traded in the over-the-counter market and
reported in the electronic bulletin board of the NASD, during the said fiscal
quarter, as follows:
Amount of Unpaid
Salary and Unreimbursed No. Of
Employee Expenses Owed Shares Issued
- -------- ----------------------- -------------
Terence C. Byrne US $ 31,707 208,177
Louis V. Muro US $ 16,916 111,027
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<PAGE>
Amount of Unpaid
Salary and Unreimbursed No. Of
Employee Expenses Owed Shares Issued
- -------- ----------------------- -------------
John L. Threshie, Jr. US $ 1,307.10(2) 8,579
Louis Sanzaro US $7,291.67 47,859
Frances Katz Levine US $ 36,615.90(3) 240,327
Vijay Kachru US $ 1,608.22(4) 10,550
2. On December 2, 1998, in consideration of unpaid executive services
rendered to, and unreimbursed expenditures made for and on behalf of, the
Company during the fiscal quarter ended September 30, 1998, the Company
authorized the issuance of an aggregate of 1,299,354 shares to six of its
executive officers and its in-house corporate counsel at a per share price of
approximately $0.106, representing 50% of the average of the bid and ask price
for the Common Stock of approximately $0.223 per share, as traded in the
over-the-counter market and reported in the electronic bulletin board of the
NASD, during the said fiscal quarter, as follows:
Amount of Unpaid
Salary and Unreimbursed No. Of
Employee Expenses Owed Shares Issued
- -------- ----------------------- -------------
Terence C. Byrne US $ 28,486 269,589
Louis V. Muro US $ 14,763 139,716
John L. Threshie, Jr. US $ 325 3,076
Louis Sanzaro US $ 43,750 414,046
Frances Katz Levine US $ 41,492.23(1) 392,679
Vijay Kachru US $ 337.65 3,195
Jean Frechette US $ 8,141.76 77,053
- ------------
(2) Reduced by $712.63 reflecting a balance owed to the corporation from a prior
period.
(3) Includes $13,115.90 of documented unreimbursed cash disbursements.
(4) Reduced by $236.17 reflecting a balance owed to the corporation from a prior
period.
(1) Includes $17,992.23 of documented unreimbursed cash disbursements.
32
<PAGE>
Issuance in Respect of Conversion of Debt to Equity
1. On December 2, 1998, Registrant issued an aggregate of two million,
five hundred twenty three thousand, seventy seven (2,523,077) shares of Common
Stock to Bartholomew International Investments Ltd. ("BIIL"), a corporation
owned by the Bartholomew Trust. Terence C. Byrne, Registrant's chairman and
chief executive officer, and his spouse are the beneficiaries under the
Bartholomew Trust. These shares were issued in consideration for the conversion
of an aggregate of US$164,000 in unpaid debts owed to Mr. Byrne and BIIL. Such
debts consisted of: (i) $14,000 lent by Mr. Byrne to Registrant, pursuant to
Registrant's promissory note, dated November 30, 1998 (the "Byrne Promissory
Note"); the Byrne Promissory Note provided for interest at an annual rate of 2%
over the Prime Rate charged by Citibank, NA and was due and payable on demand by
Mr. Byrne; and (ii) $150,000 lent by BIIL to Registrant pursuant to Registrant's
promissory note, dated October 27, 1998 (the "BIIL Promissory Note"); the BILL
Promissory Note provided for interest at an annual rate of 2% over the Prime
Rate charged by The Bank of Montreal and was due and payable on July 26, 1999.
Conversion of the Byrne and the BIIL Promissory Notes was effected at the
request of the Registrant in connection with its efforts to obtain short term
bank debt financing. The terms of the conversion required Mr. Byrne and BIIL to
forego any interest on, and repayment in cash of, the aforesaid debts and to
accept in full satisfaction thereof, unregistered shares of Registrant's common
stock valued at fifty percent (50%) of the average of the high ask and low bid
prices of such stock, as traded in the over-the-counter market and quoted in the
OTC Electronic Bulletin Board on the day immediately preceding the conversion
date (the "Average Market Price"). Pursuant to the foregoing agreements, these
shares were valued at 50% of the average of the closing bid and ask price for
Registrant's Common Stock on November 30, 1998, (50% of $0.13 or $0.065 per
share).
2. On December 18, 1998, Registrant issued an aggregate of ninety seven
thousand and fifteen (97,015) shares of common stock, $.001 par value, of this
corporation to each of Les Immobilieres Serge Beaudoin Inc. and Objectif 2007
Inc., both of which are Canadian corporations. These shares were issued in
consideration for the conversion of a debt owed by Registrant, for design and
engineering services rendered by Beaudoin, Hurens & Associates, Inc., in the
aggregate amount of thirty-two thousand, five hundred United States dollars
(US$32,500). Pursuant to the agreement negotiated by the parties, the 97,015
shares were valued at the average of the closing bid and ask price for
Registrant's Common Stock on December 16, 1998, ($0.335 per share).
Basis for Section 4(2) Exemption Claimed
With respect to all sales and other issuances of securities as hereinabove
described, which Registrant claims to have been exempt from the registration
requirements of Section 5 of the Securities Act by reason of Section 4(2)
thereof :
(i) Registrant did not engage in general advertising or general
solicitation and paid no commission or similar remuneration,
directly or indirectly, with respect to such transactions.
(ii) The persons who acquired these securities were current or former
executive officers and directors, or consultants, all of whom are
sophisticated investors; Such persons had continuing access to all
relevant information concerning the Registrant and/or have such
knowledge and experience in financial and business matters that they
are capable of evaluating the merits and risks of such investment
and are able to bear the economic risk thereof.
33
<PAGE>
(iii) The persons who acquired these securities advised Registrant that
the Shares were purchased for investment and without a view to their
resale or distribution unless subsequently registered and
acknowledged that they were aware of the restrictions on resale of
the Shares absent subsequent registration and that an appropriate
legend would be placed on the certificates evidencing the Shares
reciting the absence of their registration under the Securities Act
and referring to the restrictions on their transferability and
resale.
Item 3 - Defaults Upon Senior Securities
During the period January 7, 1998 through May 11, 1998, the Company issued an
aggregate of $535,000 of convertible, subordinated debentures bearing interest
at the rate of 10% which are due two (2) years from their respective dates of
issuance. Interest thereon was due and payable semi-annually commencing six
months from the issuance date of such debentures. As of March 9, 1999, the
Company was in arrears on interest payments accrued on these debentures since
their issuances, in the aggregate amount of $49,000, and intends to pay all such
interest as soon as the resources therefor are available.
Item 6 - Exhibits and Reports on Form 8-K
(a) No Exhibits are being filed herewith:
(b) No Current Reports on Forms 8-K were filed during the quarter ended
December 31, 1998
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
THE TIREX CORPORATION
Date: March 15, 1999 By /s/ Terence C. Byrne
------------------------------------
Terence C. Byrne, Chairman of the
Board of Directors and Chief
Executive Officer
Date: March 15, 1999 By /s/ Michael Ash
------------------------------------
Michael Ash, Treasurer and
Chief Accounting and
Financial Officer
34
