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 September 30, 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 [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of March 10, 1999: 78,241,437 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 Statements (unaudited) Page
----
The Tirex Corporation and Subsidiaries
Consolidated Balance Sheets as of
September 30, 1998 and June 30, 1998............................ 4
Consolidated Statements of Operations
for the three-month periods
ended September 30, 1998 and 1997............................... 5
Consolidated Statements of Cash Flows
for the three-month periods
ended September 30, 1998 and 1997............................... 6
Notes to Financial Statements....................................... 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 20
PART II
Item 2 - Changes in Securities and Use of Proceeds......................... 33
Item 3 - Defaults Upon Senior Securities................................... 35
Item 4 - Submission of Matters
to a Vote of Security Holders.................................... 35
Item 6 - Exhibits and Reports on Form 8-K.................................. 36
2
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The financial statements are unaudited. However, the management of
registrant believes that all necessary adjustments (which include only normal
recurring adjustments) have been reflected to present fairly the financial
position of registrant at September 30, 1998 and the results of its operations
and changes in its financial position for the three-month periods ended
September 30, 1998 and 1997 and for the period from inception (July 15, 1987).
3
<PAGE>
The Tirex Corporation
A Development Stage Company
Consolidated Balance Sheet
As at September 30,
Assets (Unaudited) (Audited)
Current Assets 1998 June 30, 1998
---- -------------
$ $
Cash and cash equivalents 150,133 398,971
Notes receivable 264,008 225,969
Sales taxes receivable 64,389 133,868
R&D tax credit receivable 902,098 855,818
Prepaid expenses and deposits 520,005 618,266
----------- -----------
1,900,633 2,232,892
Property and equipment, at cost, net of
accumulated depreciation of $24,231 1,499,036 977,288
Other assets
Prepaids 346,146 445,677
Organization costs net of accumulated
amortization of $1,264 515 536
Deferred financing fees 139,118 158,255
----------- -----------
485,779 604,468
----------- -----------
3,885,448 3,814,648
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Notes payable 391,811 407,926
Accrued liabilties 1,357,427 1,274,150
Deposits payable 34,500 143,500
Current portion of long-term debt 34,120 34,118
Stock options
----------- -----------
1,817,858 1,859,694
Other liabilities
Long term deposits 128,000
Long-term debt (net of current portion 556,305 465,894
Convertible subordinated debentures
long-term portion 1,035,000 1,035,000
----------- -----------
1,719,305 1,500,894
Stockholders' equity
Common stock, $.001 par value, authorized
120,000,000 shares, issued and
outstanding 73,736,495 shares 73,737 63,642
Class A stock; .001 par value,
authorized 5,000,000 shares;
issued and outstanding, 0 shares
Additional paid-in capital 11,887,773 10,258,116
Deficit accumulated during the
development stage (11,870,817) (10,051,483)
Unrealized gain on foreign exchange 257,592 183,785
----------- -----------
348,285 454,060
----------- -----------
3,885,448 3,814,648
=========== ===========
4
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The Tirex Corporation
A developmental stage company
Consolidated Statement of Operations (unaudited)
Cumulative from
Three months ended September 30 March 26, 1993
------------------------------- to September 30,
1998 1997 1998
---- ---- ----
$ $ $
Revenues 0 0 934,725
Cost of Sales 0 0 810,842
----------- ----------- -----------
Gross profit 0 0 123,883
Operations
General and administrative 1,451,057 486,565 4,407,397
Depreciation and amortization 232,630 4,709 256,658
Research and development 11,840 178,888 6,057,940
----------- ----------- -----------
Total Expense 1,695,527 670,162 10,721,995
Loss before other income and
expenses (1,695,527) (670,162) (10,598,112)
----------- ----------- -----------
Other income (expenses)
Interest expense (20,035) (640) (84,041)
Interest income 2,540
Income from stock options 10,855
Loss on disposal of equipment (2,240)
Loss on foreign exchange (103,770) (3,659) (142,461)
----------- ----------- -----------
(123,805) (4,299) (215,347)
Net Loss (1,819,332) (674,461) (10,813,459)
=========== =========== ===========
Net loss per common share (0.02) (0.02) (0.57)
=========== =========== ===========
Weighted average shares of
common stock outstanding 70,188,967 38,112,298 18,209,531
=========== =========== ===========
5
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The Tirex Corporation
A Development Stage Company
Consolidated statement of cash flow
(Unaudited)
Three months ended
September 30
-------------------------
1998 1997
---- ----
Operating activities $ $
Net loss 1,819,332 674,461
---------- --------
Adjustments to reconcile net
loss to net cash used in operating
activities:
depreciation and amortization 232,630 4,709
Proceeds from grants 241,002 307,123
stock issued in exchange for services 980,000 193,581
stock issued in conversion and pmts 418,750
Unrealized gain on foreign exchange 73,807
Change in assets & liabilities
increase in Notes receivable (38,039) (30,000)
increase in Sales tax receivables 69,479 (4,623)
increase in Tax credit receivable (46,280)
increase in Prepaid expenses (650) (13,929)
increase in Accrued expenses 83,277 9,932
increase in Loan payable 64,884 183,148
increase in Deposit payable 19,000 283,500
increase in Notes payable (98,551)
increase in Loan director 10,881
---------- --------
Total Adjustments 2,097,860 845,771
Net cash operating Activities 278,528 171,310
---------- --------
Investing Activities
Property & equipment (556,532) (257,911)
Licence
---------- --------
Net cash investing activities (556,532) (257,911)
Financing activities
Repayment of notes payables (16,115)
Proceeds from loan payable 48,278
Repayment of long term debt (2,997)
---------- --------
Net cash financing activities 29,166 0
---------- --------
Net Decrease in cash (248,838) (86,601)
Cash beginning of period 398,971 155,037
---------- --------
Cash end of period 150,133 68,436
========== ========
6
<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 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
7
<PAGE>
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.
Developmental Stage
8
<PAGE>
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.
Organization Costs
9
<PAGE>
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.
10
<PAGE>
Adoption of Statement of Accounting Standard No. 128
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.
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 $902,098.
11
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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 $1,729,831 for the three-month period ended
September 30, 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 June 30, 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.
Note 3 - Financing Costs
During the quarter ended September 30, 1998 the Company incurred
$11,429 in connection with debt financing . Amortization of
financing costs capitalized as of June 30, 1998 amounted to $19,137
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 September 30, 1998 plant and equipment consisted of the
following:
Furniture, fixtures and equipment $ 97,772
Leasehold improvements 97,852
Construction in progress 1,324,987
----------
1,520,611
Less accumulated depreciation and amortization 21,575
----------
$1,499,036
==========
Depreciation and amortization expense charged to operations was
$9,214 for the three months ended September 30, 1998.
12
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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 June 30, 1998,
$391,811 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)
1998 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).
- 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 1 1/2% of
annual sales in Spain and Portugal through
June 30, 2004 64,823
--------
$558,307
Less: current portion 34,118
--------
$524,189
========
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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
========
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Note 7 - Convertible Subordinated Debentures
Convertible subordinated debentures consist of the following:
- --------------------------------------------------------------------------------
Type A Type B
- --------------------------------------------------------------------------------
Balance as of $500,000 $530,000
September 30, 1998
- --------------------------------------------------------------------------------
Interest Rate 10% 10%
- --------------------------------------------------------------------------------
Maturity Earlier of (i) - the Earlier of (i)- two years
completion of a public from the issue date or
offering yielding gross (ii)- the completion of a
proceeds of not less than public offering of its
$8,000,000, (ii) - the securities by the Maker
closing on financing in
excess of $4,500,000,
(iii)- December 31, 1999
- --------------------------------------------------------------------------------
Redemption rights If not converted, the holder If not converted, the
may require the Company holder may require the
to redeem at any time after Company to redeem at
maturity at a premium of any time after maturity at
125% of the principal a premium of 125% of the
amount plus interest principal amount plus
interest
- --------------------------------------------------------------------------------
Conversion ratio 75% of the average of the $0.20 per share
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.
The Company entered into various employment agreements with the
executive officers and
15
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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.
Included in accrued expenses at September 30, 1998 is $17,076 of
salary to officers which the company subsequently issued common
stock for.
At September 30, 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 three months ended September 30, 1998, the Company issued
common stock to individuals in exchange for services performed
totaling $1,398,750. 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 $1,006,250. The dollar amounts assigned to such
transactions 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.
16
<PAGE>
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 15,712,673 2,185,413
ended June 30, 1998
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
17
<PAGE>
of RPM in exchange for common stock in the Company on a unit for
unit basis. RPM ceased to exist following the exchange.
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 three-month period
ended September 30, 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:
18
<PAGE>
Amount
------
June 30,
--------
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:
Amount
------
June 30,
--------
1999 $108,800
2000 176,900
2001 204,100
2002 204,100
2003 170,100
--------
$864,000
========
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
19
<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 month period ended September 30, 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
20
<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-
21
<PAGE>
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 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:
22
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Period Amount of Amount of R&D Amount of Tax Amount Amount of Tax Cumulative
R&D Expenses R&D Expenditures Credits Borrowed Credit Received Outstanding
Were Incurred Expenditures Eligible for Estimated by Against Balance of
Incurred Tax Credits BOM and SDI Estimated 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.
23
<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 from the BOM 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 March 9, 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,
24
<PAGE>
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 respect of research and development expenditures made during the fiscal
year ended June 30, 1998, on a "preliminary advance payment" basis.
(6) In February 1999 the Company received a check in the amount of Cdn
$491,000 from
25
<PAGE>
the Government of Quebec respecting a tax credit payment. The Company used
Cdn $222,000 of this amount to reduce the balance on the BOM Tax Credit
Loan. 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. On
March 2, 1999 a second advance payment check in the amount of Cdn $153,492
was received. A final check in a similar amount is expected to be received
by the end of March 1999. As required by the SDI Loan Guarantee Program
part of the proceeds from the second and final payments described above
will be used to eliminate the balance of the BOM Tax Credit Loan.
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.
26
<PAGE>
The proceeds of the CEDQR Loan were paid to the Company during the fiscal
years ended June 30, 1997 and 1998, as follows:
Dollar Approximation Canadian Dollars US
- -------------------- ---------------- --
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:
Dollar Approximation Canadian Dollars US
- -------------------- ---------------- --
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.
27
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Amount of
Funds
Received By
Maximum Company as of Rate of
Amount of December 31, Interest
Nature of Project Loan 1998 Repayment Terms
--------------------------------------------------------
Date Due Amount of Payment
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Market Research Feasibility Study for Cdn $20,000 Cdn At the end of any fiscal year in 1% of gross annual None
Iberian Peninsula $20,000 which the Company has revenues revenue from sales
from sales of TCS-1 Plants in the in Iberia
Iberian Peninsula
- ------------------------------------------------------------------------------------------------------------------------------------
Market Research Feasibility Study for Cdn $20,000 Cdn At the end of any fiscal year in 1% of gross annual None
India $20,000 which the Company has revenues revenue from sales
from sales of TCS-1 Plants in in India
India
- ------------------------------------------------------------------------------------------------------------------------------------
Market Research Respecting Potential Cdn $95,000 Cdn June 30, 2001 Cdn$6,333 None
United States Markets for Rubber Crumb $95,000 June 30, 2002 Cdn$12,666
June 30, 2003 Cdn$18,999
June 30, 2004 Cdn$25,333
June 30, 2005 Cdn$31,666
- ------------------------------------------------------------------------------------------------------------------------------------
Iberian Market Development Activities Cdn $95,000 Cdn At the end of any fiscal year in 1.5% of gross annual None
Related to Positioning the Company to $95,000 which the Company has revenues revenue from sales
Market TCS-1 Plants, Rubber Crumb, from sales of TCS-1 Plants in in Iberia
and Related Products in Iberia Iberia
- ------------------------------------------------------------------------------------------------------------------------------------
Market Research Activities Respecting Cdn $98,000 $98,000 June 30, 2001 Cdn $ 6,533.33 None
the Feasibility of using Rubber Crumb Cdn June 30, 2002 Cdn $13,066.66
in Thermoplastic Elastomer Compounds June 30, 2003 Cdn $19,600.00
in the United States and Canada. June 30, 2004 Cdn $26,133.33
June 30, 2005 Cdn $32,666.66
====================================================================================================================================
</TABLE>
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
28
<PAGE>
America Distribution Limited ("Enercon") of Westerville, Ohio; (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.
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 $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 be
required 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 September 30, 1998, the Company had total assets of $3,885,448 as compared
to $3,814,648 at
29
<PAGE>
June 30, 1998 reflecting an increase of $70,600. Total assets at September 30,
1998 had reflected an increase of $2,200,239 over $1,685,209 in total assets at
September 30, 1997. Management attributes such increases in total assets at
September 30, 1998 as compared to total assets at June 30, 1998 principally to
increases of $38,019 in notes receivable, of $46,280 in research and development
tax credit receivables and of $521,748 in property and equipment that outpaced
declines of $248,838 in cash, of $68,479 in sales taxes receivable, of $108,292
in prepaid expenses and deposits, and of $18,622 in deferred financing fees.
Management attributes the increase in total assets at September 30, 1998 from
total assets at September 30, 1997 principally to: (i) continuing consulting
agreements which have been recorded as prepaid expenses on the balance sheet in
the approximate amount of $970,000; all compensation payable under such
agreements was paid by way of the issuance of an aggregate of 4,000,000 shares
of common stock to two consultants and the granting of an option to CG Tire Inc.
(the "CGT Option"), the attributed value of all shares of Common Stock issued as
compensation under such consulting agreements and the CGT Option has been
included in paid-in capital; (ii) property and equipment in the amount of
$1,499,036 which represents an increase of $448,012 over property and equipment
of $1,051,524 at September 30, 1997; (iii) cash assets in the amount of $150,133
at September 30, 1998, which reflects an increase of $81,697 over cash assets in
the amount of $68,436 at September 30, 1997; (iv) research and development tax
credit receivables ("R&D TCR's") in the amount of $902,098 at September 30,
1998, which reflects an increase of $632,180 over R&D TCR's in the amount of
$269,918 at September 30, 1997; and (v) the recognition of deferred, financing
costs in the net amount of $139,118 after deduction of amortization in the
amount of $19,137.
As at September 30, 1998, the Company had total liabilities of $3,537,163
as compared to $3,360,588 at June 30, 1998 and $2,073,379 at September 30, 1997,
reflecting an increase in total liabilities of $176,575 and $1,463,784 over
total liabilities at June 30, 1998 and at September 30, 1997 respectively.
Management attributes such increase in total liabilities at September 30, 1998
when compared to total liabilities at June 30, 1998 primarily to an increase of
$83,277 in accrued liabilities; an increase of $90,111 in long term debt; and
$128,000 in long term deposits as compared to no long term deposits at June 30,
1998; that exceeded declining liabilities of $109,000 in deposits payable.
Management attributes the increase in total liabilities at September 30, 1998 as
compared to total liabilities at September 30, 1997 primarily to: (i) 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 $175,250 over CEDQR balances of
$383,693 at September 30, 1997; (ii) the issuance during the first half of 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; (iii) bank indebtedness in the amount of approximately
$418,000 versus a zero balance in bank indebtedness as at September 30, 1997.
Reflecting the foregoing, the financial statements indicate that as at September
30, 1998, the Company had a working capital surplus (current assets minus
current liabilities) of $82,775, that as at June 30, 1998 the Company had a
working capital surplus of $373,198, and that as at September 30, 1997 the
Company had a working capital deficit of $1,056,825. The primary causes of this
net increase in net working capital at September 30, 1998 as compared to net
working capital at June 30, 1998 were increases in notes receivable, research
and development tax credit receivables, and property and equipment together with
declines in notes payable and deposits payable. The primary causes of the net
increase in net working capital at September 30, 1998 as compared to net working
capital at September 30, 1997 were (i) an increase in research and development
tax credits receivable in the amount of $632,180, (ii) an increase of prepaid
expenses and deposits respecting on-going consulting agreements in the amount of
$970,000, and, (iii) a decrease in deposits payable of $729,000.
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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 $1,451,057 for the quarter ended
September 30, 1998 which reflects an increase of $964,492 over the analogous
period in 1997, when general and administrative expenses were $486,565. During
the quarter ended September 30, 1998 the Company had no operating revenues, had
total operating costs of $1,819,332 and incurred a net operating loss of
$1,819,332. During the analogous quarter ended September 30, 1997 the Company
had no operating revenues, had total operating costs of $674,461 and incurred a
net operating loss of $674,461. The $1,055,371 increase in total operating costs
and net operating loss during the quarter ended September 30, 1998 as compared
to the quarter ended September 30, 1997 is primarily attributable to three
factors. These factors are (i) 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 in the amount of $980,000
reflecting an increase of $786,419 over the analogous three month period ended
September 30, 1997 when such amount was $193,581; (ii) an increase of
approximately $406,000 in respect of valuations attributable to stock issued in
consideration for the release of an exclusive distributor rights agreement and
(iii) an increase of $138,421 in depreciation and amortization, a non-cash
charge, from the amount charged for the three month period ended September 30,
1997 where depreciation and amortization was $4,709. The stock issuances in
exchange for services during the quarter ended September 30, 1998, as referred
to above, consisted of a bonus payment to a corporate officer and corporate
counsel respecting certain financial accommodations made by them on the
Company's behalf 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. Also reflected in total operating costs and net operating loss for the
quarter ended September 30, 1998 as compared to the quarter ended September 30,
1997 is a $167,048 decrease in research and development expenses from $178,888
in research and development expenses during the quarter ended September 30, 1997
to $11,840 during the quarter ended September 30, 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
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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.
From inception (July 15, 1987) through September 30, 1998, the Company has
incurred a cumulative net loss of $11,870,817. 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.
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PART II
OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the fiscal quarter ended September 30, 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,
for the reasons described below.
On or about July 9, 1998, the Company authorized the issuance of 4,000,000
shares of its common stock to Terence C. Byrne, the chairman of the board of
directors and CEO of the Company and 2,000,000 shares of its common stock to
Frances Katz Levine, formerly the secretary and a director, and presently chief
corporate and US securities counsel of the Company. Such issuances were made in
consideration of financial accommodations made by such persons for the benefit
of the Company including, but not limited to, the following: since January of
1995, on behalf, and for the benefit, of the Company and without any cash
compensation therefor, Terence C. Byrne, the chairman of the board of directors
and CEO of the Company and Frances Katz Levine, formerly the secretary and a
director, and presently corporate and US securities counsel of the Company, had
made substantial financial accommodations and had put themselves at significant
financial risk, including, but not limited to the following: Mr. Byrne's; (i)
having made personal loans to the Company, including a loan in the amount of
$102,000 made in January of 1998; (ii) having been personally responsible for
all credit card debt of the Company, covering all travel, entertainment, and
significant day-to-day operating expenses of the Company; (iii) being the
co-guarantor of all bank debt of the Company and its subsidiaries; and (iv)
being the co-guarantor on all equipment leases of the Company; and Ms. Levine
having for a continuous period of three and one-half years, provided, rent-free
and with no charge for the costs of utilities, a fully-equipped law office,
dedicated solely and exclusively to the requirements of the Company and
throughout such period, having paid, without any cash reimbursement ever having
been made to her, all costs and expenses incurred by the Company in connection
with its legal service requirements, including but not limited to: (i) telephone
charges (ii) office furnishings, equipment, and supplies; (iii) Federal Express
and other postage; and (iv) secretarial and clerical staff salaries.
On or about July 28, 1998 the Company issued an aggregate of 4,095,057
shares of its common stock to three individuals, as follows:
1. 3,000,000 shares were issued to Louis Sanzaro pursuant to the terms
of his employment agreement with the Company, dated July 23, 1998,
which provided for the issuance of: (i) 500,000 shares as a signing
bonus in consideration for Mr. Sanzaro's agreeing to discontinue his
other business
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activities in order to enter into the said employment agreement; and
(ii) 2,500,000 shares in consideration for Mr. Sanzaro's release of
his right to serve as the Company's exclusive distributor of TCS-1
Plants in North America and to receive commissions of any kind in
connection with sales of TCS-1 Plants theretofore or thereafter made
by the Company in North America.
2. 1,000,000 shares issued to Jean Frechette pursuant to the terms of
his employment agreement with the Company, dated July 24, 1998,
which provided for the issuance of such shares as a signing bonus in
consideration for Mr. Frechette's agreeing to discontinue his other
business activities in order to enter into the said employment
agreement and serve as the president and chief operating officer of
the Company's wholly-owned subsidiary, The Tirex Corporation Canada
Inc.
3. 95,057 shares issued to Scott Rapfogel in lieu of $12,500 in salary
due to Mr. Rapfogel under the terms of his employment agreement with
the Company whereby he agreed to serve as the Company's Assistant
U.S. Corporate and Securities Counsel. For purposes of such
issuance, the stock was valued at 50% of the average bid and ask
price for the Company's common stock during the period in which such
stock was earned.
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 executive officers and
directors, or employees of the Registrant, all of whom are sophisticated
investors; Such persons had continuing access to all relevant
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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.
(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 4 - Submission of Matters to a Vote of Security Holders
In accordance with the Delaware General Corporation Law, Section 228(a),
on July 9, 1998, the holders of record of approximately 50.7% of the issued and
outstanding shares of common stock, $.001 par value, of the issuer, in person or
by proxy, by their consent in writing authorized, approved and adopted a
resolution respecting the amendment of the issuer's certificate of
incorporation. Pursuant thereto, effective July 10, 1998, the certificate of
incorporation of the issuer was amended so as to change the amount of capital
stock, which the issuer is authorized to issue, from 69,900,000 shares of Common
Stock, par value $.001 per share and 100,000 shares of Open Stock, par value
$.001 per share; to 115,000,000 shares of Common Stock, par value $.001 per
share and 5,000,000 shares of Class A Stock, par value $.001 per share. The
Board of Directors has the power to designate the Class A Stock in one or more
classes and/or series, with such rights and preferences as the Board of
Directors shall determine.
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Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits filed herewith:
None
(b) Current Reports on Forms 8-K filed during quarter ended September
30, 1998
Current Report on Form 8-K dated September 14, 1998 filed with the
Commission on September 18, 1998 reporting Item 5. Other Events respecting the
issuer's retention of the Canadian engineering firm of Beaudoin, Hurens &
Associates, Inc. and the extension of the stage two test phase on the issuer's
TCS- 1 Plant for approximately two additional months.
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 11, 1999 By /s/ Terence C. Byrne
--------------------------------------
Terence C. Byrne, Chairman of the
Board of Directors and
Chief Executive Officer
Date: March 11, 1999 By /s/ Michael Ash
--------------------------------------
Michael Ash, Treasurer and
Chief Accounting and Financial Officer
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