Note 14 - COMMITMENTS
The Company leases office and 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
-------- ----------
2001 $ 153,075
2002 204,100
2003 170,100
----------
$ 527,275
==========
Rental expense for the year ended June 30, 2000 and 1999 amounted to
$176,900 and $111,930, respectively. One of these leases contains a
second ranking moveable hypothec in the amount of $300,000 on the
universality of the corporation's moveable property.
For the three-month period ended September 30, 2000, the rent for the
factory, warehouse and office space, converted to US dollars amounted
to $58,294.
Note 15 - CONTINGENCY
The Company is involved with a lawsuit with a prior consultant. The
complaint alleged that the Company breached its consulting agreement
by failing to pay compensation due there under and sought damages in
the amount of $221,202 including interest and legal costs. The Company
filed a counter claim for fraud, breach of contact and unjust
enrichment on the part of the consultant. The Company sought relief
consisting of compensatory damages in the amount of $28,800 and
cancellation of the stock certificate issued to the plaintiff for
263,529 shares; a declaratory judgment that the consulting agreement
is of no force and effect; punitive damages; and interest and legal
costs. The Company's position is that it has viable defenses and
counterclaims respecting this lawsuit.
Note 16 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The deficit accumulated during the development stage included other
accumulated comprehensive income totaling $103,396.
Note 17 - SUBSEQUENT EVENT
Subsequent to June 30, 2000, the Company modified its agreement with
Ocean Tire Recycling & Processing Co., Inc ("OTRP") to clarify various
terms of the parties prior agreements and to obtain a commitment by
OTRP to pay future lease payments on the prototype system, if
necessary. The Company also exchanged its debt obligation to OTRP for
4,553,102 shares of its Common Stock, which was issued, pursuant to
OTRP's request, to its principal shareholder and President, as well as
other consideration, including a grant of shares to an employee of
OTRP who is also a director of the Company.
On November 2, 2000, the Chancery Court of the State of Delaware
dismissed the legal actions initiated against the Compnay by IM(2) and
David Sinclair, which suits had alleged breach of contract and fraud.
13
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, 2000. 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 first three quarters of Fiscal 2000 were devoted primarily to the
completion of the Company's prototype TCS-1 System such that the Company would
have a demonstrable technology and thus the capability of concluding sales
agreements. While the Company would have preferred a more rapid progression to
the commercial stage, limitations on the availability of financial resources
imposed a more modest climb toward the Company's goal. It was not until the
beginning of March 2000 that the Company was in a position to state that its
tire recycling technology was ready for replication and thus commercialization.
Thus, while the Company now has a demonstrable technology to demonstrate to
potential customers, the Company nonetheless considers that it is still in the
very early stages of marketing and fabricating or arranging to have fabricated
the two versions of its patented cryogenic scrap tire recycling equipment (the
"TCS System").
The Company is still in the very early stages of the business of
organizing the manufacturing of its patented cryogenic scrap tire recycling
equipment (the "TCS System"). Management is currently negotiating potential
sales agreements and possible manufacturing agreements, the effect of which,
should negotiations be successful, would be that commencement of full-scale
commercial fabrication of TCS Systems would occur in the near future.
With respect to the US market, the Company signed a License Agreement
in November 1999 with Ocean Equipment Manufacturing and Sales Co. (OEMS) of New
Jersey for the marketing and for the manufacturing, installation and service of
Tirex tire recycling systems. This agreement covers the entire US market. The
Company will receive a royalty for each system sold, subject to adjustments
respecting actual manufacturing costs. As of November 1, 2000, OEMS had not yet
concluded any sales of TCS Systems to independent parties.
The Company has signed Memoranda of Understanding or letters of Intent
with numerous Asian and European groups outlining the intentions of the parties
to enter into purchase and sale agreements respecting TCS Systems. While the
Company is confident that purchase contracts will result from one or more of
these Memoranda, no guarantees can be given that such purchase contracts will
actually be signed or that even if signed, the Company would realize a profit
from such contracts.
Because of the lengthy delay preceding the commencement of commercial
operations, the Company has had to, and will in the near future be forced to
continue to, cover its overhead costs from sources other than revenues from
operations. As of November 1, 2000, the Company estimates that overhead costs
from July 1, 2000 until the date that adequate revenues could be generated from
operations to cover its overhead costs, will be approximately $400,000.
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 and by additional capital investments by
directors, officers and employees. During the three-month period which ended
March 31, 2000, directors, officers, employees and consultants made direct cash
investments into the Company for an amount of $80,690.
14
As reported in previous 10-KSB filings, the Company received financial
assistance by way of loans and grants from the governments of Canada and of
Quebec, directly or through agencies thereof, for the design and development of
the TCS-1 Plant and for export market development. Briefly, they have included
the following (note that conversions to the US Dollar were made at 70(cent)
which was the approximate prevailing rate at the time such loans and grants were
received:)
Actual Cash Received
-------------------------
Type of US$
Source Assistance Purpose Cdn$ Amount Equivalent
------ -------------- ------------ ----------- ----------
Government of Canada
Industrial Recovery Interest-free Construct $ 500,000 $ 350,000
Program for Southwest loan prototype
Montreal TCS-1
Innovation, Development Interest-free Market Study $ 20,000 $ 14,000
& Entrepreneurship Assistance loan - Iberian
Program (IDEA) (#1) Peninsula
IDEA (#2) Interest-free Market Study $ 20,000 $ 14,000
loan for India
IDEA (#3) Interest-free US market for $ 95,000 $ 66,500
loan crumb rubber
IDEA (#4) Interest-free Market $ 95,000 $ 66,500
loan development
in Iberia
IDEA (#5) Interest-free Use of crumb $ 98,000 $ 68,600
loan rubber in
thermoplastic
compounding
Government of Quebec
Recyc-Quebec Grant Construct $ 75,000 $ 52,500
prototype
TCS-1
Repayment of the loans received under the Industrial recovery Program
for Southwest Montreal (IRPSWM), and the Innovation, Development &
Entrepreneurship Assistance Program (IDEA), noted above, are as per the
following table. Note that the IDEA loans designated above as #1, #2 and #4
provide for repayment as a percentage of sales; there is no fixed repayment
schedule. In each case, the percentage is used to compute an amount payable to
the Government of Canada under these loans as a function of gross sales in a
specified territory, these being the Iberian Peninsula for IDEA #2 and #4 and
India for IDEA #2. If sales do not result in the specified territories, no
repayment of the loan is required. In all three cases, the amount which results
from the multiplication of the percentages by the gross sales is capped at the
actual amount of money lent to the Company. Only IDEA #3 and IDEA #5 have fixed
repayment schedules.
The following amounts are in Canadian Dollars. US Dollar equivalents
follow using a 66(cent) equivalent which is the approximate current exchange
rate versus the Canadian dollar:
Loan Now Due FY 2001 FY 2002 FY 2003 FY 2004 FY 2005
---- ------- ------- ------- ------- ------- -------
IRPSWM $100,000 $150,000 $200,000
IDEA #3 $6,333 $12,666 $18,999 $25,333 $31,666
IDEA #5 $6,533 $13,067 $19,600 $26,133 $32,667
TOTAL (Cdn$) $106,333 $169,199 $232,066 $44,933 $57,799 $32,667
US$ equivalent $70,180 $111,671 $153,164 $29,656 $38,147 $21,560
15
The Company is presently negotiating with various financial and
operating companies concerning the possible investment by such companies in
Tirex. As of this date, none of those negotiations have been completed or have
resulted in a definitive agreement. Also, the Company is in discussions with a
major tire manufacturer concerning a possible working relationship, or strategic
investment by that Company into Tirex. There is no assurance that any such
relationship will be established.
Whether or not 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 the amount of such
financing which the Company is actually able to raise and the as yet unproven
ability of the TCS System to operate continuously on a long-term commercial
basis in accordance with its anticipated performance specifications.
Any failure or delay in the Company's receipt of the proposed financing
would be directly reflected in a commensurate delay or failure in the
commencement of full-scale manufacturing and / or sales of TCS Systems. 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 TCS System, which could manifest themselves over the next
several months. Given the early stage of the transition of the Company from that
of a developmental stage company to a fully commercial stage operation, it is
impossible at this time to estimate with any certainty the amount of incoming
cash flow from operations, if any, during the next twelve months.
In order for the Company to continue to pay its general and
administrative expenses in the future, it must raise funds from the sale of
securities, receive loans from its officers and directors, or obtain financing
from other sources. In order to conduct further research on its existing or
future products, it will continue to depend principally on various governmental
financing assistance programs.
In the event that the Company does not succeed in the private sale of
securities, nor that an investment from a strategic alliance partner is
received, 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, the Company may wish to raise funds
through a public offering, which would require it to locate a broker-dealer,
willing 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 alternate funding, the
Company's financial position and its prospects for developing a profitable
business operations would be materially adversely affected. The Company does not
presently have the funds necessary to manufacture any of its TCS-1 systems and
must therefore depend on potential customers or other financial sources for such
working capital. Also, at present the Company does not have the funds on hand
required to defray the administrative expenses expected to be incurred in fiscal
year 2001.
As at September 30, 2000, the Company had total assets of $3,234,812 as
compared to $4,435,305 at September 30, 1999 reflecting a decrease of
$1,200,493, and a decrease of $52,572 versus total assets as of the last fiscal
year-end, June 30, 2000, which total amounted to $3,287,384. Management
attributes the decrease from September 30, 1999 to September 30, 2000 primarily
to the following factors: (i) a decrease of $519,919 in Tax Credits Receivable
from the balance as of September 30, 1999 in the amount of $1,079,625 to the
September 30, 2000 balance of $559,706, and (ii) a reduction of prepaid expenses
and deposits from the balance as of September 30, 1999 in the amount of $555,313
to $103,074 as of September 30, 2000, a decrease of $452,239. The reduction in
total assets of $52,572 from June 30, 2000 to September 30, 2000 is primarily
attributable to the reduction in accounts and notes receivable from $129,431 as
of June 30, 2000 to $11,446 as of September 30, 2000, a difference of $117,985,
reflecting the offset of certain receivables against current payables to the
same persons. The reduction in accounts and notes receivable was offset by an
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